AptarGroup - Earnings Call - Q3 2019
November 1, 2019
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by. Welcome to Aptar Group's twenty nineteen Third Quarter Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Introducing today's conference call is Mr.
Matt De La Maria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.
Speaker 1
Thank you, Howard, and welcome, everyone. Participating on our call today are Stephane Tonda, President and Chief Executive Officer and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. You can find a copy of our press release as well as the slide presentation that summarizes our results on our website. We will also post a replay of this conference call on our website. Lastly, today's call includes some forward looking statements.
Please refer to our SEC filings to review factors that could cause actual results to differ materially from those projected or contained in the forward looking statements. Aptar undertakes no obligation to update the forward looking information contained therein. I'd now like to turn the conference call over to Stephane.
Speaker 2
Thank you, Matt, and good morning, everyone, and thanks for joining us. Yesterday, we reported core sales growth of 4% and adjusted EBITDA growth of 9% for the third quarter. Before I go into the quarterly segment results in more detail, let me start by sharing an update on our most recent acquisition of Noble and the announced segment leadership appointments. Then I will speak to each of the segments before turning it over to Bob for some more details. You can refer to slide four of the presentation that is featured on our website.
As we announced in our press release, we have acquired Noble International, a leader in drug delivery training devices, including auto injectors, prefilled syringes, arm body and respiratory devices, and patient onboarding programs. Noble's training devices, mimic the field activation forces and functions of the actual drug delivery device, are designed to reduce error and increase device familiarity. Both are key to ultimately improving healthcare adherence and outcomes, especially in settings where patients self administer the treatment. This acquisition is another step in our strategy to build out our pharma service business, serving this attractive and rapidly growing market. On next slide five, you can see how we are expanding our offering from drug delivery devices and components, to being a full service provider for our customers, from product development through the post launch stage.
Our pharma clients who increasingly are smaller innovative companies procure more and more of these services to increase the likelihood of success of their innovations, to shorten the time to launch and to improve performance in the market post launch. Now shifting topics, as shown on slide six, we have announced new segment leadership appointments. Mark Priehr will assume leadership of our Beauty plus Home segment, as Alden Schafer will be taking on a new leadership role overseeing strategic projects and commercial excellence initiatives. And Hetty clearly will succeed Mark as President of Aptar Food plus Beverage. Hetty previously led the food and beverage business in Europe and most recently led the Beauty plus Home segment also in Europe.
All new responsibilities take effect December 1 with a thorough handover activity, going well into the new year. The pace of activity in Aptar has picked up considerably over the past years. We are investigating several strategic projects that require more executive level attention and oversight that Aldon is uniquely suited to provide. We are fortunate to draw upon our deep talent base and Mark's extensive operational leadership experience, combined with his passion for innovative, sustainable solutions, make him an ideal leader to take Beauty plus Home segments, to new heights. Teddy has brought international experience having led our European sales and operations for both Food plus Beverage plus Beauty plus Home segments.
He has successfully implemented transformation initiatives in both segments and his knowledge of emerging high growth markets, including The Middle East and Africa will be very important for our strategy execution going forward. Now turning to Slide seven, I will share a summary of our pharma segment, which had another outstanding quarter. We continue to benefit from strong sales momentum in the allergic rhinitis and central nervous system categories. The allergy category, which is a significant part of our pharma business, has really outperformed when you look back over the past twelve to eighteen months, primarily due to the huge success of the branded treatments being now sold over the counter in significant quantities. We believe that we are in the later stages of the tremendous expansion we have seen in this category in The US, and we expect growth to normalize in the near term.
That being said, we are in the earlier stages of what we believe is the growth trajectory of our central nervous system devices, although this is a smaller part of our pharma segment today. We also saw broad based increased demand across our other pharma applications, including our consumer healthcare business and the injectables division. I'm also pleased to share that our active blister packaging solution developed by Aptar CSB technologies for oral solid dose drug delivery was recently approved by the US Food and Drug Administration for an HIV prevention medicine. This represents the first FDA approval for our proprietary active blister system, which protects and contributes to the stability of oral solid dose drugs with a solution that is fully integrated into the blister package. The system can be customized specifically for the drug development, drug developers formulation, offers a broad spectrum of protection including moisture absorption, oxygen, and or odor scavenging.
In other pharma news, we have also entered into an agreement with Bryn Pharma, a privately held pharma company, for the development of a nasal spray version of epinephrine using our ByDose nasal device. Brin is currently conducting clinical trial in its epinephrine nasal spray using our portable device capable of delivering two therapeutic doses of epinephrine, replacing the need to carry two epinephrine auto injectors. I want to stress that this has not yet been approved by the FDA, but BRIN has announced our partnership, and we see this as yet another key example of converting the delivery of existing medicines to the nasal drug delivery route. Now turning to our Beauty plus Home segment and to Slide eight. As we saw in the previous quarter, this segment faced considerable challenges from weaker demand from the personal care market.
Speaker 0
At the same
Speaker 2
time, sales to the Beauty plus Home Care markets grew nicely with strong demand from prestige fragrance and skincare customers and broad based increased demand in the home care market. Our transformation progress, however, was offset by under absorbed fixed costs and underutilized facilities due to the weak demand in personal care. Looking at the column to the right, as previously announced, we have taken an important step in our strategy to gain scale in the fast growing Chinese beauty market. We have signed an agreement to acquire 49% equity interest in VTY, a leading Chinese manufacturer of high quality decorative metal components, metal plastic sub assemblies, and complete color cosmetic packaging solutions for the beauty industry. This transaction meets our disciplined investment approach of partnering with leading recognized players with innovative technology and know how and includes an option to raise our stake in future years.
I'm also excited about an interesting product innovation in China, the first one of our facial skin care dual dispenser that features a separate airless booster cartridge. Our device called Neomix is featured on a dual serum, facial skin care product for the fast growing local premium brand, Shundo, by Jarmah. On the topic of the dental solutions, as shown on the far right, our foreclosure is made from a 100% potent tumor. We like retina featured online, okay, products for love, beauty, and planet. Moving now to slide nine, our food and beverage segment grew wholesale, an increased demand for our dispensing products with food products, is reflecting some general seasonality and additional reductions in our beverage sales in China.
We also are passing through lower renting costs to our customers, creating an additional headwind on food and beverage top line. The segment continues to benefit from conversion opportunities, especially in condiments, where you'll see several products moving from traditional formats to invert the pouches with our dispensing system. One example is the newly launched Squeeze Guacamole by Yucatan, which features our custom pouch fitment with pull ring and our flip lid closure with Simply Squeeze valve for cleaner, more precise application in an inverted pouch format. The same closure and valve combination is also featured on the new inverted pouch of Chico Honey. Both products cannot be found here in The US, and we are very optimistic that this trend towards squeezable pouches will open up even more opportunities for food products that were not previously dispensed in this format.
In summary, we have had a good quarter overall with top line gains in pharma and food and beverage offsetting some softness in Beauty plus Home. We are also pleased that we announced new product conversion stories, new strategic partnerships and the first FDA approval for our active listed packaging solution. With that, I will now turn it over to Bob, who is going to walk through some of the financial details that impacted the quarter. Bob?
Speaker 3
Thank you, Stephane, and good morning, everyone. I'll briefly walk through some of the details concerning our third quarter results. If you are following the slides we published with the press release, you can refer to Slide 10. We reported sales growth of 5% that was comprised of core sales growth of 4%, with a positive impact from acquisitions of 4% and a negative impact from currency rates of 3%. Our Pharma segment achieved a core sales growth of 13% and an adjusted EBITDA margin of 36%.
The strong sales volumes, particularly in the prescription division, drove margins to the high end of our long term range. Core sales to the prescription market increased 17%, driven by increased demand for our innovative drug delivery systems for allergic rhinitis, central nervous system treatments and asthma. Core sales to the consumer healthcare market increased 3% due to increased demand for our products used on nasal saline and eye care treatments. Lastly, core sales to the injectables market increased 12% due to increased demand for our plungers and stoppers. Turning to our Beauty plus Home segment, core sales decreased 1%, primarily due to the significant weakness in demand from the personal care market compared to a year ago.
Beauty plus Home's adjusted EBITDA margin of 13% was slightly above the prior year level. The positive effects of our transformation efforts and lower raw material costs were offset by the negative effects related to the decrease in volumes. Looking at sales growth by market on a core basis, core sales to the beauty market increased 5% to strong growth in skincare and fragrance products, primarily driven by the China luxury market and travel retail. Core sales to the personal care market decreased 8% due
Speaker 4
to
Speaker 3
the weak demand that I previously mentioned that was across most of our major applications, including body care and hair care products. Political and economic uncertainties are causing our customers to be cautious and reduce their inventory levels. Core sales to the home care market increased 4% due to higher sales across a variety of categories. Looking at the business from a regional perspective, the core sales increases we saw in Europe and Asia were not enough to offset the 9% decline in North America or the 7% decline in Latin America. Looking at our Food and Beverage segment, core sales increased 2% in the quarter.
This includes the negative impact from passing on lower raw material costs, which negatively affected the growth by 2%. Food and Beverages adjusted EBITDA margin reached 18% due to productivity improvements and lower resin costs. Looking at each market, core sales to the food market increased 3% due to strong sales of our products used on granular, powder, soft and condiment applications. Core sales to the beverage market increased 1%, primarily due to increased custom tooling sales. Increased demand in the bottled water and dairy categories was offset by decreases in functional drink application sales in China and Europe.
Turning to Slide 11. With an effective tax rate of 31%, third quarter adjusted earnings per share totaled $0.93 Prior year comparable earnings per share totaled $0.97 I would also like to remind you that in the prior year third quarter, we had certain discrete tax benefits and our effective tax rate on adjusted earnings was 24%. We also grew adjusted EBITDA by 9% in the quarter and expanded our overall adjusted EBITDA margin to approximately 21%. Slides twelve and thirteen cover our good year to date performance and highlight our 5% core sales growth and 7% adjusted earnings per share growth. Slide 14 refers to our outlook.
We are expecting earnings per share for the fourth quarter to be in the range of $0.74 to $0.80 per share using an expected tax rate range of 30% to 32%. I have a few other details to share, and then I will hand it back to Stephane. As shown on Slide 15, in the quarter, cash flow from operations was strong and totaled approximately $159,000,000 Capital expenditures were approximately $62,000,000 and therefore, our free cash flow was approximately $97,000,000 compared to approximately $2,000,000 a year ago. Higher earnings and working capital improvements led to the improvements in free cash flow. This brings our year to date free cash flow to $194,000,000 compared to $64,000,000 a year ago.
Looking at our balance sheet capitalization. On a gross basis, debt to capital was approximately 43%, while on a net basis, it was approximately 37%, and we remain less than 2x levered. At this time, Stephane will provide a few comments before we move to Q and A.
Speaker 2
Thanks Bob. In closing, I'd like to leave you with a few key takeaways as also shown on Slide 16. The diversity of our portfolio continues to allow us to grow even if there is weakness in some of our markets or regions. We posted 5% core sales growth through the first nine months of the year with double digit adjusted EBITDA growth. We continue to innovate vigorously and had several new dispensing drug delivery and active packaging product launches this year.
We're building out our pharma service offerings with three acquisitions to date that are greatly enhancing the value we bring to our customers. We continue to add capabilities and scale in Asia to better serve the more rapidly growing markets there, especially for our beauty business with the addition of our new partnership with PTY. While we are positioning the company for long term growth, we are also facing some near term challenges. As we look to the fourth quarter, we anticipate that the above normal growth we have seen in parts of our Pharma business will revert to a more normalized growth rate. Several Beauty plus Home customers have indicated that they are reducing inventory levels in reaction to uncertainty around the impact of political and economic developments and consumer demand for their products.
In closing, we are managing this business for the long term and will continue to focus on our customers and end consumers and provide tangible value for many of the world's leading brands. We will bring to life dispensing solutions that transform and enhance everyday users experience around the world. With that, I would like to open it up for your questions.
Speaker 0
To withdraw your question please press the pound key. In the interest of time and fairness to all participants please limit yourself to two questions and one follow-up. Then you can come back into the queue if you have more questions as time allows. Please stand by while we compile the Q and A roster. Our first question or comment comes from the line of Daniel Rizzo from Jefferies.
Your line is open.
Speaker 4
Good morning, guys. How are you?
Speaker 5
Good morning, Dan. Good morning.
Speaker 4
Just with the Noble acquisition, are there any synergies or does it just kind of expand the product platform?
Speaker 0
When
Speaker 2
you look at how our customers are, the mix of customers is changing is the new product development, especially in biotech are increasingly done by smaller customers. So these smaller customers require services to get their product to market faster, deal with all the FDA approvals. And, that provides an additional revenue opportunity for us. And of course, we also benefit from the increased device sale as the product is launched. So it is really a synergistic effect, with everything we do.
We provide these services, I think almost exclusively when one of our devices or injectable delivery solution is involved at the tail end.
Speaker 3
And maybe I could add just a couple other small points. You know, typically the sales cycle, for Noble is later on in the process. And and if you look at where we get involved with our customers, on the device, it's it's very early on. So clearly, we can provide a window of opportunities to Noble much sooner, on on on pipeline projects than they've seen in the past. I think the other important thing is, since they are really dealing with the patient onboarding, they have great patient feedback on what patients like and dislike about various devices.
And we think that that's a benefit for us moving forward in developing some new pharmaceutical device applications.
Speaker 4
Alright. Thank you for the color. And then you mentioned that you were looking for towards more normal growth in allergies. I was wondering how we should think about what that means in terms of, I don't know, yeah, in just terms of percentages or how we should think about it going forward?
Speaker 2
Well, we've been clear that our long term growth rates for the Pharma business is in the 6% to 10% range. This business in particular has been well above that. So it will revert back to that kind of range.
Speaker 4
Okay. And then finally, you mentioned the Effenantin nasal spray. What phase is that in, in terms of with the FDA? In terms of development?
Speaker 2
It's still in clinical trials. I don't have with me whether it's Phase II or Phase III.
Speaker 4
All right. Thank you very much.
Speaker 0
Thank you. Our next question or comment comes from the line of John Kreger from William Blair. Your line is open.
Speaker 6
Hi. Thanks very much. Just to expand on the question about normalization within the pharma business. From your perspective, is that a new longer term trend or just something that you think will be realized in Q4?
Speaker 2
Well, the long term trend is six to 10. Now we've been for, I think almost eighteen months, well above that in the teens for that particular segment. And, six to 10 is much more reasonable and we see that, materializing.
Speaker 6
Okay, great. Thanks. And then maybe just digging into the slide five that you walked us through during the prepared remarks, how much of your pharma business currently would be for commercialized products versus products that are in clinical trials or earlier stages of development?
Speaker 2
Yeah. By far, the vast majority is in in commercialized product, I realize, because most of our revenue is from device revenue. So the the quantity of devices used in clinical trials compared to being commercial is is is much lower. Now having said that, we have for quite some time provided services through an express unit for the nasal delivery route. And now with Noble and Nonopharm and Gateway, we all can also offer services for the injectable side of the house.
And as Bob already mentioned, for the patient onboarding, the human factor side.
Speaker 6
Great. Thank you.
Speaker 0
Thank you. Our next question or comment comes from the line of Dabihajdah from Wells Fargo Securities. Your line is open.
Speaker 5
Good morning. I was going to try to revisit Noble a little bit. Unless I missed it, I didn't see much in the way in terms of, I guess, financial profile. Is there any way to give us a perspective as to what you might expect from, I guess, EBITDA contribution or even revenue? I mean, what I saw, it looked like revenue might be around $20,000,000 although it looked a little choppy.
So hoping you can help us in that regard.
Speaker 3
Sure. Yes, Gabe, you're spot on in the $20,000,000 estimate that you've got, and it is a bit choppy. It's very highly dependent on new device introductions into the market. And from an EBITDA perspective, we're not going to comment specifically on that. Will tell you from an EPS perspective, it's not going to have an impact on the fourth quarter results.
It'll be slightly dilutive $01 or $0.00 in 2020, and then we would expect it to ramp up 2021 and beyond. So this is really a growth platform for us, and we see some we see some upside in the in the near future.
Speaker 2
So I would add, though, that the service business itself is is a high growth part of the pharma segment, especially given that more and more of the clients requiring those services are smaller. They are not the big pharma houses, and therefore, they have a need for these services. So we see this as a as a good growth opportunity.
Speaker 5
Understood, Stephane. Is it something that you have to maybe go out and and acquire another business to to offer another product or or service? Or is this something that can, I guess, grow at the rates that you expect on a stand alone basis?
Speaker 2
No. As you as you see in slide five, we got this space pretty nicely filled out and not ruling out anything, but I think we have a pretty big part of what we need.
Speaker 5
Okay. And as a follow-up in the food and beverage segment, can you comment at all about you mentioned, I think, in prepared remarks, the China beverage issue coming back to haunt you a little bit on things or, excuse me, on Halloween. Is that something you have any visibility in in terms of is it more of a dual source issue? How long that persists?
Speaker 2
Think you characterized it well. I'm not sure that I can add anything to it. This customer will never give us perfect visibility. It is now more of a little bit, but still an impact that's not comparable to the impact we had in prior years.
Speaker 5
Okay. Thank you.
Speaker 0
Thank you. Our next question or comment comes from the line of Jason Rodgers from Great Lakes Review. Your line is open.
Speaker 7
Yes. Just in the pharma segment, can you give us a better idea of what percent of your revenues prescription area are generated from the allergy side versus central nervous and other areas?
Speaker 3
Sure. So it's roughly about two thirds of the prescription division's revenues are generated from allergy related products. And then about less than 10% of the prescription, division sales are are coming, today for central nervous system. And I
Speaker 2
think prescription's about half of our pharma products.
Speaker 7
And would you expect the allergy side to norm to, come in somewhere in line with your long term pharma growth rates? Or is that an area that's, because it's so strong, could potentially, fall below that?
Speaker 3
It's hard to say. I mean, we've been surprised on the upside before. I mean, it's going to be highly dependent on any new product entries into this category and growth geographically as well. But but certainly it's gonna taper off more closer to the to the long term target. Yeah.
Really multiple trends happening at the same time. On the one hand, allergy continues to be an expanding category through,
Speaker 2
I'm not a expert, everything I read is the warming climate certainly increases the allergen load in the environment and for whatever reason, all of us become more prone to allergies year round, certainly I'm one of the best examples of year round allergies. And, so that is a growth driver and that affects more and more parts of the world that can afford allergy medications that will continue to grow. Overlays on top of that, we had this conversion in The US where more and more went over the counter with broader distribution, including club stores, e commerce. We think that has kind of run its course, but to pick apart those two trends is not easy, but certainly, we see a slowdown, from these mid teen rates to something that's more reasonable, at the six to 10 range. And yes, some quarters it's going be at the low end and some quarters it's going to be mid range of, we don't have a crystal ball like that.
Speaker 7
And it's nothing to do with like a new competitor or any situation like that. Correct?
Speaker 2
Not really. I mean, certainly we have competition. I mean, our market share is high, but not a 100%. And there will always be some competitive activities in competitive market.
Speaker 7
Okay. Thank you.
Speaker 0
Thank you. Our next question or comment comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.
Speaker 8
Good morning, Stephan. Good morning, Bob.
Speaker 3
Good morning, Mark. Good morning.
Speaker 8
I wanted to just dig in on the fourth quarter outlook. You talked about Beauty plus Home customers destocking. I'm curious, is this a separate and more recent phenomenon than the sort of third quarter weakness that you pointed out in personal care?
Speaker 2
In short, absolutely. I mean, we've pretty much in almost uniform chorus get that back from
Speaker 0
not only
Speaker 2
our personal care customers, also our beauty customers that their degree of uncertainty about demand is ratcheted up and they are throttling back their inventories, quite a bit. So, that is different than, the personal care weakness that we or additional to the personal care weakness that we pointed out before. Now historically, these destocking movements have gone on two to three quarters. We started already seeing that in quarter three, we certainly see it in full force in quarter four. Now if history is any guide, probably will be with us part of Q1.
And as Bob pointed out, we saw a particular weakness in North America and in Latin America, which is a big part of our Beauty plus Home business. But it's certainly not the quarter four is another steady state picture.
Speaker 8
Stephane, does tend to hit prestige harder than say mass market or is it pretty much across the board?
Speaker 2
Actually, prestige is the the the one part of the market of no. Luxury is the one part of the market that's still doing well. It's it's really the broader prestige, mass teach that's being impacted here.
Speaker 8
Okay. The other question I had is just can you update us on sort of your cost reduction efforts, the efforts to kind of improve manufacturing excellence? And I think you'd even been looking at kind of footprint over in Europe, having some conversations with works councils. So if I can get kind of an update on that side of things.
Speaker 2
Sure. So you're really talking about our Beauty plus Home transformation. And, just as a backdrop, as a reminder for everybody, we set out to do, three things. One is to reaccelerate the top line, which, notwithstanding what we just discussed was actually quite successful by after several years of flat to declining sales. We're able to reaccelerate the top line, grow above market, regain some share and much stronger commercial excellence activity, sales activities and so on.
The second part is to address our underperforming sites where we had operational issues, the custom beauty sites in France, anodizing site and a couple of sites in The U. And then the third one is headcount reduction and SG and A streamlining all the corporate support functions. That is quite a bit also in Europe, including the installation of the shared service center, which requires all work kind of approval also in France. And that is a longer drawn out process. Now, we are executing and have been successful in doing what we set out to do.
I'm actually just a couple of weeks ago with it looks back in Monaco, Very heartened by the feedback we're getting from customers about our increased service levels, our proactiveness, the filling of the pipeline is good. Also our sites are performing much better and we are successfully addressing most of the trouble spots. Now having said that, if your revenue hits a New York pothole like we're doing now, you have huge unabsorbed fixed costs which is eating up those gains. Nevertheless, we are executing and performing much better. Now looking at the demand scenario, of course, we're taking additional measures in the short term.
Anything you can imagine, reducing people who have temporary contracts, which we have quite a few in Europe, eliminating over time, subcontracting work where it makes sense to variabilize cost, doing the opposite in other cases, insourcing, to leverage our own fixed cost, and of course further working on purchasing. Now, we're also looking at scenarios to further streamline our footprint. Some of those we've already discussed. We also recently announced that, internally that we are consolidating facilities in Argentina based on the weakness there. And we will continue to look, whether we need to make additional structural changes.
I think that's probably as much as I can cover.
Speaker 8
Okay, very good. I'll turn it over.
Speaker 0
Thank you. Our next question or comment comes from the line of Adam Josephson from KeyBanc. Your line is open.
Speaker 9
Thanks. Good morning, everyone.
Speaker 3
Good morning, morning,
Speaker 9
Stefan or Bob Stefan, I think you just commented that you don't think 4Q is a steady state situation in terms of the guidance just given the BD and Home customer destocking. Can I know you said you would expect it to last into 1Q, but can you give us a sense of how much of a hit you're expecting from this destocking to the extent, again, you consider it kind of nonrecurring situation?
Speaker 2
Adam, good morning. It's hard to tease that apart. Clearly, we would expect this segment to grow in the 3% to 6% range. We certainly expect it to decline in quarter four. Actually, the underlying beauty business and all the trends we see in beauty, continue to look very favorable.
Personal care is a larger challenge. I think there we see some trends of, the changes in use usage patterns, in particular in hair care, that need a closer look. But overall, the beauty side of it, I remain very, bullish about this destocking notwithstanding.
Speaker 9
Sure. Just two others. One on, also on Beauty plus Home. So you talked at length about the restructuring, Stephan, just now. Do you think there's any relationship between this restructuring program you're doing and the sales weakness you're seeing in that segment to the extent reducing employees might be having an impact on your core sales there?
Speaker 2
None whatsoever. In fact, customers are as happy as they've been since certainly I've been here and the pipeline still looks good. So I don't see any relationship there.
Speaker 9
And just one last one again on Beauty plus Home. So the restructuring was intended focused primarily on Beauty plus Home and you had that $80,000,000 EBITDA target. Now you're changing the leadership of that segment. Can you just update us on kind of where you are in terms of the $80,000,000 of EBITDA incremental EBITDA to which you guided by the end of next year? And why the leadership change now as opposed to, I don't know, two quarters ago or two quarters from now?
Speaker 2
Sure. I would say we're about halfway through and obviously some of that has been eaten up with the current demand picture. Alan has done a good job in particular on the front end of the business. We feel that a very good team. Now a different mix, of skills and experience is required.
And certainly Mark brings those experiences and skills. And frankly, we need Elton elsewhere, on some topics that need attention and leverage his commercial excellence expertise more.
Speaker 8
Thanks, Stephane.
Speaker 0
Thank you. Our next question or comment comes from the line of Dansham Panjabi from Baird. Your line is open.
Speaker 10
Hey, guys. Good morning.
Speaker 0
Good morning, guys.
Speaker 10
I guess following up on, you know, the last few questions on duty and home and personal care in particular for North America, you know, that category seems particularly weak, you know, just relative to what your customers have been saying over the last couple of weeks as they reported earnings. You know, Can you just give us some more color as to what's going on there? I mean, that's a pretty significant number in terms of a 9% decline, from North America.
Speaker 2
Hi, Ghansham. Yeah, let me, provide a bit more transparency. Certainly, some of our customers and frankly we're growing with them, but others are not. And I think we highlighted previously that in particular one product launch that pretty big last year, The sell through is actually not great. And I think J and J has been public about their disappointment in the performance of their product.
Speaker 0
Ladies and gentlemen, please stand by. Speaker line drop, we'll we'll get them connect reconnected. Please hold. Okay. You're reconnected.
Let me put mister Gonchar back up.
Speaker 2
Yeah. Yes, please. And everybody.
Speaker 0
Okay.
Speaker 2
Hey. Sorry, Ghansham. Where did we lose you?
Speaker 10
I think you mentioned J and J, and the disappointment with that with that product, and then I I couldn't hear anything after that.
Speaker 2
Right. Yeah. Our line dropped. Bob was adding something. Yeah.
I was saying that
Speaker 3
I if I'm not mistaken, I think some of the customer announces announcements were talking more about their their core sales grain gains were coming from pricing than volume. And obviously, we're going be very volume dependent. So that's also part of the equation.
Speaker 10
Okay, that's helpful. And then just in terms of Pharma, the strategy in terms of broadening out your relevance, how much customer pull driven? And also, you just give us a sense as to the profit pools of the various nodes that you sort of highlighted on slide five as you kind of build out your service capabilities, etcetera?
Speaker 2
Yeah. I mean, clearly, today, the vast majority of our revenue, is is downstream. The service part of it is, more rapidly growing, and profitability, frankly, is very good. So certainly in line with pharma profitability. And we see that really two opportunities.
One is just participate in that higher service revenue, but two, also increase the odds of our devices being in a successful launch at the back end. So and the strength of the pharma model is that, unlike in some other, markets, we actually can charge for the services good money and at the same time then benefit from the success, through the device sales. And in between there are also milestone payments that we referred to, exclusivity payment that these kind of things along the pipeline. So it's really building out the ecosystem and dipping more into the whole profit pool of the whole chain that we showed there on Slide five.
Speaker 10
Okay, thanks. And just one final one maybe for Bob. Just in terms of the tax rate, you guys are one of the few companies that we follow that's seen a year over year increase in the tax rate, especially one that's substantial. Is this a new baseline for a tax rate going forward? Or is 2019 sort of an anomaly?
Yes,
Speaker 3
sure. Good question, Ghansham. When the Tax Reform Act came out, we had mentioned that about 70% of our business is outside of The U. S. So we've got a little bit more of a disproportionate share of our business outside The U.
S. And you know, the the tax changes were meant to to really bring more of of that manufacturing to The US. Our fluctuation in the past and our lower tax rate has been predominantly from option exercises and the tax the increased tax deductibility on that. So our normal run rate, absent any of those discrete items and and tax benefits from stock option exercises, is more in that, 30% to 32% range.
Speaker 10
Got it. Thanks so much.
Speaker 0
Thank you. Our next question or comment comes from the line of George Staphos from VOA Merrill Lynch. Your line is open.
Speaker 11
Hi guys, this is Molly Baum sitting for George. He had a conflicting conference call today. The first question I wanted to ask, you guys talked a lot about sustainability at your Capital Markets Day. So in the beverage space in particular, wanted to ask if you'd seen any impact, be it positive or negative, from this increased focus we've seen on sustainability? And then just in general, if you've seen any impact or see opportunities or risks in any of the other segments and categories?
Thank you.
Speaker 2
Yeah, hi, Molly. Thanks for the question. I would say we have gotten very high marks from customers for our proactive engagement with the topic and not just in words, but also in deeds. As you know, our participation in the loop pilot and also being on the board of loop, Our investment in pure cycle to help bring about food grade polypropylene 100% recycled. And we start to see more projects in the pipeline, with higher or 100% PCR content, and customers are really wanting to get their hands on those products.
Recently, also saw a very good interview from the CEO of Coke who said, look, this is not about getting rid of plastics, this is about making one of the lowest carbon footprint products fully recyclable and taking advantage of it because the carbon footprint of plastic is of course much lower than that of glass and aluminum. So it's really, customers engaging with us on how to solve this issue, which is primarily a waste issue in Asian countries who don't have good waste management situations and then it ends up in the ocean and gave rise to this whole topic. And as we engage with customers and also at the more senior levels, we get more projects. And certainly you will see some shifts, I'm sure, from things that are more multiple material to unit material to make them more recyclable. You may see shifts of products that are one time use to products that can be reused.
And we are engaged in many of those projects.
Speaker 11
Got it. Thank you for the additional details. And my second question goes back to the Noble acquisition and just really pharma services more broadly. Really, the question is how much further do you want to expand the business? And then if you look at Slide five, do you are what stages along the, I guess, product life cycle do you see gaps that you could potentially fill through further bolt on acquisitions?
Thank you.
Speaker 2
Yes, let me not speculate here. Of course, it is an active M and A environment, but we're quite happy with how we filled out this slide. You want, if you saw our internal strategy slides from a couple years ago, very happy with the progress. These things also go in stages. We need to digest what we have.
These are all successful business in their own right, but we of course want to lift the synergies, which are mainly top line synergies. And, yeah, we may add to that down the road, but we're quite happy with what we have here.
Speaker 11
Got it. Thanks again.
Speaker 0
Thank you. Our next question or comment comes from the line of Debbie Jones from Deutsche Bank. Your line is open.
Speaker 12
Hi, good morning. Thanks for taking my question. First question, highlighted the role I think that was created for Eldon here and said there were some things he needed to do. I was wondering if you could just talk about that a bit, what kind of strategic projects, if possible, and then at very least, kind of the commercial excellence focus that he's going to be having.
Speaker 2
Yeah. I mean, by the very nature, strategic projects are not something that we can talk publicly about, but I think you have noticed maybe over the last few years that our level of activity has increased and we're not done in terms of positioning the company and future proofing the company in the right areas. So there are quite a few projects that need more attention And, know, Eldon's towering strength is in commercial excellence and certainly the rest of the company can benefit more, from his guidance there.
Speaker 12
Okay. I'm sorry, my line was cutting in and out during the call and I'm not sure if anyone asked about the kind of the uptick in CapEx and that you were calling for and just kind of the the working cap move that Bob highlighted earlier. Was just wondering if you could get some more color on that.
Speaker 13
Yeah. I mean, Debbie, the
Speaker 3
the working capital, we've we've, you know, we picked it up a little bit just based on where we where we finished q two q q three actuals on on on capital. I don't think there's really much to read into that. On the working capital, we are starting to see some benefits of some extending of payment terms with our suppliers. We've made some progress in the inventory area as well, but we still have a long way to go. And we haven't seen any real further degradation on the receivable side.
So all in all, a good quarter from working capital, and and the businesses are are refocused on on this topic. And like I said, we we still got well, we've made some good good progress. We still got we still got some work left in front of us.
Speaker 12
Okay, great. Thank you. I'll turn it over.
Speaker 0
Thank you. Our next question or comment comes from the line of Neel Kumar from Morgan Stanley. Your line is open.
Speaker 14
Great, thanks. In terms of the growth normalization in pharma, is that mainly just limited to the OTC allergy market? Or is it also impacting the prescription allergy market? And then also, margins have been trending towards the higher end of your target range as well. Can you maybe just talk about whether you expect margins normalize in near term or stay at current levels?
Speaker 2
Yes, on the first question, you are right. That is primarily about the OTC market. I need to communicate that a little bit because OTC in one country might be prescription in another country, but given the dominance of The US here, I think your comment is right. The margin is really largely dependent also on the mix of businesses. So we've been very open that our injectable business has a lower margin than the average.
So if our injectable business grows faster for a couple of quarters, than the other part of the portfolio, you will see, that impact the margin. Well, Yes. We're not in Yeah.
Speaker 3
No. I would say also you got you can throw active packaging into that mix as well. I mean, it's it's it's closer to to the injectable margin, and that's also been performing very, very well. So I think in the past, we've come off a very robust prescription growth in the pharma business overall. So the the mix tempering the mix is really what what's what's tempering that that that margin and impacting that margin.
Speaker 14
Okay. And then also just can you just talk about CSP performance in the quarter? Any progress on how it's performing with some of the newer applications?
Speaker 3
Sure. So it's actually been doing quite well. So we we've lapsed the one year anniversary and like for like on the one month in September, up mid teens in terms of growth, which is good. So I would say it's performing as we had expected. We're starting to gain some new traction on some new application.
Devon mentioned active blister project, and and we have some others in the pipeline. We're starting to see more activity jointly with our with our legacy business. The application on the epinephrine that Siobhan mentioned also will contain a CSP vial as well to protect the integrity of the package. So we are starting to see some some synergies from, from both the device and the secondary packaging side of things. So we're very pleased with, with the development of CSP and and and see a lot more on the on the horizon.
Speaker 14
Very helpful.
Speaker 0
Thank you. Our next question or comment comes from the line of Adam Josephson from KeyBanc. Your line is open.
Speaker 9
Thanks everyone for taking my follow ups. Bob, would you mind just talking about the cadence of sales growth through the quarter to the extent there was a notable slowdown toward the end of the quarter and then because of the Beauty plus Home inventory destocking? And then relatedly, how would you compare this customer destocking you're seeing to previous cycles, whether 'eight, 'nine, 2010 when you saw the bounce back? Can you just talk about how this feels compared to those previous periods in that regard?
Speaker 3
Sure. So I don't have the figures in front of me in terms of month to month. But typically, in normal cycles, September tends to be one of our stronger months, and we didn't really see that this time. So that's one indication, if you want to look at the month to month progress throughout the quarter. I would say, at least from my experience and from what I've seen, this is very normal.
Typically, we've seen, for whatever reason, personal care oftentimes be first into slowdown economic cycle. And then typically the first out, as Stephan mentioned, can last anywhere between two and three quarters. Looking back at 08/09, we first saw the dip in the fourth quarter in personal care, and then we started to see it in the first quarter, nine on the beauty side. But then in the back half of the year, Personal Care was the first to come out of that cycle, followed by beauty. So I would say it's very typical for us.
I can't explain why that phenomenon is there, but it's definitely something that seems normal.
Speaker 9
I appreciate that. And just back to, I think, Mark's question earlier about how the personal care weakness you called out last quarter was different than this. Can you just, again, help me understand the difference between the two issues?
Speaker 2
Well, in personal care, it's really a mix of end user demand and change also in usage pattern. I mentioned the hair care and grooming shifts. So one example, dry shampoo being used, by millennials. And the particular, exposure we have to the J and J product with the launch not repeating and the product not doing as well. That is different than the beauty customers all of a sudden, hey, we're spooked and we're going to run our inventories down.
Speaker 9
Sure. Thanks, Stephane.
Speaker 0
Thank you. We have time for one more final question. Our last question is from Salvator Tiano from Vertical Research Partners. Your line is open.
Speaker 13
Hi. Good morning, Stefan and Bob. So just to talk a little bit about 2020, if you can provide some early moving pieces that
Speaker 0
you see with regard to
Speaker 13
CapEx direction, any meaningful change in your volume trends besides what you already discussed about the short term implications in Farm and Beauty plus Home or margins? How should we think about next year's earnings and cash flow?
Speaker 2
Yes. Hi, Salvator. We really don't give guidance at this stage for 2020. We just gave the Q4 guidance. We stand by our long term targets, for the three segments.
I think, clearly we are entering the year, in a destocking mode with the challenges we've discussed in the Beauty plus Home side. And, we'll have to see how long into the year, that takes. And, I think beyond that, we really can't give you 2020 guidance at this stage.
Speaker 10
Yes. And I'll touch on
Speaker 3
your question on free cash flow. I mean, as Stephane said, we're very early not early, but we haven't finished our complete review of the capital requirements for next year. And certainly, that will be scrubbed and reviewed. And will be highly dependent on projects that are in the pipeline and ready to execute. We are going to continue to focus on working capital improvements.
So that's certainly going to be an area of focus in 2020 as well. And that's about really all I can give you from a cash flow guidance perspective.
Speaker 13
Great. Thank you very much.
Speaker 2
Thanks, everybody. Thanks for joining us. And we look forward to see you on the road.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.