Q3 2019 Earnings Call
Aptargroups 2019 third quarter conference call at this time all participants are in listen only mode. Later, we'll conduct a question and answer session. Introducing today's conference call is Mr., Matt Dellamaria Senior Vice President Investor Relations Communications. Please go ahead.
Thank you Howard and welcome everyone participating on our call today, our stuff on turned a president and Chief Executive Officer, and Bob Kuhn Executive Vice President Chief Financial Officer, and Secretary you could find a copy of our press release as well as the slide presentation that summarizes our results on our website.
We'll also post a replay of this conference call on our website.
Lastly, today's call include 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.
After undertakes no obligation to update the forward looking information contained therein.
I'd now like to turn the conference call will reduce the fun.
Thank you, Matt and good morning, everyone and thanks for joining US yesterday, we reported core sales growth of 4%, an 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 mobile.
Emptying out segment leadership appointments.
Then I will speak to each of the segments before turning it over to ball 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 on body and respiratory devices.
And patient Onboarding programs.
No its training devices, which mimic the field activation forces and functions of the actual drug delivery device.
Are designed to reduce error and increase the rights in New Jersey.
Both a key to ultimately improving health care appearance and outcomes, especially in settings, where a patient 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.
And next slide five you can see harbir, 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.
Oh pharma clients increasingly are smaller innovative companies.
You are more and more of these services to increase the likelihood of success of their innovations to shorten the time to launch into to improve performance.
In the market post launch.
Now shifting topics as shown on slide six we have announced new segment leadership appointments Merck pre your go to leadership of our beauty and home segment is olden shape or will be taking on the new leadership role overseeing strategic projects and commercial excellence initiatives.
And how do you believe will succeed mark as president of after food and beverage.
And he previously led the food and beverage business in Europe . There. Most recently left the beauty and home segment also in Europe .
Oh, no responsibilities take effect December 1st.
With a thorough handover activity.
God willing to new year.
The pace of activity in after has picked up considerably over the past years.
We are investigating several strategic projects that they require more executive level attention and oversight that element uniquely suited to provide.
We are fortunate to draw upon our deep talent base and marks extensive operational leadership experience combined with his passion for innovative sustainable solutions make him an ideal either to pick beauty and home segments.
To new Heights.
He has brought international experience, having let our European sales in operation for both food and beverage and beauty and home segments. He has successfully implement the transformation initiatives in both segments in his knowledge of emerging high growth markets, including the middle Eastern 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 LNG category, which is a significant part of our pharma business is really outperformed when you look back over the past 12 to 18 months, primarily due to the huge success of the Brenda treatments being now sold over the counter and significant quantities.
We believe we are in the later stages of tremendous expansion, we have seen in this category in the U.S. and we expect growth to normalize a near term.
That being said we are indeed earlier stages of what we believe is the growth trajectory bar central nervous system devices. Although this is a small upwards of a pharma segment today.
We also brought these increased demand across our other farm applications, including our consumer healthcare business and the Injectables Division.
I'm also pleased to shared at our active blister packaging solution develop after CSP technologies for oral solid goes drug delivery was recently approved by the you with food and drug administration for an HIV prevention medicine.
This represents the first half the approval for a proprietary active lister system, which protect and contributes to the stability of world. So windows.
Drugs with a solution that is fully integrated into the blistered package.
The system can be customized specifically for the drug development drug developers formulation offers a broad spectrum of protection, including moisture absorption oxygen.
Indoor older scavenging.
In other pharma news, we have also entered into an agreement with Britain pharma a privately held former company for the development of Amazing spree version or hoping that from using our by those nasal device bring is currently conducting clinical trial in its upping that friends nasal spray.
Using a portable device capable of delivering two therapeutic doses have been a friend, replacing the need to carry two Ethernet for in auto injectors.
I want to stressed that this is not yet been approved by the FDA, but Britain has announced a partnership and received this is yet another key example of converting the delivery of existing Mets Institute amazement drug delivery route.
Now turning to our beauty and home segment and slide eight.
As we saw in the previous quarter. This segment face considerable challenges from weaker demand from the personal care market.
At the same time sales through the beauty and home care markets grew nicely.
With strong demand from prestige fragrance and skin care customers and broad base increased demand in the home care market.
Our transformation programs, however was offset but under absorbed fixed cost and [noise] underutilized facilities due to the weak demand in personal care.
Looking at the cone to the right as previously announced we have taken important step in our strategy to gain scale in the fast growing Chinese beauty market, you're signing an agreement to acquire 49.
Percent equity interest in BT right.
Leading Chinese manufacturer of high quality decorative metal components mental plastic sub assemblies and complete color cosmetic packaging solutions for the beauty industry.
This transaction meter disciplined investment approach, we're partnering with leading recognize players with innovative technology and know how includes.
An option to raise our stake in future years.
I'm also excited about an interesting product innovation can China is first of all of our facial skincare dual dispenser that features a separate airless boost the cartridge.
Our device called meal makes is featured on a dual serum facial skincare product for the fast growing local premium brand.
John Doe by drama on the topic folks sustainable solutions as shown on the far right or color closure, which is made from 100% post consumer recycle Britain is featured on a line of hair care products were low beauty and planet.
Moving now to slide nine <unk> food and beverage segment grew core sales increased demands for our dispensing closures for food product overcame weaker demand for beverage closures, which is reflecting some general seasonality and additional reductions in our beverage sales in China.
We also are passing through lower resin 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.
Well you will see several products moving from the traditional former student bird couches without dispensing system.
One example is the newly launched discrete work come on that but you could turn which features our custom called treatment with pooling and I'll flip <unk> closure was simplisqueeze valve for cleaner and more precise application in inverted pouch format.
The same closure involve combination is also featured on the new inverted pouches Chico honey.
Both products can now be found here in the U.S. and we're very optimistic that this trend toward Squeezable pouches will open up even more opportunities for food product.
We're not previously dispensed in this former it.
In summary, we have had a good quarter overall, it was topline gains in pharma and food and beverage offsetting some softness in beauty and home. We're also pleased that we announced new product conversion stories, new strategic partnerships in the first after the approval for active blister packaging solution.
With that I will now turn it over to book was going to walk through some of the financial details that impacted the quarter Bob.
Thank you use the fun and good morning, everyone.
I'll briefly walk through some of the details concerning our third quarter results.
If you're following the slides we published with the press release, you can refer to slide 10.
We reported sales growth of 5% there was comprised of core sales growth of 4%.
With the positive impact from acquisitions of 4%.
And a negative impact from currency rates of 3%.
Our pharma segment achieved the 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.
Of course sales to the consumer healthcare market increased 3%.
Due to increased demand for our products used on nasal saline and I care treatments.
Lastly, core sales to the Injectables market increased 12%.
Due to increased demand for our Plungers and stoppers.
Turning to our beauty and 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 in homes, 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%.
The 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 to 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.
Of course sale 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.
We're not enough to offset the 9% decline in North America.
For 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 soften 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.
It 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 93 cents.
Prior year comparable earnings per share totaled 97 cents.
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%.
Slide 12, and 13 Cobra are 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 74 to 80 cents 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 Stefan.
As shown on slide 15 in the quarter cash flow from operations was strong and totaled approximately $159 million.
Capital expenditures were approximately $62 million and therefore, our free cash flow was approximately $97 million.
Compared to approximately $2 million a year ago.
Higher earnings and working capital improvements led to the improvement in free cash flow.
This brings our year to date free cash flow to $194 million compared to $64 million a year ago.
Looking at our balance sheet capitalization on a gross basis debt to capital was approximately 43%.
Well on a net basis it was approximately 37%.
And we remain less than two times levered.
At this time Stefan will provide a few comments before we move to Q and aim.
Thanks, Bob in closing I'd like to leave you with a few key takeaways has also shown on slide 16.
The diversity of our portfolio continues to allow us to grow even if there's 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 are building out our pharma service offerings with three acquisitions today that are greatly enhancing the value we bring to our customers.
We continue to add capabilities and scale in Asia to better serve more rapidly growing markets, there, especially for our beauty business with the addition of our new partnership with BP why.
Well, we've positioned the company for long term growth, we also facing some near term challenges.
As we look to the fourth quarter, we anticipate that the above normal growth we've seen in parts of our pharma business revert to a more normalized growth rate.
Several beauty and home customers have indicated that the 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 we'll continue to focus in our customers and consumers and provide tangible value for many of the world's leading brands.
We will bring to life dispensing solutions that front for transform and enhance everyday use his experience around the world.
With that I would like to opened up for questions.
[noise] as a reminder, ladies and gentlemen to ask a question you would need to press Star then one on your telephone to withdraw your question. Please press the pound.
And the interest of time in 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 question as Tom time allows.
Please stand by what we compound to coordinate roster.
Our first question or comment comes from the line of Daniel Rizzo from Jefferies. Your line is open.
Good morning, guys how are you.
Good morning, Dan right.
Just want to noble acquisition.
Are there any synergies or was it just kind of expand the product platform.
Yeah.
When you look at how our customers customers.
Our mix of customers. It changing is the new product development, especially in biotech to increasingly done by smaller customers. So these smaller customers require services to get their products to market faster.
Deal with all the FDA approvals and that provides additional revenue opportunity for us and of course, we also benefited from increased device sales as the product is launched so it is really a synergistic effect.
Everything we do we provide these services.
I think almost exclusively when one of our devices or injectable delivery solution is involved at the at the tail end.
Maybe I could add just a couple other small fleets.
Typically the sales cycle.
For noble is later on in the process and if you look at where we get involved with our customers on the device. It's very early on so clearly we can provide a window of opportunities to noble much sooner.
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 in dislike about various devices and we think that that's the benefit for us moving forward in developing some new pharmaceutical device applications.
Hi, Thank you for the color and then you mentioned that you were looking for towards like more normal growth in allergies I was wondering how we should think about what that means in terms of I don't know yet in terms of percentages or whether we should think about it going forward.
Well you know we've been a clear that our long term growth rate 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.
Okay, and then finally, you mentioned the infinite F and entrant nasal spray.
What's phases that in in terms of with the FDA fees in terms of so it really clinical trials I don't have with me whether its phase two of history.
But thank you very much.
Thank you. Our next question or comment comes from online Oh, John Kreger from William Blair. Your line is open.
Hi, Thanks, very much just to expand on the question about normalization pharma business from your perspective is that a new longer term trying or just something that you think will be realized in Q4.
Well the long term trend is a six to 10 now we've been for I think almost 18 months, so well above that in the teens for that particular segment.
And a six to 10 is much more reasonable.
We see that materializing.
Okay, great. Thanks, and then did maybe just digging into that slide five that data 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.
Yeah, it by far the.
The vast majority is in commercial product realized because.
Most of our revenue is from device revenue. So the quantity of devices used in clinical trials compared to the promotion is much lower now having said that we have for quite some time provided services through our nexpress units for the nasal.
Delivery route and now with a noble.
And a non farm and gateway, we all can also offer services.
For the injectable.
Side of the house and on a bump already mentioned for the patient Onboarding the human factor side Uh Huh.
Great. Thank you.
Thank you. Our next question or comment comes from a line of Gabi Hotshot from Morgan Wells Fargo Securities. Your line is open.
Good morning was going to try to revisit noble a little bit unless I missed that I didn't see much in the way in terms of I guess financial profile is there any way Ted 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 million, although it looked a little choppy. So hoping you can help us in that regard.
Sure Yeah gave that you're spot on and that 20 million 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 I will tell you from an EPS perspective.
It's not going to have an impact on the fourth quarter results. It will be slightly dilutive penny or two in 2020, and then we would expect it to ramp up.
2021 and beyond so this is this is really a growth platform for us and we see some we see some nice upside.
In the near future.
So I would add though that the service business itself is a high growth part of the pharma segment, especially given that more and more clients requiring to sources are smaller they're not that big pharma houses and therefore, they have a need for these services. So we see this is a good growth opportunity.
Understood Stefan is it something that you have to maybe go out and acquire another business to to offer another product or service or is this something that can I guess grow at the rates do you expect on a standalone basis.
No.
In slide five where we got this space pretty nicely filled out them not ruling out anything but.
I think we have some pretty big part of what we need.
Okay and the follow up in the food and beverage segment can you comment at all about you mentioned I think in prepared remarks that China beverage issue.
Coming back to onto a little bit on things or excuse me on Halloween.
Is that something you have any visibility in terms of is it more of a dual source issue.
How long it might persist.
I think you characterize it well I'm not sure that I can add anything to it.
It's customer will never give a perfect visibility.
It is no. Moreover, a little bit, but still an impact is comparable to the impact we have in prior years.
Okay. Thank you.
Thank you. Our next question or comment comes from the line of Jason Rodgers from Great Lakes Review Your line is open.
Yeah, just in the pharma segment can you give us a better idea of what percentage of your revenues in the prescription area are generated from the allergies side versus central nervous and other areas.
Sure. So it's roughly about two thirds of the prescription divisions revenues are generated from LNG related products, and then about less than 10% of the prescription.
Division sales are coming today for central nervous system, and I think prescriptions about half of Afirma growth.
And when do you expect allergy side 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.
You know <unk>, 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 new product on entries into this category and and growth geographically as well, but but certainly it's going to taper off.
More closer to the to the long term target you really multiple trends happening at the same time on the one hand.
LNG continues to be an expanding category.
Through.
I'm not a expert but everything I read is the warming climate certainly increases Oh, the Atwood Allergan loads in the environment and.
For whatever reason.
All of us become more prone to allergies year round, certainly and I.
Well around allergies.
And so that is the growth driver and as that affects in more and more parts of the world that can afford Elijah medications that we'll continue to grow on overlaid on top of that we had this conversion into U.S., 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 are mid teen rates to something that's more reasonable.
Six to 10 range and yes, some quarters, it's going to be at the low end that some quarters im going to be mid range.
We don't have a crystal ball like that.
And it's nothing to do with.
Like a new competitor or any situation like that correct.
Not really I mean, certainly we have competition I mean on market share is high but no time to present, a and there will always be some competitive activities and.
<unk> market.
Okay. Thank you.
Thank you. Our next question or comment comes from a line of Mark will be from BMO capital markets. Your line is open.
Good morning, Bob.
Hi, Mark wondering I.
I wanted to just dig in on the fourth quarter outlook for you you talked about beauty and home customers de stocking I am curious is this.
A separate and more recent phenomenon and the sort of third quarter weakness that you pointed out in personal care.
In short absolutely I mean, we've pretty much.
Almost uniform cordis get that back from normally our personal care customers, but also a beauty customers that their degree of uncertainty about demand.
Got you did up in the throttling back the inventories are quite a bit so.
That is different than the personal care weakness that we or additional to the person here weakness that we pointed out before now historically these destocking.
Movements have gone on a two to three quarters.
We started already seeing that in quarter three we certainly see it in full force in quarter four.
No. If history is any guide probably will be with us as part of Q1 and as Bob pointed out we saw particular weakness in the North America and in Latin America, which is a big part of a beauty and home business.
But it's certainly not the quarter affords them all the steady state picture.
And stuff I'm, just trying to hit prestige harder than say mass market or is it pretty much across the board.
Actually prestige is the one part of the market, though not a luxury is the one part of the market Thats still doing well.
It's really the brought up prestige matthijs, that's being impacted here.
Okay. The other question I had is just can you update us on sort of your.
Cost reduction efforts the efforts to kinda improve manufacturing excellence and I think you'd even been looking at kind of footprint over in Europe , having some conversations with works council. So if I can get to kind of an update on that side of things.
Sure.
So you're really talking about a beauty and home transformation and I'm just as a backdrop as a reminder for everybody we set out to do.
Three things one is the 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 topline growth above market, we gained some share and.
A 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 cut the beauty site in France, a anodizing site and a couple of sites in the U.S.
And then the third one is.
Head count reduction and a as GMI a streamline also corporate support functions.
That is.
Quite a bit those in Europe , including the installation appreciate service center, which requires all worked off recruitment approved.
Approvals in France, and that is along with growing up process now.
We are executing and theyve been successful in doing what we set out to do I'm actually just a couple of weeks ago was it looks back in Monaco.
Very heartened by the feedback we're getting from customers about our increased service levels or proactiveness, the filling up 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 a if your revenue.
It's a new York portal like we're doing now you have huge unabsorbed fixed costs, which is eating up.
Those gains Nevertheless, we're executing and performing much better.
Looking at the did in bad scenario of course, we are taking additional measures in the short term anything you can imagine.
Reducing people, who a temporary contract, which we have quite a few in Europe .
Eliminating overtime subcontracting.
Work, where it makes sense to variable I'd call. It actually doing the opposite the other cases insourcing to leverage our own fixed costs.
And of course, where they're working on purchasing now we also looking at some areas to further streamlining our footprint. Some of those we've already discussed thrilled to 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.
Moving goods, probably as much as a consultant.
Okay very good I'll turn it over.
Thank you our next question or comment comes from the line Adam Josephson from Keybanc. Your line is open.
Thanks, Good morning, everyone.
Yeah.
Stefan or Bob stuff I think you just commented that you don't think for Q is a steady state situation in terms of the guidance just given that.
The beauty and home customer Destocking, Ken I know you said, what you would expect it to last into one cubic can you give us a sense of.
How much of a head you're expecting from this de stocking to the extent again, you consider it kind of a nonrecurring situation.
Yeah, It's Adam good morning, it's hard to threes that apart.
HM.
Clearly we would expect this segment to grow in the 3% to 6% range, we certainly expected to decline in quarter four.
Actually the underlying beauty business and all the trends we see in beauty and continue to look very favorable a personal care is the larger challenge I think there we see some trends of the changes in usage pattern, particularly in hair care.
That that need a closer look but overall the beauty side of it though I remain very bullish about the destocking notwithstanding.
Sure It just to others one on <unk> also on being at home. So you talked at length about the restructuring Stephane just now do you think theres 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.
Our sales there.
None whatsoever, a in fact, a customers are as happy as that business and certainly I've been here.
And the pipeline to looks good.
So I don't see any relationship there.
And just one last one again on beauty and home. So they eat the restructuring was intended focused primarily on PD and all I mean, you had that 80 million EBITDA target now you're changing a leadership of that segment can you just update us on kind of where you are in terms of the 80 million of EBITDA incremental EBITDA.
To which you guided oh by the end of next year in and why the leadership change now as opposed to honor now two quarters ago or two quarters from now.
Sure.
I would say, we're about halfway through and over the several that Oh has been eaten up with the current demand picture element done a good job. It in particular on the from the end of the business.
We feel that a very good team.
No it different mix a of skills and experience is required and certainly mark brings those experiences and skills and frankly, we need to Oldham elsewhere.
On some topic that need attention and that Leverages commercial excellence expertise more.
Thanks, Stephanie.
Thank you our next question or comment comes from the line Ghansham Punjabi from Baird. Your line is open.
Hey, guys good morning <unk>.
I guess following up on the last few questions on beauty and home and personal care in particular from North America, a you know that category seems particularly weak.
Just relative to what are your customers I've been saying over the last couple of weeks as they reported earnings.
Okay 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.
Hi, guys from Yeah, let me.
Quite a bit more transparency certainly some of our customers are growing like Procter and gamble and frankly, we are growing with them, but others are are not and I think we highlighted previously that particular, one product launch that a pretty big last year, the sell through and is actually no.
Upgrade.
And I think JNJ has been public about the disappointment in the performance of the product and.
<unk>.
Ladies and gentlemen, please standby.
Speaking I want to drop will.
Connect reconnecting so.
Okay Your reconnected.
Mr gotten back up.
Yes, please and everybody.
Okay.
Hey, sorry on what did we lose you.
I think you mentioned JNJ, a and a disappointment would that would that product and then I.
I couldn't hear anything after that.
Right. Yeah, we are lined dropped a valve with adding something yeah, I was saying that if I'm not mistaken I think some of the customer and ounces announcements.
We're talking more about their their core sales green gains were coming from pricing.
And then volume and obviously, we're we're going to be very volume dependent. So that's also part of the equation.
Okay. That's helpful. And then just in terms of pharma you know the strategy in terms of broadening out your relevance how much of this this customer pull driven a and also can you just give us a sense as to the the profit pools of the various nodes that you sort of highlighted on slide five and you kind of build out your service capabilities et cetera.
Yeah, I mean, it clearly is today the vast majority of our revenue is downstream the service part of it is a more rapidly growing and profitability frankly is very good so certainly in line with farmer profitability and.
We see that really two opportunities. One is just participate in that highest service revenue, but to also increase or the odds of our devices being in a successful launch at the backend 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 than benefit from the success or through the device sales and in between there was a milestone payments that we referred to.
Hey, exclusivity payments that you kind of things along the pipeline. So it's really building out the ecosystem and the dipping more into the whole profit pool. The whole thing that we showed there on slide five.
Okay. Thanks, and just one final one maybe for Bob a you know just in terms of the tax rate you guys are one of the few companies.
That we follow that seen a year over year increase and the tax rate, especially one that's the substantial is this a new baseline for tax rate going forward or 2019 sort of an anomaly. Thanks.
Yes sure. Good question Ghansham. So yeah, we when when the tax format came out we had had mentioned that you know about 70% of our businesses outside of the U.S.. So we've got a little bit more of a disproportionate share where business outside the U.S. and you know the tax changes were meant to.
To really bring more of that manufacturing to the U.S.
Our fluctuation in the past and a lower tax rate has been predominantly from option exercises in the Texas increased tax deductibility on that so.
Our normal run rate absent any of those discrete items and and tax benefits from stock option exercises more net you know 30% to 32% range.
Hi, Thanks, so much.
Thank you. Our next question or comment comes from the line of George Staphos from Detroit Merrill Lynch. Your line is open.
Hi, guys. This is my bomb sitting for George I get a conflicting conference call today. The first question I wanted to ask need I talked a lot about sustainability at your capital markets day.
So in the better space in particular I wanted to ask if you'd seen any impact to be a positive or negative from you know this increase focusing on sustainability and then just in general I think you know see any impact or see opportunity to risks in any of the other segments and category. Thank you.
Yeah, Hi, Molly Thanks for the question.
That.
I would say the we have gotten a very high marks from customers for a proactive engagement with the topic and not just in words, but also in deeds.
As you know our participation in the loop pilots and those are being on the board of loop.
Our investment in pure cycle to help bring about food grade polypropylene, 100% recycled and that we started to see more projects in the pipeline.
With higher or on the percent Pcr content.
And customers are really wanting to get the hands on those products.
Recently also saw very good interview from the CEO Coke.
Who said look this is not about getting rid of plastics is about making one of the lowest carbon footprint product fully recyclable and taking advantage of it because the carbon footprint of plastic is a fourth much lower than that of class and aluminum. So it's really customers engaging with us them how to solve this issue which is primarily.
A waste issue in Asian countries, who don't have good waste management the situations and then it ends up in the ocean and give rise to this whole.
Topic, and as we engage with customers and also at the more senior levels or we get more projects and.
Certainly you will see some shifts I'm sure from things that the more multiple material to unity material to make them more recyclable.
You may see shifts the products that they are onetime use two products that can be reduced and we are engaged in many of those projects.
Got it. Thank you for the additional details and my second question you know goes back to that the noble acquisition and just really pharma services more broadly.
The question is how much further do you want to extent expand the business and then you know if you look at slide five feet deep are what stages, along the I guess product lifecycle do you see you know gaps that you could potentially Phil through further bolt on acquisitions. Thank you.
Yes, let let me not speculate here of course, it is an active M&A environment, but we're quite happy with how we feel about thislife. If you want a if you.
And so our internal thrives on slides from a couple of years ago I'm very happy with the progress that none of these things also going stages, you we need to digest, what we have.
These are all successful business in their own right, but we of course I don't want to lift the synergies, which are mainly topline synergies.
And yeah, we may add to that down the road, but quite happy with what we have here.
Hi, Thanks again.
Thank you our next question or comment comes from it [laughter] excuse me.
Our next question or comment comes from a line of.
[noise] Debbie Jones.
Debbie Jones from Deutsche Bank. Your line is open.
Hi, good morning, Thanks for taking my question.
First question I highlighted.
Yes.
There's one thing to do.
You could just talk about <unk>.
That's the kids project possible.
These kind of a commercial excellence, that's going to be Apple.
Yeah, I mean by the very nature.
Strategic project does not something that.
We can't 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 a in terms of positioning the company in future proofing The company a in the right areas. So they're quite a few project that need more attention.
And you know elms towering strength in commercial excellence in the certainly the rest of the company.
Benefit more from his guidance there.
Oh, Okay, I I'm, sorry, my wine with cutting in and out during the call and I'm not sure if anyone else about the kind of the Upticking cat X. in that you were calling for and just kind of the the working cat, but Bob pilot earlier, it's just when it gets more color on that.
Yeah I mean.
Capital. We we you know we picked it up a little bit just based on where we where we finished cues you Q3, actual and capital I I don't think there's really much to read into that.
Working capital we are starting to see some benefits of you know some extending a payment terms with our suppliers. We've made some progress in the inventory area as well, but we still the long way to go.
And and we haven't seen any real further degradation.
On the receivable side Tylenol or was it was a good quarter from from working capital on it and and the businesses or a refocus on on this topic and like I said, we we still got well we've made some good good progress we still got we've still got some work left in front of us.
Okay, great. Thank you well turnover.
Thank you my next question or comment.
Because for the line of Neo Kumar from workers damage you align herself.
Oh, great. Thanks in terms of the growth normalization and pharma is that mainly just limited to D.O.T.C. allergy market or is it also impacting the prescription allergy market and then also margins have been trendy and towards the higher end of your target range as well do you maybe just talk about whether you stick Martin's normalizing near term our stay at current levels.
Yeah on on on the first question.
You are right that is primarily about the O.T.C. market.
I need to.
Handicap that a little bit because O.D.C. in one country might be prescription in another country, but given the the the dominance of the U.S. here.
I think you'll you'll Carmen is right.
The margin is really a larger depending on the mix of businesses. So.
<unk> very open that though injectable business as a the lower margin than the average so he's very injectable business growth faster for a couple of borders.
Than the other part if the <unk> that impact the margin yep.
<unk> Yeah, no I would say also you guys you can throw active packaging into that mix as well I mean, it's closer to to the injectable margin and that's also been performing very very well. So I think in the past and come off of very robust prescription growth in the form business overall, so the the mix tempering.
The mix is really what what's what's kind of bring that the that margin an impact in that margin.
<unk>.
Okay. And then also just you just talk about C.S.P. performance in the quarter any progress on how it's performing but some of the near applications.
Sure. So it's actually been doing quite well. So we we lapsed the one year anniversary and you know like for like on the one month.
In September we we were up mid teens in terms of growth, which is good. So I would say it's performing as we we had expected we're starting to gain some some new traction on some some new application.
On mention the the active I have to blister project and we have some others in the pipeline, we're starting to see more.
Activity jointly with her with a lazy business the application on the up and Ephron that someone mentioned also will contain the P.C.S.P. file as well to protect integrity of the package. So we are starting to see some some synergies from from both the device in a secondary packaging side.
I think so we're very pleased with with the developments C.S.P.N. in into a lot more on.
Very helpful.
Thank you.
Question or comment.
The line of Adam Joseph <unk> from key bank, your wine or something.
Thanks, everyone for taking my follow ups, Bob what do you mind, just talking about the Kate inside of sales sales growth through the corridor, yeah to the extent there was a notable slide down toward the end of the quarter and then it because of the beauty and how many minutes already stocking and then related Lee how would you compare this customer d. stocking, you're saying two previous.
Psychos, whether you know all eight or nine and 10, you know 2010, when he's had to bounce back can you just talk about how this feels compared to those previous periods in that regard.
Sure. So I don't have the figures in front of me in terms of of month to month, but typically.
In in normal cycles September tends to be one of our stronger months and we didn't really see that this time. So that that's one indication. If if you want to look at the month to month progress throughout the quarter I 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 the first into a slowdown economic cycle and then typically the first out is the phone mentioned you know can last anywhere between two and three quarters looking back it away you know nine.
We first saw the dip in the fourth quarter in personal care and then we started to see it in in the first quarter to nine and the beauty side, but then in the back half of the year you know personal care was the first to come out of this cycle followed by beauty. So I would say, it's it's it's very typical for us I I can't <unk>.
Blame why that phenomenon is there, but but it's it's definitely something that seems normal.
<unk> I appreciate that and just it back to I think marks question earlier about how the personal care weakness you called out last quarter was different than S. can you just get help me understand the difference between the two.
<unk>.
Well <unk> personal care, it's really.
A mix of.
And user demand and Jane <unk> in usage pattern and I mentioned the hair care in grooming.
Sure. So one example, more <unk> being used.
By millennials and the the particular exposure, we have to the J. and J. product the with the launch not repeating and the product of doing as well that is different than the beauty customers all of the hey.
Very spooked, and we're going to run or inventories down.
Sure no thanks to <unk>.
Yeah.
Thank you we have time for one more final question on that last question is from Salvador Tiano from vertical research partners you align herself.
Hi, I could more stuff I'm involved so just took a little bit about 2020. If you can provide some early moving piece that you see with regard to Catholics direction any meaningful change in your volume trance. Besides what you already discussed about the short term implications and farm and getting home or Mar Jane's House.
Should we think about you know next here so <unk> some cash flow.
Yeah, Hi, Salvatore it we really don't give a guy and at this stage for 20 or we just gave the queue for guidance.
We stand by a a long term targets for the the three segments I think clearly we are entering the year into these docking mode and with the challenges we've discussed in the in the beauty in the room side.
And we'll have to see how long into the year that takes and I think beyond that and you really can't give your 2020 guidance at this stage yeah in a in pets in your question on free cash flow I mean, <unk> were very early not early but we we haven't finished our complete review of the capital requirements for next year.
And certainly you know that will be scrubbed and reviewed and it will be highly dependent on projects that are in the pipeline and ready to execute.
We are going to continue to focus on on working capital improvements. So that's certainly going to be an area focus in 2020, as well and and that's about really all I can I can give you from you know from a capital gains perspective.
Great. Thank you very much.
Thank you everybody things for joining us.
And we look forward to see on the road.
Ladies and gentlemen, thank you for participating in today's conference. This concludes to program. Even now disconnect everyone have a wonderful there.