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Aptargroup Inc (NYSE:ATR)
Q3 2019 Earnings Call
Nov 1, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2019 Third Quarter Conference Call. [Operator Instructions]

Introducing today's conference call is, Mr. Matt DellaMaria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

Matt DellaMaria -- Senior Vice President, Investor Relations and Communications

Thank you, Howard, and welcome everyone. Participating on our call today are Stephan Tanda, 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 Stephan.

Stephan B. Tanda -- President and Chief Executive Officer

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 4 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 autoinjectors, prefilled syringes, on-body and respiratory devices and patient onboarding programs.

Noble's training devices which mimic the feel activation forces and functions of the actual drug delivery device are designed to reduce error and increase device familiarity, both a 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 is attractive and rapidly growing market.

On next Slide 5, 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, increasingly are smaller innovative companies, procure more and more of these services to increase the likelihood of success of the innovations, to shorten the time to launch and to improve performance in the market, post launch.

Now shifting topics as shown on Slide 6, we have announced new segment leadership appointments. Marc Prieur will assume leadership of our Beauty and Home segment, as Eldon Schaffer who will be taking on a new leadership role overseeing Strategic Projects and Commercial Excellence initiatives. And Hedi Tlili will succeed markets, President of Aptar Food & Beverage. Hedi previously led the Food and Beverage business in Europe, and most recently led the Beauty and Home segment also in Europe. All the responsibilities take effect December 1st, 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 investing in several strategic projects that they require more executive level attention, and oversight that Eldon is uniquely suited to provide. We are fortunate to draw upon our deep talent base and march the extensive operational leadership experience combined with his passion for innovative sustainable solutions, make him an ideal leader to take Beauty and Home segment to new heights.

Hedi has broad international experience having led our European sales and operations for both Food and Beverage and Beauty and 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 7. 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 allergic 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 branded treatments being now sold over the counter in significant quantities.

We believe 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 a broad based increased demand across our other Pharma applications including our Consumer Health Care business and the Injectables division. I'm also pleased to share that our Activ-Blister packaging solution developed by Aptar's CSP 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 Activ-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, and oxygen, and 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 the Nasal Spray version of epinephrine using our Bidose nasal device. Bryn's 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 autoinjectors. I want to stress that this is not yet been approved by the FDA, but Bryn 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 and Home segment and to Slide 8. As we saw in the previous quarter, this segment faced considerable challenges from weaker demand from the personal care market. At the same time, sales to the Beauty and Home care markets grew nicely with strong demand from prestige fragrance and skin care customers and broad-based increased demand in the home care market.

Our transformation progress however, was offset by under absorbed fixed cost and the utilized 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 BTY, 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 launch of our facial skincare dual dispenser that features a separate airless boost cartridge. Our device called Neomix is featured on a dual serum facial skincare product for the fast-growing local premium brand Chando by Jala, on the topic of sustainable solutions as shown on the far right are Colored Closure, which is made from 100% post consumer recycled resin is featured on a line of hair care products for Love, Beauty and Planet.

Moving now to Slide 9, our Food & Beverage segment grew core sales as increased demand 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 & Beverage's top line. This segment continues to benefit from conversion opportunities especially in condiments where you will see several products moving from the traditional formats to inverted 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 SimpliSqueeze valve for cleaner and more precise application in inverted pouch format. The same closure and valve combination is also featured on the new inverted pouch of Chico Honey. Both products can now be found here in the US and we are very optimistic that this trend toward 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 and Home. We are also pleased that we announced new product conversion stories, new strategic partnerships and the first FDA approval for our Activ-Blister 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?

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Thank you, Stephan, 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% 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 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. Core sales for 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 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 and 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%, due to strong growth in skincare and fragrance products, primarily driven by the China luxury market and travel retail. Core sales for 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.

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 Beverage's 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, sauce 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 12 and 13 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 Stephan.

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 improvements in free cash flow. This brings our year-to-date free cash flow $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%, while on a net basis, it was approximately 37% and we remain less than 2 times levered.

At this time, Stephan, will provide a few comments before we move to Q&A.

Stephan B. Tanda -- President and Chief Executive Officer

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 are 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 BTY. While we are positioning the company for long-term growth, we're 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 and 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 we'll 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.

Questions and Answers:

Operator

[Operator Instructions] Our first question or comment comes from the line of Daniel Rizzo from Jefferies. Your line is open.

Daniel Rizzo -- Jefferies -- Analyst

Good morning guys. How are you?

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Good morning Dan.

Stephan B. Tanda -- President and Chief Executive Officer

All right.

Daniel Rizzo -- Jefferies -- Analyst

Just with the Noble acquisition, are there any synergies or does it just kind of expand the product platform?

Stephan B. Tanda -- President and Chief Executive Officer

When you look at how our customers are -- the mix of customers is changing, is the new product developments, especially in biotech and increasingly done by smaller customers. So these smaller customers required services to get their products 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 increase 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.

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

And maybe I could add just a couple of other small points. 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 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.

Daniel Rizzo -- Jefferies -- Analyst

All right. Thank you for the color. And then you mentioned that you were looking for toward like more normal growth in allergies. I was wondering how we should think about what that means in terms of, I don't know, yes, in terms of percentages or how we should think about it going forward?

Stephan B. Tanda -- President and Chief Executive Officer

Well, we've been clear with our long-term growth rates for the Pharma business is in the 6% to 10% range. This business particular has been well above that. So it will revert back to that kind of range.

Daniel Rizzo -- Jefferies -- Analyst

Okay. And then finally, you mentioned the [Indecipherable] nasal spray, what stage is that in, in terms of with the FDA, in terms of...

Stephan B. Tanda -- President and Chief Executive Officer

Its still in clinical trials. I don't have with me whether it's Phase II or Phase III.

Daniel Rizzo -- Jefferies -- Analyst

All right. Thank you very much.

Operator

Thank you. Our next question or comment comes from the line of John Kreger from William Blair. Your line is open.

John Kreger -- William Blair -- Analyst

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.

Stephan B. Tanda -- President and Chief Executive Officer

Well, the long-term trend is 6% to 10%. Now we've been for -- I think almost 18 months, well above that in the teens for that particular segment and the 6% to 10% is much more reasonable and we see that materializing.

John Kreger -- William Blair -- Analyst

Okay, great, thanks. And then maybe just digging into the Slide 5, 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?

Stephan B. Tanda -- President and Chief Executive Officer

Yeah. By far, the vast majority is in commercialized product realized because most of our revenue is from device revenue. So the quantity of devices used in clinical trials compared to being commercialized is much lower. Now having said that, we have for quite some time provided services through express [Phonetic] units for the nasal delivery route and now with Noble and Nanopharm and Gateway we can also offer services for the injectable side of the house. And as Bob already mentioned for the patient onboarding, the human factor side.

John Kreger -- William Blair -- Analyst

Great. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Gabe Hajde from Morgan -- Wells Fargo Securities. Your line is open.

Gabrial Hajde -- Wells Fargo Securities -- Analyst

Good morning. Was going to try to revisit Noble a little bit, unless I missed it, I would 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 million although it looked a little choppy. So hoping you can help us in that regard?

Stephan B. Tanda -- President and Chief Executive Officer

Sure, yes, Gabe, you spot on, in the $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 $0.01 or $0.02 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 nice upside in the near future.

So I would add though that the service business itself is a high growth part of the Pharma the segment, especially given that more and more of the clients requiring the 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 good growth opportunity.

Gabrial Hajde -- Wells Fargo Securities -- Analyst

Understood. Stephan, is it something that you have to maybe go out and acquire another business to offer another product or service or is this something that can -- I guess and grow at the rates that you expect on a stand-alone basis?

Stephan B. Tanda -- President and Chief Executive Officer

No, as you see in Slide 5, 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.

Gabrial Hajde -- Wells Fargo Securities -- Analyst

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 terms of, is it more of a dual source issue, how long it might persist?

Stephan B. Tanda -- President and Chief Executive Officer

I think you characterize it well. I'm not sure that I can add anything to it -- this customer growth, and then we give a 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.

Gabrial Hajde -- Wells Fargo Securities -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Jason Rodgers from Great Lakes Review. Your line is open.

Jason Rodgers -- Great Lakes Review -- Analyst

Yeah. Just in the Pharma segment, can you give us a better idea of what percent of your revenues in the prescription area are generated from the allergy side versus central nervous and other areas?

Stephan B. Tanda -- President and Chief Executive Officer

Sure. So, with 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 coming today for central nervous system. And I think prescriptions are about half of our Pharma for us.

Jason Rodgers -- Great Lakes Review -- Analyst

And would you expect the 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?

Stephan B. Tanda -- President and Chief Executive Officer

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 and entries into this category and growth geographically as well, but certainly it's going to taper off more closer to the long-term targets.

Multiple trends happening at the same time, on the one hand, allergy continues to be an expanding category through. I'm not a expert, but everything I read is the warming climate certainly increases the allergen loads in the environment and for whatever reason, all of us become more prone to allergies year round certainly unwanted but [Indecipherable] around allergies. And so that is a growth driver. And as that effects, more and more parts of the world that can afford allergen medications that will continue to grow.

On overlaid 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. It's the 6% to 10% range and yes, some quarters it's going to be at the low end and some quarters it is going to be mid range. We don't have a crystal ball like that.

Jason Rodgers -- Great Lakes Review -- Analyst

And it's nothing to do with like a new competitor or any situation like that. Correct?

Stephan B. Tanda -- President and Chief Executive Officer

Not really, I mean certainly we have competition. I mean, our market share is high but not 100%. And there will always be some competitive activities and competitive market.

Jason Rodgers -- Great Lakes Review -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.

Mark Wilde -- BMO Capital Markets -- Analyst

Good morning, Stephan. Good morning, Bob.

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Good morning Mark.

Stephan B. Tanda -- President and Chief Executive Officer

Good morning.

Mark Wilde -- BMO Capital Markets -- Analyst

I wanted to just dig in on the fourth quarter outlook for you. You talked about Beauty and Home customers destocking. I'm curious, is this a separate and more recent phenomenon and sort of third quarter weakness that you pointed out in personal care?

Stephan B. Tanda -- President and Chief Executive Officer

In short, absolutely. I mean we've pretty much and almost uniform quarters get that back from not only our personal care customers, but 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. If there is any guide, probably will be with us 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 our Beauty and Home business. But it's certainly not the quarter four is one of the steady state picture.

Mark Wilde -- BMO Capital Markets -- Analyst

And Stephan, does that -- is that tend to hit prestige harder than say mass market or is it pretty much across the board?

Stephan B. Tanda -- President and Chief Executive Officer

Actually, prestige is the one part of the market of -- luxury is the one part of the market that's still doing well. It's really the broader prestige masstige that's being impacted here.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. The other question I had is just can you update us on sort of your cost reduction efforts. The efforts that 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 a kind of an update on that side of things?

Stephan B. Tanda -- President and Chief Executive Officer

Sure. So you really talking about our Beauty and Home transformation. And just as a backdrop, the remainder 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 top line growth 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 cost of beauty sites in France, analyzing site and a couple of sites in the US. And then the third one is headcount reduction and SG&A streamlining, also corporate support functions that is quite a bit also in Europe, including the installation of the shared service center, which requires all work channels of improvement approved -- 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, and actually just a couple of weeks ago, with a 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 New York parcel [Phonetic] like we are doing now, you have huge unabsorbed fixed cost which is eating up those gains. Nevertheless, we are executing and performing much better.

Now looking at the demand scenario, of course, we are 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 variablized cost actually doing the opposite in other cases, in-sourcing to leverage our own fixed cost and of course further working on purchasing.

Now we are 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.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay, very good. I'll turn it over.

Operator

Thank you. Our next question or comment comes from the line of Adam Josephson from KeyBanc. Your line is open.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning everyone.

Stephan B. Tanda -- President and Chief Executive Officer

Good morning Adam.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Stephan, or Bob. Stephan, I think you just commented that you don't think 4Q is a steady state situation in terms of the guidance, just given the Beauty and Home customer destocking. 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 a non-recurring situation?

Stephan B. Tanda -- President and Chief Executive Officer

Yeah, Adam. Good morning. It's hard to tease [Phonetic] that apart. Clearly, we would expect the 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 the larger challenge. I think there we see some trends of changes in usage patterns, particularly in hair care that need a closer look. But overall the beauty side of it remain very bullish about this destocking, notwithstanding.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Sure. Just two others. One on also on Beauty and Home. So you talked at length about the restructuring Stephan just now, do you think there is 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?

Stephan B. Tanda -- President and Chief Executive Officer

None whatsoever. In fact, the customers are as happy as they've been and certainly, I've been here. And the pipeline too looks good. So I don't see any relationship there.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

And just one last one, again on Beauty and Home. So the restructuring was intended -- was focused primarily on Beauty and Home and you had that $80 million 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 million of EBITDA, incremental EBITDA to which you guided by the end of next year and and why the leadership change now as opposed to, I don't know two quarters ago or two quarters from now?

Stephan B. Tanda -- President and Chief Executive Officer

Sure. I would say we're about halfway through, and obviously some of that has been eaten up with the current demand picture. Eldon 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 skills and experience is required. And certainly, Marc brings those experiences and skills. And frankly we need Eldon elsewhere, on some topic that need attention and the leverage is commercial excellence expertise more.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks, Stephan.

Operator

Thank you. Our next question or comment comes from the line of Ghansham Panjabi from Baird. Your line is open.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Hey guys, good morning.

Stephan B. Tanda -- President and Chief Executive Officer

Good morning Ghan.

Ghansham Panjabi -- Robert W. Baird -- Analyst

I guess, following up on the last few questions on Beauty and Home & Personal Care in particular for North America. That category seems particularly weak, just relative to what your customers have been saying over the last couple of weeks as they reported earnings. 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 for North America.

Stephan B. Tanda -- President and Chief Executive Officer

Hi Ghansham. Yes, let me provide a bit more transparency. Certainly some of our customers [Indecipherable] and frankly we are 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&J has been public about the disappointment in the performance of the product [Technical Issues]

Operator

[Operator Instructions]

Stephan B. Tanda -- President and Chief Executive Officer

Yes, please.

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

And everybody.

Operator

Okay.

Stephan B. Tanda -- President and Chief Executive Officer

Sorry Ghansham where did we lose you?

Ghansham Panjabi -- Robert W. Baird -- Analyst

I think you mentioned J&J and the disappointment with that product. And then, I couldn't hear anything after that.

Stephan B. Tanda -- President and Chief Executive Officer

All right, yes. Our line dropped, Bob was adding something.

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Yeah, I was saying that, if I'm not mistaken. I think some of the customer announces -- announcements, we're talking more about their core sales green gains were coming from pricing than volume and obviously we're going to be very volume-dependent. So that's also part of the equation.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Okay, that's helpful and then just in terms of Pharma, the strategy in terms of broadening out your relevance. How much of this is customer pull-driven and also can you just give us a sense as to the profit pools of the various notes that you sort of highlighted on Slide 5, as you kind of build out your service capabilities etc?

Stephan B. Tanda -- President and Chief Executive Officer

Yeah, I mean, it clearly today, the vast majority of our revenue 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 the 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 then digging more into the whole profit pool of the whole chain that we show there on Slide 5.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Okay. Thanks. And just one final one, maybe for Bob. Hey, 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 in the tax rate, especially one that's the substantial. Is this a new baseline for tax rate going forward or is 2019 sort of an anomaly? Thanks.

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Yes, sure. Good question Ghansham. So, when the tax format came out, we had mentioned that about 70% of our business is outside of the US. So we've got a little bit more of a disproportionate share with business outside the US, and the tax changes were meant to really bring more 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 of the increased tax deductibility on that. So our normal run rate absent any of those discrete items and tax benefits from stock option exercises more net 30% to 32% range.

Ghansham Panjabi -- Robert W. Baird -- Analyst

Got it. Thanks so much.

Operator

Thank you. Our next question or comment comes from the line of George Staphos from BoA Merrill Lynch. Your line is open.

Molly Baum -- Bank of America Merrill Lynch -- Analyst

Hi guys, this is Molly Baum sitting in for George. I had conflicting conference call today. The first question I wanted to ask and you guys talked a lot about sustainability at your Capital Markets Day. So in the Beverage space in particular I wanted to ask if you'd seen any impact, be a 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 opportunity to risks in any of the other segments and categories? Thank you.

Stephan B. Tanda -- President and Chief Executive Officer

Yeah. Hi, Molly. Thanks for the question. I would say the -- we have gotten very high remarks 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, I 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 product 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 are 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 shift. I'm sure from things that are more multiple material, unique material to make them more recyclable, you may see shifts of products that they're one-time use to products that can be reused. And we are engaged in many of those projects.

Molly Baum -- Bank of America Merrill Lynch -- Analyst

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 a question is how much further do you want to expand the business and then if you look at Slide 5, 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.

Stephan B. Tanda -- President and Chief Executive Officer

Yeah, let me not speculate here. Of course it is an active M&A environment, but we are quite happy with how we filled out this slide if you want, if you -- so our internal strategy slides from a couple of years ago, I'm very happy with the progress. These things are also going stages if 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 yes, we may add to that down the road, but we are quite happy with what we have here.

Molly Baum -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks again.

Operator

Thank you. Our next question or comment comes from -- our next question or comment comes from the line of Debbie Jones from Deutsche Bank. Your line is open.

Deborah Jones -- Deutsche Bank -- Analyst

Hi, good morning. Thanks for taking my questions. My first question. You highlighted the role, I think there was created for allergen here. And so there is somethings you needed to do. I was wondering if you could just talk about that a bit. And what kind of strategic projects if possible is there at least kind of the commercial excellence focus that its going to be having?

Stephan B. Tanda -- President and Chief Executive Officer

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 are 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 towering strength is in commercial excellence and certainly the rest of the company can benefit more from his guidance there.

Deborah Jones -- Deutsche Bank -- Analyst

Okay. I am sorry, my line was cutting in and out during the call and I am not sure if anyone asks about the kind of the uptick in capex that you were calling for and just kind of the working cap maybe a bit Bob highlighted earlier, so I was just wondering if I can get some more color on that?

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Yeah, I mean, Debbie, the working capital we've -- we picked it up a little bit just based on where we finished Q2 -- Q3 actuals and 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, it was a good quarter from working capital and the businesses are refocused on this topic. And like I said, we still got -- well, we've made some good progress. We still got -- we've still got some work left in front of us.

Deborah Jones -- Deutsche Bank -- Analyst

Okay, great. Thank you. I'll turn it over.

Operator

Thank you. Our next question or comment comes from the line of Neel Kumar from Morgan Stanley. Your line is open.

Neel Kumar -- Morgan Stanley -- Analyst

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 in allergy market? And then also, margins have been trending toward the higher end of your target range as well. Can you maybe just talk about whether you expect margins to normalize in the near term or stay at current levels?

Stephan B. Tanda -- President and Chief Executive Officer

On the first question, you are right that its primarily about the OTC market. I need to kindly give 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 then the other part of the portfolio, you will see that impacts the margin. Yes. Bob is nodding.

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Yes. No, I would say also you guys you can tract the packaging into that mix as well. I mean it's closer 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 mix tempering -- the mix is really what's tempering that margin and impacting the margin.

Neel Kumar -- Morgan Stanley -- Analyst

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?

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Sure. So it's actually been doing quite well, so we've lapped the one-year anniversary, and like-for-like on the one month in September, we were 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. Stephan mentioned the Activ-Blister project and we have some others in the pipeline. We're starting to see more activity jointly with our legacy business. The application in the epinephrine that Stephan mentioned also will contain a CSP vial as well to protect integrity of the package. So we are starting to see some synergies from both the device and the secondary packaging side of things. So we're very pleased with the development of CSP and see a lot more on the horizon.

Neel Kumar -- Morgan Stanley -- Analyst

Very helpful.

Operator

Thank you. Our next question or comment comes from the line of Adam Josephson from KeyBanc. Your line is open.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks everyone for taking my follow ups. Bob, would you mind just talking about the cadence of sales 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 and Home inventory destocking, and then relatedly, how would you compare this customer destocking you're seeing to previous cycles whether '08 or '09 and 2010 when you saw the bounce back. Can you just talk about how this feels compared to those previous periods in that regard?

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Sure. So I don't have the figures in front of me in terms of month-to-month, but typically in normal cycle 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 the first into a slow down economic cycle, and then typically as 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 '09 in 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.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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?

Stephan B. Tanda -- President and Chief Executive Officer

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, one example more dry shampoo being used by millennials. And the particular exposure we have to the J&J product with the launch not repeating in the product not doing as well, that is different than the beauty customers all of sudden, hey, we are spooked and we're going to run our inventories down.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Sure. Thanks Stephan.

Operator

Thank you. We have time for one more final question and last question is from Salvator Tiano from Vertical Research Partners. Your line is open.

Salvator Tiano -- Vertical Research Partners -- Analyst

Hi, good morning. Stephan, and Bob. So just to talk a little bit about 2020, if you can provide some early moving pieces that you see with regard to capex direction, any meaningful change in your volume trends besides what you already discussed about the short-term implications in Pharma and Beauty and Home or margins. How should we think about next year's earnings and cash flow?

Stephan B. Tanda -- President and Chief Executive Officer

Yeah. Hi, Salvator. We really don't give guidance at this stage for '20, we just give the Q4 guidance. We stand by our long-term targets for the three segments. I think clearly we are entering the year in the destocking mode and with the challenges we've discussed in the Beauty and 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.

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Yes. And I'll touch on your question on free cash flow. I mean, [Indecipherable] 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.

Salvator Tiano -- Vertical Research Partners -- Analyst

Great. Thank you very much.

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Thank you.

Stephan B. Tanda -- President and Chief Executive Officer

Thanks everybody. Thanks for joining us. And we look forward to see you on the road.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Matt DellaMaria -- Senior Vice President, Investor Relations and Communications

Stephan B. Tanda -- President and Chief Executive Officer

Robert W. Kuhn -- Executive Vice President, Chief Financial Officer and Secretary

Daniel Rizzo -- Jefferies -- Analyst

John Kreger -- William Blair -- Analyst

Gabrial Hajde -- Wells Fargo Securities -- Analyst

Jason Rodgers -- Great Lakes Review -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Ghansham Panjabi -- Robert W. Baird -- Analyst

Molly Baum -- Bank of America Merrill Lynch -- Analyst

Deborah Jones -- Deutsche Bank -- Analyst

Neel Kumar -- Morgan Stanley -- Analyst

Salvator Tiano -- Vertical Research Partners -- Analyst

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