AptarGroup, Inc. (ATR) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentleman and welcome to the Aptar Second Quarter Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise, but later we’ll be holding any question-and-answer session and instructions will follow at time. [Operator Instructions]. As a reminder, today’s conference call is being recorded. I would now like to introduce your first speaker for today, Matt DellaMaria, Vice President Investor Relations. You have the floor, sir.

Thank you. And welcome, everyone. Participating on the call today are Steve Hagge, President and Chief Executive Officer; and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. Steve will begin our call with a brief overview of our quarterly performance. Bob will then discuss a few financial details and we will open it up for questions. Information that will be discussed on today’s call includes some forward-looking comments. Actual results or outcomes could differ from those projected or contained in the forward-looking statements. Please refer to Aptar Group’s our SEC filings to review factors that could cause actual results to differ materially from those projected or contained in the forward-looking statements. We will post a replay of this conference call on our website. And AptarGroup undertakes no obligation to update the related forward-looking information. I would now like to turn the conference call over to Steve.

Thanks Matt. Good morning, everyone. Before we comment on the quarterly results, I would like to take a moment to briefly review the subject of my retirement that was announced a couple weeks ago. As many of you know I have been with AptarGroup for 35 years. And I will be 65 at the end of this year. I am in good health and the timing is right for me to move on to the next phase in my life. It’s been a tremendously exciting career and it was not an easy decision to retire. I am very thankful to be part of an excellent long-term performance of this organization. We have a very talented and experienced management team, and an exceptionally dedicated global workforce. Following good governance practices, our Board is conducting a review of both internal and external successor candidates. Because we must respect the Board’s responsibilities and the detailed nature of this process, we will not be commenting on potential successors or the timing related to any forthcoming announcements on this matter. I expect a smooth transition once a successor has been named by the Board. I have no doubt that Aptar will continue to lead the industry in dispensing and sealing solutions for many years to come. I plan to continue to serve on our Board and I look forward to contributing to our future success. Now turning to our quarterly performance, yesterday we reported second quarter sales growth of 4% and record quarterly net income and earnings per share. We continue to deliver value to our customers through innovative dispensing and sealing solutions and manufacturing excellence. We were able to achieve these strong results despite certain headwinds, including lower custom tooling sales, passing through lower resin cost, and softness in certain markets. In addition to record earnings per share, I am pleased to report that we also expanded our adjusted EBITDA margin over the prior year. We continue to successfully integrate the recently acquired Mega Airless company and we’re happy with the performance of the business. Now as we anticipated, our beauty and home segment reported positive top-line core sales growth after several challenging quarters. This growth was primarily driven by increased sales to the beauty and home care markets and more than offset some continued softness in the personal care market. Demand from the beauty market was broad-based and across different applications such as fragrance, color cosmetics, and facial skin care, while sales of our insect repellent dispensers helped drive some of the growth in the home care market. We were happy to see a good level of project discussions and new product introductions in the quarter, including many global fragrance launches such as Lacoste, Michael Kors, and Hugo Boss. Our new applicator with adjustable side actuation and continuous formula dispensing was selected for a facial skin care product in Europe. In China, Aptar’s all plastic arrow system is found on new men’s facial skincare products. Finally, Unilever has relaunched its Alberto Balsam shampoo in Europe to include a custom snap top for a more overall modern package design. Our pharma segment had another good quarter with increased core sales across each market. Sales to the prescription drug market increased over the prior year even though last year’s strong second quarter was a difficult comparison. Demand for our dispensing systems use with medicines for allergies was strong again in the quarter, and this included generic and over-the-counter treatments. Sales to the consumer health division increased due to improved sales to the eye care market with our innovative ophthalmic preservative free system. And increased demand for our nasal saline rinse spray systems. Our injectables business grew over the prior year and we continue to work with our customers to qualify the added capacity that has been installed earlier this year in Europe. As we announced in the press release, we are pleased to be adding capacity at our Congers, New York facility to better serve our customers in the U.S. injectables market. Several new products were introduced in the quarter, including a generic allergy treatment using our nasal spray system. Also two new dermal products were launched in the U.S., featuring our airless system. One for the topical treatment of acne and the second for the treatment of rosacea. Aptar’s ophthalmic squeeze dispenser is also found on two new eye care products in Latin America. We help Abbot in Columbia launch a new pain management product featuring our versatile spray pump. This quarter was a bit more challenging for our food and beverage segment. This segment what have shown positive sales growth had it not been for decreased custom tooling sales. And the negative effects of passing through lower resin costs to our customers. In addition our food and beverage segment was negatively impacted by a decrease in demand from food and beverage customers in Asia. We do expect a continued softness in the Asian beverage market going into the third order. Despite the softness in Asia, we have been busy helping our customers introduce new products around the world, including several new bottled water launches in Latin America, featuring our sports cap. In the US, Weight Watchers launched a new liquid concentrate water enhancer featuring our closure and SimpliSqueeze valve. We partnered with Nestle in Canada on the Nestea liquid tea concentrate and also the development of a custom jar lid for the Nescafe Taster’s Choice ground coffee. Our closures with SimpliSqueeze valves can also be found on new barbecue sauces in Brazil and Mexico for both Hunts and Heinz. Looking forward I’m confident that our diversified business model will continue to drive future growth. We are serving eight different markets with a broad portfolio of dispensing and sealing solutions, across many different geographies. Our level of project dialogue with our customers across each segment remains high. We look forward to opportunities to bring new and existing Aptar innovations to the market. At this time I’ll turn it over to Bob who will give some of the details behind our recent financial results.

Thank you Steve. And good morning everyone. I will briefly cover a few details and then we will turn it over for questions. In looking at how our business segments performed in the quarter, I will start with our beauty and home segment. Reported sales increased 7% and this includes Mega Airless for the full quarter, which accounted for 5% of the year-on-year growth and reported growth also reflects a negative translation impact of 2% coming from changes in foreign currency exchange rates. Therefore, core sales increased 4% due to increased demand from the beauty and home care markets. When we look at profitability, our beauty and home segment achieved an EBITDA margin of 15.5% in the quarter. This was an improvement over the prior year margin of 14.4%, due to the strength of the beauty and home care business and our continued focus on cost containment. Looking at sales growth by market on a constant currency basis, sales to the beauty market increased 21% on broad-based increases and demand across different application fields and inclusion of Mega Airless in our 2016 results. Mega Airless represented approximately 9% of the sales growth in the beauty market. Sales to the personal care market decreased 2%. And the positive effect of including Mega Airless, approximately 3%, was offset by an equal reduction in custom tooling sales compared to the prior year period. And sales to the home care market increased 7% from the prior year, primarily due to increased sales of spray systems used with insect repellents. Our pharma segment had another good quarter with reported sales growth of 4% on broad-based increases in sales to each of the three markets served by this segment. Mega Airless represented 1% of the sales growth and currency translation effects were not significant. Therefore core sales increased 3%. EBITDA margin improved to 36% from 35% in the prior year period. Looking at sales growth by market on a constant currency basis, sales to the prescription market increased 1%. And this included a negative impact from lower custom tooling sales of 4% compared to the prior year period. Growth was driven primarily by strong demand for our nasal spray systems for allergy treatment. Sales to the consumer healthcare market increased 9%, and this is mostly due to the inclusion of Mega Airless which contributed 6% of the sales growth. Excluding Mega Airless sales to the consumer healthcare market grew 3% over the prior year on increased sales of our ophthalmic squeeze dispenser and nasal saline spray systems. And sales to the injection market increased 8%. Our food and beverage segment faced some headwinds and the quarter and reported sales declined 3%. Changes in currency translation rates accounted for 2% of the decrease, therefore, core sales declined 1%. The decrease in core sales is in part due to lower custom tooling sales and the negative effects of passing through lower resin costs to customers. Despite these headwinds, the segment achieved a strong EBITDA margin of just over 22%, which was a slight increase over the prior year period. Looking at each market on a constant currency basis, sales to the food market increased 6% on increased sales to the dairy creamer, sour cream, and infant formula categories. And sales to the beverage market decreased 9%, primarily due to the declines in sales to beverage customers in Asia. Also lower custom tooling sales represented approximately 2% of the decrease. Capital expenditures were approximately $33 million in the quarter and equal to the prior year. Our free cash flow was approximately $41 million compared to $67 million a year ago. The primary reason for the decrease in free cash flow relates to changes in working capital. Looking at our balance sheet capitalization at quarter end on a gross basis, debt to capital was approximately 41% while on a net basis it was approximately 30%. We are over one-times levered compared to our trailing 12 months EBIDTA. We repurchased approximately 520,000 shares in the second quarter and this brings the year to date repurchased share total to approximately 635,000. I have a few comments on our guidance before we open it up to questions. As noted in our press release, we expect our earnings per share for the third quarter excluding any potential impacts of the timing of cost incurred and any related insurance reimbursements associated with the Aptar Annecy facility fire to be in the range of $0.79 to $0.84 per share this compares to $0.83 reported in the prior year and to $0.81 if we adjust the prior earnings share to be on a comparable foreign currency basis. This guidance contains different assumptions including the continued softness in the beverage market in Asia and the changing mix of business within our pharma segment. In addition, we are updating our previously disclosed projections regarding depreciation and amortization and capital expenditures, including the recently required Mega Airless business. For the full-year 2016 we now expect depreciation and amortization to be approximately $155 million and that our capital expenditures will be approximately equal to that amount. Lastly, we expect our effective tax rate for the remainder of the year to be in the range of 30% to 31%. At this time Steve and I will be glad to answer any of your questions.

[Operator Instructions] Our first question or comment comes from the line of Ghansham Panjabi from Robert W. Baird. Your line is open.

Hey guys, good morning. And Steve, congrats in your announced retirement. I’ll obviously miss-working with you.

Thank you.

First off, so understanding that comps we easy, 2Q was still one of the strongest quarters in beauty and home and quite a while. Can you touch on mix with segment. Just given your optimization program, I would’ve thought the margin contributions would have been higher. I think you mentioned tooling, was there anything else and that it was unfavorable?

We had a little bit of the resin pass through that affected us. But again I think we were seeing that we’ve had some as you said some challenges in the segment over the last several quarters. We were very positive to see the growth. Again, our beauty market did very well. And certainly as you have seen with some of our customers like Unilever, Procter & Gamble talking about personal-care, they’ve seen a relatively soft market worldwide for those customers. That had an impact. But overall I think our performance, and then the other side, just to reiterate the home care, the home care market for insecticides was positive and most of the growth there was coming from insecticide sales.

On the comments on 3Q guidance, I think you said Bob, changing pharma demand, can you elaborate on that? What does that refer to?

Yes. I think if you looked at it particularly over the last year and a half we’ve seen extremely strong Rx sales. And the margins on a segment income basis have been exceeding, say, where even our targeted upper end of the range of between 30% and 31%. I think the positive of what we are seeing is the diversity of our business is continuing to help us. We’re going to see, Rx business last year and the third quarter was probably 12% to 14%. Now we are just starting to see that more equalize and we’re starting to see more growth in our elastomer business and our consumer healthcare, which has a bit of a different margin profiles. So while we continue to be strong in terms of growth, we think our pretty margins will be closer to the upper end of our stated range than what they’ve been over the last couple quarters.

One final one on Congers, it seems like demand for elastomers has been, is expected to be quite strong going forward. Was there any consideration for a new plant in the U.S.? And at current, how much elastomer demand in the U.S. for you guys is being supplied locally versus maybe facilities outside the U.S.? Thanks so much.

Well going back. All of our sales to North America, which is about $30 million or so, have been supplied from France. So again strategically when we acquired Stelmi several years ago we intended to build capacity first and then try to expand that capacity to other regions. And we’ve looked at Congers. What we been able to do instead of building a full new facility we will be doing a finishing a washing of the products et cetera. So I think we’ve been able to do it on a very cost-effective basis to serve our North American customers. So again we’re really, this is part of the long-term strategy we’ve had and I think we are excited about being able to better serve our customers in the fast-growing North American market.

Thank you. Our next question comes from Adam Josephson from KeyBanc. Your line is open.

Steve, Bob good morning. Steve, let me add my congratulations as well to you. Just one more Bob or Steve on the guidance. So I think earnings were up 11% in 2Q and you’re guiding to essentially flat in 3Q, appreciating that you’d be slightly up on a constant currency basis. But you’re talking only a percent or two. You mentioned the weakness in the Asian beverage market, Bob, but you also experienced that in the second quarter and your earnings were still up by 11% year-on-year. Does it all have to do with Rx or, I’m just try to understand why earnings would go from up 11% to essentially flat?

Adam on the Asian beverage softness that we talked in Q2 it primarily came in the month in June. So our guidance for Q3 is really based on what we experienced in June looking out forward. April and May I would say were more normal months for us in the beverage market. So that is why you see a larger impact in Q3 rather than what we had in Q2.

Bob, how big is that business for you, just to give us some perspective?

If you look for food and beverage the overall split geographically for food and beverage, we have got about 18% of the sales are made in Asia. And if you look at the broad-based split between food and beverage were about 59%, 41% food versus beverage. Our beverage market is slightly higher. Those percentages are somewhat flipped when we look at Asia.

Just a couple other thoughts, any idea what precipitated the weakness in June? Why June as opposed to a few months ago? Is there something that is obvious that would have changed in those markets in June?

Couple things. Let me take that one Adam. We had two issues going on in the Asian market, one on the food side, one of our key customers which normally does their plant shutdown in the first quarter moved that to the second quarter. So we got impacted by that. That is actually back online so, it will not have as big impact in the third. But secondly, several of our beverage customers are seeing some softness in their demand. So as a result they are actually pulling back a bit on inventory. But we continue to be optimistic about the long-term future in Asia. But we see this is more of a temporary blip that occurs, our discussion with the customers, they’ve started to see that more late second quarter and they are being more cautious as they go into the third.

Thanks. Just two others Bob, on the seasonality on earnings just so we have some perspective, typically how much should earnings go down by sequentially from 3Q to 4Q?

It’s not necessarily 12 months. It depends on where we’re coming out of a particular cycle from an economic condition. I would say generally Q2 and Q3 are our stronger ones. I hesitate to give permanent assertion that 3Q should be closer to 2Q. Going back we’ve had variation depending on whether we’re coming out of a particular weakness or strength in any particular environment. But generally 2Q and 3Q are strongest and fourth is our weakest. One is most impacted from the recognition of the stock option expense. That’s about really all I would say for seasonality.

Thanks Bob. Steve one last one. I know you said you can’t discuss the CEO search, but obviously when Peter’s retirement was announced five years ago, you were named his successor after having been a COO for over three years at that time. This time around your retirement was announced. There were no successor names there is obviously no COO at the Company during your tenure as CEO. Can you just help us why there would have been differences with Peter’s tenure and yours as to why there would have been a COO under his watch and not yours?

Again, I think it was a different timeframe. If you went back before that we didn’t have a COO before Peter. I think it’s been difference where the business was. Again, I want to be, important here that the Board is really coming back in terms of overall governance feels that it’s their obligation to review both internal and external candidates. And the timing of that is what they are going through now. So, I wouldn’t over read anything from where we’ve been in the past. But certainly the governance situations over the past five years have put more responsibilities to the Board and they are trying to reflect that in their decision.

Thank you. Our next question comes from George Staphos from Bank of America. Your line is open.

Let me also congratulate you. It’s been a pleasure working with you the last 20 years or so. And best of luck to you in the future. And your Cardinals. I guess, I think, I want to ask about, I know it’s hard to predict this sort of thing. In the past when there’s been destocking, it usually lasts about a quarter. What makes you comfortable that this Asian beverage situation is that garden-variety of blip? Why wouldn’t it be something larger? And if you brought a bit more color around that, that would be helpful to me anyway.

George, what we’re doing is reiterating what the customers are telling us. In China the markets that we are serving whether it’s water or functional drinks are seeing more challenges in the market from different competitors. It depends on which customer we are dealing with. So right now our customers are saying they think it’s more of an inventory issue. But we will get more color to the as we go through the third quarter. That’s all we have right now.

Not to be too pedantic about it, but why would there be so much inventorying of beverages in the first place? Which I would think that would be fairly fast moving consumer goods types of items.

I think it’s probably just because of the length of distribution channels that you see in China. So once you’ve got it there’s, there’s still a fair amount of the product that you have to put to be able to cover the country. And several of our customers have to distribute these throughout the full Asian market. That is the only thing I can give you George.

Okay. Fair enough. If we can switch gears a little bit, I’ll ask a couple questions and then I will come back into queue. Can you talk about beauty and home did in Brazil? If you mentioned it I missed it. Has there been a pickup there? I seem to remember from the first quarter that there were some green shoots there, if you could comment that would be helpful.

George we were very strong in the second quarter in Latin America and primarily in Brazil. I mean, we were up almost 40% in the quarter. Now probably half of that we estimate is coming from volume and half is related to catch up of inflation and pricing increases. But you’re right the strength that we noted back in Q1 continued into Q2. So very positive sign in the second quarter for our beauty market. Also Latin America we also saw good growth really across all of our markets. Personal-care was up, food and beverage was up, Rx, CHC, so Latin America was a strong performer for us. I mean overall on a consolidated basis we’re up about 33% in the quarter.

That’s helpful thank you. My last one and I’ll turn it over for everybody else. I seem to remember back last quarter back to food and beverage here, that there were a number of projects you were optimistic on, that the tone of the business seemed to be strengthening. This question has been asked a couple different times already. But is there anything else we need to be mindful of other than the China and the destocking, which will run its course in terms of why we’re not seeing a better trend there? Thank you.

No George. That’s a good question. Frankly I would tell you I’ve been sitting through management meetings over the last two to three weeks. And we have a significant amount of new projects. So we’re continuing to be very excited about the number of things we are looking at and the potential projects we will be adding. I do not think there’s been any change in sentiment; there seems to be more what we hope is a short-term issue. But again, we’re positive about the number of prudent new projects and we reiterated that in the press release. So, still positive about the long-term future of the segment.

Our next question comes from our line of Anojja Shah from BMO Capital Markets

Hi, good morning. Congratulations again, Steve. I wanted to talk about the insecticide sales and I think you had mention in 1Q that you started to see an uptick and that you were expecting about $10 million to $15 million of additional sales this year? Is that still the estimate, is it higher now?

It’s going to depend on what really frankly what happens here in the United States. That is the run rate we have had that 7% growth that we saw in home care through this quarter, the majority of that is related to the increase we are seeing in the insecticide side.

Going back to the strengths that you are seeing in Brazil and Latin America, I know you called out some things last quarter about exposure to specific customers that were doing well, but it just seems to me that beauty is a discretionary item. And in a country that has bad macroeconomic situation, I’m just surprised that the strength has been maintained for quite some time now. Do want to describe?

Again there’s a couple issues. The beauty culture in Latin America and Brazil in particular is pretty strong. I think what’s happened is our customers and I think everything has to be put in perspective, our customers last year were seeing challenges in that market. We were flat to even being down on the beauty market. They’ve become much more aggressive coming back in marketing their products. Certainly as we are getting closer to the Olympics there’s been more promotions going on. Again, I would tell you it is culture and frankly our customers went through about an 18-month of slowdown in their sales and they have been much more aggressive in marketing. But again what I like to reiterate is what Bob said, this is really broad-based for us in Latin America. That is coming from converting projects in our beverage. We put Mexico in our Latin America business, we’re seeing continued expansion with Gatorade and other products expanding. We are actually increasing from non-dispensing to dispensing. The same goes into our pharma market. Today it’s been a positive outlook for the whole region.

Thank you. Our next question comes from the line of Debbie Jones from Deutsche Bank.

Congratulations, Steve. I just wanted to ask, I think you just took down you CapEx target by $10 million, I might be wrong about that. Can you address that? And again you just announced the Congers project. Also you were discussing you like the pipeline of projects that you have going forward.

Debbie I can take that one. When we put together the CapEx guidance at the beginning of the year, we are working off of a budgeted number. At that time we had out there the projects for the Congers facility even though we had not started. So the $10 million for our original guidance was already baked in there. The pullback from $165 million to $155 million was a couple things, one a little fine-tuning once we’ve gotten further into the Mega integration process. We were not quite sure until recently how much that was, how much spend there was going to be before the end of the year. Secondly, it really reflects our cautious guidance in Q3. As we have done in the past we have been pretty good stewards of capital. When we see business slowing down we look for areas where we can pullback. Not only on general operating cost but also in the capital area. So it reflects both of those things.

Okay. Thanks. That’s helpful. And then could you talk about the fire that occurred, and what happened? It doesn’t happen to open but this has happened in the past. And just how to think about the impact in Q3, I know you addressed in your opening comments, but it’s a little bit unclear to me on how that’s going to impact guidance?

Okay. Yes. I’ll be going to take that. This was a facility that does anodizing that is basically coatings or transformation of color to metals. The facility is in France. There were three, in the site, there were three production units. One is where the fire significantly destroyed. I am very positive that no one got hurt in the facility. We had no environmental issues around that. We’ve done an outstanding job, and I really congratulate the people that have been involved in this on our side, is making sure we have supply. Because these are subcomponents that go into our products. To be able to continue to supply customers. Right now we do not think one of a material impact on our customers as a result of this. The fire itself got started as a short in an electrical component. You’re right, we’ve had one of the several years ago, but we are again going back and reinforcing all of our fire safety protections systems on all our facilities worldwide. Overall we do not think the impact is going to be, when you consider insurance side et cetera, going to be material to Aptar, but as we saw anytime you get into this you can get cost in one period and reimbursement in another. And right now it’s hard for us to estimate what that split could be.

Can I ask which your resin assumption is in the Q3 guidance?

Right now, I’m going to go from second quarter to third quarter, we are seeing a slight drop both in Europe and in the U.S.. Again, you’ve got to take this in other parts of the world it may be slightly different, but that is our biggest user. So it’s a couple 2% to 3% down right now. But again there’s still quite a bit of volatility in those.

Thank you. Our next question comes from the line of Chip Dillon from Vertical Research Partners. Your line is open.

My first question or actually my first statement is Steve congratulations. And also I think it’s fascinating, most management’s never achieved an upward goal. It seems like you’ve never seen the pharma margins get down to what you always fear they might get to, so congratulations on that. Actually Speaking of that segment I had a quick question. I know that when Bob went through the numbers he mentioned the prescription growth, the consumer growth, there was one number that was up 8%; I just don’t recall what that was.

That was in the injection side. We were up 8% in the quarter on our injectable business.

Got you, okay. Steve I think you mentioned that pharma margins are likely to average higher in the back half than the first half? If you could clarify that and say what was going to contribute to that performance.

No, I think. Maybe I misspoke on this, Chip, what I’m saying is as you’ve said our margins for pharma have been outside of our normal range for the last several quarters. Due in part to very strong Rx sales that have been double digits for the last several quarters. What we do is, and I think this is a strength of our pharma business, being in both prescription, consumer care, healthcare, as well as injectables. While was still seeing growth we’re now seeing that growth among both in consumer healthcare and injectables, which carry a bit of a lower margin profile. I think we will be coming down from being over our estimates to be more on the high end of our long-term targets.

Got you, that’s clear. I think, next question is, as we look at the food and beverage segment, I know it’s really early days, but is there any thought to or maybe I will put it this way, if the weakness you are seeing in Asia persists say for six or nine months, would there be the potential to do any kind of footprint realignment in that region in that business or without just be too early of a reaction?

I think it would be too early of a reaction. I want to reiterate we’re still very positive about the Asia area growth platform for us. I can tell you Chip, one of the things we’ve been looking at is the need to potentially expand in Asia. Today we are in one large, several different facilities and one in Suzhou, China, we’re looking at whether should we be expanding in Guangzhou. So I’d say it’s more a of growth look for us than a contraction. But certainly we will end up monitoring where we’re going to be on the food and beverage side over the next 6 to 12 month.

One last quick one. You mentioned the lower CapEx for the year, we had $165 million in our model. What would next year directionally look like versus this year? It’s early days, do have an early read on that?

No. We’re just now Chip starting to get into that process. It’s really going to be very much project dependent. At this point I do not foresee any major bricks and mortar or anything other than potential expansion that Steve just alluded to there. I would say we probably would be in the ballpark of where we are today $165 million, but I would really have to see some of the details which we won’t be getting now for a couple months yet.

Our next question comes from the line of Chris Manuel from Wells Fargo.

Good morning, gentlemen. Steve, congratulations.

Thank you very much.

The only question I want to ask, going along these lines and I know you are trying to avoid some questions around this. But I think you gave a relatively hard stop toward year end retiring, is it anticipation thought of having someone in place before you retire?

I think what I’m going to be doing, I’ve told the Board this I will be flexible in terms of making sure that there is a smooth transition. I think the Board is diligently working to try to find the successor again, either from an internal or external candidate side. So I will have some flexibility, it’s not a hard stop at year end.

That’s helpful. Just having Interims or different things in between can sometimes be disruptive.

From my perspective that is not something that makes a lot of sense for the Company or for me.

With respect to the Stelmi and then Congers addition and stuff as well, it sounds like you’re getting closer, you are doing some trials in customer qualifications. When do you anticipate commercial shipments going? If memory serves, what you did over in Normandy was to expand capacity roughly 40%. How much with the washing and cleaning or prep facility in North America be able to absorb if you wanted to ship product here. Could it cover most of that? Kind of give us a sense of how significant the North American add will be?

Let me come back and take two parts. First of all you’re right, we have ended up coming back our new operations have been expanded in France. The mixing machine is in and we’re going through the qualifications. We actually are expecting to ship commercial product out of that starting in the third quarter, ramping up to the fourth. What will be doing in North America will effectively adding about 10% to 15% to potential capacity. I think it’s our most important side it’s really going to improve the service, the quality, et cetera for what is a potentially significant, what is a significant U.S. market. For us it’s a growth platform, so will probably be able to get another 10% to 15% in terms of potential sales out of the addition. We should be done with the construction of that in Congers towards the end of this year and then qualifying customers as we go into next year.

That’s helpful. One last maybe something I’m a little confused with here. Steve you mentioned that you feel best about your prospects that you have in a good while. That you are seeing lots and lots of development and heavy activity across customers. Bob when you mentioned whenever you start to see slowness or different elements in your business and you start to see any kind of pullbacks or changes you reassess and that’s what lead you to the low-end of the CapEx. Kind of hearing those two side-by-side, they don’t necessarily sound consistent, maybe I’m misinterpreting something; how would you want us to think about that?

On the CapEx as we get into the year we are better to fine-tune what are the immediate CapEx needs. I mean I think Steve’s comments are much more medium to longer term focused. And the CapEx is, I was focusing on the next six months. What we’re putting in CapEx in the next six months is not necessarily where, the growth that Steve is alluding to is really investments that we have made in the past and current project activity.

Yes. And again, I would reiterate to that, Chris, we continue to, we’ve never not invested when we see good growth projects. And that will continue to be the company’s profile going forward.

Looks like we have a follow-up from George Staphos from Bank of America. Your line is back open.

Thanks for taking my follow-up. Perhaps we’ll back a bit Brexit, have you seen any change in buying behavior from your customers since Brexit? At all would you relate what you are seeing in Asia to Brexit, or is it totally unrelated in terms of the macro concern, the second derivative issue?

Let me come back and do it the second. Certainly what we are seeing in Asia is completely disconnected from the Brexit side. That is more of a local market issue. In general for us with Brexit, and I think this is true for most of the companies that I have had a chance to talk to, if you look at our profile while we have manufacturing in the UK it tends to be relatively small. So the devaluation of the pound on the immediate side didn’t have a material impact for us. What I think Brexit is doing in the short term is probably not causing much disruption. But what it is doing is putting a certain amount of uncertainty in the marketplace. I wouldn’t tell you it is necessarily helpful, but in the short term we do not see any major material negative.

Thanks for that Steve. Zika what sort of additional benefit might you see from this above and beyond the run rate that’s been witnessed already? Are you seeing any kind of fall off in duty-free? I wouldn’t imagine there’s that much duty-free related to the regions that are being affected by this unfortunately; but can you comment to that effect the puts and takes relative to Zika?

I think. It will be interesting to see as we get into the Olympics if you start to see travel downturn. Certainly as Bob alluded to when he talked about market, we’re actually seeing pretty strong growth throughout Latin America. We don’t think that the Zika virus per se has a lot of negatives. What I do think you’re going to get is that there wasn’t much insecticide used in Latin America in prior years. We think that’s probably going to be a trend that’s going to continue now that they are using it and they are going to need to continue that. I look back to this like the hand sanitizer issues when we had the Avian flu. All the sudden you have a base that moves up from a level of 100 to 115 that stays there. So I do think insecticide, insecticide sprays will continue to be, maybe not have the same growth we had this year, but won’t go back to where they were in the past.

Thanks Steve. My last question, maybe you’ll cover this in September when you do analyst day, periodically we all ask you the same question perhaps in different ways. From my vantage point covering the industry, I haven’t had a company that’s putting up the same high level of consistent growth as Aptar in my time covering your stock. That being said, it seems more frequent as an occurrence that Aptar has a one-off issue here a one-off issue there, you’re really not hitting your core growth rates longer term across all of your segments. Again, you have a very high comparison to go up against. Do think at this juncture that maybe it’s time to rethink the longer term growth rate Steve? What would you lead us to believe at this juncture? Thank you.

That’s a good question, George. It’s one that we’re going to continue to follow-up. We will talk a little bit more about it at analyst day. One of the things you bring up is a real strength of Aptar’s and that’s the diversity of the business. You’ve not seen just one market being up or down, we’ve seen volatility and using that in a positive term between the various markets. We are going to be taking a look at it across where our growth targets are. But I think again the diversity of our business is the strength to be able to help drive not only growth, but also the margin profile that we have seen improve across all three of the business segments over the last year to year and half.

Thanks a lot. Good luck in the quarter. We will see you in September, Steve.

[Operator Instructions] We have a follow-up from Adam Josephson from KeyBanc.

Steve just two follow-ups. One on the destocking issue, if memory serves you’ve had a few of these occurrences in recent years. Can you give us some perspective as to how long these have typically lasted?

It will depend on, it’s a good question Adam, but it will depend on the segment that it is in. As we’ve seen some destocking in pharma, we saw a little bit in beauty and home a couple years ago. Typically for us they tend to be one to two quarters that’d be the impact. But again everything is going to be dependent on the region and the particular customer.

Sure. Related to George’s question about the core sales growth target, you’re falling short of that target conversely you’ve been above your year to date, you’re above your long-term margin target. Can you just give us your thoughts as to why these things would be happening that you would be above your long-term margin target and below your long-term sales target? And do you think it’s reasonable to expect that to continue, and if so why?

One explanation if you look at it is just pure mathematics. If you look at the size and beauty and home segment, which is where we have fallen short of the sales target, that is our lowest margin. The slowness that we have experienced in the last 18 months in beauty and home also has a positive influence on the mix of the margin as pharma and food and beverage have grown. The converse is true as well, that is one of the positives coming out of Q2 is we’re starting to see beauty and home come back to within the range of their long-term sales growth. I think part of that is just pure math.

I think the other thing and going back, I will take a little bit on top of what Bob has said, I think we’ve done an excellent job as a company taking a look at our cost controls over the last and this is across all three segments. We have done a very good job of doing that. That’s helped. Certainly the other thing I wouldn’t underestimate has been resin and let’s call it raw materials on a broad base. So fiscal, I don’t see, we’re not exiting a major deterioration in the margin profile. Couple of more some of the margin targets for a couple of the segments at least in beauty and home we still got ways to be able to get and I’m still pretty optimistic that we’re going to be able to for that.

Thanks a lot, Steve. Best of luck.

Thank you we have a follow up from Chris Manuel from . Your line is open.

Good morning. This is actually Gabe. Three-part question first, and then another one. With respect to Stelmi, just a point of clarification. The 10% to 15% expansion that you talked about in capacity, Steve. I think you talked about it being a $30 million business. Should we think about that as $3 million to $5 million revenue opportunity? And then I think to build on Chris question, how much of that new capacity that you added in France is going to be taken up by the new opportunity in Congers? And then even further does this take away from any prospects of expanding in other regions? Of have you identified any other bottlenecks with respect to Stelmi?

Let me go back and see if I can try to do with each of those. On the 10% to 15%, I think it is more 10% to 15% of overall Stelmi, because this is one piece of the whole manufacturing process. It is bigger than just the U.S. side. It adds capability. And frankly what we’re up and running in the states, while we will be dedicating most of that capacity to the US, there is nothing that would say we couldn’t ship that to other parts of the world. Secondly in terms of the new production going on in France for Congers, this would be an additional piece of dedicating that new growth. That is the key side, we’re seeing 8% to 9% growth in our injectable market. Looking back this is a way to help facilitate that growth. Again, some of that will end up using for Congers, some will be used for the rest of the world. And lastly, I actually think what we’re doing in Congers in terms of in terms of breaking down some of our business actually makes entry into other areas of the world much more economically feasible, rather than building a whole new production facility. I think this is an excellent strategic move in terms of our overall growth and really helps us as we go for the next 5 plus years.

Very helpful. Last one, any early wins that you can talk about from a cross-pollination from a Mega Airless?

Again what I am going to do is we have up couple on the personal care side. One I touched upon in my remarks. We’re seeing on the dermal side because we talk pharma as a growth area for us. We have two new projects, one for acne, and one for a red skin condition that has come back, and both of those are using Mega products. Both of those end up coming out of the prescription side. Certainly Mega was working on those, but our regulatory knowledge really helped them get across the finish line. We’re also seeing some really interesting opportunities in Asia and also going into Latin America on future projects using the Airless technology.

We have a follow-up from Chip Dillon, Vertical Research. Your line is open.

Just a quick one on the buyback, you give us an update on the buyback activity, what you have left on it? You mentioned your level of leverage. Is there any thought towards increasing whatever the pace of buybacks is, or possibly doing a Dutch auction given the low leverage right now?

Chip we have about $37.5 million from memory sake left on the existing authorization. We will look at that with the Board at future Board meetings as we do each time on whether we’re going to go for another extended authorization. After that we will evaluate the situation where we’re at. Certainly the share price where it is today, we’ll have to take that into consideration whether we look at in ASR or Dutch auction or whether we just do open market transactions. We’re committed to the consistent capital application approach. It’s something we evaluate on a regular basis.

I am seeing no other questioners in the queue at this time. So, I’d like to turn the call back over to management for any closing remarks.

Great Andrew, thank you. This concludes our call today. And I’d like to thank everyone for joining us.