Welcome to AptarGroup's 2016 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Introducing today's conference call is Mr. Matt DellaMaria, Vice President, Investor Relations. Please go ahead, 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'll 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 AptarGroup's 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 Web-site, 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, and good morning everyone. Before we review our quarterly results, I'd like to briefly comment on the CEO succession process. As many of you know, I previously announced my intention to retire from Aptar. We expect to announce my successor in November and my resignation date will be sufficiently flexible to accommodate a smooth transition. Now turning to our third quarter results, yesterday despite challenges in certain markets during the quarter, we were able to grow our top line and deliver strong profitability. We reported third quarter sales growth of 1% and EBITDA margin of 21%. Our Beauty + Home segment faced sluggish demand in each region other than Latin America which continued to generate good growth for us. The softness in the other regions was across each end market served by this segment. Certain customers are cautious and consequently implementing inventory reduction programs that have affected short-term demand. It seems to be a combination of weak consumer spending in our markets and key customers finding it difficult to grow their own market shares. We are effectively managing costs and focusing on high growth potential areas such as facial skin care, color cosmetics and the home care market. We expect this growth to be driven by trends such as the rise of e-commerce, which will continue to generate demand for innovative packaging solutions. I'd also like to mention that the integration of Mega Airless continues to go as planned and this business performed well in the quarter. We participated in several fragrance launches in the quarter, including global launches for David Beckham's new fragrance, Louis Vuitton's travel size perfume set. Our Twist & Lock and Bag On Valve technologies are now found on new sun care and insect repellent products in North America. Johnson & Johnson is using…

Thank you, Steve, and good morning everyone. I'll cover a few details and then we will turn it over for questions. I'll start with comments on our Beauty + Home segment's performance. Reported sales decreased 2%. This included a negative impact from foreign currency translation of approximately 1% and the positive contribution from the Mega Airless acquisition, which we completed earlier in the year, of approximately 5%. Therefore, core sales decreased 6%, primarily due to weak demand across each end market and lower custom tooling sales compared to the prior year. Softer consumer spending caused certain customers to tightly manage inventories and delay orders. When we look at profitability, despite the challenges to the top line growth, our Beauty + Home segment achieved an EBITDA margin of approximately 15% in the quarter, and this was a slight improvement over the prior year due in part to the contribution of Mega Airless as well as our continued focus on cost containment. Looking at sales growth by market on a constant currency basis, sales to the beauty market increased 2%, mainly due to the contribution from Mega Airless that was partially offset by lower custom tooling sales. Sales to the personal care market increased 1% due to the contribution from Mega Airless. Sales to the home care market decreased 17% from the prior year, mainly due to soft demand. Our Pharma segment had another good quarter with reported sales growth of 9%, due to a strong increase in custom tooling sales and increased product sales to the consumer health care market. Mega Airless contributed 1% of the sales growth but this was offset by a negative 1% impact from currency translation effects. Therefore, the core sales growth equalled the reported sales growth of 9%. Segment EBITDA margin was 34% compared to 35%…

[Operator Instructions] Our first question comes from the line of Mr. Mark Wilde from BMO Capital. Your line is open.

Steve, it sounds like we may hear you on one more conference call.

Yes, that's probably a likely guess at this point, Mark.

Good news from our side. Listen, I wondered if you guys could just talk about the strength in Latin America, because most of the other packagers have been giving us different messages this quarter.

Mark, I guess what we've seen is, again I think this is a comparison to last year, we saw some softness in Latin America as we went through 2015 and we've been pretty strong going through the first three quarters. And again, it's across both fragrance cosmetics for us as well as pharma and food which have been growing nicely from a relatively small base. That being said, I think this is one of the things as we look out to the fourth quarter, some of the size of the growth we have in Latin America, and in particular Brazil, we expect to start to slow down. While we're still anticipating growth, we're not looking at growth at the same level, Mark, in the fourth.

Okay. And then if we kind of turn to a place that was much softer, that Chinese beverage situation, can you just talk about sort of how volume kind of trended as we moved through the third quarter, and then what you've seen in October, and then also maybe to talk about this issue of a customer adding a second supplier or moving to a second supplier?

Sure, Mark. As we looked at – again, let's come back and take a look at it, this is one of our larger customers in our beverage market in China. It deals in what I call a child-based tonic type drink. It's a sugary drink for children that they are selling to. Our market information has been that the whole market category, our customer and one other make up the majority of that market, are seeing some market softness, so that's what our customer has been telling us in the quarter, and some inventory. The other thing our market intelligence is saying, given the size of our business with the customer, they've been looking to add a second source. We don't think that had a major impact on the third but it is something we will see. For their side, it was more risk mitigation going into the future. When we look at the business, it tends to be very seasonal. So, our business as we got into September was starting to soften and we expect a relatively soft fourth quarter. We tend to see that business in China pick up in the first quarter, which is more traditional.

Okay. And then the last question for me is, can you just talk about sort of any resin impact in the third quarter and what's your thinking about in terms of resin impact in the fourth quarter?

Resin impact for us in the third was relatively minor. So we didn't see too much movement in that. But again, going into the fourth, we're seeing, and again we're going to be looking now at U.S. and Europe, probably 3% to 5% over last year's level, 2015's level, and also an increase from the fourth. And you couple that with also some increases we're seeing in other raw materials, that's going to have a short-term negative impact on our profitability till we get those things pass through. So, it's not a huge increase, but it's enough to affect short-term profitability a bit.

Would you or Bob kind of quantify that just in terms of pennies a share or whatever, maybe down a little bit now?

Looking out to fourth, there's too many assumptions, Mark. I mean I can't give you an exact number, but we have factored some of that cost increase into our estimates.

Okay, great. I'll turn it over. Good luck in the fourth quarter and in the next year.

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

So, kind of putting the declines in your non-pharma businesses in perspective, these seem to be recession type declines. You called that inventory correction. Maybe start off by say just giving us some color as to, first off, what gives you comfort on that in terms of an inventory correction, and second, how did demand flow out during the quarter, was there a big drop towards the end of the quarter in any particular region?

Now are you talking, Ghansham, just Pharma or were you talking across all of Aptar?

All of Aptar.

Okay. Let me come back and deal a little bit with coming up where, as all of Aptar, we actually came into the quarter, July for us was a really soft quarter, softer than we had initially anticipated, that had a big impact on Beauty + Home. After July, we actually saw business from overall Aptar increase as we got into August and September, both of which exceeded the prior year numbers. So, we started soft and then started to pick back up. If you look at our customers, and again it was that inventory issue, whether you look Procter & Gamble, Unilever and frankly even GSK has announced that they are tightening inventory in terms of cash flow, so we've seen that kind of across all of our various sectors. What gives us confidence is we start to take a look at their new product introductions as we go out to 2017, and again I think there's a lot of new activity that will be 2017 based.

Okay. And then just kind of staying on that same theme, assets did change hands during the quarter with Procter & Gamble and Coty, et cetera, on their beauty business. Do you think that that had a material impact on your order patterns during the quarter as well?

I think it had an impact. How much that is, is hard for us to do because certainly as that business was transitioning, Procter was not as focused on it. We think as we get into, again this goes back into late into 2016 but more into 2017, Coty is certainly going to start to focus more on that business even than what Procter was for the last year. So we see that as an advantage for Aptar. We're major suppliers to both Procter and to Coty and I think we're going to be continuing to add our new technologies to their new product innovation model.

Okay, thanks so much. I'll turn it over.

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

Steve, I was just wondering how excited you are about the Cubs run to the World Series this year?

Adam, I was afraid you were going to bring that up, and as a Cubs fan, we have to wait every 100 years for this, so I'm going to give the Cubs their due. It can't happen again for another 100 years.

So, Steve, back to what Ghansham was asking about, you talked about the customers delaying projects, cutting back on promos, destocking, you mentioned Glaxo, P&G, Unilever, I mean does this remind you at all of what you experienced in 2007-2008, or if not, how is it different?

I think the cautiousness is a little similar to 07-08 where there is a bit of concern from our customers on their growth. I mean if you look at P&G or Unilever, their growth has been somewhat anemic over the last couple of years. The big difference here [indiscernible] from 07-08 is the financial side. All of our customers are in a much better financial position and certainly to the liquidity markets that they're seeing on the outside. So, you don't sense that there is a pending doom and gloom that we saw back in 07-08, but there are certain similarities where they are certainly conservating a lot of stuff and trying to get ready for what may not be a robust market from a consumer standpoint.

And do you think they have reason to think that, I mean why would they have reason to think that?

I think it goes back to their sales on a total basis. So again if I look at Procter, they are up 1% to 2%, in some categories they are down. Unilever has mentioned that they are up. A majority of what they are up is actually in pricing in terms of their products. GSK is coming back and had a major effort, one of the first we've seen, where they are taking inventory out of the chain. So, it's not just one of the customers, there tends to be a broader base that they are conserving cash.

Sure. Bob, just also on the core sales issue, if you exclude the impact of lower raws that you've had over the last couple of years, can you tell us what your core sales growth would have been both this quarter and over the past couple of years, and how that compares to your recently revised long-term core sales growth target of I believe it was 4% to 6%?

You're talking about the resin impact going back over the past couple of years?

Exactly. So if it weren't for lower resin, obviously your core sales growth would have been a bit better over the last couple of years, right?

Yes, you know it impacts probably more our Food + Beverage segment. So, for example this quarter it was about 1% negative on the top line. But I don't have the figures in front of me, Adam, but I mean I don't remember it being any more than 1% to 2% in any one particular quarter on the top line.

But I think also, Adam, going back to that, if you exclude resin, our Pharma would have been pretty much within our target range. Food + Beverage over the last couple of years would have also been in the target range for sales growth. We would have been maybe a point below on Beauty + Home if I go back for a couple of years, at least on the revised projections we gave at Analyst Day.

So that's what gives you confidence that this revised long-term core sales growth target is reasonable, because if you exclude the resin impact, you would have been at least close to that target in your second?

Yes, and I think the other side from ours that's also a positive, despite what have been a challenging quarter in terms of sales growth for both Food + Beverage and Beauty + Home, our profitability side continues to be strong and that's something I'm really encouraged about which gives us a lot of optimism as we look going forward.

Thanks, Steve and Bob. Just one more, a few on the CapEx, I think you guided to $140 million, down from $155 million last quarter, if memory serves. I assume that's entirely related to the sales weakness you're seeing?

Not exactly. I mean it's just more again fine-tuning as we come into the end of the year. I mean certainly as we continue our integration of Mega, as we had mentioned back in April, we are going to avoid certain CapEx that we had already planned in 2016 on some Airless expansion. So I mean now that we're in there and we're looking at it, we're able to better take a look at what our capital needs are for the remainder of the year. So I wouldn't tie it so much to demand. It's really more just fine-tuning.

Thanks a lot, Bob. Best of luck.

Our next question or comment comes from the line of George Staphos from Bank of America. Your line is open.

Thanks for all the details. I guess first question I had, so beverage volume was down 20% and that was driven by Asia, correct?

Yes, that is coming out of Asia, it's correct.

I mean if I extract Asia, what was the rest of your beverage business doing in the quarter, up a little, up a lot, down a little, down a lot? And then, I seem to remember from the last conference call that you weren't terribly worried about share position as far as the beverage volume issues you pointed out last quarter, but now you are losing some share. So I just want to understand a little bit more in terms of what's happening in that region with that product.

So, George, let me take the first one on the beverage. So, we were down in the U.S. in beverage in the quarter roughly about 11%. We were up slightly in Europe and we were up very strongly in Latin America, and that's not surprising based on the fact that we've, as we've said in the past, committed additional resources in that market and we're pretty active on a lot of projects. So, U.S. down, Europe and Latin America up, and then Asia down.

And again to the other point in terms of the competitive side, our market intelligence came back on our Asia customer in the quarter that they were looking, given the size of the business we had, as a second source. Again, I don't think – we're going to still maintain the majority of that business, that's our anticipation. But if you look around the world, we've actually been increasing share as opposed to decreasing share. So, it tends to be a much more Asia specific issue.

Okay. So in the U.S. being down 11%, can you remind me why that's the case, because at least some of your peers, clearly they are not exactly analogues of you, have shown better performance in their businesses that are driven by single serve beverage. So, what's so unique about your 11% down and what's driving, I should say, in U.S. beverage?

George, it's hard to say. We're present in so many different areas. One area that may not track exactly what you're trying to compare us to is in some of the water enhancements and the flavourings, which we saw a pretty strong ramp-up in the past and now we've seen somewhat of a flattening to declining market. So that could be part of it.

So I don't think – again, it's not any one product, we also get into certain seasonality. Our coffee creamer business tends to be stronger as we get into the fall and the winter months, as we come out of the summer months. So, there's nothing that we've seen as a loss to competition or anything in that side. It was more just timing of our orders for that.

Okay. Two more and I'll turn it over just to be fair. Just first one, Steve, a year ago and throughout this year you have been optimistic on new product launches, the new product pipeline. Obviously Aptar does a great job on that, but getting it ultimately commercialized and your customers using, it seems like it's been a little bit more of a challenge this year at least in terms of the overall volume growth. Agree or disagree with that and tell us why we should be encouraged looking out to 2017 when we're basically hearing the same thing we heard over the last several quarters and yet volumes have been relatively challenged?

It's a good question, George, and I think if you came back – first of all, I think we have to split these in terms of where our markets are. So if you look at our Pharma business, the projects we're on, and again I'm very encouraged by the tooling sales that we had in the quarter coming back in the ophthalmic area which opens up a lot of opportunities for us, so when I start looking at Pharma, those projects I see coming on, the timing of when they come might be an issue. I can tell you in Food + Beverage outside of the Asia side, those projects we're still pretty optimistic, and the ones that I'm looking at are more 2017. Where I think the challenge has been and where you rightfully so bring it up, has been in Beauty + Home. What we've seen there is we've been getting a lot of projects, but they've been smaller in nature than what we had originally anticipated. So, what gives us some – and I think that's somewhat the concern of our customers, is not doing a lot of major introductions, but when I look at the project portfolio, and Bob and I just sat through some budget meetings over the last week, there is still a lot of optimism certainly within Europe and U.S. and we'll be going through budget meetings in Latin America over the next week or so, there is still a lot of optimism. But I understand your question, particularly on Beauty + Home over the last year, we're still seeing a lot of project activity though.

Okay. My last one and I'll make it a two-parter and in sequence so you can get off finish answering it. One, when you've gone through these destocking periods, and this has come up in the past, we're already one quarter into it, barring recession, my experience is it usually takes a couple of quarters which would mean we maybe have one more quarter of destocking, but hopefully first quarter is on a better trajectory, recognize you don't guide more than one quarter ahead, frame that however you feel like framing it. And then in France, was there something that you missed in terms of commitments in terms of why customers didn't take product from you that we should be concerned about or why should we not be concerned about the delay?

Okay, let me deal with the first one. The destocking side again will be different by market, but I think you're right George, when we've seen that, it tends to be one to two quarters. So we've actually anticipated that part of the guidance we're giving for the fourth quarter is that there is not a strong rebound to that. Typically in the past we've seen that rebound after we get out three to six months. So going into your point, I would anticipate that the first quarter would start to see a bit of a rebound. In terms of France, I want to put this in context. That has to do with our injectables market. We've been expanding our injectables capacity, and as we've been doing that, we have to go through validations with customers. What we had is timing of validations getting done at the end of the quarter that didn't get as done as soon as what we would have liked. That is more not a loss of business but that's a push of business from the third quarter into the fourth quarter, and so we're again positive about the growth we're seeing in the fourth.

Thank you, Steve.

Our next question or comment comes from the line of Mr. Chip Dillon from Vertical Research. Your line is open.

Steve, good to have you around and good luck with the World Series. First question is on the consumer health business. You noted that sales were up 12% in the quarter, which Pharma [indiscernible]. I just didn't know where that compares to the rest of the year. Is it year-to-date double digits as well and do you think you can sustain in that part of the Pharma business something on the top line that approaches double-digits in the future years?

I think, Chip, if you looked at it, consumer health care, and again this is the strength of Aptar, is that we play in a lot of markets, even within each of our segments. So, if you look back a little bit, consumer health care was actually pretty soft, relatively flat to down 1% or so in 2015. We looked at that. That had to do with Eastern Europe, Russia. That started to come back. We're going that with Russian customers and Western customers shipping in. So our target is still to be in that upper single-digit growth. And again, if you look on a year-to-date basis, I think we are up 5% ex-tooling on product sales for consumer health. So 12% is certainly a good ramp-up, but we are optimistic on that going out, going not only to the fourth quarter but into 2017 and 2018.

Okay, that's good. And I guess the second question I had is, as you look back from a big picture perspective, it looks like with your guidance for the fourth quarter, which means we can figure the year, and if you kind of look back, it looks like the EPS growth rate has been about 3% since 2011, and even if you go back to 2007, it's a little over 5%. And if you were just the Pharma division, it would have been lights out, I know that, and it looks like obviously the other two have not really grown as fast, I'm really thinking Beauty + Home. And I think as we look out, what are your thoughts, you think that this slowdown from what Aptar used to deliver in prior decades, you think that the potential is to kind of get back onto a maybe not that fast but a faster growth ramp than what we've seen or do you think something structurally is different?

I don't think this is much structurally, and again I think what we've done over that period, even with Beauty + Home, we've supplemented some of that organic growth with acquisition growth that is right in our product. The Mega acquisition we did this year is doing as well or even better in terms of financially than we originally anticipated. So, the other side that I think is important is when I start to look at products being developed. So part of that Pharma growth is products that have been developed in our other segments and I still think that is a huge strength within Aptar that helps trigger that. I'm still optimistic about future growth in our Beauty + Home and our Food + Beverage segments, and I think it's a real positive that we have the diversification. So, I mean we're going to see more of not as big of a growth, but I think last third quarter, if you look back, Chip, we were up almost 14% in product sales in Rx. We're going to be, I think in the third quarter we were probably up 1% to 2%. So, the good news is that got filled in by CHC, so our consumer health care business. So I think that's the real value that we see going forward. So I don't see a big change in terms of what we've done in the past to deliver that in the future.

Okay. And then maybe I missed something, but I think I heard you all say the CapEx for this year would come in at $140 million, and is that lower than what you had previously guided to or was my model too high? And secondly, directionally which way do you think CapEx goes next year?

Chip, you're right, we guided about $10 million lower than what we had said previously. So we moved it down from $150 million down to $140 million. And right now it's too early, as Steve said. We're only now just getting into the budgets for 2017. So we don't have a real look at where 2017 CapEx is going to be.

Okay. Thanks.

Our next question or comment comes from the line of Mr. Philip Ng from Jefferies. Your line is open.

Underlying demand was pretty strong in Pharma, but margins were at least a touch light versus our models. Was that largely due to the tooling sales dynamic or anything we need to be mindful of, and how should we think about margins going forward, at least fourth quarter?

First of all, I think we're really encouraged because while it is a bit lower than what it was the previous quarter on the margin side, but you are exactly right, the tooling sales which were pretty significant in the quarter always carry a lower margin profile than our product sales. So, overall we would anticipate still staying well within the range that we've given at the Analyst Day for the Pharma operating margins.

Okay, that's helpful. And I guess just going back to the destocking by customers, how are your inventory levels implicit in your 4Q guide, are you assuming that you're going to be drawing down to the inventory here and is that baked in as a potential drag for the fourth quarter, and do you have a view on how inventory levels are at your customer post fourth quarter?

That's a tough one for us to deal with. I think what we're finding is that, and that goes back to what I answered earlier, these destocking tends to take one to two quarters for us. So I would anticipate that as we get into the first part of the year, we're going to be lapping some of the destocking side. If you look at our business, inventory is always an area that we try to manage to, but I don't think our inventory move is going to have a major play in terms of earnings in the fourth quarter for us.

Okay. And just one last one for Bob, you have obviously announced a pretty sizable buyback program in the quarter, can you talk about how we should think about the pacing going forward and would you look at more opportunistic if there is a dislocation of your stock? Thanks and good luck in the quarter.

Sure, Philip. It's something that we look at on a regular basis with our Board. I mean if you look back historically, I mean we've bought back this year about 1.1 million shares to date. Prior to that, excluding the ASR we did in 2014, it was slightly higher, about 2 million. So, we'll take all the market conditions into account, what we see in the short-term horizon, but I think you'll see a pretty consistent open market buyback approach, and then barring any short-term things on the horizon, we would consider something a little bit larger like we did in 2014, but that's something that we look at on a regular basis.

Our next question or comment comes from Ms. Debbie Jones from Deutsche Bank. Your line is open.

I wanted to go back to the guidance you gave, [indiscernible], you did $0.67 a year ago, so I'm just wondering if I'm just kind of thinking about it the right way, as Pharma grows, contribution from Mega Airless are positive and is this all going to be completely offset by volume declines in beauty or is there something more or is the resin that's more material?

I think you've got a couple of things going back into that. As you come back, certainly you're going to get our normal seasonality in terms of the beverage business, which brings us back down. But on a comparable basis, it was also low last year. So we're not anticipating strong recovery, as we said in the outlook. The other side here is resin is going to be an impact, and I think the one thing I want to, resin and other raw materials and there is generally some short-term issues until we get caught up with that. The other area that I opened up a little bit is, Latin America has been very strong for us, Debbie, and as we've seen and we've seen other competitors, end market hasn't been as buoyant for others in these markets. So we're not seeing as much growth down there as we had in the past. And the last area I think I'd want to underscore is, unfortunately we did have a fire that we had to deal with that we announced a quarter ago. Our estimates, and you can see it was about $0.01 impact in the third quarter, our estimates do not include any timing issues of recovery on insurance for the fire.

Okay, that's helpful. And then on Stelmi, the qualifications, can you give us a sense of how you think that might impact the fourth quarter once that starts to roll through?

It's going to be positive. We would expect year on year growth in the quarter from the injectables market. So, I don't want to come back, we don't get into that kind of granularity, but we would expect year on year growth.

Okay, great. I'll turn it over.

Our next question or comment comes from the line of Chris Manuel from Wells Fargo. Your line is open.

Couple of questions I wanted to kind of follow-up on or maybe approach from a little different direction. In your prepared remarks, Steve, you referenced that customers weren't growing market share as fast as maybe you'd hoped. If I kind of think of sort of the hallmarks or the pillars of what Aptar has been able to do, it's traditionally been able to go in and grow new categories where you're putting dispensing systems or conversion oriented stuff and it's not traditionally been about your particular customers growing market share. I get that at your Analyst Day you laid out long-term targets that were very similar to where they've been for past years, still kind of mid-single digits organic growth, but did this sort of signal perhaps that there may be aren't as many categories that you're trying to go into or how would you have us think about where your white space is or your best opportunity for new product expansion or new category expansion is going forward?

It's a good question, Chris, because also in my prepared remarks, that's kind of on a macro basis but we are seeing growth for example in Beauty + Home in facial skin care. You go into the Pharma, the ophthalmic market for us is growing significantly. We are seeing new applications coming back in, in terms of Food + Beverage. So, those markets, you're right, we're going to end up still having certain fields that we're going to grow in, but I can't come back and ignore macro standpoint of P&G's, of those type of customers are flattening. A lot of those bigger growth opportunities are going to affect us, and we are gaining incremental business on a lot of those smaller markets, but if the overall market slows, it has an impact on our overall sales.

All right. Another follow-up kind of along these lines, are you seeing some of the new products and things that you are launching more cannibalizing existing stuff that you have today, meaning the next generation on next generation, or do you still see considerable amount of white space, whether it's I think about walking up and down the aisle of a grocery store and still seeing a lot of screw-on screw-up caps or sample sizes when you would look at personal care products, other things of that nature that are still in my mind a lot of white space for dispensing systems?

I would say it goes back to your second, we still see quite a bit of white space. Certainly some of the products that we come out with will enhance other products that we are already on, but I would still say the majority of what we've got are new areas. Again going back to skin care or facial care or color cosmetics, ophthalmic, those are all growth areas in terms of products that we haven't been on in the past.

That's helpful. One question on your new Pharma capacity and the injectables in that piece, it sounds like it's just a little bit of a timing hiccup of getting some qualifications done. Have you been building a pretty healthy inventory, or I should say inventory, but backlog there or projects, and might we or might we not see the same thing as you get the capacity, same sort of qualification issues up in Congers or I mean is that a segment that, look, if you've been a little bit behind here recently, that's a growing segment, we saw that in West results as well, is that a piece that you can kind of still grow at mid-single digits?

We think we are very optimistic on the injectable market, and so what we saw here was more of a one quarter timing issue rather than a long-term trend. So we continue to be very optimistic about the injectable market. And certainly there's always going to be challenges as you validate new facility. So I can't tell you that that won't ever happen again, but I'm very comfortable that once we get everything done, we'll see an acceleration of the growth because the market is growing frankly.

Thank you and best wishes. Just one comment for Bob, go [indiscernible].

That's terrible.

Our next question or comment comes from the line of Jon Andersen from William Blair. Your line is open.

Maybe starting out, putting the [indiscernible] beverage customer in China, the point you mentioned earlier Steve, aside, how are you feeling generally about have your market share positions, the level of kind of competition that you're seeing in various segments, and are there other, any other customers where you may have represent a significant enough portion of your business that there could be a consideration of dual sourcing?

I'm just trying to think going back, Jon, China, that was our biggest single source customer. Certainly we've got significant share on some, and it happens to be more on our Food + Beverage business than it does in our Beauty + Home, and in Pharma we are also single sourced but there is less opportunities to come back and second source to that. So I would say, again in thinking about it, I don't see a major risk in the short term. There is always an issue as we lookout longer-term.

Okay. And with respect to destocking, is the inventory destocking that you've talked about, did that really begin in earnest I guess in the third quarter, did you notice any of it earlier in the year, and is that kind of been more pronounced in certain parts of your business or certain geographies, and I'm thinking maybe some geographies where there is kind of two-step distribution or the potential for more inventory in the channel?

I mean we started to see it a little bit in some of the markets at the end of the second quarter. So, if you looked at the destocking, we started to see that a bit in Asia and in the beverage market. When you came back, I think Beauty + Home as our customers have talked about it, and then in the Pharma, GSK actually announced that they were going to be doing some inventory reduction plans as they got into August and September. So, I think it's going to be region to region and product line to product line for us. But I think it's tended to be more third quarter, fourth quarter but we started to see a little bit of it in the second.

That's helpful. Last one for me is, if some of these trends persist a little bit longer than anticipated, I mean you talked about just kind of the strong cost-containment efforts and clearly that's helped you kind of maintain very strong profitability, can you talk a little bit about your ability to contain costs and what those kind of efforts are focused on as you look ahead over the next kind of couple of quarters? Thank you.

I mean what we take a look at is our whole let's call it our overhead structure in terms of what we have in terms of cost containment. That's something we try to focus on all the time. We're also taking a look at the productivity of our products, how we can improve that to make sure we can be as cost-effective from a product costing standpoint. So this is one – and again, I would say that I'm really pleased with how the third quarter came up in terms of overall profitability. But I can assure you this is an area that is getting a lot of focus for us. We want to be very competitive from a cost standpoint and it's critical for us to be successful as we go long term.

Actually one quick follow-up if I might, on the pricing and kind of the input or resin cost dynamic, can you remind me what's the lag time or the timing differential between you incurring some additional cost in the P&L and being able to kind of pass those through from a pricing perspective?

I think on the resin side, again it's going to be dependent. Around the world, it tends to be anywhere from 30 to 90 days on the pass-through. When you get to let's call it aluminum or some of the other costs, that's a little bit longer out because we ended up basketing that with other materials. So that tends to be probably anywhere from four to five months out when we would generally get those pass through.

Okay, thanks. Go Cubs.

Our next question or comment comes from the line of Brian Rafn from Morgan. Your line is open.

I joined a little late, so pardon if I have a duplicative question. Steve, could you comment a little bit about your knowledge through the third quarter Christmas sales kind of in the beauty care business like perfumes and that sort of thing, what are you seeing for, what's been kind of your sense of the buildup because a lot of the National Retail Federation have been very punk on what they see the Christmas growing, and then if you could segment out in kind of the perfume and cosmetics area, what are you seeing any trend differences between kind of the lower end commodity and then the higher-end premium side?

Brian, I think when we came back just to get a little bit of reference here, our customers again I think are cautious about the Christmas season. I don't think they are negative but they are more cautious. The good news for us is, and I think this has a little bit to do with the third, we had fragrance sales for us, or beauty sales as we would call them, growing about 12% in the second quarter. So we think there was kind of a push-back into the second quarter for the Christmas season, and so I think they are filling. So again, we are not seeing any negative coming out but we are not seeing overall bullish. I do think you're seeing probably prestige doing probably a bit better than what we're seeing on the mass side.

Okay. And then from the standpoint as you look at your digit actuating dispensing system, the technologies, when you look at China or you look at South America, Latin America, how proactive are they at being kind of lead-edge, kind of first adopters relative to transformational closures in caps and pump type technology versus say more of a European or an American market?

I think Latin America, and again this will be somewhat dependent on the market, certainly in Beauty + Home they tend to be if not first adopters right at the top of everybody adopting. That's a very strong market for them. Asia tends to be a little bit more of a follower, but that's also starting to change because where we've found our growth in Asia historically has been with the multinational and we're now seeing a significant part of growth for us coming at that first year Chinese national business. And there they are looking for new technologies. So again, our technology should play well into that.

Yes, okay. And then your sense, Steve, maybe a little – what is your sense on kind of going from 2016 to 2017? We've been getting certainly some warnings across conference calls about slowing markets and weakness and trepidation in that, how are you seeing in your earliest kind of forward, how are you seeing the kind of the container packaging side for you guys going into 2017?

Again, I think we've been prudent as we look at 2014. We're going through the budgets now into 2017, and again, I think we are hoping to see growth, but I think we're prudent going into the end of the year. So it's a little bit early just our commenting on what 2017 looks like, Brian.

Okay. And then kind of the pacing, what are you seeing on new customer projects and that type of thing? Are you seeing any changes from the standpoint of things being delayed or sizes of launches or is there anything that you can say as we are here late in 2016?

I think the number of projects we are working on continues to be very high for across all of our market segments. What we have seen is probably a bit more delay in some of the projects coming back out, and that's probably been more in the Beauty + Home side. There's been more delay in some of that than what we had originally anticipated. But overall, the number of projects and the amount of innovation that our customer is looking for, we are still very positive about it.

And then just one final one, Steve, on the Stelmi acquisition, in the whole injectables area, are you seeing the drive from the standpoint of growing market share in kind of established legacy injectable markets or are you seeing much like you do in some of the other cap closure and pump areas where you are actually bringing injectable delivery systems to completely different drug delivery systems that maybe haven't used injectables in the past?

I think in this area given that we are one of the smaller players and growing in this market, we are seeing more second sourcing opportunities, West is still the largest player in this market, and we've adopted some new technologies that will help us grow the business. So, it tends not to be just adapting to brand-new markets here as we do in some of the others, but we are working within biologics and our new products coming back to deal with growth in the whole injectable category.

All right. Thanks, guys. Appreciate it.

We have one follow-up question from the line of George Staphos from Bank of America. Your line is open.

Two questions for you. First, if you were in our seat, and I recognize it's hard to give an average, but please give it a shot here, what do you think your incremental margin might be either in total for the business or by segment if we obviously hold foreign exchange and input cost flat? And then the second question I had, specifically for Bob, when you do look at buyback, Bob, and I know you said it's going to be relatively steady unless there is a dislocation, but do you typically look at intrinsic value for your share in terms of when you would be accelerating or decelerating buyback or do you look at an earnings yield? Just any thoughts that you can share there would be helpful. Thanks guys and good luck in the quarter.

I'll try to take a little bit on the incremental. Our cost of sales if I take a look on a consolidated basis for Aptar is around 35%, after you take out cost of goods sold from the selling side. So it's about 35% gross. I'd say if you take a look at that as we add, we're probably getting 40% to 45% dropping down because a lot of those are going to be fixed costs. Again, that's a broad average, George, so that's the best I think I can give you on the short-term. Bob, I don't know if there's anything…

So in theory, you're doing I don't know 5 to 10 percentage points better on the incremental than say your average segment margin, and I'm not trying to be too prescriptive but…?

Yes, and by the way, that would also – I'm giving you that at the gross margin, but I would also say, that would assume then that that should basically drop to the bottom because SG&A is not going to – that won't move up. So that's roughly what we'd be looking at.

Okay, thanks for that.

And George, on the buyback, really it's more a reflection of use of cash in the balance sheet, and as we said before, M&A transactions are really one of our top two uses of cash. So, if you remember back in 2014, we were very under-levered, but going back to that time period, we were also looking at some things that we felt were actionable at the time. When we determined that there wasn't anything on the short-term horizon actionable, that's when we pulled the trigger on the ASR. So, I think it's more a reflection to things obviously we can't talk about but things we see from a shareholder value perspective looking forward. If there is an actionable deal that makes sense to us strategically, like a Mega or Stelmi, I don't think you'll see us going out and do anything absent of anything like that. That's the one lever we have to kind of remain within our minimum targeted balance sheet capitalization.

Okay. Thank you very much, guys.

We have a follow-up question from the line of Chris Manuel from Wells Fargo. Your line is open.

Just one last question from the Cleveland contingency.

No, we shouldn't take this call.

Don't worry. It's been a long time since we've had a baseball title here too. But with respect to just the insurance stuff, so you were off 1.4 million or so this quarter. Is your anticipation, you made some comments earlier about it might still be bumpy here, is your anticipation that this gets recovered, is there anything that might it still be a negative this quarter or do you get it recovered this quarter, how are you thinking about that?

Chris, it's purely a timing matter. So if you look back to the fire we had in Brazil, we're going to have quarters where the costs or the business interruption side of the business exceed the reimbursements from the insurance company, but we're fully covered for business interruption and all the fire damage and repair to rebuild the facility. So we're going to have some quarters where it will be a negative and there will be some quarters where it will end up being a positive. But in the end, net-net, when everything is done, we shouldn't see any negative impact as it relates to the fire. So it's purely a timing matter.

Okay. What is the sort of ETA, if you will, of when everything is back to normal there, when you get – I'm assuming you're rebuilding the facility and that type of stuff?

We're in the process of starting the rebuild, coming up now. We are anticipating that that's going to take us till the middle, at least the middle second, end of the second into the third quarter of next year before we get the facility back up. So there is still quite a bit of lead time going out for that.

Okay, thank you. Good luck, guys.

Thank you. I'm showing no additional audio questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

This concludes our call today and I'd like to thank everyone for joining us. Thank you.