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AptarGroup (NYSE:ATR)

Q3 2013 Earnings Call

October 31, 2013 9:00 am ET

Executives

Matthew DellaMaria - Vice President and Assistant Secretary

Stephen J. Hagge - Chief Executive Officer, President, Director and Member of Executive Committee

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

Analysts

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

Albert T. Kabili - Macquarie Research

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Jason A. Rodgers - Great Lakes Review

Todd Wenning - Morningstar Inc., Research Division

Deborah Jones - Deutsche Bank AG, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2013 Third Quarter Conference Call. [Operator Instructions] Introducing today's conference call is Mr. Matt DellaMaria, Vice President, Investor Relations. Please go ahead, sir.

Matthew DellaMaria

Thank you, Sahid, and welcome, everyone. Participating on today's call 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 an overview of our quarterly performance. Bob will then discuss our financial results in greater detail, after which 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 website. And AptarGroup undertakes no obligation to update the forward-looking information contained therein.

I would now like to turn the conference over to Steve.

Stephen J. Hagge

Thanks, Matt, and good morning, everyone. I'd like to wish everybody a Happy Halloween, and also congratulate those Boston Red Sox fans. So yesterday, we've reported a good quarter for Aptar, with a record quarter revenue of $624 million and strong earnings of $0.70 per share before restructuring charges. We're able to achieve these results, even though we faced some challenges in the quarter.

We continue to see good growth in all regions other than the U.S. The timing of passing through resin cost increases had a negative impact on our bottom line and we experienced negative foreign currency transaction effects, primarily related to our operations in Latin America.

However, given all that we encountered, I'm pleased that we're able to achieve record third quarter sales and grow earnings over the prior year.

I'd like to take a few minutes to summarize our business segment performances, and then turn it over to Bob. Our Beauty + Home segment saw a good sales growth in the quarter. Continued weak demand across each of the markets served in the U.S. was more than offset by growth in Europe, Latin America and Asia. Profitability was negatively affected by the slowness in the U.S. and the timing of pass-through of the increased cost of resin.

Customer sentiment seems to indicate that we're not out of the woods yet in the U.S. but our ongoing dialogue regarding potential new projects remains at a good level. In the quarter, we participated in several new launches by our customers, including Bath and Body Works signature line of body lotions and shower gels that are packaged with our custom dispensing closures. Lancome's Dream Tone cosmetic lotion utilizes our custom airless dispensing solution and our fine mist pumps can be found on several new celebrity fragrances. And finally, our flat sampling system, which we referred to as Imagine, was chosen by P&G to promote their Dolce & Gabbana fragrance Intense and this will be distributed up inside of 12 different magazines across Europe, the Middle East and Latin America.

Now turning to our Pharma segment, which performed very well on the quarter. Sales growth was driven by increased demand from the consumer health care and injection markets. Sales to the prescription market were down slightly, mainly due to lower custom tooling sales compared to the prior year. Profitability was at a good level and within our long-term target range for this segment.

In the quarter, there were several interesting consumer health care launches, primarily in the nasal decongestant category, with 2 new products from NanoMed hitting the market in the U.S. and other decongestant launching in Europe, each equipped with a reliable nasal spray system.

Now looking at our last segment, Food + Beverage, we had a mixed quarter. Sales to the food market increased over the prior year, while sales to the beverage market were basically even with the prior year when currency and custom tooling were excluded. The soft demand from the beverage market was expected. This is consistent with what we're hearing from other companies regarding the cooler weather conditions resulting in lower demand for single-serve beverages. Profitability was negatively impacted by the timing of passing through of the increased cost of resin.

It was an active quarter in terms of new product launches in both the food and beverage markets. First of all, in the food market, our ECOLITE pour-style closure was chosen by Cosco for their Kirkland brand Maple Syrup. WhiteWave expanded their coffee creamer line with the introduction of Dunkin' Donuts brand coffee creamer using our custom closure, and we're very encouraged by the numerous new cooking and soy sauce introductions in Latin America using our innovative dispensing closures.

Now in the beverage market, we participated in several new functional drink introductions in China and Latin America and 3 new bottled water products that were launched also in Latin America using our dispensing closures.

Now as we look ahead to the fourth quarter, we expect core sales for each of our segments to increase over the prior year. However, we anticipate that our earnings will be negatively impacted by the continuing soft conditions in the U.S. market served by our Beauty + Home segment. Also, Europe continues to recover and in the emerging markets, we expect to see continued good growth across the various markets we serve.

I'd like to underscore that the strength of our diversified business portfolio with the industry's broadest product offering, presence in multiple geographies, serving many markets and customers, we're able to achieve growth, even though pockets of softness may occur in certain markets or regions. And lastly, our organization and our customers continue to benefit from the dedication of our people who, even in difficult times, always put their best foot forward and strive for excellence in all they do.

At this time, I will turn it over to Bob, who will review the details behind our financial results.

Robert W. Kuhn

Thank you, Steve, and good morning, everyone. As announced in our press release, our reported sales increased 6% to a record third quarter level. On a constant-currency basis, our core sales increased 4% in the quarter. We've now lapped the Stelmi acquisition date and, therefore, for the quarter, there is no separate acquisition effect.

Our third quarter earnings per share guidance did not include any costs from our European restructuring plan, which was about $0.03 in the quarter. So on a comparable basis to our guidance, we earned $0.70 in the quarter. This compares to $0.66 in the prior year when the negative impact from the write-up of inventory related to the Stelmi acquisition is excluded from the prior year results. That negative effect was about $0.04 per share.

On a reported basis, earnings per share increased 8% over the prior year. Free cash flow, which we define as cash flow from operations less capital expenditures, was $46 million in the quarter compared to $76 million the same period a year ago. The decrease in free cash flow in the quarter was due in part to the timing of our pension plan contributions.

On a gross basis, debt to capital was about 23%, while on a net basis, it was roughly 11%. We paid approximately $17 million in dividends in the quarter, representing $0.25 per share.

Regarding our share repurchase program, we spent approximately $35.6 million to repurchase 600,000 shares in the quarter. This brings the remaining balance of shares authorized for repurchase to approximately 4.6 million.

Turning to market details by business segment. Our Beauty + Home segment's core sales increased 4% over the prior year. Looking at our markets on a constant-currency basis, compared to the prior year, sales to the beauty market increased 5%, sales to the personal care market increased 4% while sales to the home care market decreased 5%.

In addition to the negative operational impact coming from the softness in the U.S. market, our Beauty + Home segment's income was negatively impacted by approximately $1.4 million related to higher resin costs. Our Pharma segment's core sales increased 7% over the prior year.

Looking at the markets on a constant-currency basis compared to the prior year, sales to the consumer health care market increased 21%. Sales to the injection market increased 27% while sales to the prescription market decreased 4%, nearly all of which was related to lower custom tooling sales compared to last year. Our Pharma segment reported good profitability in the quarter.

Our Food + Beverage segment's core sales decreased 1%, primarily due to lower custom tooling sales. If we exclude the effect of lower tooling sales, product sales actually increased mid single-digits over the prior year. As we look to the 2 markets served by this segment, the decrease in custom tooling sales compared to the prior year had an impact on the overall sales to each market. On a constant-currency basis, sales to the food market increased 4%, however, if we exclude the impact from a decrease in tooling sales, product sales to the food market increased 8%. Sales to the beverage market decreased 7%. However, if we exclude the impact from a decrease in tooling sales, product sales to the beverage market were equal to the prior year. Similar to our Beauty + Home segment, higher resin cost had a negative impact of about $1.7 million on our Food + Beverage segment income in the quarter.

Now looking at our year-to-date results, our reported sales grew 7%. On a constant-currency basis, and excluding Aptar Stelmi sales from the first half of this year, our core sales increased 2%. On a comparable basis, when you adjust for the negative impact of about $0.12 from our European restructuring plan, we earned $2.10 per share thus far this year. And this compares to $1.95 per share in the prior year when transaction costs and inventory writeup related to the Stelmi acquisition are excluded from prior year results. These 2 prior year effects totaled approximately $0.09 per share.

We also generated free cash flow in the 9 months year-to-date of $84 million, which is an increase of $19 million over the last year's free cash flow of approximately $65 million. Regarding our European restructuring plan, we are on track in terms of both costs and savings.

Looking forward, we are holding to our previous guidance on depreciation and amortization for 2013 and expect to be in the area of $150 million. And we still expect capital expenditures to be in the area of $160 million. I would like to point out that these amounts could vary depending upon changes in exchange rates.

We currently estimate that diluted earnings per share for the fourth quarter of 2013 will be in the range of $0.62 to $0.67 per share, compared to $0.57 per share in the prior year fourth quarter when charges relating to our restructuring plan are excluded from both years. I would like to emphasize that the fourth quarter range I just mentioned does not include a potential negative impact from the pending French tax legislation mentioned in the press release that we estimate could be as much as $0.09 per share.

At this time, Steve and I will be glad to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Ghansham Panjabi from Robert W. Baird.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Going back to the North American personal care business, Steve, can you help us understand if this is a customer alignment issue that you're sort of exposed towards or is it just broad-based weakness in the personal care market across the board because it seems like some customers are doing better than others in North America, and do you think you're maintaining your share in terms of the new products that are being introduced for some of these initiatives that you sort of called out earlier?

Stephen J. Hagge

Yes. A couple of things, Ghansham, related to that. In North America, we've done a couple of things over the last couple of years strategically. So as you've seen, we've seen -- we were doing mostly some of our developing market business on an imported basis. Some of that was coming from the U.S. So we continue to move more to local production there. So that's affected some of our production. Realistically, frankly, we expected to be seeing faster growth in North America and hope to fill some of those gaps with new business, and we're probably a bit behind in terms of our timing to that. I also mentioned in a couple of calls that we did walk away from some unprofitable business also which had an impact. That being said, we're still very comfortable that we still will maintain the majority of the market share we have. And we're actually very enthusiastic about it and very encouraged to this point by the number of new projects that we're working on. And so what we see is hopefully more of a temporary issue in areas. We are continuing to challenge our cost makeup in each of our business segments in the U.S., make sure that we're appropriately staffed.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then in terms of the margin volatility in the Food + Beverage business, I know you called out resin. But tooling, I thought was pretty low margin business. So shouldn't margins have been up a bit more on a year-over-year basis if you adjust for resin?

Stephen J. Hagge

Yes, that's a good point. I mean, if you adjust for resin, I think it's important that if you took the resin out, we would have been about a 12% operating margin for the Food + Beverage, which is pretty much where we're targeting. Tooling doesn't have as much margin. But again, given the overhead structure, it didn't have a significant impact on it. So it would -- we were probably down because of utilization, given the beverage side, so that had -- that offset some of that tooling, call it, negative profitability, Ghansham.

Operator

And our next question comes from Chip Dillon from Vertical Research.

Chip A. Dillon - Vertical Research Partners, LLC

Can you -- thanks for calling out the resin impact, and I just had a question. What's the -- and I think you said $1.4 million in Beauty + Home and $1.7 million in Food + Beverage. Was there any in Pharma?

Robert W. Kuhn

No, not anything of significance. If you -- the majority of those resin increases are really coming from the United States. So a lot of our Pharma business, obviously, is European-based manufacturing-wise, so the effect on the Pharma side was really not material.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And as a way of thinking about it, was this -- the numbers you gave us, the 3.1, was that a lag or, in other words, what I'm trying to say is did you get the resin cost going up and no pricing or was it sort of a moving target where the resin cost increase might have been more than that and you could recover all but 3.1 of that?

Robert W. Kuhn

It's really more, Chip, a comparison to where we were last year. So without getting too technical on how we calculate that, it's quarter-to-quarter, comparing third quarter this year to third quarter last year. The lag and the pass-through was approximately $3.1 million negative compared to where we were last year in the third quarter.

Stephen J. Hagge

But also, Chip, I think it's important to hear is we will recover all of the pass-throughs, so essentially we do get back that resin. It's only a timing issue for us.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And as we look at CapEx, you guys have a very consistent -- relatively consistent pattern vis-à-vis depreciation. And I know you mentioned that you probably aren't as -- at a higher utilization rate, say, in Food + Beverage as you thought you might be here in the States. On other hand, it seems like from what you're saying in the Pharma segment, you are doing quite well, noting the injection volumes, et cetera. So is it fair to say that you will have a similar CapEx number next year, but it might be tilted more toward the Pharma segment than it might have been the last year or 2?

Robert W. Kuhn

Well, one thing to keep in mind is that the announcement we made last quarter on the expansion of Stelmi for approximately $26 million, virtually nothing of that is going to fall in 2013. So by definition, all else being equal, we would be adding that $26 million on top of what the DNA. So yes, there might be a slight additional waiting on the Pharma side, but I just want to point out that, that $26 million that we talked about is really -- is going to fall into 2014.

Operator

And our next question comes from Chris Manuel from Wells Fargo.

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

Turning to circle around a couple of different items, first, a couple of housekeeping items. If you could maybe tell us what tooling sales were actually in this quarter versus last year?

Robert W. Kuhn

Sure. So looking at tooling sales in the third quarter, overall, we were about $14.5 million, and that would compare in the third quarter last year of about roughly $22 million.

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

Okay, that helps. And then 2 last ones. One would be, could you give us a little more color around the French tax issue? Is that something that -- it's a 1 year issue, would hit this year, or would that be something that, if legislation did go through, would impact things on a go forward basis? Maybe a little more color there would be helpful.

Robert W. Kuhn

Sure. So as usual, we're early on in that process, and there's several proposals that are out to the government to evaluate. So one of which is a general increase, if you will, on the effective tax rate. They're trying different methods as to how to implement that. There's different proposals on the floor, one of which is an increase in the surtax, which we talked about, I think about 1.5 years ago. That's one of the things. And also, they're challenging various deductions, again, in terms of business, one of which is interest expense. So there's several proposals out there and it makes it very difficult to evaluate which ones are eventually going to get passed. And also, I think on the retroactive side, we're really just speculating based on what we know now and based on what we've seen in the past that it would be retroactive to the beginning of the year. But again, we have to wait to see what eventually makes it through and what eventually gets enacted by the end of the year. But if the surtax gets enacted, obviously, we're going have that retro impact for this year, but it will be an ongoing spread throughout all of 2014 and same thing on some of the deduction limitation. So it will be an ongoing type of cost. It just won't be $0.09 per quarter, will be closer to $0.02 per quarter.

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And then, Steve, one question for you with respect to -- maybe if you could comment on -- I know you don't want to comment on anything specific, but certain -- what you might be seeing out in the acquisition markets. It looks like things have been heating up again and there are some different dispensing assets and closure assets, and things in the market, what you're seeing with respect to -- are multiples looking attractive to you or they're looking a little inflated, et cetera. How you're feeling about M&A?

Stephen J. Hagge

Well, Chris, I think you're right. I guess, what I -- we're not going to comment on any specific transaction, as you alluded to in the question. But what we are seeing is there are more properties coming to market, and we've seen that over the last probably month and a half. How those end up getting priced? Well, it's kind of a subject for debate. But right now, the one thing is the M&A market seems to be more active than it was 3 to 6 months ago.

Operator

And our next question comes from George Staphos from Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

I wanted to ask a couple of questions. Realizing that the Stelmi buildout is early days, where do you stand in those early days in terms of being on project, on budget. Any issues, hopefully not, that maybe have risen with the buildout? And then, you might have mentioned it earlier and I've missed it, should we take away anything from the fact that tooling sales are down in a couple of your segments in terms of what it means for customers' expectations for new products and the like in the next several quarters?

Stephen J. Hagge

Okay. Let me -- George, let me take that on the Stelmi side. Frankly, we've started the process on Stelmi as we talked about in the call last quarter. We're going through getting permits and getting all the material supported. The good news is, for that, all of that process is going pretty much exactly to the timeline we set up when we started that. So we look to be in line in terms of cost and in timing. We would expect the final permits to come through in the early part of 2014 through the first or early second quarter. And the cost related to that, again, we're pretty much in line with. On the tooling, I think if you followed us, you'll find that tooling does vary quarter-to-quarter and really largely depends on when the tooling actually comes online for us. But we're very comfortable that we haven't lost anything in terms of the momentum in tooling. And if we look at our projects or custom projects, we're getting still as the market leader of the majority of those products. So we're not concerned about the timing, George.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Would there come a time, let's say, it's a couple of quarters from now whereas you have -- and I'm not saying this is going to happen, but just hypothetically, if tooling stays lower than the year-on-year period, would that be more of a yellow flag for us to pay attention to?

Stephen J. Hagge

I don't think so, because -- well, one of the things we'd have to look at is -- remember tooling for us is when customers want to customize their projects. So sometimes when you're looking at more cost-effective solutions, they'll look at our stock products and we'll be able to do that. So what we'd have to do is compare how new products are getting introduced. And if we're missing new products, then we've got reason for concern. If it's a shift between custom tooling and stock, frankly for us, we're somewhat ambivalent.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay, that's fair. Last one and I'll turn it over. Have you called out in the past -- and if you have, I apologize for not recalling -- what the, if you will, frictional costs from the Stelmi buildout will be next year? Obviously, it's not going to be a 0 on the P&L next year, at least, I wouldn't think so. So what kind of headwind should we build in for that from a P&L standpoint for next year, if that's available at this time?

Stephen J. Hagge

Right now, we're still going through the process to that. I do expect, and we talked about this, we'll be adding probably a little bit in the SG&A portion to Stelmi to reinforce some of the staff. I don't expect it to be a material amount of money, but I don't have a number to be able to give you at this time, George.

Operator

And our next question comes from Adam Josephson from KeyBanc.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Steve, how would you characterize how your discussions with customers have changed at all in recent months? I mean, in light of the fact that Europe is improving, the U.S. appears not really to be an emerging markets are still growing, I mean, there doesn't appear to be any kind of discernible general trend, but perhaps, you'd disagree.

Stephen J. Hagge

No, I don't -- I think the discussion with customers is -- and again, it's very dependent on the market. So if I talk to our pharma customers, they're concerned about the regulatory issues around Obamacare, what they're doing in that area. When you talk to the personal care and fragrance/cosmetic, those type of customers, I think, are still coming back in a relatively positive going forward, cautiously optimistic. If I look at our Food + Beverage customers, there has been some transformation in that market. One of our largest customers, being Heinz, was recently acquired, so they're going through some internal transactions. So I think there's a lot of different dynamics, Adam, but there's not one side that's out there other than, I'll tell you, I would say, it's more generally on the positive side in terms of growth than it has been over the last couple of years. There are more positive initiatives going forward than there were probably 2 years ago.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

And that's across regions, Steve?

Stephen J. Hagge

That's pretty much across regions, in fact, I mean, certainly, with Latin America and Asia for us, which has been growing double digits for this year, there's still continuing to be momentum. The challenge in those markets, particularly in Latin America, has been the currency.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Got it. And just on your balance sheet, how do you view your leverage ratio at the moment? And what might you do over the next year or 2 with the cash you expect to generate after the dividend and after repurchasing shares to offset dilution?

Robert W. Kuhn

Adam, I mean, we've looked at that on a -- really, on an ongoing basis. We are exploring some opportunities. We are underlevered. I think one of the good things is that we continue to earn one of the higher internal rate of return on our own investments. And we -- capacity increases as we announced -- and Stelmi are good examples of how partially, on a smaller scale, we're redeploying some of that capital. But we are looking at different alternatives. And again, as we discussed at the Analyst Day, and in line with what Steve is saying in terms of M&A activity increasing, we really -- we're balancing and evaluating a lot of different impacts.

Operator

And our next question comes from Phil Gresh from JPMorgan.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

So just, I guess, a follow-up on that. With the evaluation of the M&A alternatives out there, more properties coming to market, Stelmi was the largest deal, I believe, that you've done and it's gone fairly well. So kind of wondering how you feel about -- I mean, obviously, you have the balance sheet capacity, but wondering how you feel about -- given the CapEx you're spending and the growth you're focused on with Stelmi, how do you feel about kind of, I guess, your operational capacity to do something of potentially a larger size or would you say the things you're looking at are kind of Stelmi or smaller to the extent you can comment?

Stephen J. Hagge

I think, I guess, Phil, we're going to continue to look at companies that would add strategic value to Aptar. One of the things, and we've mentioned this in the past, that we would be looking for, is we look at any acquisition, is we need good management. One of the things that we recognize we're not very good at is turnaround from an operational perspective, so we want companies that operate well. As a result of that, I think if they have good operations, we can end up doing, certainly, a bigger scale than that what we did with Stelmi. As you point out, I think when you get to some of these bolt-on acquisitions, they tend to be able to -- we can integrate them a lot quicker and there's certainly less risk. So if I had my preference, those would be doing 3 of those versus 1 big one, would probably be a preference. But the key for us is, it needs to be a strategic space where we need to be adding value.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay, that's helpful. My second question is just with respect to utilization issues that you've had in North America, is there a way to think about maybe the amount of growth you feel like you need to kind of overcome those issues at this point? Is it a year of growth? Is it 2 years of growth? I mean, how are you kind of you thinking about what it will take to get back to where you want to be?

Stephen J. Hagge

Yes. It's a good question, and it's difficult because it's done by product line. So I think as we look at it, we're seeing -- and we're talking about Beauty + Home in this case because we're seeing pretty good growth in terms of overall year-to-date Food + Beverage growth in North America. What we didn't anticipate, and I can tell you at the beginning of the year, we didn't anticipate the market, the overall market being somewhat flat. What we are seeing is some new projects coming, but we need probably growth in the Beauty + Home market of -- at 4% to 5% to be able to fill our operations on an effective basis. And if not, we'll need to be continuing to look at how we adjust to reacting -- to deal with those market side. The good news is, with our products, we're entering new markets and we have a lot of new opportunities.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Is that Beauty and personal care or is it one or the other that you feel like you need that type of growth?

Stephen J. Hagge

It's really on a combined basis. And I think one of the things on Beauty, that it's important to come back is, you saw our fragrance business was up about 5% to 6% in the quarter. A lot of that is Europe, but a good portion of that Europe gets reexported back to the U.S. So the -- in effect, we are improving in the States indirectly through our customers' products coming back to the States. But the numbers that we're giving you relate to both Beauty and personal care.

Operator

And our next question comes from Jon Andersen from William Blair.

Jon Andersen - William Blair & Company L.L.C., Research Division

I wanted to -- just a clarification. You said the injectable market was up -- your business was up 27% in the quarter, is that accurate?

Robert W. Kuhn

That's correct.

Jon Andersen - William Blair & Company L.L.C., Research Division

Is that a figure that you've provided before? And I guess, is that kind of consistent with recent trends?

Robert W. Kuhn

We haven't provided it before, Jon, because, quite frankly, this is the first quarter where we're comparable, where Stelmi is included in the third quarter last year and it's included in the third quarter this year. What we have indicated in the past and, particularly, in Analyst Day is that through the first 6 months, we're up about 13% if we were to look at just the pure Stelmi business, even though that's not the impact that's affecting us.

Stephen J. Hagge

Yes. And I think, Jon, that's -- when we carve all the injectables, we hope to be adding maybe more to that market. But that, today, is almost entirely the Aptar Stelmi operation.

Jon Andersen - William Blair & Company L.L.C., Research Division

Yes. That was I thought and, I guess, that's part of my -- the second part of my question would be on the acceleration, I guess, that you saw in the third quarter relative to the first half. Any color there just in some of the developments that are driving that. And is that kind of sustainable for the foreseeable future? Or how are you thinking about the growth rate going forward there?

Stephen J. Hagge

Well, a couple of things. Obviously, being that we acquired them early in the third quarter last year, we were just beginning the integration phase, we were just beginning the analysis of customers and volumes and products and all those things to a much deeper level. So what you have is you have the twofold effect. One, the volumes in this overall primary component, the last number side, have been growing really across the board. So we've been benefiting from that. So I would say general, normal economic growth in that area. But also, you have, I think, also an increase in some pricing. One of the things that we brought to the table as part of the integration was really a better analytical view of who they're selling to, what products, the pricing and, quite honestly, there hadn't been a whole lot of price increases prior to the acquisition. So what you've got is a little bit of a combined mixture of both pricing and volume. But to answer your question, on a go-forward basis, we're just getting into looking at 2014 budgets. But at least, on the near-term, what we're seeing and hearing is that volume growth that we're experiencing today is expected to continue in the near future.

Jon Andersen - William Blair & Company L.L.C., Research Division

That's helpful, if I could just squeeze in one more on the Food + Beverage business. Beverages, I guess, being flat x tooling in the quarter, it sounds like some of that was expected due to cooler weather or shouldn't have been a surprise, affecting demand for certain beverages. Is that something we should view as more transitory related to that and sort of we'd see kind of a recovery sooner rather than later in that part of the business?

Stephen J. Hagge

Yes, I think, Jon, to your side, that -- we did anticipate that. It was related to kind of the coolness of the season. So we view that as more of a temporary not a market indicator on a long-term basis. And we're still comfortable that we're going to be seeing double-digit growth in terms of our Food + Beverage business as we go forward.

Operator

Our next question comes from Al Kabili from Macquarie.

Albert T. Kabili - Macquarie Research

On the European restructuring, were you -- did you get any benefit in the third quarter? And how about -- how are we thinking about it this year? I know it ramps more next year, but are we getting anything this year from that?

Robert W. Kuhn

We are, Al. In fact, we didn't call it out in the press release because we had -- it was a pretty significant quarter in terms of equipment movement from facilities. And so, the savings that we realized, if you will, were somewhat mitigated or offset by some startup costs, if you will, and getting that equipment up and running in some of the newer plants. So the net impact of the overall savings was immaterial. We're going to have similar movements into the fourth quarter. So again, while we're comfortable in 2014, with the $12 million, it's really because we are seeing -- the identified savings that we were targeting are materializing, and these start-up of getting the equipment online are really more short-term in nature and we would expect most of those bugs to be worked off as we get into the first part of 2014.

Albert T. Kabili - Macquarie Research

Okay, that's helpful. On the resin headwinds that you called out in the third quarter, does your guidance reflect that those will be similarly temporary tailwinds in 4Q? And can you just help us with that?

Stephen J. Hagge

Yes. I think, Al, what we gave going into the -- we're not going third quarter to fourth quarter. We're going fourth to fourth, which is also an important side. So when I look at fourth quarter last year and compare it to what we expect this year, we expect relatively small headwinds. We don't expect it to be positive, but not nearly to the extent of that $3.1 million we saw. So we expect it to be somewhat negative, but not to the levels we saw this year, or this quarter.

Albert T. Kabili - Macquarie Research

Okay, that's helpful. And then the last question I had is just the -- with the slowing economies we're seeing in South America and Brazil, I was wondering if you could kind of just talk about -- I know it's still growing for you there, but just a trajectory that you're seeing down there and the trends you saw kind of inter-quarter.

Stephen J. Hagge

So I think if you look at inter-quarter, there's no question, when you go down there and talk to our customers, they're feeling no longer the 20% to 25%, they may be down to 10% to 15%. That being said, at least on my last visit, which was in August, the customers that I talked to were still very bullish in terms of their growth perspective. So a bit from maybe down from kind of the upper teens down to the lower teens but still nice growth going forward. So again, what we're trying to do is actively manage how we do on an import basis. And as I mentioned, strategically, try to localize as much production as we can to avoid some of the currency issues.

Operator

Our next question comes from Brian Rafn from Morgan Capital Management.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Give me a sense, Steve, on -- you talked about personal care. Was the weakness in U.S. personal care, was it number of projects? Was it the size or volumes of launches? Was it more regional versus national or international? And the new project pipeline that you talked about, is that accelerating enough materially to replace some of that maybe import business you might be doing in-country in Latin America or international?

Stephen J. Hagge

So I think on the personal care side, a couple of things to it. I think it was more general market conditions in terms of we've seen -- and you can see this with the Procter & Gamble's and the Unilever's, just haven't been overly strong in terms of their sales. So it's been relatively small. The other thing that's important when we look at personal care and we talked about this in previous quarters, we are a major provided to the suncare market and the suncare market in the U.S. was relatively soft this year. And I think that's more of a one-off issue, and we'll see that, as we get into '14, starting to improve. That being said, again, we see a nice project profile of new things coming back on with our customers. And we would anticipate seeing growth as we get into the fourth quarter and, certainly, as we get into 2014.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

How does the Christmas holiday season in bookings and projects look for in the cosmetic perfume area?

Stephen J. Hagge

Well, I think, again, as Bob mentioned when he was going through our market stuff, we're around a 5% or so up in fragrances in the quarter and that reflects some of our customers filling up the pipeline to get ready for Christmas. As our senior management has talked to our customers, I don't know that people would say it's going to be a blowout Christmas and it will be up 20%, but they're optimistic that it will be at or above last year's level, at least, at this stage.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, and just one more. Given the atrocious launch to the Obamacare websites, if the exchanges collapse or if it's just a nightmare, does that have any disruptive effect in your Pharma drug area for new product development?

Stephen J. Hagge

At this point, it's really difficult to say what Obamacare will do to us. Our view was, on the whole, it will probably increase our customer sales because they'll end up using more product. The fact that it may not go to plan, we've not have any customers, frankly, building inventory for Obamacare. I mean -- so they're taking a little bit -- I think, with what the country's doing, I'm going to wait and see what the impact of it is.

Operator

And our next question comes from Jason Rodgers from Great Lakes Review.

Jason A. Rodgers - Great Lakes Review

Could you provide a breakdown of the performance in the quarter by region, U.S. versus Europe versus Latin America and Asia?

Robert W. Kuhn

I have not yet, but I can. So the U.S. overall -- and again, this is all segments blended together. And this is core sales growth, so this is excluding any currency impacts. So the U.S. was down about 10% on a core sales basis. Europe and Asia were up both about 9% and Latin America was up 14%.

Jason A. Rodgers - Great Lakes Review

And given the new category, injectables, in the Pharma segment, would you provide the percentage of segment sales by injectables versus Rx versus consumer?

Robert W. Kuhn

Sure. So what we've got -- let me give you more of what we believe on a year-to-date basis it will be because, again, third quarter is a little bit different in that you got a big slower August type of thing. But overall, we would expect, on a 12-month basis, Stelmi to represent about 14% of the overall Pharma sales, CHC to represent about 26%. And then the legacy Rx, if you will, would be making up the remainder of about 60%.

Operator

And our next question comes from Todd Wenning from Morningstar.

Todd Wenning - Morningstar Inc., Research Division

Between the syringe pump and valve drug delivery systems, where have you seen the most competitive pressure over the past quarter and in which you areas do you expect to see the most pressure going into 2014?

Stephen J. Hagge

I don't know if -- I don't know that it's easy to compare those because they're really very different. One tends to be a component, which is our elastomer parts. As we're growing that market, I think there's -- we've always seen competitive pressure in the markets. But I don't know that there's one that's more than the others. And we want to continue to react with our customers to be the most cost-effective supplier of products that they've got. So there isn't one that stands out over the other, particularly, over the last quarter.

Todd Wenning - Morningstar Inc., Research Division

Okay, great. And do you expect any negative impact on your Food + Beverage business if the proposed soda and junk food tax proposal goes through in Mexico?

Stephen J. Hagge

I -- we're going to continue to look at that. We don't think so because in terms of -- a lot of the products that we're even selling are water-based and we're coming back, it's not even the junk food side. And the other side that is important to remember, a lot of those are screw-off caps and not dispensing systems. So we're really in a niche of that market, so we would not anticipate maybe as large of a hit as someone else who is supplying kind of screw-off caps to that market. So at this point, we see a lot of discussion, but we're not expecting any big negative. In fact, we've actually got several interesting new projects that we're working on in the beverage market to differentiate products in Latin America which, from ours, may show nice growth as we go forward.

Operator

And our next question comes from Debbie Jones from Deutsche Bank.

Deborah Jones - Deutsche Bank AG, Research Division

I was wondering if you could talk about their utilization rates at your North Carolina Food + Beverage plants, and then if you're still continuing to see a shift into your dispensing closure applications in that segment?

Stephen J. Hagge

We're -- right now, I think we're -- it's a large facility. The facility we've got, our operating efficiencies are continuing to increase, really, on a month-by-month basis. So -- but we've still got quite a bit of room to be able to grow in that facility. It's about a 300,000 square foot facility and we're probably occupying about 1/3 of that right now. So we've got quite a bit of growth potential going forward. The good thing is, from us, is that we're seeing operating efficiencies improve on the products that we're producing there. So that would be the biggest thing that -- I guess, coming back to that market.

Deborah Jones - Deutsche Bank AG, Research Division

Okay. And are you able to parse out kind of your growth rates projections for food versus beverage. I know, in general, it's supposed be about 10% long-term, but there -- is there 1 category that will be driving that at a faster rate?

Stephen J. Hagge

It's really difficult for us to do that. I think it depends on the new applications. So as we got into the flavored water market last year, that had a big impact, as we've got into orange juice. And then we start looking at new food products, I talked about in my comments, soy sauce in Latin America, those open new application fields. So the hope for us is we'll see good growth in both of them.

Deborah Jones - Deutsche Bank AG, Research Division

Okay. And a final question, can you just sort of comment on your capacity expansion in Colombia? And then who's your competition in that market?

Stephen J. Hagge

We -- I think it's a unique site. So number one, we expect to be in the production. And when I say production, it's assembly. We're not going to be doing molding there to start with. And we'll be doing assembly primarily for our Beauty + Home type products. And those products, we're going to be moving actually to localize some of the things we've been importing in that market. So that market for us is between $30 million and $40 million the Andean region, so we'll be localizing some of those products which I think, right away, fills facilities. So I think that's a plus. The other thing that, for us, has been critical in terms of Colombia and broader-based the Andean, we'll be the first company of our competitors to go into that market. So we'll have that, what we hope, is a first mover advantage.

Deborah Jones - Deutsche Bank AG, Research Division

Okay. And -- but your current competition existing in the region?

Stephen J. Hagge

Yes. Our current competition is doing what we're doing. They're actually importing to the region from other Latin American countries like Brazil or the U.S. or Europe, which is how we've been serving that market today.

Operator

[Operator Instructions] We do have a follow-up question from Chip Dillon from Vertical Research.

Chip A. Dillon - Vertical Research Partners, LLC

Steve, when you look at -- you mentioned the M&A market was heating up a little bit and you've got, I think, a pretty high-class challenge in sort of looking at buying back your stock with the earnings yield or, should I say, free cash flow yield, which is 5-ish percent versus an acquisition which would seem to, with the low interest rates, probably provide pretty immediate accretion. And yet, you've got a very high quality business mix that you don't want to see that diminish at all. So how do you kind of weigh -- even though, probably, any deal you did would be accretive, how do you weigh the culture issue as well as the creativity issue that makes Aptar see the very high returns that's experienced?

Stephen J. Hagge

It's a good question, Chip, and I think it goes back to what I talked about a little bit earlier in the call, is that when we look at acquisition, it has to fit a need for us, a strategic need. So when we're looking for that, the others -- it needs to fit that, number one. So that's the first side. The other side, the cultural fit, is really very important for us. As we integrate businesses into Aptar, we want it to be able to fit within Aptar's growth profile that we've got. So we take a very hard look at that. And the good news is, from us, while we're into a short interest rate environment today, we also recognize that, that can change. So try to take a long-term view of it. So in terms of the M&A, we're going to look to see if it fits with us. Because even if the product may not have necessarily the profile today, if we can start to take that worldwide or use the resources of Aptar, it may end up making what may, off the surface, not be a great transaction to a very good one. And Stelmi would be kind of the best example to that.

Operator

And I'm showing no further questions at this time, gentlemen. I would like to hand the conference back over to Mr. Hagge for closing remarks.

Stephen J. Hagge

Again, I'd like to thank everyone for attending today's conference, and we look forward to talking to you at our next one back in February. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.

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