AptarGroup - Earnings Call - Q1 2018
April 27, 2018
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by. Welcome to Aptar Group's twenty eighteen First Quarter Conference Call. 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 Della Maria, Senior Vice President, Investor Relations. Please go ahead, sir.
Speaker 1
Thank you, Kevin, and welcome, everyone. Participating on the call today are Stephane Kanda, President and Chief Executive Officer and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. Stephane will begin our call with a brief overview of our performance. Bob will then discuss a few financial details and turn it back over to Stephane before we open it up for questions. Information that will be discussed on today's call includes some forward looking comments.
Actual results or outcomes could differ from those projected or contained in the forward looking statements. Please refer to Aptar'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 Aptar undertakes no obligation to update the forward looking information contained therein. I would now like to turn the conference call over to Stephane.
Speaker 2
Thanks, Matt, and good morning, everyone, and thanks for joining us today. I will start with some general comments about the quarter and we'll then move to Slide four of the accompanying presentation to provide an update on our business transformation. Then I will turn it over to Bob. As you saw yesterday, we reported a positive start to the year with a strong first quarter. Sales growth was robust both on a reported basis and on a core basis after neutralizing for currency effects.
We also had corresponding strong bottom line growth. Each business segment achieved core growth at or above our long term growth targets. Our Beauty plus Home segment achieved core sales growth of 8% in the first quarter, thanks to increased demand for our innovative dispensing solutions, especially in our two large markets, Beauty and Personal Care. Demand was broad based across our different end markets and geographic regions. We are seeing increased demand in both large and small accounts, so the general underlying current is positive.
Let me give you some examples. In the quarter, we helped Walgreens Boots launch a new global facial skincare booster serum with a successful brand number seven that features our Airless Serum Dropper. Bureaage brand selected a different Airless solution with an integrated lockable on off system for its global launch of a new skincare line called Age Protect. In the North American homecare market, our spray accessory and valve are featured on the new Clorox Scentiva bathroom foam cleaner. And our dual action spray trigger accessory and valve were selected for a new insect control product called Zevo by P and G.
We are early in the implementation stages of our transformation. The growth we are seeing in the quarter is clearly a result of market driven growth with some added benefits and positives coming from our transformation initiatives. Profit margins in the segment improved over the prior year, but were negatively impacted by rising raw material costs. Our Pharma segment had another excellent quarter with core sales growth of 6% in the quarter. This business continues to benefit from strong demand for our leading drug delivery systems.
And the aggressive flu season in the first quarter helped to drive demand for our nasal spray and saline systems. Our spray system with Bag On Valve technology was used on Sarby's Soothing Saline Nasal Mist in The U. S. Also in the quarter, our ophthalmic squeeze dispenser was featured on BioCanada's new HydraSense Allergy Therapy eye drops and our advanced preservative free dispensing system is found on a new moisturizing eyelid spray for CVS in North America. In The UK, our metering valve was chosen by Cipla for the ZeriFlo treatment of asthma and COPD.
Our Food and Beverage segment had a strong first quarter with core sales growth of 10%, helped by an increase in custom tooling sales. We continue to expand and grow in newer categories like infant nutrition and premium bottled water, while growing our market share in key mainstay categories like condiments. In the food market, our custom closure is featured on a new Dun on Wave coffee creamer for the North American market called Left Field Farms. In China, our custom closures are improving the customer experience for infant nutrition products from Yashili and from Yili. And our beverage sport closure was chosen for new flavor soda water by Lingwu.
If you now look to our presentation slide deck that was posted on our website, I'd like to turn to Slide four, which provides a brief update on our business transformation. The initiatives we are putting in place are beginning to gain traction, including the execution of commercial excellence initiatives, manufacturing and supply chain efficiencies and purchasing savings. We expect our benefits to lag our implementation costs, but we do anticipate a gradual ramp up in benefits over the next twelve to twenty four months. We remain focused on executing our strategies across each of our businesses to ensure that we will achieve our long term financial objectives and position the company for success for many years to come. We are also looking at current market trends and we react accordingly.
Similarly to what we have done in recent years in Latin America, we are recognizing increasing inflationary environment in The U. S. And in Europe and are implementing price increases in the coming months in addition to our normal resin pass through mechanisms. Last but not least, I continue to be impressed by our talented people and their drive to help our customers win with our broad portfolio of differentiating dispensing solutions. We operate in attractive markets and have proven a ability to generate strong cash flows.
Our balance sheet remains strong and we will continue to seek out opportunities that generate value. With that, I will now turn it over to Bob, who is going to walk through some of the financial details that impacted the first quarter. Afterwards, I will come back and close out our proposed remarks. Bob?
Speaker 3
Thank you, Stephane, and good morning, everyone. I'll briefly walk through some of the details concerning our first quarter results. If you are following the slides that accompany our remarks, you can refer to Slide five. We reported excellent sales growth of 17%. That was comprised of solid core growth of 7% and positive currency effects of 10%.
Before I speak to the segment and market results for the quarter, I wanted to mention that Custom Tooling sales, while not overly significant to our consolidated results, can directly impact the quarterly sales growth rates in our different markets as they did this quarter, and I'll speak to those when I review growth by market. As you saw in our press release, Beauty plus Home core sales keeping currencies constant increased 8%. When we looked at profitability, our Beauty plus Home segment's adjusted EBITDA margin improved to 14%. This was despite negative impacts from the timing of passing through higher raw material costs of approximately $1,000,000 compared to the prior year. Looking at sales growth by market on a constant currency basis, core sales to the Beauty market increased 11%, primarily driven by strength in the Facial Skin Care, Fragrance and Color Cosmetics markets.
Core sales to the personal care market increased 6% due to increased demand in the body care and cleansing markets. Core sales to the home care market were flat compared to the prior year due primarily to lower custom tooling sales. However, product demand increased across a wide variety of end applications. Our Pharma segment achieved the core sales growth of 6% and an EBITDA margin of 35%. Core sales to the prescription market were even with the prior year, primarily due to lower custom tooling sales.
Demand for our drug delivery systems increased and was particularly strong in the central nervous system and asthma and COPD therapeutic areas. Core sales to the consumer healthcare market increased 17%, driven primarily by increased demand for nasal sprays for decongestants and saline rinses. Lastly, core sales to the injectables market increased 9% as demand was strong for our injectable components, primarily used with vaccines. Our Food and Beverage segment's core sales increased 10%, helped by an increase in custom tooling sales and increased demand for our innovative dispensing and sealing systems. This segment reported an adjusted EBITDA margin of 13%.
Margins were negatively impacted by the mix of products sold and the timing of passing through higher raw material costs of approximately $1,000,000 Looking at each market, core sales to the food market increased 16%, primarily due to increased custom tooling sales. Demand for our dispensing closures and sealing solutions increased in the infant nutrition and condiment categories. Core sales to the beverage market were even with the prior year, in part due to lower custom tooling sales and weak volumes in China. However, we did see an increased demand in the bottled water and juice categories. Comparable adjusted earnings per share excluding the business transformation initiatives in the current period totaled $0.99 and this compares to the $0.81 reported in the prior year and to the currency adjusted $0.90 in the prior year.
On Slide six, we can see that our adjusted EBITDA for the first quarter rose 17% and this included positive effects from sales growth, currency translation and efficiencies, which were partially offset by negative headwinds from the timing of our pass through of higher raw material costs as well as higher corporate costs. Moving to Slide seven, I can provide an update on The U. S. Tax reform. Based on recent new interpretive guidance, our present understanding regarding the limitation on the utilization of our foreign tax credits results in an increase in our previously estimated effective tax rate.
We've used this updated rate in both our first quarter results and our second quarter EPS guidance. Turning to Slide eight and our outlook. We are expecting earnings per share for the second quarter to be in the range of $0.99 to $1.04 using an expected tax rate range of 30% to 32%. This compares to the current Street consensus of 1.2 which according to our information is mostly based on an effective tax rate of 28%. Our guidance range compares to prior year reported earnings per share of 1.1 and prior year currency adjusted earnings per share of 1.08 Prior year's reported effective tax rate was approximately 18%.
Had prior year's results been tax affected at our current guidance effective tax rate range, prior year earnings per share would have been lower by approximately $0.16 I have a few other details to share and then I will hand it back to Stephane. Cash flow from operations in the quarter was approximately $50,000,000 Capital expenditures were approximately $40,000,000 and our free cash flow was approximately $10,000,000 compared to $6,000,000 a year ago. Looking at our balance sheet capitalization, on a gross basis, debt to capital was approximately 47%, while on a net basis, it was approximately 27% and we remain slightly over one times levered compared to our trailing twelve months adjusted EBITDA. At this time, Stephane will summarize the key takeaways from our remarks today.
Speaker 2
Thank you, Bob. So in closing and as noted on Slide nine, I'd like to sum up our key takeaways as follows. First, it's been a positive start to the year with core sales growth across all segments. Second, our business transformation is progressing well and we are gaining traction on our initiatives. And third, while we have a higher ongoing effective tax rate, we expect our good momentum to continue and have a positive outlook for the second quarter.
With that, I would now like to open up for your questions.
Speaker 0
You. Our first Jones question comes from with Deutsche Bank. If your phone line is muted, could you please unmute the phone line? Do want you me to go and move on to the next question?
Speaker 1
Sure, sure. We'll try to get Debbie back in the queue. Maybe there's a technical issue. Thanks, Kevin.
Speaker 0
Okay. No problem. Our next question comes from John Andreessen with William Blair.
Speaker 4
Hey, good morning everybody.
Speaker 2
Hey, John. Hey, John.
Speaker 4
I wanted to ask first just a bigger picture question. Your customers, many of which are consumer branded consumer products companies as well as private label operations are having difficulty raising prices to offset some of the inflation that they're experiencing in the system, whether it be freight and warehousing, certain ingredients. And I guess what I'm trying to understand from your perspective, how this if at all impacts you as a supplier to many of those companies, your ability to price to offset resin movements, etcetera, whether that's just something that's kind of baked into your arrangements and non negotiable or if there are kind of other considerations here as well. And Stephane, I know you mentioned some pricing in your prepared comments. I'm not sure if that's in certain product areas or certain geographies, but if you could talk a little bit just broadly about the pricing backdrop, what you're experiencing and where you think you can take price if you can?
Thank you.
Speaker 2
Sure. Look, I think everybody who's following, the current environment sees inflationary pressures coming, and there's no way to escape that. We are clearly, putting our foot forward and making sure that, we pass on not only, the increased raw material from a polymer point of view, which by and large is contractual and is an automated mechanism. And that's no different now. But also the additional increases that we see come the pike, whether it's, other materials, metals, freight, packaging, and other inflationary increases.
And of course, each situation is different, but as you know, we are serving a very broad set of customers in different markets and each negotiation is by itself. But clearly, we are going across the board and the magnitude of the increase is different by segment and so on. But clearly, these price increases will happen and that's just the current reality.
Speaker 4
Thanks for that. Also had a question about the nature of your customer set. It sounds like you're making good progress with large customers. I know there's been a focus on maybe upping your game with smaller customers, smaller brands that seem to be growing faster in the current environment in many cases. Is that the case?
Can you talk about some of the efforts and results you're getting with kind of smaller, maybe more rapidly growing customers? And do you have to serve those customers? Is there a different go to market strategy for those customers? And can they be as profitable just given that you're probably dealing in kind of smaller volumes?
Speaker 2
Okay. Yes. Maybe let's step back, for everyone's benefit. So our overall approach is that, we are strengthening the regional, market and business teams, by giving them the resources and the authority and the accountability to win the business in the regions with the large accounts, the small accounts, whatever is appropriate, for their environment. Indeed, we've been very happy to see that large customers are growing again, and certainly contributed to the quarter, but actually the smaller customers are growing faster.
And we saw good growth, not only in the big regions, but also for example, Latin America had very good growth also with smaller customers. So we think this is paying off. And I know it sounds simple, but it isn't. It's just simply going where the growth is. And we are have adjusted our structure so that we can go where the growth is.
And to your question on profitability, that's really a multifaceted question. I think sometimes smaller customers are independent brands with a premium offering where that can accommodate a higher price that more than offsets any inefficiencies for smaller lot sizes. Sometimes not, sometimes we go through distribution and often we go to go direct, particularly when it seems like a winning player who will become large pretty quickly or might be bought up by a larger player. So I wouldn't say that smaller customers are less profitable, not at all. And certainly the very large customers have a different negotiation power.
So, there's no rule of thumb here. Maybe to anticipate another question, the resources we are adding to the regions and to the smaller business teams, of course, we are largely deploying resources that have been held at Global, where they maybe have been less effective and are now more focused on the business at hand, which is fueling some of the growth, although it's still early days in the transformation.
Speaker 4
Very helpful. One I get one quick follow-up, think, maybe more for Bob. What was the tooling contribution to the core growth in the quarter overall? Overall,
Speaker 3
Sure, John. Overall, was flat on a consolidated basis. It was down in Pharma and it was up in Food and Beverage and it was relatively flat to slightly down in Beauty plus Home. But on an overall consolidated basis, it was essentially flat.
Speaker 5
Thank you.
Speaker 0
Our next question comes from Debbie Jones with Deutsche Bank.
Speaker 6
Hi, I'm actually here this time. Thank you. I wanted to ask you actually just mentioned adjusting where the growth is. And I'm assuming you meant to just focusing on some of those smaller customers or where industry trends are. But can you clarify that?
And then just what do you have to do or how hard is it to make these adjustments? And then I have a follow-up.
Speaker 2
Yes. Hi, Debbie. Good morning. Look, it is really depending on each segment and geography. And all we're doing, and it sounds simple, is to look much harder, okay, in which geography, in which segment, which customers that we're going after.
So we've done a much more thorough job in segmenting our customer base and making sure that customers we haven't served, we're going after in good opportunities. And in other cases, adjust our resource level that is commensurate with the opportunity. And clearly, from a macro point of view, that also means deploying more resources in high growth economies by and large, but it's not an all one size fits all. It again depends on the segment. So we put more into infant nutrition in China or more into the color cosmetics area in Asia and maybe less in some other markets and for sure less at the global level.
Speaker 6
Okay. And then just one more on volumes. Can you mentioned, I think Brazil Any other regions that you would call out as driving above trend growth? And then you've also been putting these incentives in place accountability with your teams.
How much of that do you think has been driving some of the growth you've seen in the last couple of quarters?
Speaker 3
Hey Debbie, this is Bob. So I'll take your kind of regional growth question. So really it was pretty widespread on a consolidated with the exception of Asia. On a consolidated basis, both The U. S.
And Europe were up 7% core and Latin America was up 20% core for us. And as I mentioned, Asia was flat. So again, even within Asia though, we were up in Beauty plus Home and Pharma, but down in Food plus Beverage because of the Chinese beverage customer we mentioned. Stephane?
Speaker 2
Yes. Maybe just to add to Bob's point, certainly, I would also highlight the consumer healthcare in North America has very much benefited from the aggressive flu season and it certainly had above trend growth in quarter one that contributed. Now to your second question, clearly what we've seen is a tremendous increase in ownership, entrepreneurship drive of the regional teams. How much of that is attributable to just the empowerment and the more the increased freedom to operate, they feel as opposed to the incentives, think it's hard to quantify.
Speaker 6
Okay. Thanks. I'll turn it over.
Speaker 0
Our next question comes from George Staphos with Bank of America.
Speaker 7
Hi, this is actually Molly Baum sitting in for George Staphos. My first question is on the beverage closure trends in China, sorry. I know this trend has been a lingering one. Should we expect a stronger trend at some point? And why or why not, if you can comment?
Speaker 2
Yes. Hi, Molly. To be perfectly honest, this is a bit of a limited visibility situation. It is one single large customer, a good customer. We continue to do good business with them.
Clearly, Q1 has been lower than prior year. If you include that, the rest is growing like by leaps and bounds. But of course, it's a big thing to include. And certainly, when I talk to my people, we never exclude anything. The bottom line performance is what counts.
But we thought we had lapped it. It looks like Q1 was not as strong as we had hoped and the visibility is continues to be limited. Again, it's a single customer, dual source situation, and you have demand volatility and you have sourcing volatility of the customer.
Speaker 7
Got it. Thanks for that. And then my next question and then kind of the related follow-up are on the pharma segment. So the first half of that is, do you think you're gaining share in injectables? Is this the type of market where competitors can respond to share trends?
Or is it more driven by the product pipeline? And then, you know, my related follow-up, is there a way to either qualitatively or quantitatively, to size the pharma backlog that you have right now? Thank you.
Speaker 2
We really don't think of it as gaining share. One is please remember that, this is still a small part of our pharma business, about 20%. And we are a small part of that industry and any given quarterly volume trends is more driven by what projects we are in, what projects come online. And but certainly, we had a good quarter in injectables. Overall, backlog is hard to describe, but certainly we feel good about the momentum in the Pharma business.
Clearly, it's a long cycle business. So changes in trends happen over years, not over quarters.
Speaker 3
Yes. And I would add that the backlog remains strong, but I mean, to confidentiality, we wouldn't ever be able to give you size and potential in that without breaching confidentiality with certain customers. I'm not sure how meaningful that would be, but the backlog overall in terms of number of project remains strong.
Speaker 7
Okay. Thanks for that. I'll turn it over.
Speaker 0
Our next question comes from Ghansham Panjabi with Robert W. Baird.
Speaker 8
Thank you. Good morning, everyone. I guess first off on Beauty plus Home, it's been a very long time since Aptar reported such strong growth numbers and clearly the end markets are also better based on comments out of your customers publicly. Can you touch on how the organization is responding to this increase from a productivity standpoint given the inflection in growth, any bottlenecks in manufacturing etcetera that you see? Just curious as to your perspective on the incremental margins at current in the context of your transformation initiatives.
Speaker 2
Well, maybe I'll take the big picture and Bob you can add. I mean, look, any team that hasn't been winning for a while and starts winning feels very good. So it's certainly from a momentum and reinforcement of what we're doing in the transformation, this is really helpful to the team. People are working very hard under the new cadence and the new commercial excellence systems and to put a few wins on the board is positive for the organization. The nice part about this business is the capacity increments tend to be very small.
So it's not that you have large expansions that you need to do, but you might add another press here and a bigger mould there. And so we are able to accommodate the increased demand. And in addition, of course, it does help productivity gains.
Speaker 3
Yes. Ghansham, I'll take the bottleneck question. So I mean, what we're doing is we're taking a look at, obviously the order book for the remainder of the year and what bottlenecks. But the beautiful thing I would add about the transformation is that as we continue to improve efficiencies, we essentially gain more capacity. But we are taking a look at, do we need to accelerate maybe some investments that we earmarked in the latter half of the year, placing those orders sooner to better time it.
So I think our guidance is up slightly both because of currency FX, but also because we're looking at that and expecting slightly higher CapEx commitments in 2018.
Speaker 8
That's helpful. And then as you think about the large customers versus the small run customers, small accounts that you called out, how have the commercial teams been adjusted, the organization's ability again to respond to this flexible manufacturing that's needed to be able to target small accounts? It sounds easy in theory, but it's much harder to obviously execute. Just curious as to where you are in that process as well as an organization.
Speaker 2
Yes. Maybe again, stepping back. So in the large markets, what we're doing is we're sub segmenting first, the P and L ownership from make it simple in The U. S, we used to have Beauty plus Home U. S.
Now we have a beauty business and the Home and Personal Care business with their own designated P and L leaders. In Europe, we are heading to break it into four units, the beauty unit fragrance unit, the skincare and color unit, a personal care unit, the home care unit and dedicated custom beauty leadership. So breaking down, the big P and Ls into smaller P and Ls with their own entrepreneurial leaders. In addition, we have talked to you before that we start to or have segmented customers into smaller universes and then adjusted the sales force to be specifically target at that kind of customer, that both from a end use point of view, but also from a size characteristics point of view. And at the same time, strengthened our key account management approach to the large accounts.
And you overlay that with more, autonomy and accountability for which each of these teams are doing, while still being fully connected to, the technology and know how backbone of the global company. That just creates a lot more accountability and drive and ownership in driving the business forward.
Speaker 8
Okay, terrific. Thank you, Stephane.
Speaker 0
Our next question comes from Chris Manuel with Wells Fargo.
Speaker 9
Good morning, and congratulations to a strong start to the year.
Speaker 3
Thanks, Chris. Thanks. Good morning.
Speaker 9
Couple of questions for you. First, a real simple one, Bob. Could you actually give us what the either what the tooling numbers were or what the year over year differential was for the three segments?
Speaker 2
Sure.
Speaker 3
So in total, we reported a little over $17,000,000 in tooling in the quarter, dollars 17,200,000.0 to be exact and last year reported was 16,800,000.0 So obviously, there's a little bit of currency in there. But Pharma was roughly about $3,000,000 Beauty plus Home was roughly $5,500,000 and Food plus Beverage was a little over $8,500,000 in the quarter. So that was a pretty significant decrease for Pharma, about $5,000,000 on a reported basis, 6,500,000.0 on a constant currency basis. And then you got the kind of the offset there with Food and Beverage being up by about $6,000,000 on a reported and same reported in constant currency. And then Beauty plus Home was down slightly.
Speaker 9
Perfect. That's helpful. Next question I had was from there, your looked like the or what you told us, the growth rate out of the injectable business was pretty strong, again 9%. I think some point this year you were planning on commencing major shipments out of the Congress facility. Last quarter, I think you talked to us about still doing some testing and shipping up samples and things.
Where are you at with the process? I would have to guess that you're getting close to tapped out with what you had over in France out of that, that the next leg to continue growth is for significant shipments out of there. Can you kind of give us an update on where you are in that process or when you anticipate ramping that up?
Speaker 2
Sure. The good news is the facility is up and running as being fully qualified. Customers are really happy and it's just a matter of gradual ramp up. It's not that we are flat out and limited in Europe. This was a strategic investment to make sure that we can absorb future growth and also give peace of mind to North American customers.
So some of it is will be absorbing new growth and some of it might be over time moving things from Europe to The U. S. So we are fully operational.
Speaker 9
Okay. And customers have qualified that they'll accept shipments from there then?
Speaker 8
Yes.
Speaker 9
Okay, perfect. Last question I had. I mean, I know last quarter you talked about a significant acquisition that you did not make that was out in the space. You're still sitting on a pretty healthy you're the apple of the packaging land sitting on a pretty healthy cash balance there, almost $0.07 $5,000,000,000 What are you seeing in the marketplace? Is there anything still big out there that you're looking at?
Or should we kind of anticipate share repurchase ramping up as the year goes on? Or what's kind of the thoughts there for redeployment?
Speaker 2
Hey, I'm going to put this on my wall, the apple of the packaging land. Thanks for that quote.
Speaker 9
Think Bob is checking his watch there right now, checking on Apple.
Speaker 2
Seriously,
Speaker 0
look,
Speaker 2
we will continue to remain a disciplined acquirer. We are very conscious of our balance sheet and that to put the shareholders' money to good use. But in the end, needs to be a good deal. We've talked about before, certainly Aptos history, my history is an acquisitive one, but not at the expense of value generation. So we continue to look at deals, valuations continue to look challenging.
And, one of these days, a willing seller and the willing buyer will meet, but more than that, we can't really not tell you.
Speaker 9
All right. No, I appreciate that. Thank you guys. Good luck in the rest of the quarter.
Speaker 3
Thanks, Chris.
Speaker 0
Our next question comes from Anja Shah with BMO Capital Markets.
Speaker 10
Hi, good morning. Anja. How are you? Thanks. I just wanted to talk about corporate costs.
It seemed a little higher this quarter. Is there anything in there you can call out specifically? And what's your outlook for that for the rest of the year?
Speaker 3
Sure. So nothing of noteworthy that we can talk about. It's a little higher professional fees. As we've talked, we have added some new corporate level positions to support our growth strategy, some new leaders in Asia, strategy team, etcetera. Going forward, I think it would be reasonable to target in the 12,000,000 to $13,000,000 per quarter range.
Speaker 10
Okay, great. Thank you. And then switching over to Brazil, we're getting some mixed reads from the packagers about Brazil. Some people have seen quite a recovery, some have not. Can you detail what you're seeing there?
I know you mentioned that it was pretty strong, but just kind of some details on that market and what you how you think the outlook is for the rest of this year?
Speaker 2
Yes. I think a couple of things. One is, it's not just Brazil, it's Latin America in general is strong, but certainly Brazil had a great quarter. Also in the context of a fairly easy comparable, remember a year ago things didn't look so bright. And certainly with our kind of end market mix, particularly with fragrances, we've seen a rebound.
There might have been also some rebuilding of stock that was depleted. The visibility there is not perfect, particularly as you deal with some of the multi level players. You're never quite sure what is in the collective value chain inventory. But certainly, it's been a strong quarter and things look up from a year ago.
Speaker 10
Great. Thank you very much.
Speaker 2
Welcome. Our
Speaker 0
next question comes from Jason Rodgers with The Great Lakes Review.
Speaker 4
Yes. You had another good quarter in Beauty plus Home and was wondering how much of that was due to the transformational initiatives versus a general recovery in the market?
Speaker 2
Hi, Jason. Look, certainly, I mean, the macro environment is very good. I read somewhere that 95% of all IMF member countries have report growth, which is almost unprecedented. That has a read through to how consumers feel and how they spend. And while a lot of our end users are not so sensitive to overall consumer sentiment, certainly the premium beauty side will benefit from that.
Now having said that, clearly, the efforts we are making in transformation, both on the top line, all the sales efforts that I talked to, some share regains are helping the top line and but also the bottom line activity, the productivity, the purchasing gaining traction. So we feel good about where we are in the transformation. I want to make sure everyone understands, we're still early days. This is a twelve to twenty four months program that was started in Q4. So we are early into the transformation and we certainly expect our efforts to ramp up.
But clearly, there's a benefit in results.
Speaker 4
And speaking of the bottom line, are you able to quantify any of the purchasing or manufacturing savings that you might have realized so far? Or is it just too early in the process?
Speaker 2
No, I think what we said is we're going to give you what are the costs that occurred in the quarter and we will continue to do so. And we also also said that the benefits will somewhat lag the one time cost. But by the end of year three, we will have had the full benefit to the bottom line.
Speaker 4
And then just a question on tax rate. Is that 30% to 32% rate a good rate to use for the second half of the year and 2019?
Speaker 3
That's a great question. So I want to qualify that by saying that last year, accounting rules changed in terms of how we account for the additional tax deduction you get on stock option exercises. So that becomes really, really difficult to predict. So in that 30% to 32% rate, we've got about $02 per share baked in as a rough estimate of stock option exercises. But that number could change depending on the value of the stock price and the number of employees that would like to exercise in the quarter.
So there's no easy way to predict that. But just as a reference point, we had about $07 per share positive in the first quarter because our stock price was at a pretty good level. So I'll leave you with that. I can't give you any more than that because it's really there's variables that we don't know how they're going to play out.
Speaker 4
Okay. Thank you.
Speaker 0
Our next question comes from Chip Dillon with Vertical Research.
Speaker 11
Hi, guys. This is Salvator Tiano filling in for Chip. How are you?
Speaker 1
Hi, Salvator.
Speaker 11
So my first question, trying to understand with all this raw material inflation and you called out resin prices for one of your segments. In the core sales growth, how should we thinking about volumes versus price contribution this quarter and going forward?
Speaker 3
Salvador, in the quarter, we estimate that about 1% of our sales growth was from the pass through of the higher raw material costs in Q2. So difficult to say going forward. I mean, don't really try to predict what resin is going to do. We can tell you though that right now we're hearing that going from Q1 to Q2, resin costs are expected to trend slightly lower heading into Q2.
Speaker 11
Okay, understood. And then can you provide us a little bit more color on food and beverage? You called out obviously resin and mix, but this was unusually low margin even for this quarter. So can you provide a little bit more color here? And when should we expect to see the margin recovery from resin price from the pass through of higher resin costs in Q2, Q3 perhaps?
Speaker 3
Sure. I'll take that one as well. So in the quarter, Food plus Beverage had about a $1,000,000 headwind coming from the timing of the pass through of those raw material costs.
Speaker 2
So
Speaker 3
our timings of the pass throughs vary depending on customers, but we would expect that in fairly stable resin environment that we would be able to catch up sometime in the next quarter on that pass through. In terms of product mix, certainly, we've said that some of our beverage capabilities with the valve technology do have some pretty good margins on it. So less sales of some of the beverage closures, particularly in Asia this quarter. And then also the higher tooling didn't really help much either. Looking forward, I mean, you look at the pattern of our Food plus Beverage business, we in Q1, we tend to build for the heavy summer months in Q2 and Q3 and in Q4 is also a little bit difficult to predict.
But we typically see higher margins in our second quarter and third quarter.
Speaker 11
Perfect. And since you brought up all the closures here, in The U. S, I think a peer of yours mentioned that they may have seen some pull forward of demand for a kind of warm weather related items, be it closures or plastic packaging. Are you seeing anything like that in food and beverage and perhaps anything outdoors related in Beauty plus Home?
Speaker 3
It's Diva. We haven't heard anything from our internal discussion. The only thing I can say at least in Food and Beverages, our condiment sales were strong. So maybe that's in relation to our customers thinking that warm summer season, more outdoor use and things like that.
Speaker 11
Okay. Understood. Thank you very much.
Speaker 0
Our next question comes from Brian Rafa with Morgan Dempsey.
Speaker 12
Good morning, guys.
Speaker 3
Hey, Brian. How are you?
Speaker 9
Good morning.
Speaker 12
Go back and talk a little bit, Stephane talked a little bit about some of the smaller sized customers, some of the regional, even maybe local customers. I'm wondering how innovative relative to dispenser delivery technology are they? How adaptive, how transformational are they? Or do they just tend to kind of copy with a time lag some of the multinational, the global consumer branded companies?
Speaker 2
Yes. Thanks, Brian. Without offending some of our large customers, let's say the upper half of these smaller independent brands is certainly very innovative and comes up with new product gestures, with new ways of positioning their products. And certainly next to the traditional centers of New York, Paris, you see a lot of innovation coming out of the West Coast, out of Korea, out of even Latin American countries. And as you've seen, maybe Unilever not too long ago, they just then tend to buy the most successful of those.
They bought a very successful Korean beauty company not too long ago. And, I mean, even some of the retail products that we highlighted, the Walgreens Boots number seven, it's a very innovative packaging. So I wouldn't say that they copy the big ones. They're just smaller, faster, maybe not everything buttoned up from a supply chain and technology where we can add more value. But many times they didn't end up also in the hands of larger customers.
Now having said that, we are of course also very closely working with high end premium even luxury customers in France with our custom beauty business. That is probably the leading edge. Every new product has to be unique and different. As you remember, that also created sometimes some issues that we had with our custom beauty facility. So, but maybe just a sidebar on that, we continue to make progress on our Custom Beauty facility in Europe.
They still were about drag of about 1,000,000 in the quarter, but the drag continues to decline. So hopefully that by the middle of the year, this is behind us from a year over year impact. And certainly the Custom Beauty premium houses continue to drive innovation in the space.
Speaker 12
All right, good. No, I appreciate the color on that. I'm wondering maybe another big picture question. If you look at as the markets tend to become a little more robust, I'm wondering what are you seeing on the life cycles in kind of the brand imaging? Are you seeing shorter life cycles with more product changes, bottle shapes, styles, innovative technology?
Or are you still seeing longer cycles with maybe more dramatic brand imaging or packaging imaging changes?
Speaker 2
Yes, look, that's a very hard question to answer in the aggregate. Clearly, innovation is works very differently in the different segments. And where we have the biggest acceleration always is if a category starts to switch from non dispensing to dispensing. The biggest runway we see there is still in the Food business with conversions, whether it's in infant nutrition, whether it's in the dairy space. But also in the pharma space, we talked before about, we see a potential trend of established drugs that used to be administered maybe by injection to people look at that whether they can administer them nasally, for example, some CNS drugs, the one that is very well known is Narcan unfortunately in this country.
So that is also conversion from that is in our favor. Clearly, when things are going well, the premium luxury good makers will accelerate their innovation cycle and come up with new formats. But I think it's too early to call this a trend.
Speaker 12
Okay. And then just a follow-up. What are you guys seeing kind of on big quote activity? Is it does it continue to remain robust as we kind of go forward? What's your thoughts on the potential big quote?
Speaker 2
I'm not sure I follow with big quote. I mean in terms of like volume,
Speaker 12
Yes, five I'm if you're looking at the first quarter, Bob or Stephane, are you seeing kind of you've got some nice robot, you got some good project demand. Are you seeing kind of follow on bid quotes and looking at new project designs and that type of thing as we move into the year versus just kind of a pent up demand or a couple of quarter cycle. I'm just wondering kind of the runway that you guys are seeing, if at all you can speak to that in packaging?
Speaker 2
Yes. Look, we've given a positive guidance for quarter two. We certainly see good momentum, a combination both of the macro picture, but also our own activities. So are we seeing more opportunities? Are we bidding on more business?
Of course, that's the result of our commercial excellence efforts that we are much more on the front foot in going after opportunities and making sure we not only have a bid in, but the winning bid. But I cannot give you color whether they become bigger or smaller. Maybe the only other point, I would mention on the previous question, the other driver for innovation is of course the whole e commerce development. So we see more and more requests for e commerce proofing of existing packaging. And there with our we have many different options, whether it's locking mechanisms, whether it's clips, whether it's redesigning pump or dispensing closure.
So e commerce also will continue to be a good momentum for us because it drives innovation.
Speaker 12
Got you. Thanks guys. Appreciate it. Great quarter.
Speaker 3
Thanks, Brian. Our
Speaker 0
next question comes from Adam Josephson with KeyBanc Capital.
Speaker 5
Good morning, everyone. Stephane, Bob, Matt,
Speaker 3
good morning.
Speaker 5
And Stephane, I'm sure you're excited by the Roquan Smith selection last night.
Speaker 2
Absolutely.
Speaker 5
One, Bob, just on resin for a second, you mentioned sequentially a bit lower. Is that more in Europe or The States that you're seeing that?
Speaker 3
It's like I mean, if you look at it going from Q4 to Q1, The U. S. Increased more while Europe kind of remained flat. So what we're seeing is on the way down, The U. S.
Is expected to decline kind of back to almost back to Q4 levels, while the Europe is down just slightly.
Speaker 5
And just a couple on Beauty plus Home. Has anything structurally changed in that industry in recent months? I ask because obviously you've been doing significantly better partly because of market growth being better, partly because of your execution being better. But have the competitive dynamics changed at all? I mean, it's typically been highly competitive and you guys have talked about that frequently.
Has that changed at all of late?
Speaker 2
No, we don't see any major change in ownership or consolidation or behavior, save maybe ours. Don't really see that, but clearly increased effort to make sure we tap all of the opportunities.
Speaker 3
The only thing I would add, Adam, might be is what we're asking our customers today is obviously consumer confidence is up and how much of this is potentially refeeding the pipeline in terms of inventory and we don't have really good data on there. But I'm sure with the macro environment improving, we've seen in past years obviously our customers don't want to be left without product on the shelf as well. So I think we've kind of over the last several years worked through the inventory destocking in multiple markets. That also could be a potential that you're seeing a little bit of a pent up demand to refill the store shelves.
Speaker 5
Thanks. And just to that point, maybe can you remind us how economically sensitive that business is? Obviously, the beauty piece is, some of the other stuff less so, but just broadly speaking?
Speaker 3
Sure. So obviously, Personal Care, we don't believe is very economically sensitive. So the best comparison we got is going back to 2008 when everybody thought the world was going to fall apart. Our Beauty business was down about 30% in the 2008, but it didn't stay down. It rebounded quite nicely in the back half of the year.
And in fact, the following year, were back to where we were at record levels in 02/2007. So I think you can see a short term pullback in an extreme macro change environment. But we're still really talking about affordable luxuries here. And I think most people, we would see probably a trade off from going to spas and things like that and before it would make its way down to skincare and cosmetics and things like that. Yes.
Speaker 2
I mean, you zoom out from that, I mentioned it before, but Aptar is really very much advantaged that most of the markets we serve are not sensitive. I mean, people don't stop taking their drugs, they don't stop eating breakfast, lunch and dinner. Indeed, it might cut back on the luxury fragrance for a quarter, but it's most of our portfolio is not sensitive to the economic cycle. Supply chain whiplash is not withstanding. Sure.
And thanks, Stefan. Just one back to
Speaker 5
your balance sheet. I know, as Chris said, you're the apple of every packager's eye in terms of your balance sheet. I mean, do you are you at all bothered by the fact that you're as under levered as you are? Is that something that you intend to change in the years to come? Are you quite comfortable being as with your leverage being as low as it is, just as a general statement?
Speaker 2
Yes. As a general statement, I certainly would love to use the shareholders' money as effectively as possible. And I think we are certainly comfortable in this one to three leverage range. So for the right opportunity, we will not hesitate to pull the trigger. On the other hand, certainly my experience and you probably agree with it is overpaying for acquisitions.
You never see the end of it and you work for the seller for the rest of your life. Nobody enjoys that. So for the right acquisition, we will pull the trigger, no doubt about it. Having said all that, I get fewer and fewer comments from investors on this topic because we look at the rising interest rate environment and they don't dislike necessarily our balance sheet as much as when there was zero interest rate. Exactly right.
Thank you, Stephane.
Speaker 0
Our next question comes from George Staphos with Bank of America.
Speaker 7
Hi, thanks for taking my follow-up. Just a quick question on currency. Do you guys call out what the currency impact is on the bottom possible? Thank you.
Speaker 3
Well, what we do try to do, Molly, is take last year's and kind of give you a comparative EPS compared to this year. But that's kind of the direction we go.
Speaker 7
All right, understood. Thank you.
Speaker 0
Our next question comes from Chris Manuel with Wells Fargo.
Speaker 9
Good morning again. Just one quick one being again that you are the apple of the packaging land. You're going to keep hearing that for a while. Along those lines, when I look at interest expense, I usually net it income expense. It was notably lower this quarter and it's been for a long, long time.
What do you have an assumption that you could give us for the year? Or is this a reasonable run rate running around $6,000,000 of net income expense over the coming quarters? How should we think about that?
Speaker 3
Yes, Chris, let explain a little bit. So the remember, we repatriated almost $1,000,000,000 from Europe to The U. So S, in Europe, that was made up of roughly $500,000,000 in cash on hand and then we took on some additional borrowings in Europe. We timed it really well in that the borrowings we got in Europe were at historically low rates. Now our when it was invested in Europe, it was essentially at zero interest income rates, right?
Bringing it back to The U. S, we're getting anywhere between one percent and one point five So now we've got 700,000,000 in cash in The U. S. Earning between 11.5%. The other thing we did in the fourth quarter is we paid off early some of our higher U.
S. Private placement debt, which is around 6%. So our all in average interest rate on our debt is much, much lower than it has been in the past. So you combine those two factors, I think a reasonable assumption is that the run rate from here going forward, barring any other M and A activity that Stephane has been talking about is a right assumption.
Speaker 9
Okay. So current run rate, good assumption going forward. That's what I needed to know. Thank you, guys. Good luck.
Speaker 0
Thanks. There are no further questions in the queue at this time. I'd like to turn the call back over to Mr. Tanda for closing remarks.
Speaker 2
All right. Well, thanks again for joining us and enjoy the rest of your day. Talk to you after Q2.
Speaker 0
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.