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Aptargroup Inc
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Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2018 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
Introducing today's conference call is Mr. Matt DellaMaria, Senior Vice President, Investor Relations. Please go ahead, sir.
Thank you, Kevin, and welcome everyone. Participating on the call today are Stephan Tanda, President and Chief Executive Officer; and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. Stephan will begin our call with a brief overview of our performance. Bob will then discuss a few of the financial details and then turn it back over to Stephan 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 we undertake no obligation to update the forward-looking information contained therein.
I would now like to turn the conference call over to Stephan.
Thanks Matt, and good morning, everyone. And thanks for joining us today. I'll start with some general comments about the quarter and will then move to Slide 4 of the accompanied presentation to provide an update on our business transformation. Then I'll 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 a core basis after neutralizing for currency effect. We also had corresponding strong bottom line growth. Each business segment achieved core growth at or above our long-term growth target. Our Beauty and 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 trend is positive.
Let me give you some examples. In the quarter, we have Walgreen Booth launch a new global facial skincare booth serum with a successful brand number seven that features our airless serum dropper. [Eliyaz] brand selected a different airless solution with an integrated lockable, on -off system for its global launch of a new skincare line called H protect. In the North American healthcare market our spray accessories involve a feature on a new Clorox, on the new Clorox Scentiva bathroom foam cleaner and a do election spray trigger accessory were selected for new insect control product called Zevo by P&G.
We are early in the implementation stages of our transformation, the growth we are seeing in the quarter is the clearly result of market driven growth, with some added benefit for this coming from our transformation initiatives. Profit margin in the segment improved over the prior year, but was negatively impacted by rising raw material costs.
Our Pharma segment had another excellent quarter with core sales growth of 6% in the quarter. Business is 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 system. Our spray system with bed and bath technology was used in [Indiscernible] soothing, saline nasal mist in the US.
Also in the quarter our automatic squeeze dispenser was featured in Bio Canada, new hydra allergy therapy eye drops and our advanced preservative free dispensing system is found on the new moisturizing eye lip spray for CBS in North America.
In the UK, our metering raw was chosen by Cipla for their zero flow 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 continued 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 ton 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 product from [Indiscernible] and from and our beverage sport closure was chosen for new flavored 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 4, 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 12 to 24 months. We remain focused on executing our strategy 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 US 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 a proven ability to generate strong cash flows. Our balance sheet remains strong and we will continue to seek that 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?
Thank you, Stephan 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 5. 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 markets.
As you saw in our press release, Beauty and home core sales keeping currencies constant increased 8%, when we looked at profitability, our beauty and home segment's adjusted EBITDA margin improved to14%. This was despite negative impacts from the timing of passing through higher raw material cost of approximately $1 million, 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 homecare market were flat compared to the prior year due primarily to lower custom tooling sales, however, product demand increased across the wide variety of end applications.
Our Pharma segment achieved the core sales growth of 6% and 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 health care market increased 17%, driven primarily by increased demand for nasal sprays for decongestants and saline rinses. Lastly, core sales to the injectibles 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 million.
Looking at each market, core sales for 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 week 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 total $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 6, we can see that our adjusted EBITDA for the first quarter rose 17% and these 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 7, I can provide an update on the US 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 rates.
We've used this updated rate in both our first quarter results and our second quarter EPS guidance. Turning to Slide 8 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 $1.02, 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 $1.01, 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 your 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 Stephan. Cash flow from operations in the quarter was approximately $50 million. Capital expenditures were approximately $40 million, and a free cash flow is approximately $10million compared to $6 million 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 remained slightly over one times levered compared to our trailing 12 months adjusted EBITDA.
At this time, Stefan will summarize the key takeaways from our remarks today.
Thank you, Bob. So in closing and as noted on Slide 9, I'd like to some of 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 that I would now like to open up for your questions.
[Operator Instructions]
Our next question comes from John Anderson of William Blair.
Hey, good morning, everybody. 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 warehousing, certain ingredients and I guess what I'm trying to understand from your perspective, how this, if it all, impacts you as a supplier to many of those companies, your ability to price to offset resin movements et cetera whether that's just a something that's kind of baked into your arrangements and non-negotiable or if there are kind of other considerations here as well? And Stephan, 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.
Sure. Look, I think everybody who is following the current environment sees inflationary pressures coming. And there is 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 there's an automated mechanism, and that's no different now, but also the additional increases that we see comes up 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're going across the board and the magnitude of the increase is different by segments and so on. But clearly these price increases will happen, and that's just the current reality.
Thanks for that. I 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 that end results you're getting with kind of smaller, maybe more rapidly growing customers? And 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?
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 larger accounts, small accounts, whatever is appropriate for their environment. Indeed, we've been very happy to see that large customers are growing again. And it 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 has 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 adjusted our structure so that we can go where the growth is. And your question on profitability that's really a multi-faceted 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 inefficiency for smaller lot sizes. Sometimes not, sometimes we go through distribution and often we also go direct particular when it seems like a winning player, who will become large pretty quickly or might be brought up by a larger player. So I wouldn't say that the 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 it another question the resources we are adding to the region's into 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 not more focused on the business at hand, which is fueling some of the growth although it's still early days in the transformation.
Very helpful, one I get one quick follow-up I think maybe more for Bob. What was the tooling contribution to the core growth in the quarter overall? Yes, I'll just stay with that.
Sure. John, overall it 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 beauty and home, but on an overall consolidated basis it was essentially flat.
Our next question comes from Debbie Jones at Deutsche Bank.
Hi. I am actually here to sign thank you. And 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. Can you clarify that? And then just what do you have to do or how hard it is to make these adjustments? And then I have a follow-up.
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 set we going at 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 and good opportunities and in other cases we 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 and also 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 than some other market and for sure let's at the global level.
Okay and then just one more on volumes. You mentioned I think Brazil being strong, any other regions that you would call out it is driving above trend growth. And then and you've also been putting these incentives in place and the accountability with your teams. How much of that do you think has been drive some of the growth you see in the last couple of quarters?
Hey, Debbie. This is Bob. So I'll take your kind of regional growth question. So really it was pretty widespread on a consolidated base with the exception of Asia. On a consolidated basis, both the US 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 and home and pharma, but down in food and beverage because of the Chinese beverage customer we mentioned.
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 dries of the regional teams. How much of that is attributable to just the empowerment and that the increase freedom to operate they feel, as opposed to the incentives, I think it's hard to quantify.
Our next question comes from George Staphos with Bank of America.
Hi, this is actually Molly Baum sitting in for George Staphos. My first question is on the beverage closure trends in China sorry. I noticed trends has been a lingering one should we expect a stronger trend at some point and why are why not? You can comment.
Yes, hi, Molly. Be perfectly honest, this is a bit of limited visibility situation. It is one single large customer, a good customer. We continue to good business with them. Clearly Q1 has been lower than prior year. And if include that, the rest is growing like 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 at the bottom line performances were counts, but we thought we had lapped it, it looks like Q1 was not as strong as we had hoped and visibility is continues to be limited. Again, it's a single customer, dual source situation and you have demands volatility and you have sourcing volatility of the customer.
Got it, thanks for that. And then my next question and then a kind of related follow up are on the pharma segment. So the first half of that is do you think you're gaining share and injectibles and are this type of market where competitors can respond to share trends or is it more driven by the product pipeline and then my related follow-up. Is there a way to either qualitatively or quantitatively to size the pharma backlogs that you have right now? Thank you.
We really don't think of it as a gaining share of one. 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 injectibles. Overall, backlog is hard to describe but certainly you feel good about the momentum in the pharma business. Clearly, it's a long cycle business so changes in trends happened over years not over quarters.
Yes. And I would add that the backlog remains strong but I mean due to confidentiality, we wouldn't ever be able to give you size and potential in that without breaching confidentiality with certain customers. So not sure how meaningful that would be, but the backlog overall in terms of number of project remains strong.
Our next question comes from Ghanshyam Punjabi with Robert W Baird.
Thank you, good morning, everyone. I guess first off on beauty and home, it's been a very long time since after I 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 and manufacturing et cetera that you see, just curious as to your perspective on the incremental margins that get current in the context of your transformation initiatives.
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 certainly from a momentum and reinforcement of what we're doing the transformation. This is this is really helpful to the team. People are working very hard under the new cadence. And the new commercial excellent systems and to put a few wins on the board is positive for the organization. The nice part about this business is the capacity increment tends 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 bigger molt there. And so we are able to accommodate the increased demand and in addition of course it does help productivity gains.
Yes, and Ghanshyam 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, 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 effects, but also because we're looking at that and expecting slightly higher CapEx commitments in 2018.
That's helpful and then as you think about the large customers versus the small run customers, a small accounts that you called out, how the commercial team's 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.
Yes. Maybe again stepping back so in the large markets what we're doing is we are sub segmenting first the P&L ownership from make it simple in the US. We use beauty in home us, now we have a beauty business and the home and personal care business with their own designated P&L leaders. In Europe, where we are heading to break it into four units, the beauty, fragrance unit, the skin care color and units, personal care, home care unit and dedicated custom beauty leadership. So breaking down the big P&L into smaller P&L with their own entrepreneurial leaders. In addition, we have talked to you before that we start or have segmented customers into smaller universes and then adjusted the sales force to be specifically targeted at that kind of customer that both from a end use point of view, but also from a size and customer characteristics point of view. And at the same time strengthens 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.
Our next question comes from Chris Manuel with Wells Fargo.
Good morning, gentlemen. Congratulations to a strong start to the year. Couple questions for you, first a real simple one Bob. Could you actually give us what the -- either what the tolling numbers were or what the year-over-year differential was for the three segments?
Sure. So in total we reported a little over $17 million in tooling in the quarter, $17.2 million to be exact. And last year reported was $16.8 million. So obviously there's a little bit of currency in there, but pharma was roughly about $3 million; Beauty and home was roughly $5.5 million and Food and Beverage was a little over $8.5 million in the quarter. So that was a pretty significant decrease for pharma about $5 on a reporter basis, $6.5 million on a constant currency basis. And then you got the kind of the offset there with food and beverage being up by about $6 million reported and same reported and constant currency, And in beauty and home was down slightly.
Perfect, that's helpful. Next question I had was from there your look like that 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 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?
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 than 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 US. They're fully operational.
Okay and then customers have qualified as the -- up shipments from there?
Yes.
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 $2.75 billion. What are you seeing in the marketplaces? Is there anything still big out there that you're looking at or should we kind of anticipate share repurchase you're ramping up as the year goes on or what's kind of the thoughts there for redeployment?
Hey, I am going to put this on my wall the Apple of the packaging land, thanks for that quote. [Multiple Speakers] but seriously look we will continue to remain a disciplined acquirer. We're very conscious of our balance sheet and that to put shareholders money to good use, but in the end it needs to be a good deal. We've talked about before certainly Aptar's 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 willing seller and willing buyer will meet, but more than that we can really not value.
Our next question comes from Anojja Aditi Shah with BMO Capital Markets.
Hi, good morning. I just wanted to talk about corporate cost. 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?
Sure. So nothing of noteworthy that we can talk about it. Its 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 and strategy team et cetera. Going forward I think it would be reasonable to target in the $12 to $13 million per quarter range.
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, and some have not. Can you detail what you're seeing there? I know you mentioned 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?
Yes. I think a couple things. One is it's not just Brazil, its Latin America in general is strong, but significantly Brazil had the 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 the rebound, there might have been also some rebuilding of stock that was depleted the visibility is there is not perfect particularly as you see over some of multi level players. You 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.
Our next question comes from Jason Rogers of the Great Lakes Review.
Yes, yet another good quarter in beauty and home and I were wondering how much of that was due to the transformational initiatives versus a general recovery in the market.
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 spent and well a lot of our end-users are not so sensitive to overall consumer sentiment, certainly the premium beauty side, they 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 are talk to, some share regains are helping the top line. And but also the bottom line activities to productivity to purchasing gaining traction. So you feel good about where we are in the transformation. We want to make sure everyone understands, it is still early days. This is 24 months program that were started in Q4. So we are early into the transformation and we certainly expect our efforts to ramp up, but clearly there is a benefit in the results.
And speaking at 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?
No. I think what we said is we're going to give you what are the costs that are occurred in the quarter. And we will continue to do so. And we 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.
And then just a question on the tax rate. Is that 30% to 32% rate a good rate to use for the second half of the year and 2019?
That's a great question. So I want to qualify that by saying that last year the accounting rules change 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 $0.02 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 $0.07 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 is variables that we don't know how they're going to play out.
Our next question comes from Chip Dillon with Vertical Research.
Hi, guys. This is [Indiscernible] filling in for Chip. How are you? So my first question trying understanding with all these raw material inflation and you called out resin the 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?
So, Salvador in the quarter we estimate that about 1% of our sales growth was from the pass-through of the higher raw material cost in Q2. So it's difficult to say going forward. I mean we 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.
Okay, understood. And then I can you provide us a little bit more color in 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 possible high resin costs in Q2, Q3 perhaps?
I'll take that one as well. So in the quarter, food and beverage had about a $1 million headwind coming from the timing of the pass through of those raw material costs. So our timings of the pass through are vary depending on customers, but we would expect that in a 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 if you look at the pattern of our food and 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.
Q -
Perfect and since you brought that up with closures here, in the US 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, beet closures or plastic packaging. Are you seeing anything like that in my food and beverage and perhaps anything outdoors related in my beauty and home?
We haven't heard anything from our internal discussion, don't I can't say at least in food and beverages, our condiment sales were strong so maybe that's in relation to our customers thinking that the warm summer season more outdoor use and things like that.
Our next question comes from Brian Rafn of Morgan Dempsey.
Good morning, guys. Go back and talk a little bit someone talked a little bit about some of the smaller size 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 they do they just tend to kind of copy with a time leg some of the multinational, the global consumer branded companies.
Yes, thanks Brian, without offending some of our large customers, let's say the upper half of these smaller independent brands that 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, Korea, out of even Latin American countries. And as you've seen maybe Unilever not too long ago, there they just then tend to buy the most successful of those; they bought the very successful Korean beauty company not too long ago. And I mean even some of the retail products that we highlighted the Walgreen boots number seven is a very innovative packaging. So I wouldn't say that they copied the big ones. They're just smaller, faster maybe not everything but enough from a supply chain and technology where we can add more value. But many times they didn't end up also on 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 some time some issues that we had with our custom beauty facility. So but maybe just a sidebar and that continue to make progress on our custom beauty facility in Europe. They still worry about drag off about a $1 million in the quarter but that 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 this space.
All right, good, no, I appreciate the color on that. I'm wondering maybe another big-picture question, if you look at is the markets tend to become a little more robust. I'm wondering what you are seeing on the lifecycles in kind of the brand imaging. Are you seeing shorter lifecycles with more product changes bottle shaped styles innovative technology or are you still seeing longer cycles with maybe more dramatic brand imaging or packaging imaging changes?
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 none dispensing to dispensing. The biggest runway we see they're still in the food business with conversions, whether it's an 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 adminis them easily. For example some CNS drugs, the one that is very well known as narcoc 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 rule accelerate their innovation cycle and come up with new formats. But I think it's too early to call this a trend.
Okay and then just 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 are your thoughts on the potential big quote?
Not sure I follow with big quote.
I mean in terms of like volume.
Yes, obviously, yes I'm wondering if you're looking at the first quarter Bob or Stephan. Yes, are you seeing kind of -- you've got some nice robust, you got some good product project demand, are you seeing kind of follow-on big 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 quarters cycle? I'm just wondering kind of the runway that you guys are seeing? If at all you can speak to that in packaging.
Yes, look, we've given a positive guidance for quarter two, certainly see good momentum a combination both of the macro picture but also our own activity. So are we seeing more opportunities? Are we bidding on more business? Of course, that's the result of our commercial excellence effort that we are much more on the front foot in going after opportunities, and making sure and we not only have a bid in but the winning bit, but I don't --can't give you color whether they become bigger or smaller. Maybe it the only other point I would mention on the previous question. The other driver for innovation is of course the whole ecommerce development. So we see more and more requests for ecommerce proofing of existing packaging. And there with our -- we have many different options, whether it's locking mechanisms, whether it's cliffs, whether it's redesigning a palm book or dispensing closure. So ecommerce is also will continue to be a good momentum for us because it drives innovation.
Our next question comes from Adam Josephson from KeyBanc Capital.
Good morning, everyone, Bob, Stephan, good morning. And Stephan I'm sure you're excited by the -- Smith's selection last night.
Absolutely.
One to 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?
It's like I mean if you look at it going from Q4 to Q1, the US increased more while Europe kind of remains flat. So what we're seeing is on the way down the US is expected to decline kind of back to almost back to Q4 levels while Europe is down just slightly.
Sure and just a couple on beauty and home. Has anything structurally changed in that industry in recent months? I asked this 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 change at all? I mean it's typically been highly competitive and you guys have talked about that frequently. Has that change at all of late?
No. We don't see any major change in ownership or consolidation or behavior says maybe ours. So don't really see that but clearly increased effort to make sure we tap all of the opportunities.
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 re-feeding 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 that that obviously our customers don't want to be left without product on a shelf as well. So I think we've kind of over the last several years worked through the inventory de-stocking in multiple market. So that that also could be a potentially you are seeing a little bit of a pent- up demand to refill the store shelves.
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?
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 -- the world was going to fall apart. Our beauty business was down about 30% in the first quarter of 2008, but it didn't stay down it rebounded quite nicely in the back half of the year. And in fact the following year we're back to where we were at record levels in 2007. So I think you can see a short-term pullback in a 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 but before would make its way down to skincare and cosmetics and things like that. I mean if you if you zoom out from that I mean I mentioned before but after it's really very much advantage that most of the markets reserve are not sensitive. I mean people don't stop taking the drugs. They don't stop eating breakfast, lunch and dinner. Indeed they might cut back on their luxury fragrance for a quarter, but it is most of our portfolio is not sensitive to the economic cycle supply chain whiplashes, we're standing sure.
Sure. Thank Stephan. And just one back to your balance sheet. I know as Chris said you're the apple of every packagers in terms your balance sheet. Do you or you'd all it bothered by the fact that you are as under levered as you are. Is it's something that you intend to change in the years to come? Are you quite comfortable being as with your leverage being as well as it is? Just as a general statement.
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 1 to 3 leverage range. So for the right opportunity, we will not hesitate to pull the trigger. On the other certainly my experience and probably you agree with is over price, over paying 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 a zero interest rate.
Exactly right. Thank you, Stephan.
Our next question comes from George Stavros of Bank of America/
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 line? If you didn't would it be possible? Thank you.
Well, 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.
Our next question comes from Chris Manuel with Wells Fargo.
Good morning again. Just one quick one being again that you is 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 assumption that you could give us for the year or is this reasonable run rate running around $6 million of net income expense over the coming quarters? How should we think about that?
Yes, Chris, let me explain a little bit. So remember we repatriated almost a $1 billion from Europe to the US right, so in Europe that was made up of roughly $500 million 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 when it was invested in Europe it was essentially at zero interest income rates right, bringing it back to the US we're getting anywhere between a 1% and 1.5%. So now we've got $700 and X million in cash in the US earning between 1% and 1.5%. The other thing we did in the fourth quarter is we paid off early some of our higher US private placement debt which is around 6%. So overall in average interest rate on our debt is much, much lower than 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 borrowing any other M&A activity that Stephan has been talking about is a right assumption.
Okay. So current run rate, good assumption going forward that's what I needed to know. Thank you guys. Good luck.
There are no further questions in the queue at this time. I like to turn the call back over to Mr. Tanda for closing remarks.
All right. Well, thanks again for joining us. And enjoy the rest of your day. Talk to you after Q2.
Ladies and gentleman that does conclude today's presentation. You may now disconnect. And have a wonderful day.