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. 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 financial details and 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, Aptar undertakes no obligation to update the forward-looking information contained therein.
I would now like to turn the conference call over to Stephan.
Thanks, Matt. Good morning, everyone, thanks for joining us today. I will start with some general comments about the quarter, will then move to Slide Four of the accompanying presentation to provide an update on our business transformation. 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 + 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. 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 the successful brand No7 that features our airless serum dropper. Uriage 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 home care 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&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 Zarbee's soothing saline nasal mist in the U.S. Also in the quarter, our ophthalmic squeeze dispenser was featured on Bayer Canada'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 U.K., our metering valve was chosen by Cipla for their Seroflo 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 DanoneWave coffee creamer for the North American market called Left Field Farms. In China, our custom closures are improving the custom experience for infant nutrition products from Yashili and from Yili, and our beverage sport closure was chosen for a 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 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. We do anticipate a gradual ramp-up in benefits over the next 12 to 24 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 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 a proven 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's 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 market. As you saw in our press release, Beauty + Home core sales, keeping currencies constant, increased 8%. When we looked at profitability, our Beauty + 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 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 skincare, 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 a 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.
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 million. 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. 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, 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%, 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%-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 year earnings per share would've been lower by approximately $0.16. I have a few other details to share, 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. Our free cash flow is approximately $10 million 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%. We remain slightly over one times levered compared to our trailing 12 months adjusted EBITDA. At this time, Stephan will summarize the key takeaways from our remarks today.
Thank you, Bob. In closing, 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. 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 it up for your questions.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. In the interest of time and fairness to all participants, please limit yourself to two questions, one follow-on question, then come back in the queue if you have more questions as time allows. Our first question comes from Debbie Jones with Deutsche Bank. Our first question comes from Debbie Jones with Deutsche Bank. If your phone line is muted, could you please unmute the phone line? Do you want me to go on and move on to the next question?
Sure. We'll try to get Debbie back in the queue. Maybe there's a technical issue. Thanks, Kevin.
Okay. No problem. Our next question comes from Jon Andersen with William Blair.
Hey, good morning, everybody.
Hey, Jon.
Hey, Jon.
I wanted to ask first, just a bigger picture question. Your customers, many of which are 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. 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, et cetera, 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. 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, 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'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. Also the additional increases that we see come up the pike, whether it's other materials, metals, freight, packaging, and other inflationary increases. 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. Clearly we are going across the board and the magnitude of the increase is different by segment and so on. Clearly, these price increases will happen and that's just the current reality.
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? Do you have to serve those customers? Is there a different go-to-market strategy for those customers? Can they be as profitable just given that you're probably dealing in kind of smaller volumes?
Okay. Yeah. Maybe let's step back, for everyone's benefit. 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. Actually, the smaller customers are growing faster. We saw good growth not only in the big regions, but also, for example, Latin America has very good growth also with smaller customers. 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. We have adjusted our structure so that we can go where the growth is.
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 with smaller lot sizes. Sometimes not. Sometimes we go through distribution, and often we also 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. I wouldn't say that smaller customers are less profitable. Not at all. Certainly, the very large customers have a different negotiation power. 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.
Very helpful. One quick follow-up, I think maybe more for Bob. What was the tooling contribution to the core growth in the quarter overall?
Overall.
Yeah, I'll just leave it at that.
Sure, Jon. 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 in Beauty + Home. On an overall consolidated basis, it was essentially flat.
Thank you.
Our next question comes from Debbie Jones with Deutsche Bank.
Hi. I'm actually here this time. Thank you. I wanted to ask you actually just mentioned adjusting where the growth is. I'm assuming you meant to just focusing on some of those smaller customers or where industry trends are. Can you clarify that? Then just what do you have to do, or how hard is it to make these adjustments? Then I have a follow-up.
Hi, Debbie. Good morning. Look, it is really depending on each segment and geography. All we're doing, and it sounds simple, is to look much harder, okay, in which geography, in which segment, which customer set we're going after. We've done a much more thorough job in segmenting our customer base and making sure the customers we haven't served, we're going after in good opportunities. In other cases, we adjust our resource level that is commensurate with the opportunity. Clearly, from a macro point of view, that also means deploying more resources in high-growth economies by and large. It's not one size fits all. It, again, depends on the segment. 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.
Okay. Just one more on volumes. You mentioned, I think Brazil being strong. Any other regions that you would call out as driving above-trend growth? You've also been putting these incentives in place and the 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?
Hey, Debbie, this is Bob. I'll take your regional growth question. Really, it was pretty widespread with the exception of Asia. On a consolidated basis, both the U.S. and Europe were up 7% core, Latin America was up 20% core for us. As I mentioned, Asia was flat. Again, even within Asia, though, we were up in Beauty + Home and pharma, but down in food and beverage because of the Chinese beverage customer we mentioned. Stephan?
Yeah. 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 Q1 that contributed. 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 increased freedom to operate they feel as opposed to the incentives? I think that's hard to quantify.
Okay, thanks. I'll turn it over.
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 know this trend's been a lingering one. Should we expect a stronger trend at some point, and why or why not, if you can comment?
Yeah. 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 the good business with them. Clearly, Q1 has been lower than the prior year. If you exclude that, the rest is growing by leaps and bounds. Of course, it's a big thing to exclude, and certainly when I talk to my people, we never exclude anything. The bottom line performance is what counts. We thought we had lapped it. It looks like Q1 was not as strong as we had hoped, and the visibility 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.
Got it. Thanks for that. My next question and then kind of the related follow-up are on the pharma segment. 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? 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.
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. 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.
Yeah, I would add that the backlog remains strong. Due 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. The backlog overall in terms of number of projects remains strong.
Okay, thanks for that. I'll turn it over.
Our next question comes from Ghansham Panjabi with Robert W. Baird.
Thank you. Good morning, everyone. I guess first off, on Beauty + Home, it's been a very long time since Aptar reported such strong growth numbers, 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, et cetera, that you see? Just curious as to your perspective on the incremental margins at current in the context of your transformation initiatives.
Well, maybe I'll take the big picture, Bob, you can add. Look, any team that hasn't been winning for a while and starts winning feels very good. Certainly from a momentum and reinforcement of what we're doing with transformation, this is really helpful to the team. People are working very hard under the new cadence and the new commercial excellence systems, 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. It's not that you have large expansions that you need to do, you might add another press here and a bigger mold there. We are able to accommodate the increased demand. In addition, of course, it does help productivity gains.
Yeah. Ghansham Panjabi, I'll take the bottleneck question. What we're doing is we're taking a look at, obviously, the order book for the remainder of the year and what bottlenecks. The beautiful thing I would add about the transformation is that as we continue to improve efficiencies, we essentially gain more capacity. 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. I think our guidance is up slightly, both because of currency effects, also because we're looking at that and expecting slightly higher CapEx commitments in 2018.
That's helpful. As you think about the large customers versus the small run customers, the 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, it's much harder to obviously execute. I'm just curious as to where you are in that process as well as an organization.
Maybe again, stepping back. In the large markets, what we're doing is we're sub-segmenting first the P&L ownership from, make it simple in the U.S., we used to have Beauty + Home U.S., now we have a beauty business and the home and personal care business with their own designated P&L leaders. In Europe, we are heading to break it into four units, a beauty unit, a fragrance unit, a skincare and color unit, a personal care unit, a home care unit, and a dedicated custom beauty leadership. We're breaking down the big P&Ls into smaller P&Ls with their own entrepreneurial leaders.
In addition, we have talked to you before that we have segmented customers into smaller universes and then adjusted the sales force to be specifically target at that kind of customer, both from an end use point of view, but also from a size and customer characteristics point of view, and at the same time strengthened our key account management approach to the larger accounts. 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. It just creates a lot more accountability and drive and ownership in driving the business forward.
Okay, perfect. Thank you, Stephan.
Our next question comes from Christopher Manuel with Wells Fargo.
Good morning, gentlemen, and congratulations to a strong start to the year.
Thanks, Chris.
Thanks.
Good morning.
Couple questions for you. First, a real simple one, Bob. Could you actually give us either what the tooling numbers were or what the year-over-year differential was for the three segments?
Sure. In total, we reported a little over $17 million in tooling in the quarter, $17.2 to be exact, last year reported was $16.8. Obviously, there's a little bit of currency in there, but pharma was roughly about $3 million, Beauty + Home was roughly $5.5 million, and food and beverage was a little over $8.5 million in the quarter. That was a pretty significant decrease for pharma. About $5 million on a reported basis, $6.5 million on a constant currency basis. You got the offset there with food and beverage being up by about $6 million on a reported and constant currency. Beauty + Home was down slightly.
Perfect. That's helpful. Next question I had was, from what you told us, the growth rate out of the injectables business was pretty strong, again, 9%. I think some point this year you were planning on commencing major shipments out of the Congers facility. Last quarter, I think you talked to us about still doing some testing and shipping out 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 the next leg to continued growth is for significant shipments out of there. Can you 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. It's been 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. Some of it will be absorbing new growth, and some of it might be over time moving things from Europe to the U.S. We are fully operational.
Okay, customers have qualified that they'll accept shipments from there then?
Yes.
Okay, perfect. Last question I had. 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 three-quarters of a billion. What are you seeing in the marketplace? Is there anything still big out there that you're looking at, or should we anticipate share repurchase ramping up as the year goes on? What's the thoughts there for redeployment?
Hey, I'm going to put this on my wall, the Apple of the packaging land. Thanks for that quote.
I can hear Bob checking his watch there right now, checking out Apple.
Seriously, look, we will continue to remain a disciplined acquirer. We are very conscious of our balance sheet and to put shareholders' money to good use. 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. We continue to look at deals. Valuations continue to look challenging. One of these days, a willing seller and a willing buyer will meet. More than that, we can really not tell you.
All right. No, I appreciate that. Thank you, guys. Good luck in the rest of the quarter.
Thanks, Chris.
Our next question comes from Anuj Shah with BMO Capital Markets.
Hi, good morning.
Hi, Anuj. How are you?
Oh, good, 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?
Sure. Nothing 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, et cetera. Going forward, I think it would be reasonable to target in the $12 million-$13 million per quarter range.
Okay, great. Thank you. 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 some details on that market and how you think the outlook is for the rest of this year.
Yeah. I think a couple things. One is, it's not just Brazil, it's Latin America in general is strong, but certainly Brazil had a great quarter. In the context of a fairly easy comparable. Remember, a year ago, things didn't look so bright. 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 multi-level players. You're never quite sure what is in the collective value chain inventory. Certainly, it's been a strong quarter and things look up from a year ago.
Great. Thank you very much.
Welcome.
Our next question comes from Jason Rogers with Great Lakes Review.
Yes. You had another good quarter in Beauty + Home. Was wondering how much of that was due to the transformational initiatives versus a general recovery in the market?
Hi, Jason. Look, certainly, the macro environment is very good. I read somewhere that 95% of all IMF member countries report growth, which is almost unprecedented. That has a read-through to how consumers feel and how they spend. While a lot of our end users are not so sensitive to overall consumer sentiment, certainly the premium beauty side will benefit from that. 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. Also the bottom line activity, the productivity, the purchasing gaining traction. We feel good about where we are in the transformation. We want to make sure everyone understands we're still early days. This is a 24-month program that was started in Q4.
We are early into the transformation, and we certainly expect efforts to ramp up. Clearly, there's a benefit in the results.
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?
I think what we said is we are going to give you what are the costs that occurred in the quarter, and we will continue to do so. We also said that the benefits will somewhat lag the one-time cost. By the end of year three, we will have had the full benefit to the bottom line.
Just a question on the tax rate. Is that 30%-32% rate a good rate to use for the second half of the year and 2019?
That's a great question. I want to qualify that by saying that last year, the accounting rules changed in terms of how we account for the additional tax deduction you get on stock option exercises. That becomes really, really difficult to predict. In that 30%-32% rate, we've got about $0.02 per share baked in as a rough estimate of stock option exercises. That number could change depending on the value of the stock price and the number of employees that would like to exercise in a quarter. There's no easy way to predict that. 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. I'll leave you with that.
I can't give you any more than that because there's variables that we don't know how they're going to play out.
Okay. Thank you.
Our next question comes from Chip Dillon with Vertical Research.
Hi, guys. This is Salvatore Tiano filling in for Chip. How are you?
Hi, Salvatore.
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?
Salvatore, 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. It's difficult to say going forward. We don't really try to predict what resin's 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. 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. Can you provide a little bit more color here? When should we expect to see the margin recovery from the pass-through of high resin costs, in Q2, Q3 perhaps?
I'll take that one as well. 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. Our timings of the pass-throughs vary depending on customers. 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. Less sales of some of the beverage closures, particularly in Asia this quarter. Also the higher tooling didn't really help much either. Looking forward, if you look at the pattern of our food and beverage business, in Q1 we tend to build for the heavy summer months in Q2 and Q3.
Q4 is also a little bit difficult to predict. We typically see higher margins in our second quarter and third quarter.
Perfect. 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 + Home?
It's Stephan. We haven't heard anything from our internal discussions. The only thing I can say, at least in food and beverage, is our condiment sales were strong. Maybe that's in relation to our customers thinking that warm summer season, more outdoor use and things like that.
Okay.
Yeah.
Understood. Thank you very much.
Our next question comes from Brian Raff with Morgan Dempsey.
Good morning, guys.
Hey, Brian, how are you?
Morning.
Go back and talk a little bit. Stephan 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?
Yeah. 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. 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. As you've seen, maybe Unilever not too long ago, they just then tend to buy the most successful of those. They bought the very successful Korean beauty company not too long ago. Even some of the retail products that we highlighted, the Walgreens Boots No7 is a very innovative packaging. 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. Many times they then end up also in the hands of larger customers. 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. Maybe just a sidebar on that, we continue to make progress on our custom beauty facility in Europe. Still worry about drag of about $1 million in the quarter, but the drag continues to decline. Hopefully by the middle of the year, this is behind us from a year-over-year impact.
Certainly the custom beauty premium houses continue to drive innovation in the space.
All right, good. No, I appreciate the color on that. I'm wondering, maybe another big picture question. As the markets tend to become a little more robust, I'm wondering, what are you seeing on the life cycles in 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?
Yeah, look, that's a very hard question to answer in the aggregate. Clearly, innovation works very differently in the different segments. 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. 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 whether they can administer them nasally. For example, some CNS drugs. The one that is very well known is NARCAN, unfortunately, in this country. That is also a conversion 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. I think it's too early to call this a trend.
Okay. Just a follow-up. What are you guys seeing on big quote activity? Does it continue to remain robust as we go forward? What's your thoughts on the potential big quote?
I'm not sure I follow with big quote.
You mean in terms of volume, like size?
Yeah. I'm wondering if you're looking at the first quarter, Bob or Stephan. Are you seeing you've got some nice robust, you got some good project demand. Are you seeing follow-on big quotes and looking at new project designs and that type of thing as we move into the year versus just a pent-up demand or a couple of quarter cycle? I'm just wondering the runway that you guys are seeing, if at all you can speak to that in packaging.
Yeah, 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 activity. 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. 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. We see more and more requests for e-commerce proofing of existing packaging in there. We have many different options, whether it's locking mechanisms, whether it's clips, whether it's redesigning a pump or dispensing closure.
E-commerce also will continue to be a good momentum for us because it drives innovation.
Got you. Thanks, guys, appreciate it. Great quarter.
Thanks, Brian.
Our next question comes from Adam Josephson with KeyBanc Capital.
Good morning, everyone. Stephan, Bob, Matt, good morning. Stephan, I'm sure you're excited by the Roquan Smith selection last night.
Absolutely.
Bob, just on resin for a second, you mentioned sequentially a bit lower. Is that more in Europe or the U.S. that you're seeing that?
If you look at it going from Q4 to Q1, the U.S. increased more while Europe kind of remained flat. What we're seeing is on the way down, the U.S. is expected to decline almost back to Q4 levels while Europe is down just slightly.
Okay.
As you know, the direction.
Sure. Just a couple on Beauty + 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. Have the competitive dynamics changed at all? It's typically been highly competitive, and you guys have talked about that frequently. Has that changed at all of late?
No, we don't see any major change in ownership or consolidation.
Behavior
or behavior, save maybe ours. Don't really see that, but clearly increased effort to make sure we tap all of the opportunities.
Sure.
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. We don't have really good data on there. I'm sure with the macro environment improving, we've seen in past years that obviously our customers don't want to be left without product on a shelf as well. 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.
Thanks. Just to that point, 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. Obviously, personal care, we don't believe is very economically sensitive. 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 first quarter of 2008, but it didn't stay down. It rebounded quite nicely in the back half of the year. In fact, the following year, we were back to where we were at record levels in 2007. I think you can see a short-term pullback in an extreme macro change environment. We're still really talking about affordable luxuries here. I think most people, we would see probably a trade-off from going to spas and things like that before it would make its way down to skin care and cosmetics and things like that.
Yeah. If you zoom out from that, I mentioned it before. Aptar is really very much advantaged that most of the markets we serve are not sensitive. People don't stop taking their drugs. They don't stop eating breakfast, lunch, and dinner. Indeed, they might cut back on their luxury fragrance for a quarter. Most of our portfolio is not sensitive to the economic cycle. Supply chain whiplash is not withstanding.
Sure. Thanks, Stephan. Just one back to your balance sheet. I know, as Christopher said, you're the apple of every packager's eye in terms of your balance sheet. Are you at all bothered by the fact that you're as under-levered as you are? Is it something that you intend to change in the years to come, or are you quite comfortable with your leverage being as low as it is, just as a general statement?
Yeah. As a general statement, I certainly would love to use the shareholders' money as effectively as possible. I think we're certainly comfortable in this one to three leverage range. For the right opportunity, we will not hesitate to pull the trigger. On the other end, certainly my experience, you probably agree with me, 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. 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.
Right
They don't dislike necessarily our balance sheet as much as when there was zero interest rate.
Exactly right. Thank you, Stephan.
Our next question comes from George Staphos with 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, what we do try to do, Molly, is take last year's and kind of give you a comparative EPS, compared to this year.
Okay.
That's kind of the direction we go.
All right, understood. Thank you.
Our next question comes from Christopher Manuel with Wells Fargo.
Good morning again. Just one quick one being, again, that you are the apple of the packaging land. You are going to keep hearing that for a while. Along those lines, when I look at interest expense, I usually net interest expense. It was notably lower this quarter than it has been for a long time. Do you have an assumption that you could give us for the year, or is this a reasonable run rate running around $6 million of net interest expense over the coming quarters? How should we think about that?
Yeah, Chris, let me explain a little bit. Remember, we repatriated almost $1 billion from Europe to the U.S.
Yep.
Right? 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 U.S., we're getting anywhere between 1% and 1.5%. Now we've got $700 and X million in cash in the U.S., earning between 1% and 1.5%. 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%. Our all-in average interest rate on our debt is much lower than it has been in the past.
You combine those two factors, I think a reasonable assumption is that the run rate from here going forward, barring any other M&A activity that Stephan's been talking about, is a right assumption.
Okay. Current run rate, good assumption going forward. That's what I needed to know. Thank you, guys. Good luck.
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.
All right. Well, thanks again for joining us, and enjoy the rest of your day. Talk to you after Q2.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect, and have a wonderful day.