Aptargroup Inc (ATR) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2014 fourth-quarter conference call. (Operator Instructions). Introducing today's conference call is Mr. Matt DellaMaria, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Jonathan, and welcome, everyone.

Participating on the call today are Steve Hagge, President and Chief Executive Officer, and Bob Kuhn, Executive Vice President, Chief Financial Officer, and Secretary. Steve will begin our call with an overview of our quarterly and annual performance. Bob will then discuss our financial results in greater detail, after which we will open it up for questions.

Information that will be discussed on today's call include some forward-looking comments. Actual results or outcomes could differ from those projected or contained in the forward-looking statements. Please refer to AptarGroup's SEC filings to review factors that could cause actual results to differ materially from those projected or contained in the forward-looking statements.

We will post a replay of this conference call on our website. AptarGroup undertakes no obligation to update the forward-looking information contained therein.

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

Thanks and good morning, everyone.

Yesterday, we reported our fourth-quarter and full-year results. Despite some challenges, we were able to grow our topline on a core basis and achieve record fourth-quarter earnings per share. The strong performance of our pharma segment offset softness in our beauty and home and food and beverage segments.

Now looking at each of the segments, first for our pharma segment, which had an excellent quarter, reporting core sales gains in each end market and geographic region, along with strong operating results. In the prescription drug market, demand was particularly strong for our metered dose inhaler valves for various asthma and COPD treatments, including new generic launches in the developing regions.

We also continue to see a strong demand from the consumer healthcare market for our innovative ophthalmic squeeze dispenser, with new launches of preservative-free eye care solutions in Europe. Also, one of our airless systems was chosen for a new dermal wound care product. And after a couple quarters of soft demand for syringe components, in part due to some inventory de-stocking, sales to the injectables market increased over the prior year.

We also continue to be well positioned to help our customers adapt to the changing healthcare landscape, including generics, as well as prescription drugs going over the counter. Just this month, GlaxoSmithKline's well-known allergy treatment, Flonase, which utilizes our proven nasal delivery system, is launching in the US over-the-counter market. The over-the-counter market is increasing the access that consumers have to prescription-grade medicines that were previously only available with a visit to the doctor's office, and we believe that the near-term impact should continue to be positive for us.

Now turning to our beauty and home segment, sales decreased in the quarter, primarily due to anticipated macro softness related to overall consumer spending trends, and specifically the fragrance sector was soft for us. However, we continue to see growth in cosmetic products and we're excited about new technologies we are bringing to these market categories. We participated in several facial skincare and lotion product launches, primarily in Europe and in China, with our cosmetic airless systems and customized pumps.

Looking at the other markets served by our beauty and home segment, sales to the homecare market decreased, while demand for the personal care market was slightly up on a global basis.

In the personal care market, we participated in a wide variety of customer product introductions. Our valves and dispensing closures were chosen together for sunscreen products introduced by both Neutrogena and also the Walgreen's house brand of kids' sunscreen. Also, our dispensing closure is featured on a new line of Disney junior bath products.

Beauty and home's profitability was negatively impacted by the weaker sales volume, as well as certain expenses related to the fire we had last year at our Brazilian anodizing facility. Now I'm happy to say that our team has made a lot of progress and the facility is running again on a limited basis as the repairs continue and equipment continues to come onstream. The expenses we recognized are expected to be covered by insurance proceeds that we should receive in the future.

Looking at our food and beverage segment, this segment also had a difficult quarter, with a decrease in core sales and consequently reduced operating margin. Sales to the food market were up over the prior year, but not enough to offset the decline in the sales to the beverage market. In particular, sales were soft in Asia and the US, primarily due to some inventory de-stocking following an exceptionally strong orders in the third quarter, as well as lower custom tooling sales.

I am pleased to see that we are continuing to grow our business in the food markets in the developing regions. In the quarter, our dispensing solutions were chosen by a variety -- for a variety of ketchup launches in Latin America and our success in the condiment field is now opening up new opportunities. For example, in Mexico, our dispensing closures were chosen for the introduction of several chocolate and caramel syrups.

In the beverage market, we continue to grow our liquid concentrate portfolio in North America. Our custom pour spout was selected by Kraft for their new, larger, multi-serve liquid concentrated flavorings, targeted at families who want to flavor larger pitchers of water. We are also encouraged by another new launch in the milk flavoring category. Our flip-top closure with Simply Squeeze Valve Technology is featured on a new line of milk flavorings called Milk Magic. And finally, we are very pleased that our sports closure was chosen by Pepsi for the Propel brand of flavored water.

Now turning to our annual performance, if I look back for the year as a whole, it was a good year for Aptar. We completed the year with our highest level of annual sales. Core sales, excluding currency effects, grew in each business segment, end market, and geographic region. Our business was partly affected by the softer macroeconomic conditions and some inventory de-stockings in certain markets.

Earlier in the year, especially in the US and Europe, we saw softer consumer spending. Towards the end of the year, Latin America slowed, as did Asia, but we never lost focus on our customers and we brought new technologies to the market, such as our new linerless hot fill beverage closure and our new cosmetic precision pen-like applicator. We also extended our growth into newer market categories, such as infant formula, liquid concentrated flavorings, pain treatment, and eye care.

We reported record annual earnings per share despite several headwinds, including those faced by our beauty and home segment, such as startup costs related to our new Latin American facilities, negative currency transaction effects, and the negative impact on margins from softer volumes at different times through the years. Even though with those headwinds, strong annual performance from our pharma and food and beverage segments help drive our record results.

In addition, our strong financial condition allowed us to take steps to enhance shareholder value. In January 2014, we increased our dividend by 12%. 2014 marked our 21st year -- consecutive year -- of paying increased dividends.

In December, we executed an accelerated share repurchase program. We were able to take advantage of the current favorable interest-rate environment to better optimize our capital structure and return value to shareholders with this $250 million accelerated purchase. This is in addition to the approximately $91 million we spent to repurchase shares earlier in the year, before the program was announced.

Now looking ahead, as we mentioned in the press release, we currently anticipate that certain foreign currency exchange rates, especially with the euro, will continue to be a significant headwind on our translated results. Also, there is a soft demand in select markets that we saw in the fourth quarter could continue into the first quarter and make difficult comparisons to our very strong performance of a year ago.

I continue to be excited about our long-term view and the opportunity that we're discovering with our market-focused approach. We continue to focus on all areas of our business that we can control, including cost containment and improving our operating efficiencies. We also continue to invest in new ideas, new solutions, and seek to leverage existing technologies across the different markets, ultimately bringing value to our customers and end consumers around the globe.

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

Thank you, Steve, and good morning, everyone.

As Steve mentioned, changes in currency exchange rates had a significant negative impact on our translated results in the quarter, compared to the prior year. Excluding the impact of currency exchange rates, our core sales increased by 1%. We also reported record fourth-quarter earnings per share of $0.63. Comparable adjusted earnings per share were $0.59 in the prior year.

In the fourth quarter, our beauty and home segment recognized approximately $1.3 million of expense related to the Brazilian facility fire of last year. These specific expenses are expected to be reimbursed in future periods by insurance proceeds, which will be recognized in the period that they are realizable in accordance with accounting rules.

Our cash flow in the quarter was strong. Cash flow from operations this quarter totaled $114 million, compared to $91 million a year ago. Capital expenditures this quarter were approximately $36 million, compared to approximately $41 million in the prior year. Therefore, free cash flow, which we define as cash flow from operations less capital expenditures, was $78 million in the quarter, compared to $50 million in the prior year.

Looking at our balance-sheet capitalization, at the end of the year on a gross basis, debt to capital was approximately 43%, while on a net basis it was approximately 29%.

Turning to our quarterly market details by business segment, I'll start with our beauty and home segment. Core sales, excluding the effects of changes in currency exchange rates, decreased 1% over the prior year. Looking at our markets on a core basis compared to the prior year, sales to the beauty market decreased 3%, sales to the personal care market increased 1%, and sales to the home care market decreased 7%.

Our pharma segment's core sales increased 6% over the prior year. Looking at our markets on a core basis compared to the prior year, sales to the prescription market increased 7%, sales to the consumer healthcare market increased 6%, and sales to the injection market increased 5%.

Our food and beverage segment's core sales decreased 3% from the prior year. About half of this decrease relates to price adjustments from the passing through of lower resin costs. On a core basis, sales to the food market increased 9%, while sales to the beverage market decreased 16%.

Looking at core sales on a regional basis, Europe was up 3%, the US was down 2%, all of which was due to lower tooling, Latin America was up 3%, and Asia was down 12%.

Looking at a few of the annual figures, for the year cash flow from operations totaled $314 million, compared to $285 million in the prior year, and capital expenditures were approximately $162 million, compared to approximately $151 million in the prior year. Therefore, free cash flow was approximately $152 million, compared to $134 million in the prior year.

Going forward, I'd just like to give you a few comments regarding 2015. We currently expect our capital expenditures to be near our targeted depreciation and amortization level for 2015, which is approximately $150 million. We believe our effective tax rate for 2015 will be in the range of 33.5% to 34.5%.

Given where currency exchange rates are today, especially with the euro, we expect our first-quarter translated results will be negatively impacted compared to the prior year. Assuming a similar currency exchange rate environment to what we use to develop our guidance, comparable earnings per share for the prior-year first quarter would be reduced from the $0.71 per share to approximately $0.60 per share. For the upcoming quarter, we expect earnings per share to be in the range of $0.60 to $0.65 per share.

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

(Operator Instructions). Ghansham Punjabi, Robert W. Baird.

Good morning. It's actually Mehul Dalia sitting in for Ghansham. Was the inventory de-stocking that you cited surprised you in food and beverage? Just trying to see how you know it's inventory de-stocking and not something else. And have volumes returned in 1Q?

That's a good question. Essentially, it was not a big surprise to us. I think if you go back and take a look at our third quarter, beverage volumes were up about -- a little over 40%.

Now there was some tooling in that, but even stripping that out, volumes in the third quarter in the beverage part of our business was up 30%. That's higher than certainly the annual consumption.

So as we got into the quarter, we expected some inventory de-stocking. We think that will actually continue a bit also into the first quarter, but when we start taking a look at projects and anticipated volumes, we see the second quarter, third quarter getting back to the normal growth rates we have had in the past.

Okay, great. My second question is, what steps are you taking to improve your competitive positioning in beauty and home, especially in the US? It seems like there has been a structural change there in profitability for that business.

Yes, it has been an issue for us over the last couple years in terms of some of the decline, as you say particularly in North America. But I am very pleased we have changed the management structure in North America as we got to the middle of the year to the second half of the year.

I'm really pleased to see what we're doing with productivity. We've taken a significant amount of cost out of the business. We're running more efficiently.

What hurt us in the fourth quarter was, frankly, a lack of volume. We saw our customers holding back on some volume on new products.

In terms of the cost structure, we are continuing to refocus on cost. We have a $10 million annual goal to take cost out of North America and we are well on the way to achieving that. So I look forward North America operationally to continue to improve and, particularly as we get into the second and third quarter, overall sales we expect to also come back, given the projects that we are working on with our customers.

Great. Thanks.

George Staphos, Bank of America Merrill Lynch.

I guess the first question I had was on de-stocking in beverage. So I don't recall, did you specifically point out in the third quarter that there would be some de-stocking in the fourth quarter? And then if I heard you, Steve, correctly, you are saying some of this is continuing to the first quarter. Will your customers typically buy over a quarter's worth of inventory if conditions allow and why would they have stocked up in the first place in the third quarter?

Somewhat, George, it's going to be dependent on where the seasons end up, so when you get at the end of the third, they're going to evaluate how much they had coming over in the northern hemisphere from how warm or how cold the summers were.

We found that when we started talking to customers -- and this occurred in the US, as well as in Asia, but they had some inventory, higher inventories, than they had anticipated, given some of the weather conditions. We didn't know how much they were going to do, and certainly as we get into the fourth quarter, that is always the more difficult one to estimate.

So in terms of what we are looking at now and having the same conversation, we are still seeing at least in the early part of the quarter some continued de-stocking, but we see that continuing to build. We've gone back; there has been no loss of business. We are basically sole spec'ed on several of these products that we are on, so we're doing well with the customer. It is more what they're doing in the marketplace, and they tend to be very optimistic, particularly as we get to the end of the first and into the second and third quarter.

Okay. Thank you for that. And then in beauty and home, I think last quarter just going back through my notes here, you had indicated that you would like to be up year on year from a margin standpoint, and I don't think you were locked tight in concrete on that goal, but it was more aspirational, recognizing that there was some noise in the quarter as well and volume was a little bit weaker. Were there any other factors that prevented you from getting to that goal, if in fact it was really a firm goal, as opposed to just being something you would have hoped to have gotten to -- it would have been a nice achievement if you could've gotten to it?

I think it was an aspirational goal and certainly it is one that we want to look at.

The other issue that I will point out is that in the quarter, we took a hit on expenses of about $1.3 million on the fire, and because of the accounting rules, while we fully anticipate recovering those expenses here in 2015, because the accounting rules require you to take the expense until you get the recovery, that was one we didn't anticipate. We thought we might have been able to actually get some of the recovery on that in 2014. That has lapped over into 2015.

Okay, so you thought the expense would show up in 2014 when you get the insurance recovery -- in 2015, excuse me; instead, it showed up in the fourth quarter because of what the accountants told you to do?

That is correct.

Okay. Thanks. I will turn it over.

Adam Josephson, KeyBanc.

Steve, back to beauty and home for a second. You talked about what you are doing in terms of taking out costs. You obviously replaced some management there, and in this quarter, volume was the real problem. Are you banking on volume picking up in the quarters to come?

And just more broadly, in terms of the CapEx that is going into that business, the business still accounts for more than half your CapEx and obviously is generating returns well below what you are generating in your pharma business. Is there a way you can reduce the capital requirements of your beauty and home business, or how are you thinking about the issue of capital going into beauty and home versus pharma in the years to come?

Okay, Adam, let me try to take both -- let me try to compartmentalize the answer to that.

So in terms of what we are looking at going forward, we are aggressively looking at all the costs we have in beauty and home North America, Europe, Asia, Latin America. That focus is continuing.

What we are still finding is that our customers are a bit hesitant, giving the worldwide market today on their product introduction. They are not negative; they are more cautious. When we are looking at projects that we are working on, I think that will be more second half of the first quarter and into the second quarter for beauty and home, but we do fully anticipate volume to begin increasing as we get particularly into the second and third quarter.

So the cost element is something we focus on day to day. I think we've done an excellent job, particularly in North America. We've taken out over 100 different heads in terms of productivity. We've increased productivity. We reduced the labor content. So as volumes pick up, I think we are doing well.

The developing regions are also coming back. Remember, we invested quite a bit last year in Latin America, building a new facility, and I will touch on that in a minute when I talk capital. Those again, by the time we get into the second and third quarters, should be coming back and flipping from negative to a positive.

Now your question on capital is a good question. What I would like to come back and point out and when we get to a couple years, one of the things we have talked about is to try to take some of the volatility out of our business is try to produce as much locally as we can.

So in beauty and home, we frankly have been underinvesting in North America and Europe and, to some degree, overinvesting in the developing markets. That was particularly true last year with Colombia, Brazil, and finally an expansion we did in Mexico. Those, as Bob talked about, if you looked at we are going to actually be looking to spend around depreciation as Aptar as a whole, we will actually be spending considerably, but below depreciation in terms of beauty and home, focusing exactly where you are talking about. We will be taking less capital going into that segment.

Got it. Thank you for that. I guess this is for Bob, just in terms of the earnings cadence here, so you did $0.63 in the fourth quarter. You are guiding to around the same. My understanding is typically first quarter is lower than the others, just because of options dilution. Bob, you talked about the FX hit. I think you -- basically, you're indicating that earnings would have been $0.11 higher were it not for the recent changes in foreign currency. But can you help us with the cadence of earnings this year and how much lower one could reasonably expect the first quarter to be than the subsequent three quarters on account of options-related dilution?

The $0.06 is pretty spot on and that just relates to how the accounting rules make us recognize those options. So it's about $0.06 higher in Q1 than it would be in Q2, Q3, and Q4.

$0.06 lower, you mean?

No, $0.06 higher in Q1, right, and then Q2, Q3, and Q4 lower, right.

So all else equal, your earnings in the subsequent three quarters would be about $0.06 higher, but there is nothing unusual otherwise about the first quarter this year?

One thing to keep in mind, though, Adam, remember the average for the fourth quarter, just using the euro, was about a 1.25 exchange rate. Depending on where the euro goes, it is running anywhere from 1.13 to 1.14 today, that is a quarter -- fourth quarter to first quarter is an element we also have to take a look at, so there -- from translation from when you compare it to that, where we are at in the fourth to the first, that's an area you need to also consider.

Got it. Thanks a lot, Steve. I'll get back in the queue.

Alex Ovshey, Goldman Sachs.

You talked about productivity in North America beauty and home of $10 million. Would you be able to provide some more color around how you are thinking about productivity in other parts of beauty and home, as well as in the pharma and beverage division?

Again, I would tell you on productivity, the North America we brought up because it has been an issue for us, so we have kind of highlighted what we were looking to do there.

In terms of productivity across all of Aptar, it is a major focus for us every year, whether that is pharma, which today is running at reasonable margins, or food and beverage or beauty and home. So we have specific actions to take a look at how effective our labor is, what equipment we are bringing in to take labor back out, how we take a look at materials, can we resource materials, what we are looking to do.

So there is a multitude of actions, Alex, that we take and I think we are pretty aggressive now across all of the regions, all of the segments. So when I have highlighted North America, it is more in reaction to a specific issue that we had in North America, but we take a very hard look across all of Aptar at those issues.

Makes sense, Steve. Okay, and just one more. On the leverage ratio, it has come up with the buyback. Can you just remind us how you are thinking about the optimal leverage level for the business?

We talked back at the analyst day that we look at it on a net debt to net capital basis, and as I mentioned, we are at about 29% at the end of the year. Our target is to stay in that 25% range, but we would be comfortable moving that much higher for the right deal.

Got you. Okay. That's helpful. Thank you.

Mark Wilde, BMO Capital Markets.

Bob, I wondered, could you talk a little bit just broad brush about the overall impact of FX if we think across your portfolio, because you produce and sell within Europe, but I think you also export some components out of Europe into your other operations, so if you can just sort of give us the big FX puts and takes?

Sure. So over the years, we've -- as Steve mentioned, we have been investing more in the regions where we are growing at and effectively increasing our localized production, which in fact then reduces the amount of our transaction exposure that you were talking about of shipping components and finished goods from one region to the next.

It is going to vary depending on activity in each quarter, but what we have seen really over the last several quarters is that all the pluses and minuses on transactions across the world have been somewhat netting out to zero and what we see on the translation impact is what is dropping to the bottom line.

So if we just try to use some very broad-based numbers, if you look at about 58% of our business is in euro and you look at looking out, and we'll take Q1 for the example, Q1 the euro rate last year was about $1.37. If I were to use today's rates -- and they are hovering around $1.14, you'd have about a $0.09 per share impact dropping to the bottom line, assuming a 12% margin. That's only focusing on the euro.

So as you know, pharma is a big part of our European business, so the margins are slightly higher, and we also have movements in some of the other currencies. So that gets you really from the $0.71 reported last year to what we indicated would be more comparable to today's exchange-rate environment of $0.60 a share.

Okay. And then, kind of along with FX, one of the other things that's moving a lot right now is just the price of resin. So what are you -- how are you thinking about these lower resin prices and how that flows through your earnings this year?

I think you are right. Right now, the resin environment has gone down and the expectation is we will see decreases going into the first quarter.

As Bob pointed out in one of his -- we actually pass through the resin, particularly on our dispensing closure business, pretty quickly. So in the fourth quarter in terms of food and beverage, which is largely a closure business, that negatively impacted sales by about 1.5% in terms of their sales side.

So we expect resin to be a positive for us in the first quarter, but that is also going to get mitigated. We are seeing some increases in other raw materials, such as aluminum, some of the tin plate costs that we've got, so it's not a -- while resin should be positive, we've also got some other raw materials, which will have a bit of a negative. Net net, we think it's a positive raw material environment certainly through the first quarter.

Okay. I will pass it on. Thanks, Bob.

Jason Rodgers, Great Lakes Review.

I wonder if you could talk about any change in pricing or your competition specifically in the beauty and home segment.

I think that's always been a very competitive segment for us. In fact, all of our business has been competitive.

What we have done when we look at pricing, our goal is is if we have to be doing something in pricing, what we're trying to do is balance that against long-term commitments from our customers or volume increases. So those type of actions are going on. Certainly when volume does not continue to grow, our customers tend to be more aggressive on the price side, but again I would tell you that is not something that we are new to. That is something that continues to go on on a day-to-day basis for us.

And just looking at the environment for acquisitions, any opportunities you are looking at or any changes in your thoughts of deals that might be coming up?

We talked about this on the last call. I think the pipeline of potential transactions continues to be pretty robust. The debt market today in terms of interest levels are positive and I think if -- so we continue to be actively engaged in looking at potential transactions, but there is nothing specific we will be commenting on today.

Thank you.

Brian Rafn, Morgan Dempsey.

From the standpoint of your sense of the global demand from a project standpoint, you mentioned the word hesitancy. Are you seeing global project launches declining at all in unit volumes or going from international launches to more national or regional? Can you give me just a little bit more color on what you are seeing for the project pipeline as we go into 2015?

Brian, let me come back and be maybe a little bit more specific because I want to deal by segment, because when I was mentioning hesitant, that would be much more on the beauty and home side. Our pharma side continues to be very aggressive and active in projects, and frankly in our food and beverage, we are seeing quite a few very interesting projects.

Where beauty and home has a lot of projects that they are looking at, it tends to be more of when they put those into play. So instead of starting in the first quarter, January 1, they are starting in more the end of March and into April, so, again, I want to put it in context.

When I look at our customers, what we are seeing a bit in beauty and home because it is -- for on the prestige side, it is an export business, how they see these developing regions, whether that is Latin America or that's Asia, what is going to be the impact to their product going into some of these markets that are showing some macroeconomic slowing and they are trying to evaluate what that is going to do to their business.

Offsetting that, the strong dollar when you produce in Europe and export has the potential for actually a positive to their margins and may actually make their marketing more aggressive, particularly as we go on through the year if we stabilize at a certain euro point.

Okay. I appreciate that. Being that we are through the holidays, what was your sense of the holiday/Christmas impact for the cosmetic/perfume side?

On the high end, I think we are going to see our customers showing lower single-digit growth, from what we are understanding. When you get to the mass side, when you get Avon and some of the other customers like that, they have been somewhat stressed, depending on the market they are in.

So overall, I would say it was an okay holiday season, but it wasn't certainly the best or the worst that we've seen over the last three to five years.

Yes, okay. And then I will just ask you, from the standpoint the last couple of years you've had some very nice applications of taking niche technologies and rolling them out in new products, bonded aluminum plastic, Bag-On-Valve. When you mention linerless hot beverage and then pen applicators, are those more niche applications or how robust can you be in actually rolling them out across multiple business lines?

The pen application is going to be more targeted towards the upscale cosmetic market, so that's probably a bit more nichey. That being said, it's got some very interesting projects that we are working on.

The linerless hot fill, given that's in the beverage side, has potential for some larger volume size, so it is nice that we are on that. It has actually been on one of the major -- that's the Gatorade brand that we see down in Mexico, so it's actually being adopted in one of the regions for them. So there is some potential for that having a much bigger impact on a year-on-year basis.

Thanks, guys.

Al Kabili, Macquarie Capital.

I guess the first question is on beauty and home. You mentioned feeling good about the $10 million annual cost savings. I was wondering if you were seeing any of that in the fourth quarter or if your guidance reflects in the first quarter any ramp up in that objective, and how should we think about the ramp up there?

Al, what we are seeing is we're starting to see some of that in the fourth quarter, but what we -- again, what we got hurt by was lack of volume. So frankly, our fixed-cost elements had a negative impact on us on the fourth.

I think as we go into the first, all of the plans we had in place are progressing according to the schedule. It's going to be largely volume dependent to see how much of that is going to actually fall to the bottom line. So I'm very comfortable with the operational side we are going forward. We need the revenue growth, and again, what I am looking at with our customers and what our beauty and home folks are looking at is probably a more second half of the first quarter into the second and third quarter in terms of that volume move.

Okay, that's helpful. So it sounds like you do need a little bit of volume to get to that $10 million. It's just not a pure cost take-out where you're going to get the $10 million irrespective of even if volumes don't improve, if I heard you're right.

Yes, I think you're going to need some volume because part of that is also productivity. So when you get to the productivity, if you are on a lower volume, you don't sense it as much. So in effect, it is a little of both.

The $10 million, a lot of that is cost based, so we will see more and more of that, but the volume tends to mask if we're not getting some kind of volume increase. You still got to cover all the additional depreciation and fixed cost and those type of costs.

Okay. Thank you. That's helpful. And I guess just a final follow-up for me is on the pharma business, which had a good performance this quarter, was there any appreciable underabsorption headwinds from the Stelmi expansion in there, so that it would have even been better than what you reported? And if so, if you can just size that up for us and when we see that headwind abating there.

I think the pharma business had an excellent quarter, again, across all the markets. If I look at what we are doing with the Stelmi -- first of all, the project is proceeding pretty much according to the timeline we had and the cost projections, so I am very positive to that.

We are probably getting a little cost buildup because we are starting to add people there, but frankly, it is not material and I don't see that having a big issue -- that had a big negative issue in the quarter.

Timing of this, though, as we have said, we'll probably start to see equipment and the facility start to get completed as we get to the mid-year, end of the summer, and then we've got to get everything qualified, so it is late 2015, but more a 2016 issue.

One of the other things in that area that we are continuing to look at is giving additional structure outside of just France for doing expansion where we want to look at doing additional production, so we are looking at different areas around the world that we might be able to cost-effectively expand the production of the elastomer line, which today is solely being produced in France.

Okay. All right. Got it. That's helpful. Thanks and I will turn it over. Good luck.

Debbie Jones, Deutsche Bank.

If we look at food and beverage, if you continue to grow in developing markets, how big do you think this business could be for you over the next two to three years? And then, do you think you can maintain your level of -- at current profitability if you continue to expand?

I think the business -- we've got internal targets. We've said that we think we can continue to grow this business at a 10%-plus level. I am very optimistic that that can continue, and certainly if you look at the last couple years, that's where we have been.

One of the things that helps us with that growth, the margin target we have is 12% or better. If you look at where we are at today, we are within a point or so of that margin target. So again, I am comfortable over the next three to five years that, yes, we can continue to get to the 10% growth, and these are all ex acquisition and constant currency, and also get to the margin levels that we have kind of addressed in our long-term outlook.

That's helpful. And then, maybe there is a simple answer to this question, but you highlighted the weaknesses in fragrances in your release, but it appears the cosmetic categories are doing pretty well. I would think these would be somewhat similar in trends. What is really driving the divergence here? Is there any potential that you are losing any share in the fragrance business or is this just lumpiness in new product development?

I think overall, I think it's a good question. We have looked pretty closely at this. Our overall, by the way, beauty sales level for the year, while it was a challenging fourth quarter, we're up about 4% on a year-on-year basis.

So if I look at the market, we are very comfortable that, A, we haven't lost and maybe even gained a little share in terms of fragrance market. But there is a bit of difference, I think, in that the fragrance is a bit more mature than the, let's call it, cosmetic lotion, so you find people looking at skin coloring or skin protection. It is still something that is a growing market, whether that is anti-aging or skin -- making you look younger, those type of issues. That is growing, and for us, that's a trend that has been growing probably for the last three to five years and we are seeing more and more. I think all you have to do is go down either to a more of a luxury store or even to a drugstore and you will see quite a few products that are aimed at skincare.

Okay, thank you. That is helpful. I will pass it on.

Jon Andersen, William Blair.

Just two quick ones. I was hoping you could talk a little bit more about the recovery in the injectable business and what is driving that and your expectations for growth going forward.

And then, Bob, I think you mentioned that Asia's constant-currency sales were down 12%, so again there, just looking for a little bit more color around that dynamic in the quarter and thoughts on that region going forward. Thanks.

I'll deal with the elastomer business in terms of where we are coming back. What we saw in the earlier parts of 2014 was, again, when we pretty much know what we have been specified on and our customers had excess inventory and were in the process of de-stocking to that. We had anticipated that actually stopped, or pretty much started to slow down in the fourth quarter, and that's why we started to see year-on-year growth.

In terms of target for us, excluding kind of new regions that we may go in, right now our target for growth is in that 6% to 10% area, and we have gone back just as recently as going through our last budget cycle and we'd reaffirmed that we still are comfortable on the elastomer business being able to stay within those areas.

And then, Jon, to answer your question on Asia, let me start by saying that it is our smallest region, so it only represents 7% of our overall turnover, so any swings in sales there obviously have a more dramatic impact when we talk about in terms of percentages. But beauty was weak in Asia in the quarter and, as we highlighted in the press release, beverage was also weak. So those were the two contributing factors to the 12% core decline.

And is that -- just a quick follow-up, do you think that -- is that driven by a slowdown in end demand or consumption in the categories, or do you see that as -- is it a de-stocking issue or just more caution on the part of some of your customers there?

No, on the beverage side, as Steve alluded to earlier, it is really more of a de-stocking issue. We are very close to the market. The market is still -- the customers are still very positive looking out. We have plenty of new projects. We are starting to make some really good inroads in the food business. We are up pretty good on food and some other areas, so we see a fairly significant amount of new projects in the regions, in that region in particular, and we think that it's just really a temporary de-stocking.

I think on the beauty side, going back just to round that out a little bit, Jon, I actually think we are continuing to expand because what we have done over 2014 and into 2015, we're now going not only to the multinationals, but to that second-tier national account and we are seeing very good growth as the quality of products at that second-tier -- I use that second-tier as below the multinational, but the local accounts are doing, so we see good growth continuing to grow also in the beauty side, in addition to the food and beverage side.

Great. Really helpful. Thanks, guys.

Chris Manuel, Wells Fargo.

Wanted to -- a couple questions. First, if we could talk about currency for a second. I heard you say $0.11 would have been the comparable adjustment for 1Q and I know you don't like to give guidance necessarily on a full year, but if you could just help us maybe with frame up or size up what the currency component might be over the balance of the year. If I look at 2Q, it is actually even potentially a bigger headwind. Could you maybe help us? If we stayed at a $1.13, $1.14-ish range where we are today, what the differential might be, or how to think about 2Q, 3Q, and 4Q as the headwind?

So Chris, you are right. It is almost -- it's impossible to estimate where we think the currency rates are going to go beyond Q1.

But if -- you have to look at the average quarterly rates when you look at it, so the average quarterly rate in Q1 was $1.37, as I indicated. The average quarterly rate for Q2 was also $1.37. So all else being equal, you would say that the $0.11 impact that we saw in Q1, assuming we stay at a $1.14 euro rate, in Q2 there is no reason to believe that it would be any different than $0.11 in Q1.

Now looking at Q3, average was about a $1.32 rate and Q4 was about a $1.25 rate, so we should see it abating, but who knows where the actual euro rate is going to be in the second half.

Okay. I guess from the perspective of your 2Q earnings are typically, from a seasonal perspective, a bigger quarter, $0.11 is a number -- I would have thought it might have been even be a little worse, considering you are starting from a bigger base, but that is fair. I get your point.

Second question I had was you mentioned Stelmi is on track mid-year to get stuff in and it sounded like qualifications would potentially even take into 2016. Can you talk about where you are in the process of beginning to -- I appreciate sort of a chicken or the egg thing -- but sell out or begin to sell the capacity as you feel confident and comfortable that is coming up. Have you begun that process? Where do you sit with respect to how you feel a ramp-up might be from a revenue perspective in 2016 for that?

We have started the process in that we are talking to customers that were adding on additional capacity. We've had very positive response from the customer base because, in fact, it alleviates some of the bottlenecks that exist out there today.

The difficulty with qualification, you can't really do qualification until you have the equipment in place and the facility. So what we are doing is trying to get our customers geared up so once we've got the facility and we've got the equipment that we can start running that. So I think we are doing everything we can do right now, but to be honest with you, it is somewhat limited until you get the equipment there.

In terms of the revenue growth, we are going -- that one, we are going to have to see. Again, it depends on where you get qualified. We will probably begin shipping product not initially to the US because there is more time consuming to get qualified in the States and start to see where some of the other regions. So, I'm going to have to defer. I don't really have a good revenue target at this point until we get a little farther down the line.

Okay, that's helpful. Then the last follow-up along those lines is you mentioned potentially doing some sort of mini add-ons of -- not a full scale plant like you have over there in France, but some other adds in different areas globally. Have you targeted or thought about potentially certain regions? Would that be North America, Latin America, etc., where you are considering that?

Again, this goes back to the initial strategy of when we acquired Stelmi that we wanted to use our platform to be able to try to grow the business.

We have kind of looked at the markets. I would tell you the focus for us will probably initially be in North America. That's where the bulk of the volumes are, so it is probably more North American-centric, but we are also taking a look at India and Asia to see where that would -- other potential there. But frankly, probably North America would have a stronger initial push for us than you would see in the other markets.

Okay, that's helpful. Good luck, guys.

George Staphos, Bank of America Merrill Lynch.

I just want to clarify a couple of things. I forget who had asked the question on beauty and home, but I remember a number being put out as up 4% and I wasn't sure what that reconciled to, if I heard it correctly, because obviously in aggregate you were down there on a core sales basis. Can you remind us what was in that plus 4%?

Let me come back -- what I was -- I think it's goes back -- in the beauty part of beauty and home for the full year, beauty was up 4%. It was down in the quarter. In fact, it was down in the quarter about -- we're down 3% in the quarter, but for the full year, it was up 4%. So, apologize if I confused you.

So again, when you look at the beauty sales, and this kind of ties back, George, if you look at beauty sales in the first quarter of 2014, we were up 10% over the previous year, so you saw some really strong comparisons in the first quarter, so when you get to the full year, that was what I was mentioning on the 4%.

That's fair. I'm sure you said it clearly; I just wasn't keeping up as quickly in my notes as I would have liked.

Secondly, to the extent that you can ballpark this, and I recognize there is no official tracking service like Nielsen that looks at this, what do you think your market share in launches is if we look at it broadly food and beverage, beauty, and personal care?

I would tell you, again, it is going to be very different, George. It's a good question, but a difficult one, because we tend to be in niches, like in food and beverage, you would find us being in niches of the market. We probably have most of the launches in the ketchup area, condiment area, and not as much if you get into salad oil or salad dressings.

Prestige, if I look at prestige fragrance, we're going to be well above 50% of new launches to that, so again I apologize. I really don't have a good number for you on a broad base.

Okay. Part of the reason why I asked the question is it's got to be part of your process of your evaluation of whether you are gaining, maintaining, or losing market share, so I guess if it is hard to gauge how you are doing in new product launches, how do you then gauge how you're doing in overall market share? I guess that's my follow-on and I had one last question on Stelmi.

Let me come back -- let me try -- because we do follow it pretty closely, but I was giving you, for example, in prestige launches, we follow that very closely. We follow mass-market launches on fragrance very closely. We follow hairspray very closely, but we are into niche to niche to niche as opposed to the overall.

What I gave you in the beauty side that when somebody asked did we lose market share, if I kind of add up all those niches, we are still -- it looks like we're, from our perspective, growing our share in what would have been what we consider the beauty part of our beauty and home side.

Okay. I appreciate the additional color there.

And then, just last question on Stelmi and I think Chris was asking this; I just want to be clear. So you said that there may be some cost build-up now as you are loading in the facility that had the revenue showing up, but you don't think it's going to be significant. So I guess the question is, should we be baking in any kind of cost build-up, whether it is 2Q, 3Q, or 4Q, in advance of the revenue showing up, or should we treat it as insignificant? Thanks, guys, and good luck in the quarter.

What I would tell you that from a labor perspective, I don't think it is going to be material. The only thing that you will start to get that may be a pop would be depreciation that you might get on the equipment when we start to run it before the volume. Outside of that, the labor side, I don't think you're going to have -- today, we do not think there is going to be a material impact to that.

Okay. Thank you very much.

Adam Josephson, KeyBanc.

Just two. Steve, you talked about macro softness related to consumer spending affecting beauty and home, obviously. Are you seeing any improvement on account of the recent fall in gas prices and improving jobs data? And how would you compare today's spending patterns to those you saw a year ago, two years ago, pre-recession, just for perspective?

Again, we are probably one step below that if we're kind of relying where our customers are at.

I don't -- I think the -- and again, I'm giving you my personal opinion as opposed to maybe a broad-based intellectual aside, I think people feel better, particularly in North America, about the reduction in gas prices. I'm not sure that is translating to people buying more of our stuff, of our customers' stuff yet, so I think there is a general feeling it is a plus.

Now again -- then if you take that to Europe and you get some of these other areas, you've got some other macroeconomic issues that are going to impact that. So again, oil for us overall is a net positive. It is very difficult for us to try to quantify it.

I got you there. And in terms of -- just one broader question, in terms of the -- given the recent weakness that you have seen in numerous economies, numerous foreign currencies, are you taking any view regarding the long-term health of those -- the countries in which you operate? And how is that informing your capital-spending thoughts in those regions in the next year, two years, three years, etc.?

One of the things that we do, Adam, is we are typically in countries close to where our customers are filling the product, so not necessarily to where the end consumption is going to go. So we will continue to invest in those regions that we see our customers growing and adding additional filling capabilities, etc. So I mean right now, we are not in a region that is in a depressed economic type of situation. We are going to be more tied to where our customers are going to be filling their product.

Thanks a lot, Bob. Appreciate it.

Mark Wilde, BMO Capital Markets.

I want to just come back to two things real briefly on the pharma segment. One, it sounds to me like 2016 will be much less than kind of a full year in terms of the benefit from the Stelmi ramp-up because it sounds like it is kind of late this year into next year when you're doing qualifications. Can you confirm that?

Yes. And by the way, I think that is true any time you see a ramp-up. By the way, this probably even relates more to pharma, but even in our beauty and home and our food and beverage, any time you get to a new facility to fill it, it doesn't like turn the switch and then you are off. Pharma, it will take us a little time and it won't be from January 1, 2016, running full out. So there will still be -- back to yours, Mark, there will still be a bit of a ramp as you get into 2016.

And Bob, can you just -- or sorry, Steve, can you just help us size how you would think about the benefit from that Stelmi expansion in 2016 versus the potential when it is all loaded?

When we were adding Stelmi in terms of the French side, we said that we were going to be getting additional capacity, between 30%, 35% just from the mixing type of capability we've got, up to 40%. So we need to also add other parts around that so it is not 40% day one. We are going to be incrementalizing that up.

So the potential is Stelmi is about a $120 million to $150 million business. You get an additional potential 30% on top of that as you ramp that up. But again, I want to be careful that people don't come back and take away from that that in 2016, we get that full benefit. We are still going to have to ramp that up, get qualified, and then we are also going to be relying on the market growth.

Yes. So is it possible, actually, that there is not any incremental earnings contribution in 2016?

I would think we will get some earnings contribution. I just don't know how much it is at this point. But for 2016 as a whole, I am very comfortable we will have incremental earnings. I just don't know what the amount will be, Mark.

Yes, okay. That's what I wanted to get. And then secondly on pharma, can you just talk a little bit about some of the expansion you have done out in Asia, and what type of traction you're getting off of that and whether you are at a point where you need to think about even expanding beyond that? I think you are mainly in India at this point.

Actually, we've got two significant -- two significant -- significant, relatively significant operations. We are in China, serving the Chinese market out of our Suzhou operation, and we are in Mumbai, serving the India operation.

What has been nice about both of those, the margin characteristics of both of those, are the products we sell carry consistent margins that we have worldwide. So in terms of India, probably even more so we are seeing good growth because India is becoming the generic manufacturer for a lot of other parts of the world. What we see in China is some very good local growth in terms of our local pharmaceutical customers growing well.

So between both of those, I don't think we will be needing to do any physical expansion of our facilities in the next year or two, depending on where the growth goes.

Okay. Super. That is really helpful, Steve. Thank you very much.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Mr. Hagge for any closing comments.

Thank you very much. That concludes our call today and I'd like to thank everyone for joining us. Have a good day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.