Aptargroup Inc (ATR) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Aptar's 2017 Fourth Quarter and Year-end Conference Call. (Operator Instructions)

Introducing today's conference call is Mr. Matt DellaMaria, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Kevin, and welcome, everyone. Participating on the call today are Stephan Tanda, President and Chief Executive Officer; and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. Stephan will begin our call with a brief overview of our performance. Bob will then discuss a few of the financial details, and then turn it back over to Stephan before we open it up for questions.

Information that will be discussed on today's call include some forward-looking comments. Actual results or outcomes could differ from those projected or contained in the forward-looking statements. Please refer to Aptar Group's SEC filings to review factors that could cause actual results to differ materially from those projected or contained in the forward-looking statements. We will post a replay of this conference call on our website, and we undertake no obligation to update the forward-looking information contained therein.

I'd now like to turn the conference call over to Stephan.

Thank you, Matt, and good morning, everyone, and thanks for joining us this morning.

As you saw yesterday, we reported a good fourth quarter. We realized robust top line performance. Each segment achieved core growth that exceeded the high end of our long-term targets. I was particularly pleased by the fact that sales increased in each end market and in each geographic region.

There were several items impacting our bottom-line results. Bob will review those -- some of the details in a few minutes, and I will come back later to discuss our business transformation plan, which is off to a good start.

Our Beauty + Home segment achieved core sales growth of 10% in the quarter, thanks to a particularly strong recovery in the beauty market. Both the U.S. and Europe had good retail sales, and our transformation initiatives are starting to take root and deliver growth. Profit margins in this segment were negatively impacted by rising raw material costs. We are making progress improving the performance of our decorative facility in Europe. However, we still have further to go. And compared to the prior year, this is still an earnings drag, albeit getting smaller.

Our Pharma segment capped another excellent year with strong finish and core sales growth of 11% in the quarter. This business continues to excel in drug delivery innovation, in meeting and exceeding increasingly challenging regulatory standards and in participating and partnering with customers to bring to market extraordinary medicines and treatments, some of which are life-saving, such as Narcan, the antidote for suspected opioid overdoses, delivered by our easy-to-use, single-dose nasal delivery system.

In the quarter, demand for our nasal spray and saline systems was particularly strong due in part to the aggressive flu season in the U.S. and in Europe. As many of you are aware, we have invested in additional capacity at our Congers, New York facility to better serve our U.S. customers in the injectables market. Our customers have demonstrated great interest in our new capabilities. After extensive audits and tests, I'm pleased to say that our new capacity has been validated for key product references. Customers have begun to receive samples, and we expect a gradual ramp-up in activities throughout 2018.

Our Food + Beverage segment also had a strong fourth quarter with core sales growth of 11%. This segment continued to expand and grow in newer categories like infant nutrition and premium bottled water, while growing our market shares in key mainstay categories like condiments.

Looking back on my first year at Aptar, it's been a rewarding year, yet not without some challenges. However, true to our name, our great team has rallied to adapt the strategy, reignite passion around the customer, empower talented people and set the direction for future growth. The progress through the year was very gratifying and solidifies my optimism for our future. Our strategy for the coming years can be summarized in the following points: number one, successfully execute the transformation, with a focus on Beauty + Home and selected G&A functions; number two, drive organic profitable sales growth, including an added emphasis on high-growth economies, such as Asia and the Middle East; number three, raise the bar on innovation, operations and commercial practices towards best-in-class; number four, develop and recruit international talent with an eye on greater inclusiveness and diversity and higher expectations for leadership up and down the lines; and last, not least, number five, pursue strategic M&A, including partnerships that will enable us to gain new technologies and/or enter new markets.

Executing these strategies will ensure that we will achieve our long-term financial objectives and position the company for continued success for many years to come. We have great people, great products and know-how, and our markets are very attractive. Further, our ability to generate strong cash flows with an already strong balance sheet enables us to take advantage of strategic opportunities, while we continue to return value to shareholders.

With that, I will turn it over to Bob, who is going to walk through some of the financial details that have impacted the quarter. Afterwards, I will come back and elaborate a bit more on our business transformation. Bob?

Thank you, Stephan, and good morning, everyone. I'll briefly walk through some of the details concerning our fourth quarter results.

If you are following the slides we published with the press release, you can refer to Slide 4. We reported excellent sales growth of 16% that was comprised of core growth of 10% and currency effects of 6%. Sales increased across each end market and geographic region. As you saw on our press release, Beauty + Home core sales, keeping currencies constant, increased 10%.

Looking at sales growth by market on a constant currency basis, core sales to the beauty market increased 12%. This was mostly due to the continued strength of the cosmetic market. Core sales through the personal care market increased 8% due to broad-based market growth. And finally, core sales to the home care market increased 3% from the prior year.

When we look at profitability, our Beauty + Home segment had an adjusted EBITDA margin of 13%. Margins were negatively impacted by higher raw material costs of approximately $3 million and operational issues at our decorative facility in Europe that accounted for approximately $2 million compared to the prior year.

Our Pharma segment achieved a core sales growth of 11% and an EBITDA margin of over 34%. Core sales to the prescription market increased 17%, primarily due to increased demand for our nasal spray systems used with allergy treatments as well as increased demand for our metered dose inhalers for asthma. Core sales to the consumer health care market increased 7%, driven primarily by increased demand for nasal spray systems used with over-the-counter decongestant formulas as well as spray systems for nasal saline rinses. Lastly, core sales to the injectables market increased 4%.

It was also a very good quarter for our Food + Beverage segment, which achieved core sales growth of 11% and an adjusted EBITDA margin of 16%. Margins were negatively impacted by higher raw material costs of approximately $1 million.

Looking at each market. Core sales to the food market increased 8%, primarily due to continued growth in our infant nutrition and premium bottled water business and steady growth in the condiment business. Core sales to the beverage market increased 18%, in part due to strong demand for our range of sport closures for the dynamic bottled water market, and also due to an increase in custom tooling sales. If we isolate product sales, we were up 12% in the beverage market. Tooling sales accounted for the other 6% of total core sales growth.

Comparable adjusted earnings per share totaled $0.81 compared to $0.77 in the prior year.

On Slide 5, we can see that our adjusted EBITDA for the fourth quarter rose 9%, and was negatively impacted by the higher raw materials and higher corporate costs.

I'm going to jump to Slide 8 and touch a bit on U.S. tax reform, as this is a hot topic. Because of our international structure, the reform has a neutral impact on our effective tax rate in the near term. There are certain taxes that are outlined in Slide 9 that will put us back to an effective tax rate range very similar to what we had before the reform legislation.

Slide 10 refers to our outlook. We are expecting earnings per share for the first quarter to be in the range of $0.90 to $0.95 per share, using an expected tax rate for the first quarter of 27% to 29%. This compares to currency adjusted prior year earnings per share of $0.91 at a lower 26% effective tax rate. I have a few other details to share, and then I will hand it back to Stephan.

Cash flow from operations in the quarter was approximately $53 million. Capital expenditures were approximately $37 million, and our free cash flow was approximately $16 million compared to $87 million a year ago. The primary reason for the decrease in free cash flow relates to our decision to make an additional contribution of $20 million to our pension plan and changes in working capital. For the year, free cash flow was $160 million compared to $197 million a year ago, the primary difference being capital expenditures, which totaled $158 million this year compared to $129 million last year.

Looking at our balance sheet capitalization. On a gross basis, debt to capital was approximately 49%; while on a net basis, it was approximately 29%, and we remain slightly over 1x levered compared to our trailing 12 months adjusted EBITDA.

At this time, Stephan will briefly comment on our business transformation plan.

Thanks, Bob. On Slide 11, we have summarized our expectations regarding the incremental EBITDA coming from the business transformation. We expect to achieve an increment of approximately $80 million on an annual run-rate basis at the end of year 3. We will gradually see some of the incremental EBITDA in 2018 and expect that it will be fully realized over the course of the next 3 years. The key goal of this transformation is to reignite our entrepreneurial spirit -- if you want, return to our entrepreneurial roots, throughout the organization. We are taking a customer-centric approach to everything we do. The transformation plan primarily focuses on our Beauty + Home segment, along with several G&A functions. We have scoped out a significant range of specific detailed projects and initiatives spanning across commercial activities and strategies, procurement, operations and general and admin functions. We anticipate onetime costs to implement of approximately $90 million over the 3-year period, with the costs being similar to a typical program of this nature and being more front-end loaded than the incremental EBITDA, which is more ratably realized over the 3 years. These costs are really an investment in our future to raise the performance for the long term, including making sure we have the right skills and resources in place to succeed.

We will also have some capital investment and, as Bob mentioned, those are included in our 2018 forecasted capital numbers. We expect to fund those additional projects through cash generated from improvements in working capital.

Also included in our transformation plan are steps to improve our organizational health and effectiveness. I'm a firm believer in best practices around safety performance, employee engagement, leadership and open, frequent communication at all levels within our great company.

Slide 12 is then a reminder of our long-term financial targets by segment and for Aptar overall. We are reaffirming these targets after completing an update to our 5-year plan, including this business transformation that we have begun. One additional point I would like to make is related to our incentive compensation, both short term and long term. With the creation of more empowered accountable regional teams, we want to closely align performance with reward and our short-term incentive compensation will be primarily tied to EBITDA and growth. For our long-term compensation, we want to continue to fully align with shareholder interest and grant equity awards. However, we are moving away from stock options to a mix of restricted stock and performance shares tied to total shareholder return and return on invested capital. For 2018, this new plan has been implemented for senior management and will be put in place for all other employees receiving incentive compensation in 2019.

In closing, as noted on Slide 13, I'd like to sum up our key messages as follows. We have returned to core sales growth across all segments and for Aptar overall. Our business transformation's underway, and it will reenergize our customer-centric approach and entrepreneurial spirit, and is already starting to create opportunities. The effect of the U.S. tax reform are more or less neutral for us, given our relatively large international presence, and we have a positive outlook on the first quarter of 2018.

With that, I'd like to open it up for questions.

(Operator Instructions) Our first question comes from Ghansham Panjabi with Baird.

This is actually Matt Krueger sitting in for Ghansham. Can you talk a bit about how the business performed during 4Q versus your own internal expectations? And can you provide some added detail on any variation relative to what you were originally thinking when you gave guidance in October?

Yes. Thanks, Matt. Obviously, we are quite happy with the performance, and it really has gained steam as the quarter progressed and clearly stronger than what we guided you. And it's probably a number of factors, one is you should see the result of all economies growing in sync and consumer confidence getting strong. Secondly, related to that, it's just the absence of any surprises that usually happen and that you guard for. And last, not least, clearly, the transformation efforts, in particular some of the commercial excellence efforts that we started early in the year, particularly in North America, are really starting to bear fruit. So it's really a combination of all of these factors.

Great. That's helpful. And then given that your release cited an expectation for continued momentum into 2018 and the first quarter, what are your volume expectations across each of your 3 businesses for the upcoming quarter, and then for 2018 overall as well?

Yes. We really don't give guidance by segment. But clearly, I think we've all seen that we had good retail season at the end of the year, which bodes well for the first quarter, and the trading environment looks positive.

Okay. And then just as for my follow-on question, I think one of your beauty customers reported a strong quarter in China recently. Have you seen any acceleration in that market? And then beauty performance by region would be helpful as well.

Sure. So yes, we did have a really strong Q4 in Beauty + Home in Asia. So if -- going back throughout the year it was a bit lumpy, we started to see some growth in Q3. But it really did start to accelerate in Q4, so you're correct with that assumption. And then, actually, if I look -- yes, if I look at all the segments combined, we were up 9% in the fourth quarter in the U.S., 9% in Europe, 16% in Latin America and 19% in Asia for an average of 10% core sales growth.

Our next question comes from George Staphos with Bank of America.

This is actually Molly Baum sitting in for George. So what I wanted to ask was, what are the major sources of performance improvement in your transformation program? And related to that, why are you confident that it will improve growth in the Beauty + Home segment?

Thanks, Molly. We talked about some of this before, but maybe I think it's helpful for everybody to lay out what are the key pillars of the transformation. Clearly, commercial practices and sales growth are on the top of the list. That starts with basic things like going after business we lost in the past, for example, in aerosol valves and closures, that involves installing a very rigorous sales pipeline management system with a weekly cadence to drive business, to drive product launches, to support the sales force in North America. That is up and running and functioning very well. It's about accelerating new product introductions, and it's also about better segmenting our customers in the market segments and adjust pricing, particularly for low volume or lower-margin products. On the manufacturing side, it's really all about improving operations. And to just give some examples, for example, adding collaborative robots to reduce the amount of repetitive labor, and while also improving quality. Or -- installing automation at the -- to eliminate the manual loading and unloading of components. We have several major scrap reduction initiatives at different sites going on, and also initiatives to reduce downtime by installing software to better measure the different components of downtime, and then systematically eliminate them. In purchasing, it's really the whole toolkit, for example, leveraging our supplier network in metal parts, to design and manufacture components with less material waste or lower thickness, packaging cost reductions by consolidating our purchasing across sites, raw material substitutions to lower-grade materials in noncritical components, consolidation of suppliers, reduction of SKUs in our MRO spare parts department, and then also several activities around G&A, which maybe Bob can elaborate on.

Sure, Molly. So on the G&A side, while not the biggest part of the transformation, it is a very important enabler to the growth of the business. So on the G&A side, what we're looking for specifically is to implement more automation, more harmonization and centralization of some of our finance and HR functions, so that we can better flex and leverage with the expected growth of the business. On the IS front, we're looking to accelerate the implementation of some of our standardized ERP platform, which is going to help us to better support both the finance and HR and the manufacturing side of the business as well as allow us to sunset some of our older legacy systems and reduce some of the overall maintenance costs.

Our next question comes from Mark Wilde with BMO.

I wondered if you could just talk with us a little bit about sort of where you are from an M&A perspective. As you said, you've been in for a year now. You're very familiar with kind of company and the different segments. Where are you at in terms of looking at kind of potential opportunities for growth through acquisition?

Yes. Look, growth through acquisition, as I mentioned, is clearly one of our key strategies. I think it's also not a secret that we had went after one in Q3, but in the end, that didn't make it on price. So I guess, it's good news and bad news. We remain disciplined around price. Clearly, it's a challenging environment from a pricing point of view, but we continue to evaluate opportunities across all 3 of our segments. And if we are convinced we can create value, then we will go for that. And clearly, maybe the future will bring additional opportunities. But clearly, the valuation are rich, and we need to be disciplined. I have to say the best investment is certainly investing in our own company. And when you look at the returns of our capital expenditures as well as for the transformation, those are very attractive returns. And I think that's the best use of our shareholder money at the moment.

Okay. And if I could as a follow-on. When you first came in, you talked about being more focused on Asia, that if you looked at sort of where the growth potential was in your business, it was greatest in Asia. Is that something that you would say still holds true? So if we see you making acquisitions, we should assume they're going to be skewed toward Asia?

Look, with acquisitions, you can kind of cast a pretty broad net. But in the end, you cannot schedule them in. And certainly, the right acquisition in Asia would be very welcome, but it needs to perform to the same criteria as any acquisition would. But clearly, what's going on in China, I mean, I cannot say it any stronger, China is the peer nation now to the United States and to Europe. And there are plenty of opportunities, but it's a competitive environment, and you need to compete for the opportunities. We are adding talent in the region. I'm very happy with our new head of China, and he's putting strategies in place and strengthening the talent bench below him. So this continue to be a focus of...

Our next question comes from Kyle White with Deutsche Bank.

I'm just wondering if -- I believe, Bob, you said LATAM sales were up 16%. If you can -- try and just dig into that a little bit. What was driving that? Do you expect this kind of demand to continue on in 2018?

Yes. I mean, for us, the biggest weighting in Latin America is going to be in our Beauty + Home business. And really, what we saw is we saw really solid growth in both the personal care and the beauty markets.

Our next question comes from Adam Josephson with KeyBanc Capital.

Stephan, just a couple for you. I think if I heard you correctly, you talked about returning to the company's entrepreneurial roots in your prepared remarks as it relates to the transformation plan. That seems to imply that the company veered away from those roots in years past. Can you elaborate on that?

Well, I mean, you really have to draw a very broad arc. If you remember, I'm now going back into the '80s and '90s, the company was put together by combining probably a dozen entrepreneurial companies built by owner founders over the years. And then that was -- all came together under the Aptar umbrella and brought to the stock market in '93. By the way, we celebrate 25 years later this year as a public company. Then the management team has really done a nice job of building a global company, a U.S. publicly traded company, in the last, let's say, decade really putting all the governance processes in place and that you would need for a publicly traded company, the ERP systems. So I couldn't be happier with all of that in place. And now it's just time, again, to reinvigorate the top line. And having all these systems in place allows me to focus on the front end of the business and rejuvenate the front end of the business. And in our particular segments, that's really done the best way by giving regional teams the autonomy and accountability to perform in their markets. And we've also seen a shift in our customers. Even when you look at companies like Nestlé or L'Oreal, they are giving much more accountability to their regional teams because, at the end of the day, the new consumers, they make decisions on their purchases locally. And that means our customers make purchasing decisions locally. That means our teams need to be able to put their best foot forward locally. So long story, but basically, part of the transformation is to, in part, partly create and to partly really make sure that these regional teams have all the things that need to be successful, and have the right leadership in place, and that they're held accountable and they're rewarded to perform at -- very favorably with competition.

Sure. And then just one more for you, Stephan, and then one for Bob before I go. On the change in incentive comp, correct me if I'm wrong, I think short-term comp has been tied to EPS and ROA for the past however many years. And now you're saying, I think, EBITDA and some growth that -- I couldn't hear what the growth was. But why do you think EBITDA and whatever the growth was are better benchmarks for you than the EPS and ROA? And same question goes for the long-term comp.

Well, I mean, it often -- and, Bob, please build. One is the short-term comp was really versus a 3-year trailing average. So the big change here is really that we really tie it to the annual performance. So that the short-term compensation really rewards annual performance. And indeed, something that particularly the local team can really put their arms around -- get their arms around, in EBITDA and top line growth, but with much more emphasis on EBITDA is something they can easily get their arms around. With the long term.

Yes, yes. I mean, well, even on the short term, I would say, if you looked at it, the top line we've been struggling the last several years, and EBITDA's also been somewhat range-bound over the last several years, part of that due to currency. So I mean, those are 2 areas that we want to place a lot of emphasis on in growing the top line and, obviously, the bottom line. And then that's kind of why we're on those metrics as it comes to the short-term incentive. On the long-term incentive, we're essentially trying to better align ourselves with shareholder value, right? So a component of the long-term incentive is going to be based on total shareholder return as well as focusing on return on invested capital. So again, a good balance between the short-term top line, bottom line growth as well as investing the shareholders' money effectively and growing both of those to capital returns.

Just one on the -- reaffirming the long-term growth targets. So I know you had your best core sales growth quarter in 4 years, which is really exceptional. Even with that though, your full year core sales growth of 4% was at the low end of that long-term range. And over the last 3 years, that's the best you've done, is to be at the low end of that long-term range. So I guess, what gives you confidence that, that 4% to 7% long-term range is, in fact, achievable? I know that this transformation plan is part of it, but can you just talk a little bit about that?

Sure. And I think I've been on the job for 1 year. And several of you, rightfully so, have asked me, "Hey, you inherited those targets. They were last updated, I think, in the fall of '16. What do you think about them?" And I think the qualitative answer I've provided looking at our end markets that are really positively supported by macro trends from demographics to geographic developments and aging population and so on, I see no reason why we shouldn't grow kind of in the mid-single digits and, given our technological strengths, why we shouldn't have this return portfolio. Now that was qualitatively. Now it's a year in. We have done a thorough process of updating our 5-year plan. We've done a very thorough bottom-up design of the transformation. And giving -- putting this all together really gives me confidence that, yes, indeed, we should -- with the markets we're servicing, with the capabilities we have and with the plans we have in place that we should perform in those ranges.

Our next question comes from Chris Manuel with Wells Fargo Securities.

A couple of questions regarding some of the targets and the thinking here. As you kind of talked about things, Stephan, you talked about doing some work is why -- I guess, where I'm coming is, do you think you can add some capacity in this process? It sounds like you're trying to free up some manufacturing, do things with more efficiency. But where do you stand on a capacity standpoint? Will this help you perhaps defer some capital a few years down the road? Or how do you think about that?

Well, certainly, every time you improve the efficiency of operations, you cannot find a hidden factory. That's first. And certainly, from a footprint point of view, we got plenty of real estate and plenty of factories to create capacity. So that would not be an unreasonable assumption, but let me leave it there.

All right. Well, the second question I wanted to ask kind of along these lines in the same topic where, when you think of this $80 million phasing, is it kind of come 1/3, 1/3, 1/3 as you work through? Is it take a little more time to get some traction? Is there -- how do you think about that? Are there certain efforts on the sale side that may take longer to get after or some on the cost side that are quicker?

All of the above. So we don't want to give you, okay, multiply with 33% for the first year and second and third year. Clearly, the onetime costs are front-end loaded. And then the EBITDA benefits are coming in starting this year, for sure, next year and the year thereafter. I also would like to say that, really, the heavy lifting of the transformation is the first 2 years, and we've already begun within -- the benefits really rolling over into the third year. So this is not that we're going to be doing projects for 3 years in a row, but their heavy lifting is in the first 3 years.

All right. Just last kind of follow-up on these topics for Bob. If I look at your working capital as a portion of sales, it's been 14% to 16%. I think you finished the year close to 16%. The $50 million you take out, that will take you down a couple of percentage points. Where do you think is a long-term reasonable spot for that to be? I mean, I've always thought that Aptar's perhaps could be a little higher than some others because you're managing a faster-growing business than some other folks. But a lot of other companies and your peers in your space are in that 12%, 13% range. Is there opportunity to even go further through time? Or how do you think about that?

It's a good question, Chris. We haven't pegged a target. But I think with our footprint and primarily being European-based, I would expect us to be a slight bit higher than some of our peers who tend to be more domestic-based. Having said that, a lot of the efforts in this transformation are around manufacturing and supply chain and procurement, as Stephan mentioned. So the area that we would like to drive down is the inventory side of the business, and that's certainly something that we can control. On the payables side, we're also going to put a strong effort in there, and we think that's an area that we can make some significant improvements in. The big challenge remains for us is on the AR side, right? I mean, on the AR side, you've seen a lot of customers push out terms, particularly in the low interest rate environment, using discounting with banks at very low interest rates if you want to get paid sooner. Certainly, with our strong balance sheet, that doesn't make a lot of sense to us. If we wanted to artificially drive it down even further, should we need the cash, we could certainly discount some of those with some of our customers. So the long and the short of it is the focus area for us right now is around inventory and payables, and I think there'll always be a slight delta probably between us and some of our more domestic-based competition.

Our next question comes from Brian Rafn with Morgan Dempsey.

Yes. Can you give me a sense how was your Christmas season maybe in the cosmetic and beauty area? And then if you just kind of segment maybe the mass-market perfume market from the prestige, the high-end premium?

Thanks, Brian. Look, overall, clearly, consumer sentiment is positive, both in Europe and in the U.S. And as you may have followed, Europe had its best quarter, the economic performance in a long time, and also France doing very well. And that really then accounts for the prestige, but also for the -- more the mass side of things. And now of course, if things move really nicely in the shop in December, that doesn't impact our sales. The supply chain is too long, but it certainly bodes well for replenishment. The other thing I would like to highlight. Even though some of -- a lot of our sales are into Europe in the prestige segment, the finished products tend to end up increasingly in Asia. The luxury end in China is growing rapidly. It's the same for travel retail across Asia. And those wealthy Chinese also spend very heavily when they're on the road, so to speak.

Super. I appreciate the color. Stephan, you mentioned a little bit about regional teams and more localized markets. Does that fragment the product line launches or the lifespan of product cycles, where you might have had something in a container packaging that might have been a 3 or 4 or 5-year product, tens of millions of units? As you become more localized, does that make shorter-term products, in not the same volume, but certainly a broader -- because you had so many little local fragmented niche markets?

Well, it's an excellent question, and it's certainly something most of our customers are wrestling with. If you think about the challenges that the big CPG companies had is their, let's say, old approach of global brand, global SKUs just didn't win the day anymore. And customers were voting with their feet to kind of go with smaller independent brands, with local brands. And the response is now that those global companies buy out those smaller brands and independent brands and integrate them into their supply chain, and we just need to be responsive to that. I think the main part of what we're doing is really making sure that the local teams have all the capabilities they need to be responsive to customers and make sure that we have a winning proposition on the table. Most of the time, that still includes the same engine for the pump, for example, that we use globally, but tailored with maybe local decoration or into a local package and, most importantly, being able -- having the right people around the table to make the sale to the customer, and then ensure their confidence that we can deliver locally. So it's more about how we organize ourselves in kind of making the value proposition to the customer, not necessarily that we're going to proliferate a whole bunch of products. We're still going to keep a small group globally that kind of overlooks the long-range product lineup.

Okay. And then just by product, some of the innovations you guys had over the years, I'm just wondering if you have any new applications. I'm thinking SimpliSqueeze, your BAP bonded aluminum plastic, blister packs, Mega Airless, bag-on-valve, anything that you're -- certainly your nasal sprays with the metered dosage, any developments there, new products, new areas? You mentioned a little bit of growth, I think, in the condiment area. You've got a very broad section there. I'm just looking at kind of new product application.

Yes, I appreciate the question. I know, usually, we kind of rattle off a whole bunch of new product introductions. We thought, this time, we had enough news not to do that. But clearly, innovation is our reason for being, allowing our customers to innovate using our innovative dispensing closures. And we have new adoptions and all of the things that you talked about, whether it's the BAP, whether it's the valve, whether it's new pharma adoptions. And that is what we're doing for a living.

I would say, Brian, probably the most significant -- and it's not new, it's been out in the market for a while, but one that we're starting to see gain some really nice traction is the ophthalmic device in our Pharma business. I mean, that's a new type of dispensing system that we continue to see good wins from. And then we talked about earlier in the year how we're investing into some connected device technologies to add on to the ophthalmic device. So I mean, we're focusing really on all 3 areas of innovation, right, improving the existing products, revolutionizing some of that, and then also spending a little bit of time looking at disruptive-type technologies as well. So that's probably best -- all I can say at this point.

Our next question comes from Jon Andersen with William Blair.

I wanted to ask about pricing. With raw materials up, to what extent did pricing contribute to the core growth? Or maybe to what extent did pricing contribute relative to recent quarters? And then as you look to 2018, particularly the first quarter, what are your expectations for pricing contribution there?

Jon, I can take the impact on the quarter. So I mean, in terms of pass-through raw materials, it added about 1% to the Beauty + Home top line. It was insignificant for the other 2 segments. And if I were to look at it over the full year, it added about 1% to Food + Beverage over the full year and was insignificant for the other 2 segments.

Great.

And in terms of outlook, look, you have a mixed bag. In the U.S., clearly, the raw materials has a more stronger, firmer tone. Whilst in Europe, it's actually the opposite. So let's see how the quarter plays out.

Okay. And you're typically still working with a -- is it about a 90-day lag on the pricing pass-through?

Yes, it's from 1 to 3 months depending really on the application, the customer and so on.

Okay. And then one kind of broader question. As more volume -- your customers' volume moves online, and I understand that's happening at a different pace, in different end markets, in different geographies. To what extent, if any, does that affect kind of how you go to market, your innovation focus and overall kind of complexion of your business and how you serve those customers as that kind of end market migration occurs?

Yes. Net-net, I would say it's really a positive because the nature of dispensing closures is -- and pumps is that it dispenses something, but you don't want it to dispense in the package while it's on route. So clearly, customers look for better locking mechanisms, better safety devices to make sure that the package survives the proverbial UPS truck. And that allows us more opportunities to discuss innovations or new adoptions with customers. And yes, some of those brands might be smaller and independent, but we also go through distribution and we catch them that way. But typically, a more demanding package is always good for us.

(Operator Instructions) Our next question comes from Adam Josephson with KeyBanc Capital.

Bob, one quick one on the core sales in the quarter. How much of that outsized growth would you say came from improving market conditions versus just much better execution than you expected or have had in recent quarters and years?

It's difficult. We've talked about that internally. I mean, I would say it's a little bit of both, to be honest with you. I think some of the initiatives that we had mentioned early in the year primarily focused on North America really started to take root in the third and the fourth quarter. So we were positively impressed by that. And then I think the other side was just the broad-based geographic growth also helps. So I mean, it's a little bit of both, but it's difficult for us to kind of pin specifically how much on each one of those variables.

Sure. And Bob, a couple more. On the costs associated with the transformation plan, so you have the $90 million of costs, plus the $45 million of CapEx. Can you just talk about what exactly is in those 2 buckets? And then are we to assume that you'll just exclude that entire $90 million of costs from your adjusted earnings in future quarters?

Sure. So the $90 million -- let me address the $90 million. So $90 million is going to be made up of some project management costs, some advisers helping us implement some of these, some personnel redundancy-related costs over time, and then just some miscellaneous operating investments in training and things like that. Yes, our expectation is we would highlight those as onetime costs going forward. And the $45 million of capital, it's a number of things. It's investing in automation in our plants. I mentioned a little bit on the IS side that we're accelerating some IS implementations to automate some manual processes. And it's a combination really of both of those 2 things, investments in the plants and some IS investments as well.

Okay. And Bob, in terms of your 1Q guidance, the $0.90 to $0.95, what is the magnitude of the transformation cost that you're excluding from that number? And is there anything in that number other than the typical $0.06 of stock options comp that always drags down 1Q relative to the other 3 quarters?

So as it relates to transformation, there was nothing baked into that in terms of any costs or anything. So we're really giving you kind of an operational comparative number in there, nothing in there on the positive or the negative side. You're right on the $0.06 more heavy hit in Q1 on equity awards. The only other item that I would mention that's baked in there is because we prepaid about $159 million in the fourth quarter of some of our long-term debt, we're -- that had about a $5 million negative impact in interest expense in the fourth quarter. We are anticipating in 2018 that we will get a slight reduction of the interest expense run rate of anywhere between $1 million and $1.5 million per quarter. So that would be one additional item that was baked into the Q1 forecast.

And Stephan, just one last one on the incentive comp change. Some companies are obviously reluctant to have sales growth as one of the metrics because managers are thus incentivized to chase sales at the expense of profitability, right? So I guess, what makes you comfortable that, that won't happen at Aptar?

Well, one, as I've tried to indicate that the weighting is heavily biased towards EBITDA. But we also wanted to, frankly, make a point that in the long run, the company needs to grow. And therefore, there is a component, although much less than EBITDA, weighting on the sales growth.

Our next question comes from Kyle White with Deutsche Bank.

Thanks for taking my follow-on. I accidentally had myself muted for my second question earlier. And I was just curious on the transformation. I appreciate all the color and examples given, but the $80 million incremental EBITDA, how much of that is driven by cost savings, operational efficiencies versus kind of the top line commercial activities and higher sales? Is there any way to kind of break that out?

Yes. We really don't want to break it out in detail. But probably, the way I talked through them is kind of the order in terms of magnitude.

Okay, that's helpful. And then I was curious. In terms of the U.S. tax reform, are you guys seeing any type of behavior -- change in behavior from your customers or from your competitors? Are you seeing any increased competition maybe potential from competitors using their savings to invest in price?

No, I would think that's too early at this point. I mean, it is truly far more complex than what you're hearing out in the market from an interpretation standpoint. So other than some industries talking about onshoring more manufacturing, I mean, in our specific space, we're not seeing any tangible changes in behavior related to the reform act. But it is definitely something that's got everybody looking at studying how to minimize some of these additional add-on taxes, so to speak. But right now, we're not seeing any change in behavior in the market. It's probably too early for that. And again, it's far too complex of a tax reform.

Our next question comes from Brian Rafn with Morgan Dempsey.

Yes, Bob, a question for you. On the -- you talked about the tax act, and I think you kind of said not a whole lot on the statutory rate. I'm wondering if -- with that tax act in the U.S., if there's any more maybe fluidity or funds flow from the standpoint of repatriating money back to the U.S. in the future going forward. Is there any more movement of capital across sovereign borders versus just the issue about the statutory tax rate?

So Brian, one of the things that we did in 2017 is we actually had preemptively brought back about $1 billion from Europe. That left roughly about $700 million overseas, and that was part of the additional transition tax that we recorded in the fourth quarter. That does give us the ability to bring that back, albeit with some potential withholding taxes attached to it, but certainly much less than in the past. So the beauty of the reform act is that, again, excluding withholding taxes, we will have the ability to bring cash back on a more regular basis should we desire to do so. The negative is, is that all these hidden minimum taxes on foreign earnings and things that are baked in there.

Got you. No, I appreciate the color. And then, CapEx, I think, was up, I think, you guys, in your comments $158 million versus $129 million. Do you guys got a budget for '18? And is there any geographic specificity or allocation by business segment where that CapEx spending's going to go in '18?

Yes. Good question, Brian. It's in the slide deck, but I didn't touch on it in my remarks. So we're anticipating CapEx in 2018 to be approximately $200 million. Now that includes the $45 million of capital for the transformation project. So roughly about $175 million on the normal business. I don't have a breakout by region, but I would say, certainly, there's -- most of it is going to follow the weighting of where we are with a slight emphasis in some of the Asian and Latin American regions. And then from a D&A perspective, we're expecting that to move up slightly higher, $170 million. Again, a big, big caveat on that is going to be where exchange rates are, right? So with a bigger base of our business being outside of the U.S. and the weakening of the dollar, we're going to see that D&A number move up.

Okay. And then just one final one for Stephan. You talked a little bit, I think, about price discipline. You talked certainly about expense evaluations. I'm wondering more from a theoretical standpoint or more of a strategy. Is there a preference on your side in looking at M&A deals between maybe the larger restructuring turnaround deal versus maybe the smaller niche play that might have a novel science or a novel technology that you can leverage and scale across your massive distribution globally?

Well, I think we discussed before, certainly, the technology acquisition, the venturing acquisition, we will always look very favorably at for the very reason that you talked about, is that you can kind of plug it into the system. And the other one I would say, certainly, my experience is that bolt-on acquisitions that kind of -- you can clearly describe what the operational synergies are, and then organize against lifting those synergies, certainly have a better track record than large transformative deals. So my preference certainly will be the bolt-on acquisitions and the kind of venturing-type acquisitions as opposed to large transformative deals.

Our next question comes from Chris Manuel with Wells Fargo Securities.

Just 2 follow-ups, one in relation to the CapEx question. So $200 million is the CapEx for this year, and I think you said $175 million would have been a normal. So that's kind of half of that $45 million this year, and then the other remainder comes next year. Is that the way to think about that?

Yes, it's hard to say. I mean, again, the total, if I took the 2, would be about $220 million. Obviously, it's all going to be on the timing of when. I can't tell you exactly when. I would -- if I were venturing a guess, I would think that most of the $45 million would probably be spent in 2018 and the push-out into future years would probably be more on the regular CapEx.

Okay, that's helpful. And then If I could go to Slide 11 for a second. And I mean, perhaps this is just for illustrative purposes, but if I look at the transformation bucket and then I think about your growth and efficiencies bucket, it actually looks bigger the next couple of years, offset by a little bit of inflation. So I guess, my question is, if normal growth efficiency stuff can be greater than this $80 million over the next 3 years, that would suggest that perhaps contribution margin from added business is a little bit better than where it's been recently. How would I think about that, number one? And then number two, when you think of normal inflationary headwinds, how do we think of those? Is it something that's $10-or-so million a year?

Yes. I mean, this is not intended as a precise bridge, but kind of more like what are the buckets. We tried to indicate this with the fuzzy ends. Kind of it's more of illustrative purposes that you think through in those 3 buckets. And then that's why we also very firmly reaffirmed our long-term targets. And we believe we will be in those long-term targets, including in the transformation. So I wouldn't read more than that into this.

Okay. Well, no, that's fair. And that's what we anticipated, but I had to ask.

Almost made it through the hour without.

With that, I'm not showing further question at this time. I'd like to turn the call back over to Mr. Tanda for closing remarks.

Very good. And thanks, everybody, for joining us, and have a good first quarter.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.