AptarGroup's (ATR) CEO Stephen Hagge on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: AptarGroup Inc. (ATR)

Start Time: 08:08

End Time: 09:06

AptarGroup Inc. (NYSE:ATR)

Q2 2014 Earnings Conference Call

July 22, 2014 08:00 AM ET

Executives

Stephen Hagge - President and CEO

Robert Kuhn - EVP, CFO and Secretary

Matthew DellaMaria - VP, IR

Analysts

George Staphos - Bank of America/Merrill Lynch

Adam Josephson - KeyBanc Capital Markets

Gabe Hajde - Wells Fargo Securities

Alex Ovshey - Goldman Sachs

Mark Wilde - Bank of Montreal

Jon Andersen - William Blair & Company

Albert Kabili - Macquarie Research

Deborah Jones - Deutsche Bank

Brian Rafn - Morgan Dempsey Capital Management

Mehul Dalia - Robert W. Baird & Co.

Christopher Manuel - Wells Fargo Securities

Chip Dillon - Vertical Research Partners

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup’s 2014 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

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

Matthew DellaMaria

Thank you, Nova 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 year-to-date performance. Bob will then discuss our financial results in greater detail, after which, we’ll open it up for questions.

Information that will be discussed on today’s call includes some forward-looking comments. Actual results or outcomes could differ from those projected or contained in the forward-looking statements. Please refer to 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 Web site. AptarGroup undertakes no obligation to update the forward-looking information contained therein.

I’d now like to turn the conference over to Steve.

Stephen Hagge

Thanks, Matt and good morning everyone. Yesterday Aptar reported record second quarter revenues and record earnings per share. Demand for our industry leading innovative dispensing solution was broad based and sales increased across each of our business segments. We grew on each geographic region with the exception of the U.S which we believe was tied to consumer softness across certain of our customers to be cautious.

Our earnings in the quarter were negatively impacted by several factors including the softness we experienced in the U.S., a smaller resin pass through benefit than in the prior year, and a negative currency effects in facility start-up costs related to our Beauty and Home segments Latin America operations.

However, offsetting these headwinds was a positive effect of volume increases in most of our markets, saving from our European restructuring initiative, and a lower effective tax rate.

I like to give you a few comments -- brief comments on each business segment and then I’ll turn it over to Bob to review the financials. In spite of certain challenges, our Beauty and Home segment reported core sales growth of 3%.

After a strong start to the year, demand from the U.S personal care market was weak in the quarter. Offsetting this softness was good growth in other regions, especially in Asia, that was driven by increased demand for our body care and skin care categories.

As I mentioned previously, profitability was negatively impacted by the softness in the U.S., weak currency conditions, and facility start-up costs in Latin America and less benefit from the resin price adjustments compared to the prior year.

We continue to participate in a wide variety of product introductions. In Europe, Unilever and L'Oreal recently introduced several new hair care products with our stylish serum pumps. In Latin America, we created a custom dispensing closure and custom lotion pump for Nature’s line of skin care. And in the U.S home care market, we’ve introduced the new line of cleaning solutions that was introduced with our dual spray value actuator.

Now looking at our Pharma segment, sales and profits increase over the prior year, driven by increases in the consumer healthcare and prescription drug markets. We continue to grow in the eye care category with our unique Ophthalmic Squeeze Dispenser that allows preservative free treatments in an easy to use package.

Demand was also strong for our Metered Dose Inhalers, which deliver asthma medication and for our nasal delivery systems that deliver pain medication. Sales to the injectables market decreased in the quarter due to lower custom tooling sales and an isolated inventory destocking situation in the U.S. The fundamentals for this market continue to be very promising.

We participated in several new customer product introductions in the quarter. We are particularly pleased with our growth in Latin America consumer healthcare market with introductions both in the ophthalmic and the nasal saline categories. Also in consumer health, our spray pump was featured on a new cough and cold relief product in Europe.

In the prescription drug market, we continue to do well in the generic space. In the U.S., Perrigo introduced a new generic allergy treatment and in Europe the French Health Authorities recently cleared a generic version of Nasonex, both are equipped with our proven nasal spray pumps. Also the FDA recently approved the testosterone gel that will be delivered intranasally with one of our dispensing systems.

Now turning to our Food and Beverage segment, this segment also had a good quarter. Segment sales and income increased in the quarter, a strong demand for our leading dispensing closures, particularly from the beverage market towards growth. We are also encouraged by further penetration in the developing regions in both Food and Beverage markets.

Now looking at some new products on the market, first, in the Food market. In China, Abbott introduced a new package for its Similac infant formula with our customized closure that features a by injected Elastomeric-sealing-ring.

In Latin America, Unilever expanded their line of Hellmann’s condiments using a no drip inverted closure. Now in the beverage market, in Europe, we leveraged our pump technology to further penetrate the concentrated flavorings category.

[Ph] [Britvic] converted the packaging of a leading concentrated liquid flavoring to a more user friendly package that utilizes an Aptar pump. We also participated in several new flavored water and nutritional drinks for children in the U.S., Asia and Latin America.

Now summarizing our year-to-date performance, it’s been a good first half with core sales growing in each business segment, end market and geographic region. I’m encouraged by the growth in newer market categories such as infant formula, pain treatment and ophthalmics.

We also continue to take successful solutions from one region to another such as the infant formula launch in China, and also with liquid concentrated flavorings in Europe and skin care in Asia and Latin America.

Now looking ahead, in the upcoming quarter, we expect that our segments will grow over the prior year. Our Pharma and Food and Beverage segments are expected to continue to do well, while our Beauty and Home segment also has many opportunities to improve, but it’s also going to face some ongoing challenges in Latin America due to the currency situation and the economic uncertainties there.

We’re taking steps to improve our operational efficiency in our Beauty and Home segment in light of the recent U.S softness, and are further focusing on cost containments and price adjustments where possible in order to improve the profitability for this segment.

There continues to be an encouraging level of project dialogue with customers and we’re excited about the opportunities to expand in existing market categories and also to enter new ones.

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

Robert Kuhn

Thank you, Steve and good morning everyone. As Steve mentioned, we had another quarter of broad based growth. Reported sales increased 5%. Changes in currency rates added 1% towards sales growth in the quarter and therefore core sales before currency effects grew 4%.

We also reported quarterly earnings per share $0.79, our highest level ever. This compares to the $0.70 in the prior year when charges related to the restructuring plan of $0.04 are excluded from the prior year results. Cash flow from operations this quarter totaled $78 million, compared to $84 million a year-ago.

Capital expenditures this quarter were approximately $44 million, compared to approximately $37 million in the prior year. Therefore, free cash flow which we define as cash flow from operations less capital expenditures was $34 million in the quarter compared to $47 million in the prior year.

At the end of the quarter on a gross basis, debt-to-capital was approximately 27%, while on a net basis it was 13%. Regarding our share repurchase program, we spent approximately $40 million to repurchase 600,000 shares in the quarter. This brings the remaining balance of shares authorized for repurchase to approximately $3.2 million.

Turning to market details by business segment, our Beauty and Home segment’s core sales increased 3% over the prior year. Looking at our markets on a constant currency basis compared to the prior year, sales to the beauty market increased 3%; sales to the personal care market were basically even with the prior year; and sales to the homecare market increased 17%.

Our Pharma segment’s core sales increased 4% over the prior year. Looking at their markets on a constant currency basis compared to the prior year, sales for the prescription market increased 3%. Sales to the consumer healthcare market increased 11%; and sales to the injection market decreased 3%.

Our Food and Beverage segment’s core sales increased 7% over the prior year. On a constant currency basis, sales to the beverage market increased 11%, while sales to the food market increased 4%.

Looking at core sales excluding currency effects on a regional basis, Europe was up 4%; Latin America grew by 11%; Asia was up 24% and sales in the U.S declined 5%. I would like to point out that the devaluation of the Latin American currencies was significant again this quarter and, our Latin American sales on a U.S dollar reported basis actually declined approximately 4% from the prior year.

Looking at our year-to-date results, we reported first half earnings per share of $1.49 compared to $1.40 in the prior year when charges related to the restructuring plan of $0.09 are excluded from the prior year results.

Cash flow from operations for the first six months of the year totaled $110 million, which was equal to the prior year. Capital expenditures for the first six months of the year were approximately $87 million compared to approximately $72 million in the prior year. Therefore free cash flow was $23 million compared to $38 million in the prior year for the first six months.

Looking forward, we continue to expect depreciation and amortization for 2014 to be in the area of $160 million and capital expenditures to be approximately $190 million, which includes the $26 million related to the Aptar Stelmi expansion project that we announced last year. I’d also like to point out that these amounts could vary depending upon changes in exchange rates.

For the upcoming quarter we expect earnings per share using a 35% effective tax rate to be in the range of $0.72 to $0.77 per share compared to $0.67 per share reported in the prior year or $0.70 per share after excluding the negative impact of $0.03 per share from the European restructuring plan.

As mentioned in our press release we’re in the process of implementing a legal entity reorganization for our non-U.S subsidiaries that will allow greater financial flexibility in the future. As a result of this legal entity reorganization, we expect to record a one-time tax expense in the third quarter of approximately $3 million or $0.04 per share, which is not included in the guidance given. The impact of this one-time tax expense is expected to increase the effective tax rate in the third quarter to 39%.We anticipate that the full-year effective tax rate including this one-time tax expense will be approximately 35%.

At this time, Steve and I’d be glad to answer any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) In the interest of time and fairness to all participants, please limit yourself to two questions and one follow-up question, then come back into the queue if you have more questions as time allows. Our first question comes from George Staphos of Bank of America. Your line is open.

George Staphos - Bank of America/Merrill Lynch

Thanks. Hi, everyone. Good morning. I appreciate you taking my question. I guess my questions are this in sequence, could you give us a little bit more color in terms of why you saw some sluggishness in personal care in the U.S? The related two questions was any of this related to some destocking that your customers needed to engage in perhaps and how would you rate your customers inventories are raw? And then, lastly, that one-off on destocking, just tell me if you could provide a little bit more color on that and why you think it’s behind it? Thank you.

Stephen Hagge

First of all, I think we have to come back and take a look at the first quarter. We were up in the U.S., we were up over 10% in the first quarter which was quite a bit higher than we had originally anticipated. So I think we had some -- actually some sales to our customers in the first quarter that probably related to product being sold in the second. So that had -- I think you’ve to balance the first and the second quarter for us. That being said, what we have seen is some consumer demand in the U.S still being a bit soft and I think our customers are being very conservative with the inventories.

When you talked about the destocking in the personal care side, what we’re hearing from our customers there was a little effect, but I don’t think that was a large factor. I think it was more of a -- for second quarter sales split for us rather than a pure destocking. When I look at the Stelmi and I think that’s a good area. Again, we were up about 6% in the first quarter with Stelmi year-on-year after a very strong year, the last year. When I look at Stelmi this year, we were down about 3%, two of which was from -- are from tooling sales. But the destocking really occurred in one customer, we’ve gone back in terms of that one customer in the U.S. They had basically built inventory for what they had a launch schedule for that didn’t occur. So we think that is temporary and we haven’t lost any market share today.

George Staphos - Bank of America/Merrill Lynch

Okay. Thanks Steve. I’ll turn it over.

Operator

Thank you. Our next question comes from the line of Adam Josephson of KeyBanc. Your line is open.

Adam Josephson - KeyBanc Capital Markets

Thanks. Good morning, everyone.

Stephen Hagge

Good morning, Adam.

Robert Kuhn

Hey, Adam.

Adam Josephson - KeyBanc Capital Markets

Steve, just to somewhat follow-up on George’s question with respect to economic conditions, outside the U.S have you experienced any notable changes of late? I know you called out South America was been uncertain in your Beauty and Home business for the third quarter, but anything beyond that?

Stephen Hagge

Yes, that’s a good question, because I think if you go outside the U.S we’ve been pleasantly surprised this year by the strength we’ve seen in Europe. So Europe for us is still doing particularly well and I think as you get into the quarter, we were up around 8%, 9% in the first quarter and still did well in the second quarter. When you look at Latin America, as you pointed out, that’s where we saw softness. Our customers were expecting a bit stronger impact from the World Cup area with people traveling, that seems to not have taken place. But then as we get back into the one bright spot for us is been Asia and that’s gone across all three segments. We were up double-digits across both Pharma, Beauty and Home, and Food and Beverage. So we’re seeing really good growth in the Asian market and I think that’s particularly encouraging as we’re getting into new applications like in Food and Beverage, the baby formula that we just entered with Abbott.

Adam Josephson - KeyBanc Capital Markets

Thanks for that. Stephen, just one more on Europe, core sales growth outlook. So your core sales growth was 4% in the quarter, obviously on a 4% comp from a year-ago. The comps get -- the comp is similar in the third quarter and considerably more difficult in the fourth quarter. As a result, would you expect your core sales growth to decelerate over the balance of the year, particularly, in the fourth quarter?

Stephen Hagge

No, I think right now when we look out and again within the earnings guidance, we’re anticipating the core growth will still be in that 5% to 6%. So it’s a bit early to talk on the fourth, but we’re seeing no indication that we should be pulling back from those levels.

Adam Josephson - KeyBanc Capital Markets

Thanks a lot, Steve. I appreciate it.

Operator

Thank you. Our next question comes from the line of Chris Manuel of Wells Fargo. Your line is open.

Gabe Hajde - Wells Fargo Securities

Good morning, Steve and Bob. This is actually Gabe on for Chris.

Stephen Hagge

Hi, Gabe.

Gabe Hajde - Wells Fargo Securities

Question with respect to the competitive landscape, I guess with a couple of assets changing ownership and in the context of I guess lower demand here domestically. Has there been any change in the competitive landscape that you’ve noticed good or bad? And if so, what product lines or geographies?

Stephen Hagge

I don’t think there has been any as a result of the most recent transaction. I don’t think there is anything specific that’s been out there. It’s always been a competitive landscape for us probably as much or more so in our Beauty and Home and even in our Food and Beverage segment. But I don’t know that the acquisitions have had a major impact to that. We gauge very closely what market shares we have and I’m pleased that we’ve been able to maintain the market shares we’ve had in these markets going forward despite the change in -- I’d say the competitive landscape over the last 6 to 12 months.

Gabe Hajde - Wells Fargo Securities

Okay. And one other one with respect to the European tax restructuring. Will this prompt any sort of administrative restructuring down the road and/or higher costs incurred here in the short run?

Stephen Hagge

No, Gabe. Again, what we’re really trying to do is really align all our non-U.S subsidiaries in a single ownership change -- single ownership chain rather, which isn’t really the case today. We’ve got the majority of our legal entities today, which are held in France and we’ve got some of them outside, they’re also owned by the U.S. So really its -- its really just aligning them in one chain to be able to be a little bit more flexible with centralized cash pooling and redeployment of that cash when needed.

Gabe Hajde - Wells Fargo Securities

Thank you.

Operator

Our next question comes from the line of Alex Ovshey of Goldman Sachs. Your line is open.

Alex Ovshey - Goldman Sachs

Thank you. Good morning, everyone.

Stephen Hagge

Good morning, Alex.

Alex Ovshey - Goldman Sachs

Just on the Food and Beverage segment, we see nice organic growth in the top line, but hasn’t translated into improvement in the operating earnings and I know part of that is the start-up costs. So can you maybe just talk about the impact of the cost line in the Food and Beverage segment and when should we expect the favorable top line to translate into growth in the operating earnings line there?

Stephen Hagge

I think, actually Alex, we’re extremely pleased right now with Food and Beverage. We’ve had a targeted margin profile for them of 12% plus and you’ll see in the quarter we’re almost up to 14%. So part of which you got is a very strong comparison to the second quarter a year-ago. So as we look forward with new product introductions, we still see continued excellent growth and frankly much more margin acceleration as we go forward. So I think the new products that we’ve got in the new product categories that we’re entering, not only here in the U.S and Europe, but across the world, are really benefiting that segment in terms of its growth profile.

Alex Ovshey - Goldman Sachs

Okay. Got it, Steve. And then on the share buyback, is there an update that you have in terms of what we should expect the buyback to be for 2014?

Stephen Hagge

Right now we’re continuing pretty much on the pace we’ve been acquiring in the area of about 2 million shares per year. We are on that pace that is an area that the Board continues at each of our Board meetings to evaluate, do we want to do more in that area, how do we want to look at it? So I’d say, right now there has been no announced change, but it’s an area that we need to consider quarter-to-quarter as to what we’re going to be doing.

Alex Ovshey - Goldman Sachs

Got it. Thanks, Steve.

Operator

Our next question comes from the line of Mark Wilde of Bank of America -- sorry Bank of Montreal. Your line is open.

Mark Wilde - Bank of Montreal

Much better. Good morning, Steve and Bob.

Stephen Hagge

I thought you had moved again Mark.

Mark Wilde - Bank of Montreal

No, no. I don’t move very often. I have a couple of questions. One is, can you just give us some sense of what’s in your third quarter outlook in terms of resin expectation, either positive or negative? And then the other question I had Steve one of your competitors has talked about moving capacity down into Brazil and I just wondered if you’re seeing any impact from that so far?

Stephen Hagge

First of all on the resin side, at least our projections were showing from the second quarter going into the third quarter. Let me first deal with that kind of sequentially that we’re seeing a -- mostly flat to slightly down potential in the U.S and a slight uptick in terms of resin cost in Europe. So when I compare that on a overall basis, it’s relatively flat. Now if I compare that to where we were a year-ago, we haven’t seen at least in our forecast a material change and how resins impacting our third quarter results compared to a year-ago. When we look down at -- on the competitive situation in Brazil, we still have a very significant -- we’re the largest player in the Brazilian market in the Fragrance, Cosmetic where this particular competitor is looking to target. So at this point, we haven’t seen any material impact from them coming and they’ve always been a player down there somewhat anyhow and it’s still taking some time to get up and running. So it’s going to be I think a while before they’re up and running a 100% in the Brazil market. But to date we’ve not have any major impact to that.

Mark Wilde - Bank of Montreal

Okay. That’s helpful. Thanks very much Steve.

Operator

Our next question comes from the line of Jon Andersen from William Blair. Your line is open.

Jon Andersen - William Blair & Company

Hey, good morning guys.

Stephen Hagge

Hey, Jon.

Robert Kuhn

Hi, Jon.

Jon Andersen - William Blair & Company

I guess, first where are you now in terms of the European restructuring savings? Have you hit kind of a run rate level and what is that at this point?

Stephen Hagge

We are pretty much on target where we’ve hoped to be. We are probably a quarter behind in terms of what we’d have actually wanted to be. In the quarter, we had a savings of about $1.3 million compared to a year-ago. But also keep in mind we’re starting to get some savings a year-ago. So in total we’re probably closer to 1.8 per quarter. Our target is to be at a $10 million run rate by the time we get to the end of the year and we’re going to be pretty close to that by the time we get to the fourth quarter.

Jon Andersen - William Blair & Company

Great. Thank you. And then on the Beauty and Home margins, I understand that FX and I guess the start-up costs were about a $2 million headwind in the quarter. How far along are we in terms of been able to absorb the start-up costs in Latin America? What -- how do we think about that impact going forward?

Stephen Hagge

Yes, the start-up costs themselves were about $1 million and you’re right currency was about $1 million in the Beauty and Home side. When we looked at Columbia, which is where the start-up costs is coming, we’re really pleased that we’re actually starting shipments in May of 2014. So we’ve started the shipments. So we’d expect those start-up costs to be going down pretty rapidly as we get into the second half of the year. We’re still be carrying some of those in the third quarter, but they will be less than the second and then again less by the time we get to the fourth quarter.

Jon Andersen - William Blair & Company

Excellent. Just the last question, you mentioned infant formula, I guess a couple of times as an example of a new category and also success in terms of leveraging and offering across geographies. Is the infant formula product in China, is that similar to the one that I think you’ve participated in the private-label market here in North America and or there are modifications that you’ve made to that and then are there opportunities that you’re seeing kind of beyond the existing business you’ve established there? Thanks.

Stephen Hagge

Again, it’s a great question and I think couple of things on the infant formula. One, this was our first move with infant formula into a branded market. So before we were with Perrigo on house brands here in the United States, the package itself is similar, but different. The designs are different and incorporate different features and benefits. I’m really excited about it in terms of our business. We were able to leverage our design capabilities here in the United States and coordinate an introduction of production in China, which is no small feet when you’re coming across. I also want to point out that frankly with Abbott, Abbott actually opened a new facility for this. So not only did we need to work with them on the product, but they needed to get through the whole new facility side. So a tremendous amount of project management side, which I think is, in this market its particularly exciting because it’s a growth market, it’s a converting market from cans back into more plastic and we see a little -- we see a lot of hope for additional transition in this over the next couple of years.

Jon Andersen - William Blair & Company

Great. Thanks for the color guys. Good luck.

Operator

(Operator Instructions) Our next question comes from the line of Albert Kabili of Macquarie. Your line is open.

Albert Kabili - Macquarie Research

Hi. Thanks. Good morning. First question is just on Beauty and Home. It sounds like you now -- you expect in the upcoming quarter year-on-year improvement. And I’m wondering what sort of drives the improvement in trends sequentially there? You mentioned some cost actions and some pricing. Is that the driver or do you also expect volumes to start to improve?

Stephen Hagge

Again, Al it’s a good question. Let me come back and try to deal. I think it’s a combination of factors. First, we expect the start-up costs that we had down in Latin America as I’ve said to continue to go down, so that should have a benefit. Right now our projection is showing a stabilization of currency. So it’s not getting better in terms of that in Latin America, so we’re hoping that, that will also help. But the other side frankly North America for us was a disappointment in the quarter. We made some operational changes there. We changed some leadership in our North American team. We’re right now taking a look at labor cost and have initiated some very strong actions within labor, and looking at significant ways to cut inventory and another costs out. So both of those, all those efforts frankly will have an impact as we get to the second half and we’re hopeful we’ll start seeing that in the third, but certainly we’re going to have a major impact as we get to the fourth quarter.

Albert Kabili - Macquarie Research

Okay. And is there any way to size up what the benefits might be from some of the cost actions you’re doing in North America?

Stephen Hagge

Right now we haven’t put a full dollar amount or disclosed that, because part of this as you said we have to be pretty flexible in terms of where the market is. Because our customers, we actually had a reasonable strong end of the quarter in terms of demand. And so we’ll have to see how that’s going to play out as we get into the third quarter. So, we’ve got to be a bit flexible on those labor costs to be able to deal with demand spikes that our customers were having.

Albert Kabili - Macquarie Research

Okay. And then last question is on the, I think you mentioned 35% sort of tax -- adjusted tax rate for the third quarter. With the legal entity change, can you help us with, if there’s a material impact on your total corporate tax rate or how should we be thinking about the long-term tax rate?

Robert Kuhn

Sure. With all the recent increases in tax rates that we’ve seen primarily today in France, again what we’re doing is more for a facilitation of cash pooling and redeployment of some of those resources. But I think this will also help us to keep the tax rate in that 33% to 35% range long-term. Absence of any restructuring, I think you would have seen the tax rate gradually continue to increase. So, it’s more of a long-term maintenance if you will of that 33% to 35% tax rate rather than it is a full decrease in a tax rate compared to where we’re today.

Albert Kabili - Macquarie Research

All right. That’s very helpful. Thanks and good luck for the rest of the year.

Stephen Hagge

Thanks a lot.

Operator

Our next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open.

Deborah Jones - Deutsche Bank

Hi, good morning.

Stephen Hagge

Hi, Debbie.

Deborah Jones - Deutsche Bank

You guys mentioned the growth in China, and I’m just wondering if you’re able to give some thoughts on the opportunities you see there? How fast are the markets growing that you have exposure to and what type of investment are your customers making in these regions?

Stephen Hagge

Well, I think a couple of things that are going back, let me try to take a couple of those because I think that you’ve got a pretty broad base. One of the things we’ve been encouraged with our growth recently in China has been now to what I would call that one tier below the multinationals. So, we’re starting to deal with some of the stronger local Chinese companies and that’s really accelerating the growth. So the market growth for us is probably double-digit across most of the product categories. But what's encouraging is, we’re not only serving the multinationals there now, we’re now also serving that kind of top tier of Chinese customers which are continuing to use our products to expand sales of theirs. So that’s been particularly successful with us. So, again we tend to be optimistic across our different categories whether that’s Food and Beverage, Beauty and Home and most recently even our Pharma business has continued to do well serving both local Chinese for that local market and then generics for that are being produced in China to go back to the western markets.

Robert Kuhn

And I think Debbie you also mentioned investments and our customers investments. I think Steve alluded to a very important fact with the evidence and formula. I mean we’re seeing our customers also invest locally in the ability to use and our products and pack them on their line. So I mean Abbott building a new facility is clearly a very strong indication that they are there and other customers are doing much the same whether it’s converting bottling lines to adapt to our closures for the beverage market or even in the pharma market. So they are -- we are seeing co-investment as well from our customer’s which is always a good sign.

Deborah Jones - Deutsche Bank

Could you give a sense on, how your margins in this region might compare to the rest of your portfolio or kind of your return on investment?

Stephen Hagge

Yes, I think in terms of margin profile today, we’re actually in China and we’re pretty much comparable or above in some of our cases margins we have in other areas of the world. So we’ve now got, we’re now back to a more sizable mass in terms of being able to start to supply the market. So what we’re seeing is in terms of growth its falling pretty much the bottom line in the same margin profile that we have today across other parts of the world.

Deborah Jones - Deutsche Bank

Okay, that’s helpful. I wanted to get just one follow-up on the resin commentary you made earlier. I know there is a differing in change between Europe and the U.S. Now can just -- polymer or polypropylene costs have gotten a lot higher in Europe recently. I’m showing to understand going forward how to look at the projections and how that might impact you?

Stephen Hagge

I think our buy, because we have a different product portfolio between Europe and the States, we’re probably 50-50. I don’t think it’s much different than that in terms of our buy, because we have more closures here in the United States and we have more pump products that fit that have less resin content in Europe. So I think if you blend those Debbie, it tends to be almost a 50-50 split. If you just look at the U.S. and Europe and then again you’ve got certainly China and Latin America we’ve got to consider. But those are the two biggest spends for us.

Deborah Jones - Deutsche Bank

Okay, that’s helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Brian Rafn of Morgan Dempsey. Your line is open.

Brian Rafn - Morgan Dempsey Capital Management

Good morning, guys.

Stephen Hagge

Hi, Brian.

Brian Rafn - Morgan Dempsey Capital Management

Give me a sense in what you guys are seeing, new product line launches, geographic scope maybe volumes of launches, and if there’s any retardant that you’re seeing or hesitation from your U.S. base multinationals?

Stephen Hagge

I think right now, frankly our customers I think, this is one of the encouraging things Brian that I’m seeing, is our customers are working on a lot of projects. If I look at the number of products introduced by our customers, even in the quarter for the second quarter its one of the largest that I’ve seen in the last 5 to 6 years. I don’t think there’s been a major change in how they’re looking to introduce. We see -- depending on the customer both regional and worldwide launches depending on where the product is. So if you’re in the food market, you’re getting much more regional launches than you would in the fragrance market which is much more worldwide. So, that’s very dependant. But I think right now our customers are also of the view they need to continue to look at how they differentiate themselves on the shelf, and they’re looking at convenience as a critical way to be able to do that.

Brian Rafn - Morgan Dempsey Capital Management

Can you talk a little bit about kind of the perfume, cosmetics and fragrance and maybe what you see globally maybe high-end versus low-end. I know that tends to tie in a lot with the Christmas holiday season were little early in the year. But just give us a sense of what you see in that area?

Stephen Hagge

I think a couple of things. Let’s take the Fragrance, Cosmetic and the Prestige side. Fragrance for us is done okay, we’re seeing growth there. But we’re seeing excellent growth on the cosmetic side, and there that’s a double-digit growth. So more people in terms of skin protection, eye protection, different serums being used and on the prestige market that has been a growth, Asia, U.S. Europe and Latin America. But we have seen a bit more softness, and frankly if you look at our customers like [ph] [Avon] the mass market has been a bit challenged with Avon’s most recent financials. So that hasn’t been as strong this year as it was last year.

Brian Rafn - Morgan Dempsey Capital Management

Okay.

Stephen Hagge

So that’s probably the best I’d give you in terms of [multiple speakers].

Brian Rafn - Morgan Dempsey Capital Management

Yes, okay. Give me a sense, and when you look at things like the Winter Olympics, the World Cup, do these episodic events from a world standpoint, did they impact any of your markets like Food and Beverage or are they really non-event?

Stephen Hagge

I would tell you, our customers probably had higher expectations for the World Cup both -- particularly in Fragrance, Cosmetic and in the Food and Beverage side. I think in terms of use it was okay. But it wasn’t as big as what they had initially projected. So, generally those things will be new product introductions, there’s more activity. But this year I think the World Cup has given some of the pre-negatives that were going, didn’t have as much. And the other side frankly is the Latin American economy, and I mean that across not just Brazil, but hasn’t been very strong across a lot of the Latin American countries. So that had an impact on the consumer spend.

Brian Rafn - Morgan Dempsey Capital Management

Let me just ask one more from the standpoint of your penetration in the infant formula, two questions. One is, are there piracy issues with that being in China, and two, does the design in the infant formulary at all segway to a penetration in getting all the U.S. the milk boys to get going on something [ph] [which feature] your product?

Stephen Hagge

Well I think, first of all, I think the piracy issue one of the reasons our customers are working with us is exactly that. This is a dedicated design on this Abbott product in China to them, and certainly we’re not producing that for anybody else. So, I think one of the reasons Abbott works with us is the integrity of that supply chain that we’re giving them. In terms of add-ons to that, we’re looking in the baby -- we’re also doing things Brian in years back to concentrates for milk which is flavorings for milk. We’re doing more in the creamer markets. So that whole dairy side for us is seeing more applications, and we’re continuing to enter step-by-step into more application fields within that dairy market place.

Brian Rafn - Morgan Dempsey Capital Management

Thank you, guys. Good job.

Stephen Hagge

Thank you.

Operator

Our next question comes from the line of Ghansham Panjabi of Robert W. Baird & Co. Your line is open.

Mehul Dalia - Robert W. Baird & Co.

Hi, good morning. It’s actually Mehul Dalia sitting in for Ghansham. How are you doing?

Stephen Hagge

Good. How are you doing, Mehul?

Mehul Dalia - Robert W. Baird & Co.

Good. Given that the de-stocking is behind you now, do you expect core sales and adjustables to rebound in the third quarter?

Stephen Hagge

Right now we’re still positive on where that’s going to go, so whether it’s going to be a full back to normal in the third or the fourth, that’s going to be hard to tell. But we’re getting through the de-stocking with the customer and we would anticipate that picking back up. So, it will be between the third and fourth quarter.

Mehul Dalia - Robert W. Baird & Co.

Okay, great. And are you seeing any pick up in promotional activity by customers in the Food and Beverage market at all?

Stephen Hagge

There is, in promotions the things that we would see would be mostly advertising. There is not sampling and types of products generally in the Food and Beverage side. But what we are seeing is continued expansion into new categories for us in that area. So, that we’re seeing, and I think the other side you’re continuing what I think is encouraging you’re seeing in the advertising, even in the advertising they’re showing the different packaging forms as a way to try to tell the consumer it’s a better product. So, we’re in effect getting our products highlighted as they go through either print or media advertising.

Mehul Dalia - Robert W. Baird & Co.

Great. Thank you.

Operator

Thank you. Our next question comes from the line of George Staphos of Bank of America. Your line is open.

George Staphos - Bank of America/Merrill Lynch

Thanks. Hi, guys, just some questions on Beauty and Home just to finish up at least from my side. I just want to make sure, I mean, I think you were answering Alex’s question earlier, are you suggesting that Beauty and Home will be up year-on-year in third quarter or that will be up sequentially in the third quarter? I just wanted to make sure if you were providing any specific guidance there.

Stephen Hagge

I think its going to be more sequentially that we look at as we get to the year, and again that we’ve been more focused more second half than we are quarter-to-quarter. But we would expect to be able to continue to build from where we’re at today sequentially over the remainder of the year.

George Staphos - Bank of America/Merrill Lynch

Okay. Thanks for that, Steve. The second question related to Beauty and Home is this. Now you were suggesting that -- you were stating that the weakness in 2Q was really driven by consumer softness, and if I would editorialize just, things not weren’t necessarily in your control just the market was weak, would you agree with that?

Stephen Hagge

To some degree that’s true. But I will also tell you, we had some self inflicted wounds. We didn’t operate in North America as well as we should. So that’s what I’m saying is we’ve done some things to be able to try to deal with that whether that is in terms of personal leadership issues, and we put in significant programs in place to try to deal with those. So, yes it is a market issue, but I don’t want to come back and tell you George it’s a 100% of it.

George Staphos - Bank of America/Merrill Lynch

Okay, that’s where I was going, because it was just a market issue. It seemed like the organizational changes that you are talking about would be bringing a sledge hammer to hang up a picture. I guess, the last question would be and I’ll turn it over. Given that Aptar has been in these markets in North America in Beauty and Home for a very long-time, and clearly you have a global platform, your business is ultimately doing well on a broad basis, so I don’t want to overly focus here. I’m surprised that you’re finding ways now to become even more efficient and organizationally effective within Beauty and Home in the U.S. and so if you could give us a bit more color about what you found that you could do better that would be helpful. Thanks guys and good luck in the quarter.

Stephen Hagge

George, I would tell you that what we did is I think we lost sight of the ball for a while, and it wasn’t that weren’t -- I think we added cost that we didn’t need to add. So, it wasn’t that we had come back and started to do things different. I think we added some costs, that when you looked at the business we probably need to come back and -- we needed to reassess. That’s what we’re doing today. That’s what had the negative impact on the results. So it’s not that we changed and have done something different. We’re going back to really what's made us successful in the past and really refocusing on the business. So I think, again that to me is the -- that’s more of the truth of where we’re at.

George Staphos - Bank of America/Merrill Lynch

Understood, and no share loss. Maybe a last question there, you haven’t seen any evidence of share loss in that market or have you?

Stephen Hagge

No, we haven’t seen share loss and we tracked that pretty closely. But I will tell you there has been some changes in some of the markets whether it is sun care, depending on where those are at; there’s been some movements in those markets. We have kept our share of all of those markets the best we can do in the market knowledge that we have.

George Staphos - Bank of America/Merrill Lynch

All right. Thank you.

Operator

Thank you. And our next question comes from the line of Adam Josephson of KeyBanc. Your line is open.

Adam Josephson - KeyBanc Capital Markets

Thanks for taking my part of the question. Steve, you obviously remain significantly under-levered compared to your peers, and that’s been the case for a long time now. Do you have any desire to change that in the foreseeable future regardless of whether you find a large deal that attracts you? I ask this given that many other U.S. companies have been highly exquisitely and they have been using low cost debt to finance these acquisitions.

Stephen Hagge

Yes, I think to ours, the needs or the uses of our cash Adam continue to be focused both first for internal expansion, second for the dividend -- or second per acquisition dividends and then share repurchase. But you’re right; we continue to look at the balance sheet from a leverage perspective. We’re looking at deals today in terms of strategic ads that we might be able to come back in. One of the things I think is challenging in today's market because of where some of the interest levels are, some prices being paid are somewhat hard for us to understand where some of those prices come -- how they get value from that, and we’ll continue to be disciplined in the acquisition side. But that being said and as I mentioned earlier in the call, the Board looks at share repurchase realizing that we are under-levered. And we’re not arguing that we want to stay at these leverage levels, we want to come back and consider how we want to move those back up on a reasonable basis over the next year or so.

Adam Josephson - KeyBanc Capital Markets

Thanks. And just to your question about multiples being -- or to your comment about multiples being paid, I mean does it kind of hearken back to ’07 levels or how would you compare what's happening today to previous periods you’ve experienced?

Stephen Hagge

Well, my concern is and I tend to be somewhat of a fatalist, because I think I have lived this story before. Where all of a sudden there is no cost of debt, everybody can borrow money. Those tend not to have always good ending.

Adam Josephson - KeyBanc Capital Markets

Right.

Stephen Hagge

So, I mean we’re seeing quite a bit of -- there’s a lot of money on the sidelines, because there’s no other place to get yield right now and as a result everybody needs to become investing. What we want to do is, we did in the ’07, ’08 period. We want to acquire strategic assets. We’re going to be in the market. But frankly we can’t just go out and pay, what I would say would be uneconomic prices for that.

Adam Josephson - KeyBanc Capital Markets

I totally understand. Thanks a lot, Steve.

Operator

Thank you. Our next question comes from the line of Chris Manuel from Wells Fargo. Your line is open.

Christopher Manuel - Wells Fargo Securities

Good morning, gentlemen. Just one follow-up, well actually I want a couple of (indiscernible) but first, a little bit with the pharma business. I know, I heard earlier you talk about you anticipated some of the other markets to bounce back, I think injectables and things and maybe that’s a couple of tough comps. But just to make sure there’s nothing fundamentally changed that you’re still not in that high single-digit long-term organic growth rate that you still feel that’s a reasonable trajectory, no legislative changes or different views in how folks want to use healthcare or anything along those lines that have changed that?

Stephen Hagge

Well, in fact I would tell you right now our pharma growth, if I look at the number of products that our customers introduced in the quarter, it’s been the largest we’ve seen going forward. So, I right now Chris, I’m very bullish in terms of what we’re seeing in terms of growth opportunity that 6% to 10% we’re getting quarter-to-quarter, I still think is a very realistic growth target for us. We’re seeing growth opportunities not only in the U.S. and Europe, but also in Latin America and Asia. So, we would -- again we’re very comfortable with the long-term growth numbers that we have out there for that segment.

Christopher Manuel - Wells Fargo Securities

Okay, that’s helpful. And then the second question follow-up I had was also in the pharma piece. But just kind of -- it sounds like you’re about done with startup costs for the facility I believe in Columbia, I think it was down to $1 million this quarter. I’m presuming that Stelmi stuffs will probably start to ramp up. So just, if you could maybe give us any color there as to what that might look like in the next few quarters? When that’s targeted to startup, and have you begun hiring or kind of an update as where you’re all along in that process?

Stephen Hagge

Yes, that’s a good question. As we indicated at the beginning of the year this is a 2014 project. We have ordered the long lead time equipment for that project that takes anywhere up to about a year to complete, so that we ordered earlier in the year. We have now started the facilities expansion. We’re expanding two of our facilities to be able to expand that. We’ve come back and construction is actually starting almost as we speak. So we are coming back and doing. We’ve started already the ramp up for some personal, and we’ll continue to do that. I don’t expect it to be a major cost factor for us. But there is some cost even in the second quarter and frankly in our projections for the third quarter for the startup because that this is not an insignificant amount of capacity that we’re adding.

Christopher Manuel - Wells Fargo Securities

Right, I mean but -- if I can push a little bit, I mean within orders of magnitude you had a couple of million bucks a quarter of startup cost for facilities in the past, but I think in France when you did the landmark stuff and in Columbia is, maybe $2 million, $3 million, $4 million a quarter given the significant size of this something that’s reasonable to anticipate as we look as 3Q and 4Q and 1Q even of next year?

Stephen Hagge

It’s probably closer to $1 million or so in the third, and $2 million as you get into the fourth. But again we’re -- as we get rough volumes ramping up, we’re going to be getting some offset to that through the sales site.

Christopher Manuel - Wells Fargo Securities

Okay, that’s helpful. And then just last one off along those lines, when will -- when do you anticipate the capacity being operational. Is that still up kind of beginning of ’15 event?

Stephen Hagge

Yes, it’s going to be -- we are going to be at least mid ’15 before we’re going to start seeing some upward to that, because we’ve got to get the facilities done. We’ve got to get in and remember the other key issue is our customers then have to come in and recertify the site. So again from ours its running almost exactly on the timeline we put together when we started the project but it is a 2015 event and less of a first quarter more after you get pass the first.

Christopher Manuel - Wells Fargo Securities

Okay. Thank you very much.

Operator

Our next question comes from the line of Chip Dillon of Vertical Research. Your line is open.

Chip Dillon - Vertical Research Partners

Yes, thank you very much. Good morning, Stephen. I had a first question, it has to do with -- I think you might have touched on the edges here. But when I think of two of the facilities that you’re either building or have built, I’m thinking of like the Lexington plant in Food and Beverage and I know the new Stelmi addition. Do you feel it might -- first of all is the Lexington plant filled up given the pressures you’ve seen in the quarter or maybe transitorily they weren’t, I don’t know. But could you just give us some, an idea of how much more there is possibility there for filling that facility up in terms of volume? And then will the Stelmi ramp be a little slower than maybe you would have thought because of the decline you mentioned in this past quarter in the syringe area?

Stephen Hagge

First of all the facility that we have come up and start up for the Food and Beverage focus initially is in Charlotte. So, but if you look at that facility it’s about a 300,000 square foot facility. We’re probably utilizing around 70,000 to 80,000 square feet of that facility today. So there’s significant growth side to that. We are focusing initially some of the growth in terms of Food and Beverage. But we need to balance that with our other production facilities. So again, we’re probably a quarter or so behind where we had on the original plan. But it’s going to take a while to fill that, and I think that’s important as we bring in. The other that has been critical for that, we brought in new technologies to that facility, the infant formula which is a very significant manufacturing challenge, the Tropicana product that’s also different manufacturing sites. So, not only we opened a facility, we brought in new technology. So again, this is really for future growth for us but we’re well positioned. Your question on Stelmi, I would -- again I think that it’s an isolated issue to the second quarter, it’s not endemic. We’re actually seeing very positive. As I said in my opening remarks on the whole injectable market, we’re continuing to be very bullish not only with the existing customers of Aptar Stelmi, but also for potential new customers that we’re starting to work with now given our platform.

Chip Dillon - Vertical Research Partners

Got you. And just as a quick follow-up, and I probably totally misheard this, but I know that within Food and Beverage the core growth was 7% and you mentioned beverage was up 11% and food was up 4%. But I think you said there was a major differential because of tooling changes and that the actual underlying volume was stronger. Could you just clarify that please?

Robert Kuhn

Sure. So on the beverage market Chip, you’re right. Beverage was up 11%, but actual product sales would have been up 23% because tooling was down about 12% in the quarter for the beverage market, and food is the opposite. The 4% increase we saw on the food market actually was all related to tooling. So product sales were flat on a global basis in the quarter.

Chip Dillon - Vertical Research Partners

And so product sales, did you say overall were up 17%?

Robert Kuhn

I believe that’s about what it comes to, yes.

Chip Dillon - Vertical Research Partners

And what kind of could -- should we expect, I mean as a range, that’s a great number, like as we look at the rest of this year and next year, and you might have addressed this. But should that stay in double-digits or was there something that made this particular quarter sort of outsized on the upside?

Robert Kuhn

No, I mean we’ve been targeting 10% plus, and I think again here it’s the number of new categories that we can penetrate. As we said the conversion opportunities in food are pretty huge. And I think some of the points that Steve alluded to are very good signs in that introducing whether it’s a new technology or just opening a new category in one market, we’re now starting to see follow-on in similar products and expansion of those categories. The infant formula was one. Steve touched on also the liquid concentrate market. So we’re gaining a lot of traction, and I would say we’re getting a lot more credibility really across the globe in the Food and Beverage area.

Chip Dillon - Vertical Research Partners

Terrific. Thanks very much.

Operator

Thank you. And our next question comes from the line of Brian Rafn of Morgan Dempsey. Your line is open.

Brian Rafn - Morgan Dempsey Capital Management

Yes. Steve, talk a little bit, you mentioned a little bit about pricing and multiples of cash flow on acquisitions. I’m wondering, historically you’ve always looked at things that had an extension of your technology. You’ve also been very measured and very paternalistic relative to simulating cultures and finding managements that will stay with their acquisitions, the people that, their technology and leadership isn’t just bailing. Is that also a constraint you guys make in acquisitions?

Stephen Hagge

It’s always been a constraint. I think you bring up the culture. Most acquisitions in my opinion, you can get a deal done. Its integrating the deal that where you’re going to make the money. So what we want to do, what we’ve come back to and I think it’s always important to look what companies don’t do particularly well on. We’re not turnaround guys. We’re going to buy business that is well run, with good technology that we can end up leveraging as we go forward. So, those are issues Brian that we have looked at for the last. I have been here 30 years, we’ve looked at that for over the last 30, and it’s something that’s very important we’re going to continue to do that. I still think in my view there are a lot of good opportunities out there. So I don’t want at all, want to leave you that there’s not any opportunities for us to be picking up acquisitions. It just makes finding them a little bit more challenging right now.

Brian Rafn - Morgan Dempsey Capital Management

Yes, sure. And then one more on, when you look globally on kind of packaging reformulations, are you seeing any changes in the cycle time or the lifespan on the shelf of product designs? Is there any faster speed to that, or has it been about the same over the last 5 to 10 years?

Stephen Hagge

Well, I think if you look across the Board lifecycle in general have gotten shorter, and you’re seeing products turned over. That’s why you see a lot more new and improved version A and B. We think those are actually benefits for Aptar, because as people look to do that, you give more opportunities to bring in new products for that. So, as a general case broad based those things have come down over time rather than gotten longer.

Brian Rafn - Morgan Dempsey Capital Management

Thank you, guys.

Stephen Hagge

Thank you.

Operator

And I’m showing no further questions in the queue at this time. I’d like to turn the call back to you Mr. Hagge for closing remarks.

Stephen Hagge

Thanks very much. That concludes our call today, and I’d like to thank everybody for joining us.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may now disconnect. Everyone have a wonderful day.

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