Earnings Call Transcript - ATR Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Aptar’s 2021 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Introducing today’s conference call is Mr. Matt DellaMaria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

Matt DellaMaria, Senior Vice President, Investor Relations and Communications

Thank you. Hello everyone. Thanks for being with us today. Joining me on today’s call are Stephan Tanda, President and CEO; and Bob Kuhn, Executive Vice President and CFO. Our press release and accompanying slide deck have been posted to our website. If you are following along on the website, you can advance the slides by hovering over the presentation screen and clicking on the arrows on the right and on left. As always, we will also post a replay of this conference call on the website. Today’s call includes some forward-looking statements. Please refer to our SEC filings to review factors that could cause actual results to differ materially from what we are discussing today. I would now like to turn the conference call over to Stephan.

Stephan Tanda, President and CEO

Thank you, Matt, and good morning, everyone. I hope that you are doing well. Starting on slide three, you will find a few highlights from the quarter. We serve patients and consumers across a variety of end markets. And this makes for a resilient business through economic cycles. In the most recent period, this is no exception. We have the industry's widest range of dispensing systems, active material science solutions, and drug delivery technologies and services that we leverage across our reporting segments. Our customers benefit from our commitment to research and development and the new innovations that allow us to help them grow their own businesses. It has also maintained our strong focus on sustainability, and Aptar was recently named among the Top 10 companies for reducing environmental impact by JUST Capital, alongside Dell, IBM, Microsoft, MasterCard, and several other large companies. As you saw in our press release, issued yesterday, reported sales increased 8%, and core sales increased 1%. This is of course, compared to the first quarter of 2020, and COVID-19 was not yet the major factor in our quarterly results. We also achieved an adjusted EBITDA margin comparable to the prior year while absorbing the mix shift within our pharma segment and the relative mix across our three segments. Our food and beverage segment delivered a stellar performance this quarter as consumers continued to cook at home during the pandemic, driving strong demand for our innovative food dispensing closures. Price increases also contributed to our top-line growth as we are passing on increased resin costs to our customers. Demand from the beverage market was below the prior year, though sales grew modestly on the resin price adjustments. In pharma, the increased demand for our injectable components, including supplying some of the COVID-19 vaccine distributions, and increased demand for our active material science solutions, including those for COVID-19 test kits, offset declines in the prescription drug and consumer healthcare markets. As we had mentioned when giving guidance for the quarter, fewer non-critical doctor visits and the lower incidence of cold and flu illnesses have resulted in certain pharma customers drawing down inventory levels of allergy and other respiratory treatment delivery devices. We continue to be well-positioned to niche healthcare sectors and view these pandemic-related supply chain adjustments as transitory. In beauty and home, sales to the personal care and home care markets increased, while sales to the beauty market declined due to the continued low level of retail beauty activity related to the ongoing pandemic-related lockdowns. We are cautiously optimistic that the second half of the year will show a recovery in the beauty market. We are also maintaining initiatives to contain costs and manage inflation that includes raising prices to offset increases in raw material and other costs while investing in key growth areas including adding capacity to supply the beauty market in China. Many of our customers remain optimistic that consumers are harboring pent-up demand for beauty products that will help bring a feeling of normalcy to their lives post-pandemic. In addition to the beauty market, we also expect the hair care category to recover as more consumers go outside and move about, and we are already seeing small but positive trends in the U.S. Turning to slide four and new product launches, I would like to briefly comment on several product introductions that will highlight the breadth of our offerings. In pharma, our active material science technology was selected to protect two new at-home COVID-19 tests that recently received Emergency Use Authorization from the FDA. These tests provide convenient access to testing without the need to visit the doctor’s office. Our technology is integrated into these diagnostic kits to protect against moisture and other environmental conditions that would otherwise impact test accuracy. In the prescription drug market, our unidose powder device is being used in a pivotal trial of intranasal powder-based Naloxone by Nasus Pharma. Also, Landmark's new nasal spray treatment, which combines an antihistamine with steroids to treat allergic rhinitis, was recently approved in Europe with our nasal spray device. This confirms that the ongoing conversion to nasal delivery continues in this important area. In the injectables market, we continue to support various COVID-19 vaccine distributions in all regions, with the most recent projects being added in India and Latin America. In beauty and home, our e-commerce capable high-flow pump was chosen by P&G for their new indie brand shampoo called Native. Our post-consumer recycled resin closure was selected by P&G for their planet KIND refreshing face wash. We are also supplying a PCR solution to Unilever for the Dove brand purifying charcoal and clove hydrating body wash. In Europe, we are providing the pump for in-store refillable personal care products in aluminum bottles for The Body Shop, and our fragrance pump is featured on the Flora and Guilty Gucci perfumes by Coty. Finally, L'Oreal is using our airless jar for its Revitalift facial skincare product in China. In food and beverage, after infant nutrition closure was selected for the Crème de la Crème instant and rich milk powder for Europe and for HiPP combiotic in China. Our closures with valves for inverted condiments are the dispensing solution for several barbecue, mayonnaise, ketchup, and jelly products in Brazil. Also in the condiment aisle, our dispensing food closures are featured on Mike's Hot Honey Original Sauce and Berman's Hot Sauce Original here in the U.S. Finally, in the beverage market, our sports closure is featured on two new flavors of a well-known functional drink beverage in China. With that, I will now turn it over to Bob, who will provide additional comments on our results.

Bob Kuhn, Executive Vice President and CFO

Thank you, Stephan, and good morning, everyone. I will walk through some of the details around the first quarter performance, starting with slide five. As Stephan stated, for the first quarter, we reported sales growth of 8% with core sales up 1%. I will go into our growth by market shortly, but want to comment on our earnings first. We reported earnings per share of $1.24, which is an increase of 48% over the prior year. Current period reported earnings included a non-cash pre-tax gain of $17 million or $0.19 per share related to an increase in the fair value of an equity investment. This investment happens to be our investment in PureCycle Technologies, our strategic partner pursuing Ultra-Pure post-consumer resin that will one day be part of our circular economy. Turning to slide six, first quarter adjusted earnings per share excluding restructuring expenses and the gain on the equity investment increased 10% to $1.09 per share on a comparable basis with the prior year, including adjustments for currency effects. Our earnings also reflect certain tax benefits, including the tax deduction that we receive from stock-based compensation that, as you know, can fluctuate from quarter-to-quarter. Aptar's adjusted EBITDA increased 6% to $152 million compared to the prior year. This included the positive effects of currency translation rates as well as the impact of the shift in business across our markets and resin cost increases. Briefly summarizing our segment results, our pharma business performance was mixed across the different divisions with total segment core sales even with the prior year, and then adjusted EBITDA margin of approximately 35%. Looking at sales growth by market compared to the prior year, core sales to the prescription market decreased 8%. Core sales to the consumer healthcare market decreased 1% for the reasons that Stephan mentioned earlier. Core sales to the injectables market increased 14% with higher demand for our vaccine components. Price accounted for approximately 2% of the total growth, and about a third of the remaining growth came from COVID-related sales, mostly to supply vaccine distributions. Core sales of our active material science solutions increased 5% primarily due to increased sales of our active containers used for probiotics. Turning to our beauty and home segment, core sales decreased 3% and the segment's adjusted EBITDA margin was 10% in the quarter, which was negatively impacted by increased resin and other raw material costs, which are passed through where possible, albeit through a process that has typically been on a 60 to 90-day lag. With unit sales growth by market on a core basis, core sales to the beauty market decreased 10% due to continued localized lockdowns, especially in Europe, and global travel restrictions, which have caused a significant reduction in traditional retail and duty-free sales. Core sales to the personal care market increased 2% due to continued strong demand for our hand sanitizer and liquid soap dispensers. Wholesale to the home care market increased 13% due to strong demand for our cleaners and disinfectants and some automotive products. Turning to our food and beverage segment, which had a solid performance, core sales increased 14% in the segment, achieving an adjusted EBITDA margin of 17% primarily due to the ongoing strength in the food market. Looking at each market, core sales to the food market increased 19% as consumers continued to dine at home due to the pandemic. Core sales for the beverage market increased 2%, primarily due to the pass-through of higher resin prices. Moving to slide seven, which summarizes our outlook for the second quarter. Current underlying demand conditions in most of our markets are not expected to change dramatically from what we experienced in the first quarter. The anticipated demand for our prescription drug and consumer healthcare devices will remain under pressure compared to the prior year, as customers continue to work off existing inventories. However, in some of our other markets, including beauty, we will have easier comparisons to the prior year second quarter, which was the most difficult period when considering the impact of pandemic lockdowns. We expect a second quarter adjusted earnings per share excluding restructuring and any change in the fair value of equity investments to be in the range of $0.91 to $0.99 per share. The estimated tax rate range for the second quarter is 26% to 28%. In closing, we continued to have a strong balance sheet with a leverage ratio of 1.4. On a gross basis, the capital was approximately 37%. On the net basis, it was approximately 31%. In addition, we continue to invest in innovative growth projects, and we are confirming our forecasted range of capital expenditures for the year at a range of $300 million to $330 million. At this time, Stephan will provide a few closing comments before we move to Q&A.

Stephan Tanda, President and CEO

Thank you, Bob. In closing, on slide eight, I'd like to mention that the broad range of end markets that we serve makes Aptar a very resilient company through economic cycles, and the most recent period was no exception. The wide variety of technologies and solutions that we provide, combined with our commitment to R&D and new innovative solutions, will further build upon our solid customer pipeline. We have a profound respect for the environment that drives lower energy consumption, landfill-free facilities, and sustainable product designs. We will continue to advocate for a circular economy in which packaging is reused and recycled. Therefore, our positive mid- and long-term view is unchanged. When we look past this global pandemic-induced crisis, the future is quite promising. We look forward to pursuing long-term benefits for all stakeholders. With that, I would like to open up the call for your questions.

Operator, Operator

Thank you. In the interest of time and fairness to all participants, please limit yourself to two questions and one follow-up. Feel free to rejoin the queue if you have additional questions as time permits. Your first response is from George Staphos of Bank of America Securities. Please go ahead.

George Staphos, Analyst

Thanks very much. Hi, guys. Thanks for taking my question. Hope you're doing well. Thanks for the details. I guess the first question I had is really more a point of clarification. Bob and, Stephan, when you talk about not much change in trends in Q2 versus what you saw in Q1, I assume you're talking about the year-on-year change that you saw on Q1 in terms of volumes, more or less occurring at the same rate in Q2. You're not saying volumes are flat, Q2 versus Q1. Just want to clarify on that?

Stephan Tanda, President and CEO

Yes. That's correct. Basically, when you look at the exponential pattern that we've laid out, I think we will continue to see some destocking on the pharma side and the recovery in beauty and home, which really depends on Europe reopening, will not be in full swing yet. But of course sequentially improving and compared to Q2 of last year, which was the bottom, we anticipate very strong growth, but the overall demand pattern is similar to what we saw in Q1.

George Staphos, Analyst

Okay. Appreciate the additional color there, Stephan. If we talk about pharma and both consumer health and RX, we're still going through the destocking. Is there anything that's unique about this destocking period that we're going through relative to others that you've seen in the past? And if you can remind us, whatever that context might be, then one, when you think we’d begin to see some inflection on the volumes in those categories as well.

Stephan Tanda, President and CEO

Yes. I think Bob can speak a bit to history. But what I've learned is that when this happens, it usually lasts for about two quarters, and so we certainly expect this to be behind us in the third quarter. You see, of course, potential inventory buildups at multiple levels: our direct customers, at the drug manufacturers, in trade, in homes, and clearly, in hindsight, there has been some buildup as people were getting ready for the pandemic. Now, we see the result with a non-existing flu season and a muted allergy season last year, as people were staying indoors, masking up. On the other hand, it will run its course. You may hear from my voice that I can personally attest the allergy season is in full bloom. If people go outside, they will be affected. We have no doubt that, unfortunately, flu season will also come back as people venture outside. You saw that with the Glenmark approval; we continue to see conversion to nasal delivery in the allergic rhinitis category. Of course, we have a strong central nervous system franchise, so there's no reason not to believe that the long-term growth rate of around 6% for this category and six to 10 for pharma overall will not return. But maybe Bob, you can speak a bit more to history.

Bob Kuhn, Executive Vice President and CFO

Yes, I think you nailed it, Stephan. Typically, two quarters is about what we've seen in the past. So I think, as Stephan mentioned, we do see us returning to growth starting in Q3 and seeing this destocking compared to any others.

George Staphos, Analyst

Thanks, Bob. Thanks, Stephan. My last one quickly. Just you mentioned that beverage was relatively flat. Could you talk about the regional trends there? And are we still seeing the lingering weakness in Asia come back? Or was that a non-event in the quarter? Thank you, guys.

Stephan Tanda, President and CEO

Yes. Actually, China, as you know, has reopened already a year ago. So they're in full swing, and there the beverage category is no exception. What we're missing is the on-the-go beverages in Europe and in the U.S. As the U.S. is really reopening just now, I think New York is going back to normal in the coming weeks. Europe is really the core of this four months behind the U.S. Thankfully, we see more and more definition in Europe, and things are coming together. Germany's getting its act together around vaccines; the UK is doing better. France is going to reopen on May 15. Hopefully, that will stay open. We certainly have some confidence that Europe will reopen about a quarter, maybe four months behind the U.S. That will be very good also for the on-the-go beverage business.

George Staphos, Analyst

Thank you.

Bob Kuhn, Executive Vice President and CFO

Yes, I would add a little more color on the geographic side. Beverage was up in every region except for Europe. And if we just look generally speaking across all segments, Europe was either flat or down across the other segments. So I think that the remarks about mid-quarter Europe reopening are going to be very helpful and beneficial across all three segments.

George Staphos, Analyst

Thank you.

Operator, Operator

Your next response is from John Kreger of William Blair. Please go ahead.

John Kreger, Analyst

Hi. Thank you very much. Stephan, could you revisit your long-term expectations for the pharmaceutical business? Can you provide some insights on the recent pipeline of opportunities and what it indicates about the different aspects of the pharmaceutical business? How do you see this impacting the business in the long term as we move past the pandemic?

Stephan Tanda, President and CEO

Yes. We just walked through the categories. The punch line is really, we don’t see any change; we still expect 6% to 10% long term. When you start with allergic rhinitis, clearly the base allergy business is kind of low single-digit, but you will have additional conversions going on; see the Glenmark approval. Then we have geographic growth in that business as allergies are not just a Western phenomenon. In Rx, of course, the central nervous system category continues to grow nicely. We called out the clinical trial with the Powder Naloxone. Just this morning, Hikma got approval for a higher dose Naloxone drug called KLOXXADOTM. We see good project flow in the central nervous system category. As for consumer healthcare, the congestion and ophthalmic markets are a target-rich environment. In injectables, as we've discussed on calls before, we've been pleased with new project activity and the recognition of Aptar's capability as part of the COVID supply chain vetting. We're still a small player in this large market, but we see good project activity and continue to grow there. The active packaging market is another strong area for us; we called out the approval of the in-home COVID tests. This showcases the powerful technologies within our active material solutions business, which provides essential tests serving diabetes, COVID, and the growing probiotic category. So across the board, there are many reasons to support the 6% to 10% growth target. We've been above that for many quarters, and while inventory drawdown might normalize some of that, there’s no reason to discontinue seeing growth rates of that magnitude.

John Kreger, Analyst

That's helpful. Thank you. And then maybe for a follow-up, can you just talk a little bit about any supply chain pressures you're seeing? And how you're managing it both from the standpoint of raw materials and also just sort of labor and productivity across your facilities?

Stephan Tanda, President and CEO

Yes. I think you touched on all the things. Clearly, there are friction losses as the economy starts to sputter up to higher speed again, whether that’s logistics availability, freight rates, air freight rates, labor availability, and pricing. There is a clear cost associated with hiring and training more people. We are working hard to pass that on, but we are very cognizant of a more inflationary environment. We're making sure that we can maintain price increases, and we have some slated for later in the quarter. Some of those will be announced, some of them will simply go through. Clearly, as I said last time, you don’t just push a button, and the economy goes back to full speed. There are friction losses, but we are working through those alongside our suppliers and our customers.

John Kreger, Analyst

Great. Thank you.

Operator, Operator

Thank you. Your next response is from Mark Wilde of BMO Capital Markets. Please go ahead.

Mark Wilde, Analyst

Good morning, Stephan, Bob, Matt.

Stephan Tanda, President and CEO

Good morning.

Mark Wilde, Analyst

Stephan, I want to just start out. If you could give us a little more color on what you're hearing from your beauty and fragrance customers. Earlier in the week, one of your peers was suggesting that they were starting to see some pickup in fragrance activity, and you sound a little more cautious about that. I wondered if you can just update us on what you're seeing kind of around the world in beauty and fragrance?

Stephan Tanda, President and CEO

Sure. Of course, all of this depends on what you're comparing to. If you compare to Q2 of last year, of course, it's better. But you're comparing to this quarter of last year. But if we look around the world, China is in full steam. We are very happy, for example, with the L'Oreal project that we highlighted; it clipped past pre-pandemic levels. Our project activities are looking good. India remains a bit worrisome; while it's not a huge factor in our numbers, the pandemic there is quite active, with significant impacts. In Latin America, we have remained quite resilient through the pandemic, and it’s very concerning what's going on there. However, it hasn't impacted consumption levels as much as in other regions. In the U.S., we clearly start to see the opening now, so we see improvement. The key question for us is Europe, as that's where a significant part of our business lies. Europe is not where the U.S. is in terms of reopening. As I said, we expect three to four months lag in the reopening in Europe. This places a key focus in the second half, and for us—it's crucial that travel activity resumes and that impulse purchases in duty-free get triggered. Customers are very positive, and they have a bunch of launches planned. We are working with them, but they won't pull the final trigger until travel resumes. We aren’t going to hit Mother's Day in Europe, and the next big events are in the fall in China and year-end Christmas in the Western world.

Mark Wilde, Analyst

That's helpful. And then Bob, just a couple of financial items as a follow-up. Can you first of all give us some sense of how big you estimate that resin headwind to be in both the first quarter and second quarter? And then, can you just talk briefly about the tax rate? It's been dancing around a lot in recent quarters?

Bob Kuhn, Executive Vice President and CFO

Sure. So, on the resin side, roughly, we had about $6 million across all segments which had a negative impact on EBITDA. The majority of that was going to be inside beauty and home. The majority relates to resin increases, but there are also other substrate increases we've seen like aluminum metal as well that contribute there. We're actually anticipating approximately the same impact in Q2. So if you think about it, we will be passing on price increases, as Stephan mentioned, but we believe we'll be catching up for Q1. We think input costs will continue to increase in Q2, so it will be the second half of the year before we catch on Q2 increases, assuming some stability in input costs for the second half. On the tax rate, the most significant driver was the additional benefit we get from stock-based compensation, which is the delta between the in-the-money exercise price for legacy options versus book expense. Those are virtually impossible to forecast. But you can see, with the share price having the run-up that it had, additional option exercises tend to occur. In Q1, we had our two blessings as well. While you see that additional benefit from the increase in share price that triggers outside tax deductions, that’s a good thing and a real cash gain.

Stephan Tanda, President and CEO

I wouldn’t say it’s bad.

Bob Kuhn, Executive Vice President and CFO

Absolutely right. That’s not a deferred benefit; that’s a true cost saving. You did also see some state tax law portions that changed in Alabama, which benefits our active material solutions business down there. That had a lesser impact on the tax rate. We’ve guided slightly lower than we typically have for tax rates; it's now at 26% to 28%. That was nearly looking at exercises to date, already baked into the rate. It’s really challenging to forecast those as they relate to factors outside our control.

Mark Wilde, Analyst

Okay. Thanks so much, Bob.

Operator, Operator

Thank you. Your next response is from Ghansham Punjabi with Baird. Please go ahead.

Ghansham Punjabi, Analyst

Good morning, everybody.

Stephan Tanda, President and CEO

Hi, Ghansham.

Ghansham Punjabi, Analyst

So, on the beauty and home segments. It looks like our model indicates volumes have been down on a year-over-year basis for about eight quarters. Obviously, a ton has happened in between there in terms of COVID and channel destocking, et cetera. But Stephan, how would you benchmark that progression relative to the end markets over that time period? And on the flip side of that, as vaccines get deployed and some of the bigger markets where you’re exposed to in Europe, et cetera, would we see a commensurate rebound that's actually faster than maybe it appears just as a consequence of coming out of the flip side of this COVID issue?

Stephan Tanda, President and CEO

Yes. Overall, I think with the exception of some personal care and hair care misses in the U.S. before we went into the pandemic, we certainly have been in line with the market. In fact, in other areas, I’ve heard from our team that we’ve gained market share. On balance, I’d venture to say things have at least normalized out and certainly align with the market. As for the speed of recovery, whatever assumptions you're making about the reopening of Europe and the travel assumptions, I believe the commensurate bounce back, especially in fragrance and duty-free sales, will go with it. I’m not sure how much color I can give you, but maybe Bob you have a different way of describing it.

Bob Kuhn, Executive Vice President and CFO

No, I don’t think you adequately described it.

Ghansham Punjabi, Analyst

Okay. And then on your customers, I mean, clearly, you've seen the velocity increase for beauty products in China as they came on the flip side of COVID. Can you just touch on activity level for maybe your larger customers specific to B&H as they position in front of vaccine deployment and potential reopening in Europe? And then a separate question on active material; you call out some of the technology being used for COVID tests and stuff like that. Are there other opportunities associated with active material that you can leverage into other future growth verticals within testing and so on within pharma?

Stephan Tanda, President and CEO

Sure. Let me first address the bigger question about project activity in China is very brisk. While I wish we had a much larger footprint, and therefore, a bigger share of that growth due to our current activity level, I’m very pleased with what we’re doing there. Our customers appreciate our global capabilities to execute, especially for projects across regions. Many are shifting their filling and execution capabilities to Asia, but there’s still a considerable amount being filled in Europe. Regarding Europe, it’s as if the horses have been in the gates and are waiting for the gates to open. Clearly, people haven’t launched new fragrances during the pandemic, but they have new launches ready. We are on an unfair share of those launches. Sampling activities have certainly increased, but mostly in E-commerce formats. Having said all that, the proof of the pudding is, of course, in the reopening.

Bob Kuhn, Executive Vice President and CFO

On the active material solutions side, we have historically had a presence in the diagnostic category with diabetes test strips. There are also some applications in Europe using our technology within DNA test kits as well. So this new in-home COVID testing avenue is very exciting for us. You are also on customers' clean kits, which we had prior to the pandemic. So we have strong interest in this space. The technology certainly has increased its speed and visibility. It could become a crowded space, as we already see some rapid adoption of the in-home COVID test kits, but this is just the beginning—it could extend to other conditions such as flu, bronchitis, and more—to someday eliminate the need before contacting a doctor. We'll see how it plays out, but we really like the space and believe it can continue to grow.

Ghansham Punjabi, Analyst

Thanks so much.

Operator, Operator

Thank you. In the interest of time and fairness to all participants, please limit yourself to two questions and one follow-up question. Then come back in the queue if you have more questions as time allows. Your next response is from Gabe Hajde with Wells Fargo. Please go ahead.

Gabe Hajde, Analyst

Stephan, Bob, Matt, good morning. I was curious if you guys could comment at all on how some of the joint ventures/minority interests are performing. I'm thinking about Kali Care and maybe some other connected devices. I appreciate that they're relatively small and still embryonic, but I think the seasonality is where Aptar has been successful in the past—in terms of nurturing, cultivating these technologies and enabling leverage of your distribution and global footprint once they're more widely adopted.

Stephan Tanda, President and CEO

Sure. Let me just offer some context for everybody. We look at M&A and ventures really to complement our organic growth with bolt-on acquisitions and complement our in-house R&D and innovation through venture investments. These venturing investments are really there to get a front-row seat on innovations; typically, these combined are operating licenses or rights. I think that makes good linkage with our business. You mentioned Kali Care; we’ve also done Propeller, which was sold and generated a good gain for us. Additionally, we have investments in the connected device space. In the food area, we invested in Loop and a second system in Eastern Europe for refillable containers at retail. Between bolt-on M&A and our venturing investments—joint ventures, and occasionally those joint ventures morph into acquisitions—there are cases where we've already invested our resources effectively, such as BTY in China. This demonstrates a great opportunity to enhance our beauty project pipeline in that region. Overall, these investments are doing well for us and may create capital gains like we saw with Propeller. But the main purpose is to advance our innovations and bolster our organic efforts.

Gabe Hajde, Analyst

Thank you. The next question concerns the transformation plan or restructuring that kind of initiated three years ago. I think it's supposed to yield $80 million in savings, and obviously, the pandemic threw a wrench in that. I was curious if you could update us on how those are progressing, given a little bit more stability in the operating environment. And, again, for us outside, is there an expectation to return to mid-teens margins in beauty and home assuming some sort of normal volume environment?

Stephan Tanda, President and CEO

The short answer is yes; that is our expectation. Those are the horses ready, and the gates are ready to go! On the delay, yes, we have hesitated on the North American footprint optimization due to the pandemic delaying equipment moves. However, we expect to complete it by the middle of this year. The raw material drag on margin is about a point, and the delay in North American footprint optimization is anticipated to be another margin point. Both are transitory and we expect them to fade. Specifically, the optimization should be completed by mid-year.

Gabe Hajde, Analyst

Thank you, guys. Good luck.

Stephan Tanda, President and CEO

Thanks, Gabe.

Operator, Operator

The next response is from Adam Josephson with KeyBanc. Please go ahead.

Adam Josephson, Analyst

Thanks. Good morning, everyone. I hope that Justin Fields tech went over well and Crystal Lake last evening.

Stephan Tanda, President and CEO

Well, we won't comment on that for several years.

Adam Josephson, Analyst

Stephan, just on beauty and home, just to follow up on a couple of Gabe's questions. So, appreciating that beauty and fragrance is not coming roaring back as yet, and Europe is still on lockdown, I gather your resin-related hits are concentrated in beauty and home. What do you think is a reasonable expectation in terms of when you can get back—either get back to mid-teens EBITDA margins or recover a good chunk of the $50 million EBITDA that you lost last year?

Stephan Tanda, President and CEO

I think the best guidance I can give is what we said before; in a normal post-COVID volume environment, we should get back into that mid-teens range and build from there. The question is when that normal post-COVID volume environment is going to happen. I'm not going to pin that down on the calendar. A year ago we never expected the pandemic to still be with us. I’m standing by that guidance; resin pass-through is slower in beauty and home than in food and beverage, but it will happen. I’m very confident about that, in addition to passing on other inflationary increases. The North American footprint optimization will also be complete by mid-year.

Adam Josephson, Analyst

Yes. That's fine. Thank you. And also following up on Gabe's question regarding the restructuring in beauty and home. That was over three years ago. Much has happened in terms of currency, COVID, personal care issues, etc. What have you learned since then compared to what you initially expected in terms of generating that $80 million in savings? What went as expected and what went differently? What lessons have you learned since then?

Stephan Tanda, President and CEO

Breaking it down into different elements, you can pinpoint creating smaller accountable entrepreneurial units with dedicated sales forces, advancing towards contemporary best practices in terms of salesforce management, customer project management, and conversion tracking. Overall, I'm very satisfied with the results. It’s a process that entails consistent training and improvement. The price increase measure also needs diligent attention. Overall, front-end commercial performance has been gratifying, and we’re developing much stronger leaders in these small entrepreneurial units. Operationally, while I’m generally content with performance, some initiatives took longer, and occasionally we needed to revise our approach and controls. Each project requires a control plan to ensure continuous improvement. In some cases, we found ourselves revisiting control mechanisms more frequently than I anticipated. Those of you who are familiar with Six Sigma understand the significance of a robust control plan in ensuring lasting change. There are other operational improvements. Our safety performance, for example, has moved from significantly below average to close to world-class. That illustrates how much we've improved our operational performance. However, we do need the volume to flow through those plants. Over this period, we also managed to take plants offline sooner than expected, for instance, our facilities in Ireland and Spain; in the U.S., we were impacted by the pandemic. Entering into this transformation, we didn’t anticipate having to take three plants offline, and we’re now executing that.

Adam Josephson, Analyst

No, thank you, Stephan. I appreciate it.

Operator, Operator

The next response is from Neel Kumar with Morgan Stanley. Please go ahead.

Neel Kumar, Analyst

Great. Thanks for taking my question. In food, you've had a few quarters of very strong growth. Do you think that some of those trends can carry through into the second half of the year as at-home consumption starts to come down? Do you see any changes in the market post-COVID that are competitive?

Stephan Tanda, President and CEO

Well, on the food team, we are doing an excellent job. This may be somewhat underreported. The strength of growth isn’t only a result of the pandemic and at-home consumption; it also reflects competitive wins for new projects and strong expansion in Asia. I have no doubt that they will continue to grow in the second half.

Bob Kuhn, Executive Vice President and CFO

In a post-COVID environment, we'll experience both gains and challenges. We'll essentially keep an eye on how the robustness of sanitizer and cleansing protocols endures. The question is: is that behavior here to stay? However, as people resume activities, categories like sunscreen and other outdoor products are likely to see heightened demand. Even if individuals begin dining out more in the food sector, we might expect a decline in at-home consumption. Remember that we have a struggling segment within food safety that should rebound.

Neel Kumar, Analyst

Okay. And then in terms of some input inflation you're seeing, are the non-resin raw materials also contractually passed through at a similar 15- to 90-day lag like resin? Or does that work differently? From a cash flow perspective, you set the higher resin and raw material prices to negatively impact working capital?

Stephan Tanda, President and CEO

On the other substrate increases, those are typically more complicated, multi-component products such as pumps and aerosol valves, and they tend to follow a more basket of goods approach. We do pass through prices when we hit certain thresholds. With some of those increases that we've recently seen, we have tripped those thresholds. As for cash flow, the $15 million decrease in free cash flow we saw last year in Q1 compared to this year is primarily due to slightly higher inventory levels. I'd think that part of the cause could be attributed to elevated costs, but it’s more likely due to some of the supply chain disruptions we experienced in Q1—not having containers for international shipments, issues with truck capacity—so we are holding a bit higher levels of working process and finished goods than in the past. I see that as transitory.

Neel Kumar, Analyst

Great. Thank you.

Operator, Operator

Thank you. Your next response is from Salvator Tiano with Seaport Global. Please go ahead.

Salvator Tiano, Analyst

Yes. Hi, Stephan, Bob, and Matt. Firstly, I want to touch a little bit on personal care. I think you mentioned that the core sales growth year-on-year was 2%. If I remember correctly last year, you should have been competing against... Well, you should have been competing this year against the destocking you saw? I’m wondering if that 2% growth shows that there’s a deceleration in personal care demand now?

Stephan Tanda, President and CEO

Not sure; I can't follow your question. Just give a little bit more color on personal care. We're still very strong in our lotion product category. That's typically products you'd see for personal cleansing, sanitizers, and body lotions. We're still suffering a little bit on the hair care side and a little bit on the sun care side, so that might be the growth coming primarily from personal cleansing.

Salvator Tiano, Analyst

Okay, perfect. My second question is which you can provide, I think, some more color on what was the price contribution in food and beverage in core sales growth? And also, if there was any meaningful price in Q1 for beauty and health and pharma as well?

Stephan Tanda, President and CEO

Yes. So overall, for the company as a whole, it was about a 1% positive impact on the core sales growth. It had a stronger impact on food and beverage, approximately 6% of the 14% positive impact came from pricing. For beauty and home, it was less than a percent positive, around a half a percent.

Salvator Tiano, Analyst

Okay, perfect. Just my last question. When you look at pharma, and obviously you have Q1 and also Q2 with software prescription and consumer healthcare demand, but you mentioned in this quarter that this injectable growth was worth about 400 basis points roughly from COVID tailwinds. When we put everything together over the past year, how will that impact on pharma’s bottom line when we consider demand margins, and everything?

Stephan Tanda, President and CEO

I’d yield to my own level. It's tough; we haven't gone through that math. I would say, again, it's similar to kind of what I was just discussing in personal care. We are receiving positives on the injectable side of the business and positives from the active material side of the business. However, those are smaller divisions compared to the total RX and THC contribution. It all depends on how you categorize that; if COVID is responsible for the lower incidence of colds and flu, that’s negative for nasal decongestion. If fewer doctor visits and primary care visits result in the destocking of allergy and asthma products, that’s negative too. However, we really haven't delved into the level of granularity regarding our pharma business.

Bob Kuhn, Executive Vice President and CFO

To re-emphasize, overall, the prescription unit is by far the highest margin, with consumer healthcare following. The injectable category lies in line with industry norms but tends to be the least profitable. Thus, as top-line metrics fluctuate, so too does profitability; although we've been managing relatively well so far, we fully anticipate the effects of top-line momentum on our bottom line.

Salvator Tiano, Analyst

Okay, perfect. That's very helpful.

Operator, Operator

Thank you. There are no further questions in the queue at this time. I will now turn the call back over to Mr. Tanda.

Stephan Tanda, President and CEO

Thank you very much. This concludes our call today. Certainly, this year will be the story of two halves. We are very optimistic about the second half of the year, and I would like to thank everyone for joining us.

Operator, Operator

Thank you. This concludes today's conference call. You may now disconnect and have a good day.