Aptargroup Inc (ATR) 2002 Q3 法說會逐字稿

Welcome to AptarGroup's 2002 third quarter results conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question and answer session. Introducing today's conference call is Mr. Ralph Poltermann, Vice President and Treasurer of AptarGroup. Please go ahead, sir.

Good morning, everyone.

Before we begin, I would like to point pout that the discussion to follow includes forward-looking comments and the actual outcomes could differ materially from those projected or contained in the forward-looking statements. To review important factors that could cause those results, please refer to AptarGroup's SEC filings. The information in this conference call is relevant on the date of this live call.

Although the company will post a replay of this conference call on its web site as a service to those investors who are not able to listen today, information contained in the replay will be dated, and should be used for background information only. The company undertakes no obligation to update material changes in forward-looking information contained therein.

Our speakers for today are Mr. Carl Siebel, President and Chief Executive Officer of AptarGroup and Mr. Steve Hagge, Executive Vice President and Chief Financial Officer. I would now like to turn the conference over to Mr. Siebel.

Good morning. I will briefly discuss the quarter and the outlook before turning it over to Steve Hagge who will provide more detailed information about our results.

In yesterday's release, we reported earnings to share that were in line with our prior guidance. Compared to the third quarter of last year, sales to the fragrance cosmetic markets decreased whereas sales to the personal care pharmaceutical, household and food and beverage market increased.

Several items had a negative impact on earnings for the quarter. These included, number one, lower sales to the fragrance/cosmetic market, particularly the high end. Number two, price competition, especially in our closure business. Number three, increased insurance costs and number four, flooding at our facilities at Czech Republic.

Actually, offsetting the adverse effect of these on the bottom line were; number one, lower interest expense, number two, cost savings, and three, as mentioned previously, increased sales to the other four markets we serve. I would now like to discuss some highlights in the quarter.

We are particularly pleased with the success and profitability improvement of our Seaquist Perfect segment , which produces aerosol valves for markets other than pharmaceuticals, as well as certain spray and lotion pumps, primarily for the personal care markets. [INAUDIBLE] doubled for the third quarter and are up over 50% year-to-date due to increased sales for the personal care and household markets as well as continued cost savings.

We are seeing increasing interest in our dispensing systems, especially the food and beverage, personal care and household markets. In particular, in the food beverage markets, the recent introduction of our Simply Squeeze closure on ketchup products by both Heinz and Hunts has generated interest by several other food marketers and the use of Simply Squeeze continues to grow fast.

Additionally, in the personal care market, introduced in the United States is a deodorant body spray for young males that uses our aerosol valves and customized valve accessory has successfully targeted a new category and, as a result, has stimulated other companies to develop their own product within this category as well.

Looking ahead, you may recall that the fourth quarter last year was quite difficult. Although sales to the pharmaceutical market was strong, sales to our two largest markets, fragrance cosmetic and personal care decreased dramatically. We expect fourth quarter sales of fragrance/cosmetic, personal care, household and food and beverage markets to increase over the prior year, and we expect pharmaceutical sales over the fourth quarter to decrease slightly from last year. Presently, we expect diluted earnings per share for the year to equal or slightly exceed the prior year on a comparable basis.

Looking further ahead, we are well positioned to capitalize on the recovery of the fragrance/cosmetics market when it occurs. Additionally, we will benefit from the improving interest in product differentiation by marketers, as well as further realization of savings from our cost-reduction efforts. At this time, Steve will review the financial results. Steve?

Thanks, Carl and good morning, everyone. I'll review the financial information and then Carl and I will be happy to answer any of your questions.

First of all, for the third quarter, reported sales increased approximately 8% while the course sales increased approximately 4% from the prior year. Looking at our core sales to each of our markets for the quarter in the fragrance cosmetic market, we were down in the mid single digit range.

In the pharmaceutical market, we were up in low single digits. Our household market grew at a rate of almost 10%. Personal care grew in a low teen area, and food was almost up 20% with our other non packaging area being approximately the same as last year. Excluding non reaccuring charges, our quarterly operating margin decreased to 12.1% versus 12.8% last year.

We recorded good will amortization of 910,000 in the third quarter last year, whereas, there was no good will amortization recorded this year under the new accounting rules. Adjusting for this elimination of good will amortization, the comparative operating margin for the third quarter of last year was 13.2%.

The operating margin was adversely affected by the weaker dollar. And I'd like to briefly explain why. As we've said in the past, although the weaker U.S. dollar has a positive effect on the translation of our foreign denominated sales and profits into U.S. dollars, there's an offsetting effect on profits due to the fact that we are a net importer to the U.S. from Europe.

This results in lower operating margins due to higher sales amounts used to calculate the margin percentage. Below the operating income line, lower interest expense helped improve our bottom line. Reported diluted earnings per share for the quarter was 49 cents per share versus 43 cents per share reported last year.

Alternatively excluding nonrecurring charges and good will amortization in the prior year, earnings per share was 49 cents versus an adjusted 47 cents per share in 2001.

From a geographic standpoint, sales to customers by our European operations represented approximately 56% of net sales in the quarter versus 53% last year. And sales to customers by U.S. operations accounted for 35% of sales in the quarter versus 37% of sales last year. Excluding nonrecurring charges, operating income in both Europe and the U.S. increased.

Our European operations represented 70% of our total operating income in a quarter compared to 67% last year while our U.S. operations represented 40% of total operating income versus 38% in the prior year. The reconciling difference between European and U.S. operating income to total operating income before charges is income from other foreign operations, corporate expenses and inter geographic consolidation eliminations.

Our cash flow from operations for the quarter was approximately 48 million compared to 41 million a year ago. From a balance sheet perspective, our return on average equity was approximately 11% and net debt to net capital is approximately 23%.

Our capital expenditures for the quarter were approximately 21 million dollars, bringing year-to-date amounts to approximately 63 million. During the quarter, we've repurchased approximately 55,000 shares of our stock at an average cost of a little under $28 a share.

This brings the total repurchased since inception to approximately 1,285,000 with an average price on the repurchase of approximately $26 a share. Now, looking briefly at the nine months, sales as reported increased 1% while course sales decreased approximately 1% from the prior year.

Our reported diluted earnings per share was $1.32 per share versus $1.34 per share reported last year. Excluding nonrecurring charges and good will amortization in the prior year, earnings per share was $1.32 compared to an adjusted $1.56 per share in the prior year.

nonrecurring charges recorded in the first nine months of the current year include the strategic initiative as well as a patent dispute settlement whereas unusual charges recorded in the prior year related only to our strategic initiative. Our cash flow from operations was approximately $111 million in the first nine months compared to 88 million a year ago.

Looking forward, total cash outlays in 2002 for capital expenditures, are expected to be in the area of $80 million with depreciation and amortization expected to be in the area of 70 to $75 million.

I would briefly like to explain the comparable earnings appear share that Carl referred to earlier. We reported $1.61 per share last year, which included approximately 16.5 cents for our strategic initiative and 9.5 cents for good will amortization. Excluding these two items, results in a comparable amount, $1.87 per share. And as Carl indicated, we expect earnings per share for 2002 to equal, or slightly exceed this amount.

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

Thank you. If you would like to ask a question, please press star one on your touch-tone phone and you will be announced prior to asking your question.

Once again, if you would like to ask a question, please press star one on your touch-tone phone at this time. Our first question comes from George Basos at Salomon Smith Barney. You may go ahead, sir.

Thanks, operator. Good morning, guys.

Good morning.

On the margins in the European segment, Steve, do you think you can move it up from these levels with Pharma decellerating in the fourth quarter, or if you were in our shoes and realizing it's difficult to project this sort of thing, would you keep your margin relatively flat until Pharma picks up?

Related question, when do you anticipate pharmaceutical actually beginning to grow again?

I think there's two things. I think relatively speaking, I don't know that we'll see a big increase in the European margins until we see the Pharma coming back. However, helping that somewhat is we are still seeing fragrance cosmetic improve on a quarter to quarter basis.

As we get better utilization, that will help it, but I don't see a major change in the margins from quarter to quarter. I guess in terms of the second part of your question, maybe I'll turn that over to Carl and let him deal with that.

George, on the pharmaceutical side, the reason why we were somewhat more prudent with our fourth quarter forecast is that we believe there seems to be one or two customers doing some destocking. That's the only reason. We certainly did not lose any market share. It is very difficult to predict these kinds of movements. We have very little, if any, idea what kind of stock level our customers have. You have heard the story from us several times before.

Unfortunately, we're not better off today in terms of evaluating the stock of the customers than we were a year or two ago. We have been prudent with our forecasts for the fourth quarter, and so we believe that we will continue to see growth going into next year again.

Okay. Steve, or Carl, quick question on fragrance. Do you anticipate that both high end and low end, if you will, fragrance cosmetics are up here year end on the fourth quarter?

Yes. We expect both low and high end to be up over the very weak fourth quarter of last year, and also up on a consequential basis from quarter to quarter as we mentioned before this year.

Every quarter we saw an improvement over the previous quarter. We expect also again an improvement in the fourth quarter and we expect certainly a major improvement in the fourth quarter 2002 compared to the fourth quarter of 2001.

Okay.

We continue to see it is extremely short term. Our visibility is very short. We continue to see every month that our forecasts on the first of the month is lower than what we -- than we finally end up at the 30th of the month. So what that means that there are orders coming in during the month, which we are able to fill, which the customer wants to be filled immediately.

Two last questions and I'll make them quick and turn it over to the other guys. One, what do you anticipate your utilization rate is right now in fragrance and cosmetics. And secondly, how is the new facility coming up in Congers?

The facility in Congers is coming up as planned between the old factory and new factory. So both our offices in manufacturing is moving forward, and we expect to be out of the old facility completely by the end of the year, being in the new facility with both offices and all our manufacturing. And what was your other question, George?

Rough utilization rates in fragrance and cosmetics right now, especially the high end.

Yeah. In the high end, I would guess that we are about 60%.

Okay. Thanks, guys.

Thank you. Our next question comes from Dan Koshiba with Deutsche Banc. You may go ahead.

Good morning, guys.

Good morning, Dan.

Um, Carl, could you talk a little bit about, you said that part of the things that you saw in this last quarter was some pricing pressure. Where are you seeing the most pricing pressure and what's causing it in your mind?

Dan, the pricing pressure we're referring to, we have always seen.

Uh-huh.

That's not new. We've always been in the pricing pressure in most of our business. We're working in a very competitive environment. We have seen this specifically in the closure business and what is happening, we have always had and will always have some products coming off patent and then you get more competition naturally.

But what is important to note is that when we make price concessions, we were able to negotiate additional volumes, additional products with the customers.

Okay.

Which gives us additional coverage, and also the potential to sell higher value new products to these customers. And at the same time, we have always been able, when we got the larger volumes and so on, to get productivity improvements, and this way, at least partially offset price concessions we may have made.

Okay. Thanks, Carl, but I guess, if you've always -- and I know that you are in a competitive business, and I know that there's always pricing pressure, but in the past, pricing pressure hasn't always resulted in a fairly large drop in gross margins. If it's not, or have you at least been able to offset some of the ongoing pricing pressure with more innovative and more volume,, more innovative products and more volume.

What's happening now to cause the margins to come in the way we have just seen in the most recent quarter? Because as I look at your volume growth in the quarter, you know, with the exception of fragrance, it wasn't exactly terrible.

You know, maybe Dan, I'll take a little part of the question. I think two things are impacting us right now. One is, as Carl said, in terms of the margin. One is some of the under utilization issues we have talked about in the fragrance/cosmetic market given the fixed cost nature. But the other side that is impacting us is foreign currency.

As we talked about in the past, while foreign currency has a plus on our translation, foreign currency as we've gone up has a neutral impact on our operating line because that net importer to the U.S., which has an impact of dropping our operating margin as the dollar weakens.

Right.

So with the dollar being on a year to year basis about up 10% on a comparable side, that's had a major impact on the operating margin line.

Does it make the imported goods, Steve, from Europe into the United States more expensive?

Yeah, that's correct. In fact, and what we've done and we saw the benefits to this when the dollar went the other way: Selling U.S dollars, so effectively what you have is a cost increase from the practical side.

Right. Okay one last question, thanks. Have you guys, and maybe I missed it, but have you recently given any guidance for '03?

No, we're right now in the process of going through all of our budgets and taking a look at it. We would anticipate certainly as Carl said that our fragrance cosmetic market sales and profits will improve next year, but we haven't gone through and done a detailed forecast yet.

Okay, thanks, guys.

Thank you. Our next question comes from Don Kontajabi from Lehman Brothers. You may go ahead, sir.

Yes, hi, good morning, guys.

Good morning. How are you doing?

Thank you. Good. Can you give us a better sense as to how much the higher end fragrance business is down versus the lower end- in terms of volume?

I cannot give you an exact percentage there.

Okay.

Certainly the drop in the high end was much stronger than the drop in the low end. We have had in certain product lines in the high end, we have had a drop in the first six months between 25% and 30% in volumes in the high end. And that's due to the fact that while we saw very, very good activity in new product launches to our customers --

mm-hmm.

Throughout the year, the recurring business was very much down. So our products of the recurring business, and that's very often the larger volume, was hit quite a bit while the product activity on the new product, as I mentioned, was doing quite well and we believe that we have certainly maintained if not increased our market share there.

But dropped in the lower end of the market was not as strong, and we have also seen as we mentioned in former calls that at the low end, our incoming orders and also our sales have recuperated earlier than we saw the improvement for the high end markets, which is not very unusual from former cycles that the low end goes down first and then comes the high end and then the low end also comes back earlier than the high end of the business.

Okay. And also, given the end market pressure in some of these product lines, is it timely to expect further consolidations in your view?

That is very difficult to predict. We will always look at potential acquisitions.

Mm-hmm.

And however, I would like to underline that except for where our capacities are so much under utilized, our market position is such that our business commands very good margins and the perfume/cosmetic business is very profitable.

Okay. And just one last question. I mean, with the stock down so much over the past few months, is there an opportunity to increase the share buyback program?

Well, we're certainly continuing to look at it. We evaluate stock repurchase on on ongoing basis. We do follow on our stock repurchase a blackout period that we keep, also, for executive officers which is about 30 days prior to any earnings announcement.

So there are periods that we are out of the market, but with the price today, we'd certainly be more apt to be buying than it would be at a higher price.

All right. Great. Thank you so much, guys.

Thank you. Our next question comes from Mamba D'Elio of Newburgher Berman. You may go ahead.

Hi.

Hi.

Um, on the question of pricing for just one second, what percentage of your business would you guesstimate is more of a commodity nature at this point? And is the pricing any more intense there? I assume it would be.

And secondly, as you look at your business as it comes off patent, where I would assume pricing becomes more competitive, you know, as a percentage of your business, your volume, your revenues, whatever, is that percentage particularly higher and particularly big products that are rolling off in this time period?

We have some -- we have two areas I would say where products have been coming off patent and we're therefore naturally the competitive nature of the business is stronger, one is our standard aerosol valve business, but there I'd like to underline we've been able to put a price increase through recently, which has helped our profitability and on the other side is some of our closures, which are off patent and which naturally therefore have become much closer to commodities where the pricing pressure is higher.

We still believe that also with these businesses, although in this kind of business, we can make reasonable margins, and as I mentioned previously, we've been able in cases where we made price concessions, we have made those price concessions to customers where we believe that they are interested in differentiation and higher value added new products. And at the same time, they give us with a higher volume sale opportunity to improve our productivity.

So up to now, naturally this doesn't happen overnight, but up to now in the past, when we had and there is a major example, we had like five, six years ago where we made the major price concession to one of our many big food customers, we were able to resume our costs and come back again to nearly the same type of margin before the price increased -- decreased. And I think that continues to be true, that we will be able to increase productivity and at the same time introduce new product with better margins to these customers.

And what percentage of the business would you estimate is more of a commodity nature nowadays? Is it 10%, 20?

Maybe in the area of between 10 and 20%, yes.

And is that sort of going to be a constant as things roll off patent and it gets commodotized? We're working that down to zero, hopefully.

That's difficult to predict right now. It takes, in our business, it takes a very long time, even in simple things like closures for food or closures for personal care products, if you are a really innovative product like our Simply Squeeze, it takes quite sometime before you get the customers convinced that they should take the new product.

Mm-hmm.

I believe that we are at the point as seen by the very heavy interest we've been generating this year, both on the food and condiments side as well as on the beverage side for our Simply Squeeze closure which we brought to the market quite sometime ago. We are at the turning point now where the percentage of innovative patented higher value products in the closure business is going up again.

Mm-hmm.

So we should be moving that down. Same thing is true for the valve business where we've been quite successful with accessories, spray caps and things like this. And you have seen from our report that the margins have gone up considerably there, and that we have been very successful introducing new products.

So I believe that in both segments, on the valve side, and also on the closure side, we are on the verge of reducing the part of what we view- what's called commodity. But I also believe that even with commodity products, you can make -- you must be able and we are able, to make good profits.

Two last quick questions. The utilization rate on the fragrance side that I think you said dropped to roughly 60%. How does that compare with other sort of cycle lows? Is that representative of a trough-like number?

It is representative with other cycles. The only difference this time, I would say, is that this cycle has taken longer than previous cycles. In previous cycles, we have been maybe three quarters. Here we are now four quarters that we are down. That's also why we expected that the high end of the market would come back sooner than it has happened this year.

Mm-hmm. But the 60% is sort of a trough-like utilization figure?

Yeah, I would say.

And last question. Is Simply Squeeze revenues themselves, I assume, are going up nicely as a percentage? Could you comment on sort of how big that is and how fast that's growing for you?

Well, I think, Steve, if you look at Simply Squeeze, this year, we're increasing about 20%.

That'd be right. We'll be about 20% up, we anticipate, by the end of the year.

And the base of Simply Squeeze nowadays is what, Steve?

You know, the I don't have the number off the top of my head but I'm guessing in the area of $20 million plus. It's getting to be a fairly good size base for us in terms of where we're starting from.

And I assume from a margin standpoint that's about as good as your margins get.

Again, the margins, I think, are good margins for us given the type of product. Certainly when you start taking compared to the volumes we're now getting and some of the particularly food beverage markets, it's doing very well.

Okay. Thanks.

You're welcome.

Thank you. Our next question comes from Tim Burns with Kramer Capital. Go ahead, sir.

Good morning, gentlemen.

Good morning, Tim.

My question, I guess, relative to new product development patents and electoral property. You guys are nonstop at innovation. Is there anything near term in the pipeline that could help, you know, recapitalize parts of your market due to technology or patented products?

Well, the biggest and best improvement immediate is as Steve already mentioned, our Simply Squeeze system where we are now really seeing the beginning of major penetration for the food and beverage market. We have, talking about the beverage, we have now the first launch also in the United States. We've had quite a few launches in Europe. We have some launches in Asia, and we also have, for example, five launches in Mexico, and the interesting thing to note here is that the customers are telling us that they are increasing their sales and market share due to our closure.

So we believe, and we've seen this when Hunts recently launched its ketchup within just a few months. Heinz followed and other competitors of those two are looking at it and may be coming soon.

So the same thing is true in the aerosol area. We mentioned already the launch of unilevel, of the male deodorant which seems to be from initial indications a great success. Now competitors of unilevel are coming, also, with the same kind of product. So I think we've got a stronger and stronger movement on some of our existing recently introduced innovations.

And naturally, we have a very good pipeline of new products coming up for the next few years. It always takes some time longer in the pharmaceutical industry than, you know, other businesses, but overall, I think we have never had as strong a new product pipeline as we have today.

I was recently in the so-called fragrance capital of the world, and many, many people who have been associated with that business have said it's the worst period they've seen in, you know, in their 15 to 20 years of experience. Would you say that's true in your case, too, Carl? I know you're only 42 or something, but --

Thank you very much. [ laughter ]

Is that true or is that an overstatement?

Well, I think what has happened is that we have seen what did Mr. Greenspan say, an excessive exuberance in the perfume market in 2000 and 2001?

Yep.

As a part of that, we have seen the situation where we have 12 to 15 months order backlog, and we had -- we were running seven days, 110% of capacity and so on, and customers were unhappy because we didn't have the capacities, and so we believe that for whatever reason, they have more than ever had overstocking in this cycle and therefore, naturally, the downturn is also very tough. September 11th hasn't helped, travel is down, all these things have added up.

So most likely, the downturn for our customers was more dramatic than it has been in the past. But I don't think that numbers like 20%, 30% down, which we see as a supplier, are reflective of a down in utilization of real consumption.

We believe in most of the people we are talking to in the industry, believe that it is a movement in the supply chain, which has extremely exaggerated overstocking as the first between 2000 and 2001 and stocks down with some sales down, for example, things like that.

Yeah, I got it.

So, when you talk to major customers, they still expect that this business will continue to grow over the long term, different from region to region, but overall, will continue to grow.

But Tim, just as one side to that, I really think that what we're hearing or what you heard, too, is that the market has been very different from the upper to the lower end of the market.

You also see companies like Avon this year who are having a relatively good year, and frankly, the mid to the low end of the range has been more -- we haven't seen as dramatic of a move. So those numbers are much more, if you will, steady than what we've seen at the high end.

Gotcha. Has this kind of, you know, trauma, um, caused you as a management team to look at, um, not necessarily reducing your, you know, your exposure to high-end fragrance and low to mid-end fragrance and cosmetics, but to diversify the portfolio so that, you know, um, utilization rate goes down to 80% there by accelerating your efforts in food and household and other areas even if the margins are lower?

Number one, it is not necessarily set that the margins are lower in the food and beverage business if you offer innovative products.

Gotcha.

And what we have done is, we have very aggressively as much as we possibly could, reduced our expense, our costs in the fragrance business. We have also moved into new areas like sampling, which is a completely new business for us.

We have developed a new innovative product which we hoped to introduce, like our click and green products. Including a spray system, which is very innovative and patented.

Yep.

We're trying to diversify and also trying to diversify by adding and selling services for our products, so we are broadening our offer and naturally our -- we continue to put a tremendous emphasis on our very strong position on the pharmaceutical market both by breakthrough innovations and also by adding their services and improving our capabilities, the capabilities and so on.

Gotcha. Well, if you can come up with a dispenser of anti-anxiety medication, I think you'd fill up some of that capacity.

That's a very good idea. Our perfume customers would be very happy if we would be able to do that.

Our friends or Wall Street wont mind, either. Thanks. That's right. Have a good fourth quarter, guys.

Thank you very much, Tim.

Thank you. Our next question comes from Greg Holter with LJR Great Lakes Review. You may go ahead.

Good morning.

Good morning.

I wondered if you could quantify the cost savings you've realized so far from your strategic initiative and expectations going forward?

Greg, this is Steve. We've estimated that in the quarter, our savings are in the area of about $1 million. The majority of our savings will occur in 2003 on an ongoing basis, we would estimate savings to be in the area of 5.5 to $6 million on a pure cost basis.

Okay, thanks. And secondly, in the past, Carl, I believe you've discussed some of the new product launches in the fragrance/cosmetics side, and I was just wondering if you could update us on what's going on there in regard to Christmas, Easter, so forth?

As I mentioned in previous calls, the activity on the new product launches for our customers has continued throughout this downturn both in 2001 and up in 2002 at a very good pace.

We have maintained a very high market share and our customers have continued to launch in great numbers. What is lagging is the recurring business. And naturally, we have also seen some very large new product launches in the last quarter, so from- the customer certainly seems to be confident in the market overall, otherwise, they wouldn't make those major investments necessary to launch all these new products.

However, we're still waiting, our customers are still waiting from the retail side. The bigger orders for the older products.

Is the split there still about 30%?

Yeah.

New in 70 recurring?

In good times it's 30% new launches and 70% recurring. Right now, that percentage of new product launch is higher, because the recurring is so much down.

Okay, thanks.

Thank you. Our next question comes from David Sachs of Hockey capital. You may go ahead, sir.

Hi. Earlier in the call, you gave some revenue performance by business. Could you give a rough sense in what's the trend in profit margins and volume to these businesses has been? I could read them off to you. Fragrance and cosmetics, you said, revenues were down mid-single digits and what would have been the profit margin changes?

We haven't -- David, we've never commented on specific margin side.

You don't have to give the specific number, I'm just more interested in the change and direction of the market.

We can say certainly in the fragrance market, given the under utilization, that margins have decreased from last year in that particular segment. But in the other areas, I would say, they have been fairly comparable.

Okay. In prior calls, you talked about the pipeline and sort of your excitement based on the number of products you are working on. Can you talk about some of the things in the project pipeline for Pharma as well as some of the other businesses?

On the Pharma side, as you know, we're talking now horizons of between two and ten years to take the extreme. We have some very positive, more short-term outlook on our [INAUDIBLE] side where we are calmly gaining market share and where, due to our development of special valves for the new propellants, have captured a very good part of the product launches and where we have contracts concluded recently, which will give us over the next two or three years considerable increase.

We've seen already very good increase in the valve business and for pharmaceutical this year, but we'll see also for the coming years, a continuous excellent increase in our sales to this type of product to the pharmaceutical market.

Anything else you'd like to talk about in terms of new product opportunities as you look forward and things you are working on and exciting projects?

We essentially have in all market fields, we have major initiative in the closure business.

The major business and expected more short term, new product launches, we have our Simply Squeeze systems, which gained popularity really, I would say around the world, and where we're working on new product launches for next year with major customers.

In the aerosol side, we have developed new dispensing systems for deodorants, personal care products and we also have built a very good business there with metering valves. Now, you cannot compare these kinds of metering valves with the ones we are selling to the pharmaceutical market. They are very different. Much simpler in design, but we see a difference for products like air fresheners and also potential in the personal care market.

We've grown this business strong double digits over the last two years for developing new product there. So, that will help and continue to help improvement in our profitability in our sales and Seaquist Perfect division.

In the closure business, other than the Simply Squeeze, we have activities also with more standard products, but for new applications. Again for the food business and in the area of the low end of the perfumery market.

We have several new products developed which will come to the market and talking about the personal care market, we have developed an upside down system, which will be launched in -- on sun care products. So I give you just a few examples of the potential which we're looking at for next year.

Okay. A couple of years ago, the business plan for Aptar was to take our 13% margins and drive them towards 15% with the higher growth, higher margin pharmaceutical business driving us that way. In the last two years, we've declined to 12% given the environment was more challenging.

Are there any structural reasons why you think that it will be impossible to reclaim the margins you were targeting a few years ago?

I mean, from Aptar's standpoint, our growth perspective is still includes the 15%. Again, some of the reasons I mentioned earlier for the reduction to 12% is currency related this year and certainly there are capacity issues.

But I think if we look at the new product pipeline that Carl's talked about, we're still optimistic that we'll be able to achieve those margin percentages in the future.

And what do you think is kind of a reasonable target for a return on equity for the business is?

Today, our return on equity is 11%. Our goal is to be at 15% or above.

Now will you do that with greater use of leverage or do you think as an under levered balance sheet we can still achieve the 15% -- ROA?

Certainly, as one of the areas as you pointed out, we have a very strong balance sheet which, I think, right now gives us the ability to do either acquisitions or stock repurchase; it gives us a lot of flexibility. We should be able to get close to the 15% under the current balance sheet conditions without going back doing a major acquisition, for example.

Okay, and since the stock prices are sort of between 5 and 6 times EBITDA from a current run rate basis, why won't wouldn't stock repurchase make a lot more sense compared as opposed to 30,00 shares last quarter and 55,000 shares in the September quarter? It just seems like not a serious effort at share purchase?

Again it's an area that we continue to look at. Part of that, remember the drop off in terms of the share prices was during a blackout period where we couldn't repurchase any shares. So it's an area, you know, the board together with management continues to look at on a regular basis.

Okay, thanks.

Thank you. We have a follow-up question from George Basos with Salomon Smith Barney. You may go ahead, sir.

Thanks, operator. Hey, guys. A few questions. First of all, Steve, did you actually mention what the transaction negative was in the quarter? If you did, I missed it.

Actually, the net -translation net of the transaction was negative about a half million dollars.

Okay. All right. Thanks. Now, next question, and kind of piggy backing on what David was talking about before, over the years which you and I have talked, we've talked about your hope to get SG&A to sales down to more reasonable level. It always seems to be at 16% despite the growth.

You've always had the expectation of levering your volume growth yet here we are through the first nine months at 16%, again, Steve. How do you get that down over time, you know? In weak years your revenues are weak so the ratio stays high. How do you get the SG&A ratio down over time?

That's a good question. If you look at it this year, a couple of things we've done. The strategic initiative for us will be a large part of what we're driving out in the net area is SG&A costs. We've refocused the fragrance and cosmetic at the SG&A level. Some of that will have a bigger impact given some of the timing of those in 2003.

But -- go ahead, Steve, sorry.

I guess it's a continual focus for us. We're still taking costs back out, taking a look at how to run the organizations, trying to take as much out as possible.

Okay.

And I'd like to add also --

Thanks, Carl.

On one side of the pharmaceutical business, Frankly, we've increased our investment in research and development.

Right. Um, but at some point, hopefully get enough growth out of that so that you lever the investment.

Absolutely.

The strategic initiative, guys, I mean it's going to save you $5 or $6 million dollars, I mean on my mat that will save you half a point of SG&A. What is your target and when do you think can you get there assuming a normal volume environment?

Again, George, not all of the strategic initiative is SG&A.

Okay.

Probably a third of that is, the rest of it is in the costs and sales side. Again, we'll be looking to that to get the majority of those savings coming back to the beginning of 2003. So we are expecting that SG&A will go down a percent next year.

Do you have a target, do you think, or is it too early for you to call it?

Too early for to us call it.

Since we're on the subject of 03, it seems like most of your markets will be growing next year. At this juncture, do you think Pharma is weak just because of year end restocking but is there a chance that Pharma will stay weak because it is your highest margin business such that your earnings aren't up 10% in '03 or is it too early to comment?

It's very difficult to say at this point. On one side, as I said, we see good increase for next year in the metering valve side of the business, and then on the other side, we don't know what the stock levels at this point, how much of the product, which has been supplied to the customers this year, where we had as you noted, good growth up to now.

Right.

How much has gone unstocked and how much is real consumption. It's unfortunate we don't have a handle on that and our customers don't answer the questions. So it is difficult to make a prediction at this point where exactly we will be ending up in terms of growth next year.

Okay, Carl. On Simply Squeeze, the growth that you're seeing this year is very good. Steve, I remember Simply Squeeze always being around $15 million to $20 million. So with the growth that you are seeing with the new product, has anything fallen off such that it's $20 million?

Certainly, I think one of the big areas we had before was Coke's usage on the Powerade side. They have not used as much in the past couple of years in that area and that has come down. We've been fortunate to be able to replace the majority of that in other areas in terms of the food and beverage market.

Do you have anything left to trail off with Coke with next year?

You know, I think we're kind of getting down to base levels with them right now because they are looking at other products besides Powerade. So hopefully we'll be at a base level and begin to start increasing with them.

Okay. Last question, guys. In terms of your growth rate on a secular basis, you know, I've been covering this company for a long time, and for good reason you've always pointed to a high single digit or low double digit top line growth roll.

Certainly, the last couple of years have been difficult years for anybody to grow, and certainly Aptar as well. Do you think it's time to reassess what you think the normal top line growth is again or once we are back to a normal environment, guys to you think that you are back to a high single digit growth? Thanks.

George, we are certainly believing that we will go back to normal growth rates. What has happened to us is we first had the incidence of the Y2K problem where we got out of that.

We got very good growth in 1999, and then we got destocking specifically in the pharmaceutical level in 2000 and 2001. Then we got the first -- then this was partly offset in 2000 and 2001 by very strong sales growth in the perfumery and cosmetic business. Then the next happened was September 11th plus the downturn, which was accelerated in the perfumery business.

Yep.

So we really have had very difficult conditions outside, which were always somewhat where we were at a negative side one and the other side was good. But both together left us not with dropping but also not any more with the sales calls we would have expected to get in these years.

So our -- based on everything we've been doing, we believe the company has a very, very strong product with good position with the customers. We don't think that we lost market share, so I think we are very well positioned for next year, and we're just hoping that the overall economic conditions will improve and then basically based on all that what we have done and what we have seen, we should come back to those rates which we have had in the past.

Okay, guys. Good luck in the quarter. Thanks very much.

Thank you, George.

Thank you. Once again, if you would like to ask a question, please press star one on your touch-tone phone. And at this time, I am showing no further questions.

Thank you, Maggie. Ladies and gentlemen, I'd like to thank everybody for participating in our today's call. Thank you and good-bye.

Thank you. That concludes today's conference call. You may disconnect at this time.