Aptargroup Inc (ATR) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the AptarGroup's 2004 third quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. At this time I'd like to introduce your host for today's call, Mr. Ralph Polterman, the Vice President and Treasurer of AptarGroup. Sir, you may begin.

Good morning everyone.

Before we begin, I would like to point out that the discussion to follow includes some forward-looking comments and that actual results or outcomes could differ materially from those projected or contained in the forward-looking statements.

To review important factors that could cause actual results to differ materially from those projected or contained in the forward-looking statements, 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 it's Web site as a service to those investors who are not able to listen today, the 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.

Thank you very much, Ralph.

Good morning, ladies and gentlemen. This is Carl Siebel. 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 record third quarter sales and income. Our earnings per share of 68 cents also represents an all-time quarterly high.

Overall, our sales goals were driven by increased volumes, higher custom tooling sales, and the impact of the weaker dollar on the translation of foreign sales. Excluding foreign currency effects, sales increased to all of our markets.

Demand for our dispensing systems was particularly strong from the pharmaceutical, fragrance, cosmetic, and food markets.

In the quarter we benefited from the mix of sales. This is especially true in the pharmaceutical market where a fairly high level of custom tooling sales in the third quarter of the prior year was replaced with sales of our metered dose valve and pump products, which carry a higher margin than the tooling.

Part of the increase in sales of our dispensing system through the pharmaceutical market is due to demand for nasal spray pumps from several companies that are preparing to market generic versions of patented drugs.

Several sectors restrained further improvement in operating income as a percent of sales when compared to the prior year. They include the higher cost of imports to the U.S., increased cost of materials, higher quality related costs, increased costs to comply with Section 404 of the Sarbanes-Oxley Act, and continued price competition.

The higher quality related costs of the quarter primarily relates to a problem that was encountered with resin used to make pumps for one of our pharmaceutical customers. As you know, in the pharmaceutical market, changing materials for the manufacturer of products must go through an approval process. We were working with a customer on approval of a new resin.

After shipping pumps to this customer, we discovered that our resin supplier had mistakenly mixed approved and non-approved resins in their supply to us. Unfortunately our statistical sampling of the resins upon our receipt did not detect the contamination. We estimate that this problem alone has cost us $2.2 million in the quarter.

Looking forward, our outlook is optimistic for the fourth quarter. We expect the momentum we experienced in the third quarter to continue into the fourth quarter. We anticipate that diluted earnings per share for the fourth quarter of 204 will be in the range of 57 to 62 cents per share, versus the 54 cents per share recorded in the fourth quarter of last year.

I'd like to turn it over now to Steve Hagge for his comments.

Thanks Carl. Good morning everyone. I'll review our financial highlights and then Carl and I will be happy to answer any of your questions.

Looking at the quarter, as Carl said our reported sales increased 16%, whereas sales, excluding the impact of foreign currency translation, grew at approximately 10% from the prior year. Our custom tooling sales increased by approximately $6 million over the prior year with most of that increase coming in the area of our personal care and food markets.

Looking at sales to each of the markets for the quarter, excluding changes in exchange rates, in our personal care market we were up approximately 12%, fragrance cosmetic market up approximately 10, pharmaceutical up 2%, household up 11, and food up almost 30.

I'd like to point out that the increase in the pharmaceutical market I just mentioned reflects a large decrease in custom tooling sales which has more than offset by increased sales of our products as Carl talked about in his presentation. Excluding FX and the decrease in custom tooling sales, our sales to the pharmaceutical market were up 12%.

Cost of sales as a percent of sales during the quarter was higher than we reported in the prior year for reasons Carl's already talked about. Also in the U.S., the majority of our operations used the LIFO inventory method, and as a result of the higher cost of materials, we recorded about $500,000 higher LIFO expense in the third quarter compared to the prior year.

We mentioned in the press release increased costs related to Section 404 of the Sarbanes-Oxley Act. These were both out of pocket as well as internal costs. From an out of pocket standpoint it cost us about $400,000 in the quarter.

The internal costs relate to the dedication of a significant amount of our internal resources to this project as well, which represents an opportunity cost as it takes away from our ability to apply these resources to normal ongoing businesses. We're not able to quantify these internal costs.

We benefit slightly from a lower tax rate in the quarter compared to last year due to the mix of earnings. And finally on the bottom line, we reported an all-time high quarterly earnings per share of 68 cents a share compared to 51 cents a share a year ago, or an increase of 33%.

Our prior year results include a charge of 1.25 million pretax for acquired research and development related to Dry Powder Technology which we acquired in the third quarter of last year. The after tax impact of this charge was a little over $800,000 or about 2 cents a share.

From a geographic standpoint, sales to customers by our European operations represented approximately 58% of net sales in the quarter versus 60% last year, and sales to customers by our U.S. operations accounted for 32% of sales in the quarter versus 31% of sales last year.

Excluding changes in exchange rates the dispensing system segment sales increased by about 11% and our SeaquistPerfect segment sales increased by about 3%.

Cash flow from operations for the quarter was approximately 51 million versus 55 million in the prior year, and our capital expenditures in the quarter were approximately 24 million, compared to 20 million in 2003.

We received the dividend from our European operations of about $49 million in the quarter. We had hedged the exchange risk on this dividend and recorded a transaction gain of approximately $700,000 which is included in miscellaneous income in our third quarter results.

We spent approximately $38 million to repurchase approximately 883,000 shares during the quarter at an average cost of $43.25 per share. This brings the total number of shares repurchased since inception to 2.4 million shares at an average cost of $33.31 per share, versus a total of 5 million shares authorized to be repurchased.

Our return on equity was approximately 11%, and our net debt to net capital is approximately 5%.

Looking at our first nine months, reported sales increased approximately 14%, whereas sales excluding the impact of foreign currency translation grew approximately 7% from the prior year. Our tooling sales have increased almost 19 million over the prior year through the first nine months.

On a year-to-date basis we reported diluted earnings per share of $1.86 versus a reported earnings per share of $1.62 per share last year or an increase of 15%. Cash flow from operations for the nine months was approximately 133 million versus 111 million in the prior year.

Our capital expenditures year-to-date were approximately 76 million, compared to 56 million in the prior year.

Looking forward, our total cash outlays for capital expenditures in 2004 are expected to be in the area of 110 million, with appreciation and amortization expected to be in the area of 95 million. Both of these amounts may change depending on what happens with exchange rates throughout the remainder of the year.

As we previously had indicated, we filed for approximately 1.5 million of tax refunds relating to research and development expenditures incurred from 2000 through 2002. We will record those when we receive those refunds which we currently expect will occur in 2005.

Lastly, the effective tax rate for the year is expected to be in the area of 31 to 32%.

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

Thank you. Ladies and gentlemen, at this time if you should have a question, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Chris Manuel of KeyBanc Capital. Your question, sir?

Hello?

Good morning, Chris.

How are you?

Great.

A couple of questions for you. First of all, you gave me a 10% number for Cap Ex. Just a couple of housekeeping first. Do you have an actual dollar amount, or is it just about 10%?

I'm not sure what you mean. We gave you a ---

You don't have an actual dollar amount that foreign exchange impacted you in the quarter, do you?

For capital expenditures?

I'm sorry, I apologize. What foreign exchange was to revenues. I apologize.

Again, we were up, it's about a 6% difference. We were about 16% reported, and 10% would have been on a constant currency basis.

Okay. Let's see. As far as new products, things of that nature go, you mentioned having some pharmaceutical that are in, close to coming off for generic. Have you already, is that, well, is that something that's coming in the next, you know, three, six months, that sort of time frame, or is that something that, in other words, have you already had the tooling expenditures and things of that nature?

Chris, what happened is, is that some major products of one of our major customers is coming off patent, or has come off patent in 2004, and there are a number of generics companies who are preparing and pipeline filling for the introduction of a generic product competing with the initial product, and who have started to pipeline fill in expectation of getting FDA approval.

In effect, it is the same product as the original product, in terms of our pumps, we're supplying essentially the same pump to those generic companies, and so there is no additional tooling necessary for this kind of business from our side, and the present situation is that so we have started to supply, and the order book for the remaining of the year is good for these products from those generic customers.

The question for the future is, will the, how will the consumer react, how will the consumer demand be in the future, and that's something we do not know and is very difficult to estimate looking forward. But presently the business in this respect is strong.

Okay. So there won't be tooling associated. And then just one question actually on the resins that you talked about earlier. With the 2.2 million of additional costs, that's costs you absorbed this quarter, right?

Yes.

Okay. Is there ever, or is there the ability to go back and recover some of those costs from resin suppliers or is that something you're going to need to bear the brunt of yourself?

The question is presently open. We are in negotiation with the supplier.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Timothy Burns of Cranial Capital. Your question, please.

Good morning, gentlemen. I was curious to know, Steve, the net impact on operating income, or EPS related to FX translation and transaction, you don't have that, do you?

Well, the operating income, again, is about, between translation and transaction on operating income, is about a plus $800,000 approximately.

Plus 800,000?

Right.

And did you say that Sarbanes-Oxley was costing you 100,000 a quarter of external or 400? I don't know if I heard that.

No, it was about 400,000 in the quarter, and we're around 900,000 to a million already accrued through the year for that.

All right. And this resin thing, I mean it sounds like you guys are trying to do something new and innovative for a customer and it kind of backfired, it'll work itself out. So, you know, we've got 2.2 million of additional costs in the cost of sales line, is that right?

Right. But Timothy, it is not, on the working, it is not an issue which came on developing a new product. It was on completely ongoing business.

We have statistical controls in place for all our incoming raw materials which are, in effect, negotiated and agreed upon those procedures with our customers. So our being statistical control happened not to detect the problem. We produced regularly and the same statistical control with the same sampling and so on is repeated by the customer, and by statistical incidence, at the customer it was detected.

So we have about 2.2 million cost and some additional internal costs which have impacted the quarter, and as I said before, we are negotiating presently with a resin supplier about the potential to recuperate part or most or whatever of that cost.

Gotcha. Carl, is that the cost of bringing the product back and going through the fire drill of remaking it and all that stuff? Is that what you're---

Yes, it is in effect, the cost of taking this product back, and then we have to, and this is mainly in the third quarter accruals, and now we have to go through the cost of reproducing and reshipping.

Gotcha. Okay. And in looking at the portfolio of sales, it looks like the stars, you know, based on the numbers you gave, were food again, at plus 30. Is this, I assume food includes some of the beverage stuff that you're doing?

Yeah, it is. It is the beverage stuff. I may mention some examples, the first example is that the trend to inverted packaging for sauces, and ketchup, mayonnaise, to salad dressings and so on, which was really initiated and started strongly by Hines last year with their ketchup, is continuing and maybe even increasing in speed.

And the other area, as you mentioned, is also beverage, then we have a major new product introduction by Kraft, one of our major customers in the food business. They have introduced a large-mouth container for mayonnaise which fits into the door of refrigerators and which has been received initially very positively by the market and by the customers. So those two areas in the food market are just examples.

Another example of new product introductions and successes which we're having in the pharmaceutical business is our preservative-free, patented delivery system which is also selling extremely well, and we are sold out in terms of capacity for this year.

Gotcha. You said preservative-free patented dispenser?

Yes.

Okay. And were there any water or sport drink products? I mean, I think you've mentioned those in the past, Carl. Are those still kind of ramping up?

Yes.

Or any news?

They are continuing to ramp up. We're selling those around the world. We have presently two more new projects in Asia. We have two projects which have already hit the market in Australia, and we have continued increasing demand in many projects around the world.

Steve, I've got one last question and then I'll get out of the way. The custom tooling sales, I mean, it's kind of an investment, it runs through the sales line, it doesn't really add a lot of profit, but like with, you know, I guess what's going on in pharma, it eventually comes back and pays the company back. How do you look at it? I mean, it's so tough to, because if you back out FX and custom tooling sales, let's say the growth, I don't know, depending on the core of the growth rate may not be as attractive or as nice as we've all liked it. I mean, how do you deal with that?

Well, I think first if you look at the quarter, even without both of those, the quarter would have been up 8% on a comparable basis from a year ago.

Right.

So still pretty good growth.

Not bad.

I think if you look at the tooling what it does show, there's a lot of customization going on in the business. And for ours, frankly, the alternative is that somebody's doing that with somebody else, so I would say on whole, it's a positive for us because it is a future view to where the business could be going, will be going in the future.

Secondly, I think the other thing we're seeing is still as we see custom tooling going up we are also continuing to expand our standard product lines. And we're still selling more of those both in the United States and Europe. So it's really two parts of the business and overall I'd still say the increase in the tooling is a positive.

It's like getting engaged, hunh?

Well, certainly it's a financial commitment on our customer's part.

A big ol' ring. Well, hey, great quarter. And hopefully you can keep dispensing that growth. Thanks.

Thank you. If you should have a question at this time, please press the one key on your touch-tone telephone. Our next question comes from Ghamsham Panjabi of Lehman Brothers. Your question please?

Hi. Good morning.

Hi, Ghamsham.

Can you help us understand the SG&A line during the quarter?

As percentage of sales it seemed quite a bit lower than your historical run rate. Yeah, we're down, I think, in the quarter. Basically it's just been some reduced spending in cost controls in the SG&A line.

Is it sustainable? As a percentage of sale?

The only biggest difference that goes quarter-to-quarter for us is some research and development issues particularly as we get into prototyping and patent expenses. So I think on a year-to-date basis it's more reflective than what you're going to see just in any one quarter.

Okay. So we should expect it to bump up a little bit?

Well, again, you know, the other thing that you see in that, I guess Ghamsham, is the leverage capability. As sales go up, we're continuing to keep costs at I think under control, so I think as sales are up you're also going to see those numbers percentage-wise continue to improve.

Okay. And you gave us guidance for tax rate for the year, what about '05? How should we look at '05?

You know, at this point we haven't started to come back to it, our first blush would be in the same 32% area.

32% area. Okay. Also the personal care business seemed a little bit stronger than I had forecasted. Is there a particular reason for that? It seems much higher than the run rate through the first half of the year.

We have seen, Ghamsham, we have seen quite a few new product introductions in that area also. I think that and on our customers' side, at the same time, we have introduced new products, we for example have recently introduced to the sun care market, which is part of the personal care market, a upside down pump system which is unique, which we believe is technically superior to competitive products and which has been very well received, and major customers are presently preparing for the 2005 summer season with the filling, which is always traditionally done in the last quarter before, or the second half of the year before, so that's one example of new product introduction [our sides] on the personal care area, and we see again also in the personal care area in our closure business, the simply squeeze system is gaining momentum also in the personal care market.

Okay. And you mentioned in the past that resin costs and some of the cost inflation is typically passed on to the customers. Are you seeing any sort of incremental push-back from the customer side on that?

Well at this time, there is a difference between the closure business and the rest of our markets and our products. On the closure business the industry standard has always been to accept pass-throughs of the resin cost increases and we have been up to date, we have been successful in doing this. Yes, always with a month delay and so on.

How this will continue going forward is difficult to predict. Naturally, we do everything to continue this practice, and we believe we will be successful.

Okay, great. Thank you.

You're welcome.

Thank you. Our next question comes from Jason Rogers of Great Lakes Review. Your question, sir.

Good morning.

Good morning, Jason.

You said this before. I apologize, I was disconnected, but a few questions. First on pricing pressure. Are you seeing any, I guess, intensification? I know it's always part of the business, but anything of significance lately?

We have always been in a competitive business, as you've said, so that is a matter of fact going into the future, naturally. We have seen increased pressure notably in our low-end fragrance business and also in parts of our closure business.

And we have seen, as we've talked about, we have seen increased activity from our Asian competitors, one side direct by Asian competitors offering pumps or other products of ours to our customers, and also we've seen indirect competition by finished products filled in Asia being introduced into Europe and the United States.

And as far as simply squeeze, has there been any competition as far as similar product introductions from maybe Crown or some of the other competitors?

In the case of Crown, one of Crown's subsidiaries is a licensee of ours. We have decided several years ago that if you want really a very good penetration of your market, having a unique product, which is patented, it may be helpful to offer large marketers a second supplier opportunity. So we have given Crown a license to sell our product both in the U.S. and in Europe.

So if you see, if you think of Crown offering something similar, in effect it is our product, and they pay a royalty. They buy the product from us. In effect, we are producing the patented pump, being a silicone valve, which we produce in our operations in the U.S., and we sell it to Crown.

Okay. And then just some questions on the data. As far as the debt goes, did you break out what was fixed or variable?

Yeah, you know, Jason, about 60% of our debt is fixed with 40% being variable.

And the average blended rate in the quarter?

About 4, about 4.5%.

Okay. And as far as corporate expenses, I noticed they were down about a million versus last year. Does that relate to that foreign payment that you received?

Yeah, it's actually the hedge gain that we had on the, around $50 million dividend we brought back from Europe, which was about $700,000.

And then finally, on the share count, you had a number of share buy backs, do you have a number for the end of quarter share count?

Yeah, I think we're at like 35.8 million. And I'll check that, but that's right around 36 million shares outstanding.

Okay. Thank you very much.

Thank you. Our next question comes from Mike Hamilton of RBC Dain. Your question, please.

Good morning. Could you spend a little time just with an overview of how you're looking at the pharmaceuticals at this stage? Obviously we've got an industry that's in a fair amount of disarray. Without getting into specifics, can you talk a little bit about your sense of pipeline and what you're seeing in response from customers?

Well, as you know, this business is a very, very long-term business. Normally the time from us developing a new dispensing system to it getting to the market can be as long as ten years, maybe we have even seen cases in the past where it has taken even longer.

The activity on the products which we are supplying continues to be good, but there is, in general, as you have seen in industry communications, the overall market growth in the pharmaceutical market has dropped somewhat.

However, our products will, in the future, still benefit from the desire for convenience. For example, if you want to go, what is tried as to replace syringes and needles by other means of application of pharmaceutical products and other ways to improve performance of the product and also to improve in other ways convenience for the consumer. I think that will continue to drive our growth in the years to come.

We have quite a few new projects. We continue to have to select the projects which we want to work on, and we have a great pipeline in our own innovation, our own research and development projects. So I believe that for the medium long-term this will continue to be a very good growth part of our business.

Thanks, Carl. Could you comment a little bit on the tooling side? I take it that what you've been working on here this last quarter are products that you have not discussed at all in the call.

Well, we have, in effect, we cannot comment on very specific customer projects, as you know and as you appreciate.

We have several major projects where customers again are funding our capital expenditures to produce for them, and some of them will materialize in terms of starting of supply within the next 12 months. So in general, without any guarantee, you can say that tooling sales, which is in reality not only molds but also assembly equipment, are a precursor to additional sales and additional volume potential.

I think, Mike, you can also come back on the tooling side. I mean we've had, with the size, I mean we've had some projects that we can give you, like customer specific, Kraft has done some major work with us, we've done a major project with Unilever and Proctor and Gamble, we've got projects going on with GlaxoSmithKline, Astra Zeneca. So it's a fairly broad-based array of customers that the custom tooling relates to.

It sounds like there was relatively little custom tooling in pharmaceutical this quarter.

That's correct, and with a fairly high comparison a year ago.

Right. Right. Well, thank you very much and congratulations on the quarter.

Thank you.

Thank you. Our next question comes from Aaron [inaudible] of Banc of America. Your question, please.

Hi, it's actually for George Staphos. How are you doing guys?

Great.

Thank you. How are you?

Good. Just a quick question on the volumes. You said that there was increased volumes. I know you gave us the sales breakout ex FX. Can you just give us a little bit more color on which markets are strong volume wise?

Essentially, Aaron, I think if you look at the sales in terms of percentage it pretty much follows the volume side. So I mean in terms of what you get, our strongest markets in terms of volume would have been our personal care market, pharmacy market, fragrance market as well as the food market. So all of those had pretty strong unit sales during the quarter.

Okay. And just on the pharma issue, the customer de-stocking that we saw about a year ago, or a couple of quarters ago, that's fully taken care of and run its course?

Yes. The customer has restarted in the third quarter ordering, and the present level of activity in orders is above the average which we had before the slowdown.

Okay. Just a couple more quick ones. In the miscellaneous item that's related to the dividend that you got from your international operations?

Yeah, remember, that relates to the hedging that we had done on that. Again, that's about, of the total increase in the miscellaneous, around 700,000 relates to that activity.

Oh, okay. And then just lastly, can you just give us a color, you know, the new corporate tax bill went through the Senate, at least, earlier in the week. Have you guys gone through any analysis to see how that would impact you going forward and if you'd repatriate some of the earnings that you have overseas?

Well, I think if you look at the bill, I mean we're certainly in the process of just starting to go through it so we've had some initial look at it. We think the bill, frankly, will be largely neutral in terms of where Aptar is at today. A lot of the repatriation or the 5% benefit that's on repatriated dollars, really benefits companies that are bringing earnings back from very low taxed jurisdictions.

Most of our jurisdictions today are within Western Europe which have comparable tax rates to the U.S., so basically as we bring back dividends, for the most part we've got credits that are coming back with that. So the bill itself, in the short-term, we don't think has a major positive or negative impact on the company.

Okay. Great. And just one last one, if you can just go into Cap Ex. You said it was going to be 110 for the year, and I know that's a little bit higher than it was say a couple of quarters ago guidance-wise, can you just refresh my memory what the projects are that would relate to that increase?

Well the biggest, there's two projects that we've had that we came back this year. There were two facilities that we had, manufacturing facilities, and both of them were coming up for renewal on their lease.

Taking a look at the economics of the lease renewal, we came back, it made more sense for to us buy the facilities rather than continue to lease, given the increase in the lease cost. So that's reason for what we're seeing. It's not really adding facilities, it's more converting an operating lease into a financing to buying the building.

So of that 110, is there a little bit more idea of what the maintenance is versus new projects, I guess, or is that --

Again, rough numbers, maintenance for us runs around 30, 35% of overall capital, and since we really don't come back and push our capital into different buckets until we get to the end the year in terms of new products, but that's probably again, in the area of 25 to 30%.

And to that you may add part of the custom tooling and equipment, because if we sell a special new product to a customer and he finances, in reality that's an additional capacity for new products.

Right. Okay. Great. Thanks a lot. Have a good quarter.

Thank you.

Thank you. Our next question comes from Edmund Griffin of Black Rock. Your question, please.

Good morning, gentlemen.

Good morning, Edmund.

I was glad to see you guys ramp up the stock buy back by a couple hundred thousand shares in the quarter. My question is still with net debt to capital 5%, do you foresee yourself getting more aggressive with the stock buy back or can you talk about deploying capital and whether or not you have any little bolt-on acquisitions on the horizon?

Well, I think if you look, as we said, at the end of the second quarter when we came out, we were looking to be more aggressive in the stock repurchase, and I think if you look at the 880,000 shares we repurchased that was certainly true in the third and we would expect that we will continue to be aggressive in the marketplace going forward. And I think as you pointed out, given the strong balance sheet position, that still makes us very much in the acquisition market we have a strong balance sheet, gives us a lot of flexibility, and as we've talked about over time we continue to be evaluating potential opportunities in that area.

Okay. So how is the pipeline looking? I mea, are you looking at a couple of opportunities?

Yes, we are. We are presenting looking at several opportunities, and this may be a little bit more at this point in time, just maybe by coincidence, than it has been maybe in previous years.

Okay. And when you make the comment about generics coming to market with a similar product, what do you typically see? I know the generics end up taking market share from the incumbent, but does the demand pick up from lower prices, or is it just a shift in market share?

This is really, in terms of the volume which is concerned, this is a first for us. Yes, there have been some generics already using our products but we have never had a case where really a very major blockbuster selling product from an innovator comes off patent. So it is very difficult for to us imagine what will be the consumer reaction.

You could hope that because of the lower price consumer demand could go up, but we really don't know. We have no experience, and, therefore, it's very difficult to make any kind of forecast for us.

Okay. And then your guidance for D&A in the quarter I think it came down from 100 to, it looks like 95 million, is this just a function of foreign exchange?

Yeah, I think it's foreign exchange, and basically what we saw is capital coming back in on timing so, and again I'd caution that number to take too exact because of where exchange goes it can fluctuate around.

Okay. And then one last question. On the, let's see, the food business, are your customers seeing that the inverted products are selling well? Do the consumers, are they liking that?

Yeah, the reaction seems to be, as the market, as our customers are telling us, extremely positive. You may have noticed that Heinz put the new inverted package last year on the cover of their annual report, and I think some of the language there, some of the information they gave to the market was to say that this was maybe the most successful new product introduction which they had, and in the meantime, for many, many years. And in the meantime, we've been seeing a lot of additional products coming, going inverted, and using our simply squeeze system, so the consumer reaction seems to be extremely positive, and that's, by the way, worldwide, that's not only the U.S., it's also Europe and also in other areas.

Okay. And then cash flow, free cash flow for the year? Do you have a guidance range?

I mean, look, at this point, cash flow from operations, we're up to, I think, I don't know, we were 133 million, I think, through the first nine months with capital expenditures being in the area of 76, so you take that difference, that's around $60 million, rough numbers, we're probably going to see that increase as we go into fourth quarter but we don't have any guidance going on for that for the full year.

Okay. Thank you for your time, gentlemen.

You're welcome.

Thank you. Our next question comes from Timothy Burns of Cranial Capital. Your question, please?

Guys, I forgot to ask this. The $49 million dividend, what was the rationale behind that? I know most of your cash is in Europe, so was it just normal process or desire, or what, I guess I forgot why that happened?

I think we've seen a buildup of cash within the European operations, and frankly over the last couple of years we had not brought very much money back to the states so for us it was for us I'd call it normal business. We would anticipate going forward that we will continue to have a flow of cash back to the U.S. on a repatriation basis as we go forward.

And you get it out pretty whole?

Again what we had, as we had talked about at the end of last year, we had a unique tax situation, which I won't get into the technical terms, but that dividend that we brought back had a tax cost of about $3.5 million. With that being done, we've actually cured that tax position, so what we bring back today is relatively, we have credits to offset any of the costs. So that was the other reason to get that behind us.

Gotcha. Gotcha. Hey, Carl, is China still going to take over the world and absorb everything that is ever made and consumed?

Yeah, I mean, you hit on something which is important, the question being with the activity being so strong in China, how much absorption of energy reserves and things like that will happen, there's also potentially a transportation issue, will it be possible to continue to go on such an extent and to have the transportation capacities available going from China into Europe and the U.S.

Our business in China is doing very well. We have got very good growth rates in terms of sales and profits over the last two years there, and we are using this on one side to reduce costs of certain components for our products, sold, produced and sold in the U.S. and in Europe, but the main objective of that presence is really to take advantage of the local market, and also to be competitive with our local, with the local Chinese manufacturers.

Presently our cost is competitive, and we can compete price-wise with these local manufacturers which we think from a strategic point of view will foster our overall worldwide position and hopefully not let those competitors grow to the extent that they become dangerous to us in the U.S. and Europe.

Is it true, I mean, I just spoke to a guy who came back from China after doing a two-week trade mission, and you know, he said the problem is, you know, it's not just sweat shops and hand labor anymore, but also that if there's a hot sector, it's almost like, you know high tech investing was three or four years ago, there's so much money floating around that if somebody got interested in making plastic bottles, that was a hot sector, that it would be overwhelmed with capital and new investment, and thus the business model ruined almost as fast as it started. Is that something you've seen, or is it not?

Up to now, our competitors, as far as we were able to evaluate, are rather mid-sized or small businesses which are using a essentially hand labor to produce considerably smaller quantities than we are used to and making them with very low cost and very low labor rates. However, in our products, most of our products are highly automated and the direct labor content is small.

Where there is a major cost advantage is in producing capital assets like molds and assembly equipment. There you may have 80 to 90% direct labor. And there we are able, we have, in effect, over the last five years, in our own operations, set up the capabilities to produce molds and equipment in China and our operations and also working with subcontractors, and, again, taking advantage of the low cost.

But in our standard products, we have invested in China from the beginning in high quality, high-speed equipment. We are highly automated to serve the local market and to be competitive, and we are less concerned about those competitors in the markets in the U.S. and Europe because we believe that we are, with our level of automation and productivity and quality, not to forget the quality side, we are certainly competitive with these competitors.

Now we've just got to get them to start eating mayonnaise, right?

Right. That would be a good idea, and some other things.

Okay. Thanks very much for that insight. I appreciate it guys, have a nice fourth quarter.

Thank you very much, Timothy.

Thank you. I show no further questions, sir. You may continue.

Ladies and gentlemen, I would like to thank everyone for participating in our call today, so thank you, and good-bye, everybody.

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may now disconnect.