Aptargroup Inc (ATR) 2008 Q2 法說會逐字稿

Welcome to AptarGroup's second quarter 2008 results 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 is Mr. Ralph Poltermann, Vice President and Treasurer of AptarGroup. Please go ahead, sir.

Thank you, Shawn. Before we begin, I would like to point out 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 its website 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 and forward-looking information contained therein. Participating on this call are Peter Pfeiffer, President and Chief Executive Officer of AptarGroup, and Steve Hagge, Executive Vice President, Chief Operating Officer and Chief Financial Officer.

I'd now like to turn the conference over to Mr. Pfeiffer.

Good morning, everyone. This is Peter Pfeiffer. I will briefly summarize our press release, then comment on our Beauty & Home segment. Steve will then provide insight on our Closures and Pharma segments and follow with his segment specific events with his usual review of our financials.

Before commencing on our results, I would like to take a moment to briefly discuss the announced increases in both our cash dividend and share repurchase authorization. The board approved a 15% increase in the annual dividend rate for -- from $0.52 per share to $0.60 per share, and at the same time the board approved a four million increase in our share repurchase authorization.

Our cash generating ability and strong balance sheet allow us improve shareholder value with these actions and at the same time, remain well positioned to take advantage of strategic opportunities in the future. Turning to our overall results, I would like to remind you that 2007 was a record year for us and as a result, we are up against tough comparisons throughout 2008.

In light of these comparisons, I'm especially pleased to report that we achieved record sales and profits in the second quarter of 2008. Sales increased in every segment. Segment income increased in the Pharma and Beauty & Home segment, but decreased in the Closures segment.

Focusing on our largest segment, Beauty and Home. For the second quarter 2008, excluding changes in exchange rate, Beauty & Home segment sales increased 4% over the prior year. This is mainly comprised of a 3% increase in sales to the personal care market, a 6% increase in sales to the fragrance/cosmetic market, and a 5% increase in sales to the household market.

Strength in the quarter was primarily in sales for -- of our airless systems, mini packaging systems and specialized accessories for fragrance, cosmetic pumps as well as sales in developing markets. In May the fragrance foundation held their annual awards event in New York and named their 2008 award winners. I would like to point out that our dispensing systems were on all four of the men's winners and two of the four women's winners.

Looking forward, although we are expecting the Beauty & Home segment business in the developing markets to continue to grow, the growth rate there is not large enough to offset the slowdown we are seeing in both the US and western Europe, which we believe primarily relates to inventory adjustments.

This situation is further aggravated by increases in input costs both in US and Europe. Where market conditions allow, we are increasing our prices in order to pass these cost increases on to our customers.

I would now like to turn the call over to Steve.

Thanks and good morning, everyone. I'll provide my comments and then Peter and I will be happy to answer your questions. First, looking at our Closures segment, second quarter results for Closures improved from the first quarter. When you compare the results for the prior year, second quarter reported sales increased 19%, mainly due to changes in exchange rates, resin pass-throughs and higher tooling sales.

Changes in exchange rates accounted for 9% of the sales increase and tooling sales and resin pass-throughs each accounted for about 4% of the increase. Excluding currency impacts, increases in the markets were as follows. There was a 10% increase in sales for the personal care market, of which about three-quarters of the increase was due to higher custom tooling sales. There was a 15% increase in sales to the food/beverage market, and a 15% decrease in sales to the household market.

The Closures segment income decreased from the prior year mainly due to underutilization of capacity due to the lower sales volumes. From a new product standpoint, a custom SimpliSqueeze system was introduced on a new line of Gillette 2-in-1 body washes for men. We heard that Heinz has announced their intention to use SimpliSqueeze across the board for all of their ketchup. Neutrogena has launched a eye lift package using our new pin-point dispensing system. And we have many interesting projects, particularly in the food/beverage market, that we expect to hit the market in the second half of 2008.

Now looking at our Pharma market, we had another good quarter with both increases in sales and profits in this segment. Reported sales grew 17% and excluding changes in exchange rates, the Pharma segment sales increased 4% in the quarter, mainly due to increased sales of both pumps and metered dose valves.

Tooling sales declined compared to the previous quarter, giving us organic growth, excluding the decline in tooling, for the quarter of about 6%. The improved profitability of the Pharma sector to 30% operating margin in the quarter, reflect, higher product sales and better overhead utilization.

During the quarter, we finished the construction of our addition to our pharmaceutical facility in France, and from a new product standpoint, early in the quarter, Alcon, one of our customers, announced they had received FDA approval of their allergy drug [Pantonase] that uses one of our nasal spray pumps. And we're also benefiting from the increased of sales of pumps to the generic replacements of Flonase.

And finally, yesterday Schering-Plough announced that their Nasonex anti-allergy drug was approved in Japan which will also be a positive for Aptar. We continue to have a high number of projects in this very profitable segment.

Now I would like to summarize our consolidated results for the quarter. As you've seen, our overall reported sales increased 17%. Changes in exchange rates accounted for 11% of this increase, resulting in organic growth for the quarter of 6%. Overall, sales from acquisitions were not significant.

From a product -- from a geographic standpoint, sales to customers by European operations represented approximately 64% of net sales this year, versus 63% of sales last year, while sales to customers by US operations accounted for 24% of sales this year, versus 26% last year.

We saw increase -- we saw continued increase in resin costs in the US during the quarter. Increasing resin costs affect us two ways. First, there's a lag in passing on the increases via higher selling prices and also the fact that our inventories in the US are on a LIFO inventory valuation method further magnifies the impact. Our increase in our LIFO reserve cost us approximately $900,000 pretax in the second quarter and accounts for about 1.9 million on a year-to-date basis.

We benefited in the quarter from lower stock option expenses, which had had a benefit of about $700,000 pretax, and reduced net interest expense of about 1.9 million pretax, due to our strong balance sheet. Our effective tax rate in the second quarter of this year was less than the prior year, due to lower tax rates in Germany and Italy, as well as higher R&D tax credits in France.

Our diluted earnings per share increased 23% to $0.64 per share, from $0.52 per share in the prior year. Free cash flow, defined as cash flow from operations less capital expenditures, for the quarter was $11 million versus 28 million in the prior year. Our cash flow from operations for the second quarter was $59 million, compared to 58 million in the prior year, while our capital expenditures were 48 million in the quarter, compared to 30 million in the same quarter of last year.

We spent approximately $20.3 million to repurchase 460,000 shares during the quarter at an average cost of $44.24. On the balance sheet, our mix of debt at the end of the quarter continues to be roughly 40% fixed versus 60% variable, with an average interest rate of around 4%. On a gross basis, debt to cap is about 23% while on a net basis, it's approximately 6%.

Now briefly looking at the six months, reported sales increased approximately 17%, and changes in exchange rates accounted for 10% of the increase, or a 7% organic growth rate. Our diluted earnings per share year to date were up 25%, to $1.16 per share, versus $0.93 per share a year ago.

Now looking forward, presently we expect our depreciation and amortization in 2008 to be in the area of 140 million, while total cash outlays for capital expenditures in 2008 are expected to be in the area of $180 million. Both of these amounts could vary, depending on changes in exchange rate. Our overall tax rate for 2008 is expected to be in the area of 29 to 30.5%. I'd like to remind you that during the third quarter of last year, the German government ratified a reduction in the tax rate which was effective January 1, 2008.

The net reduction of our net deferred tax liabilities recorded in the third quarter of 2007 related to this change was approximately $2.3 million, which had a positive impact of $0.03 per share, which was included in the earnings of $0.56 per share reported in the third quarter of last year. Excluding this deferred tax adjustment, earnings per share in the third quarter were $0.53 per share.

Now we look going into the third quarter coming off the second quarter. As Peter had talked about, we're seeing increasing input pressure and the normal delay in passing these input costs on to our customers in terms of increased selling prices. Secondly -- segment income is returning to a more normal operating margin percentage level.

We're also seeing a softer demand from the fragrance, cosmetic, and personal care markets in the US and Europe within our Beauty & Home segment, which is being offset somewhat by improved results in our Closures segment. Looking forward, diluted earnings per share for the upcoming quarter are expected to be in the range of $0.55 to $0.58 per share. This range represents an increase of 4% to 9% over the $0.53 per share last year on a comparable method.

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

Thank you. (OPERATOR INSTRUCTIONS) One moment, please. Our first question comes from George Staphos with Banc of America Securities.

Thanks. Hi, everyone. Good morning. Good afternoon, Peter. I had a couple of questions just looking at the third quarter guidance.

And Stephen in your comments, you were saying margins were returning to a more normal level. There was a break in the transmission. I'm assuming you were talking about pharmaceutical margins returning to more normal level in the third quarter. Is that correct?

Yes, I think if you look at it, George, our margins in pharma have ranged between 25 and 30% and we were 26% in the first quarter, 30% in the second. So we expect that to moderate somewhat back to more of an average in the third quarter.

I know you've touched on it and you said some of it was improved operating overhead utilization, but can you touch on what drove the margin in 2Q? Whether there were any aberrational factors and in turn, what are the things that are driving it towards a more normal level? We've noticed, too that the core growth rate here has decelerated a little bit in 2Q. Is that also one of the factors?

Well a little bit. First of all, I think the product mix was very good. Because in the second quarter the product mix was very good and the customer base related to that was a possible. But again going back, we had very strong growth in the first quarter also, and the margins were at 26.

So I wouldn't say there's anything unusual in the second quarter. Utilization was good, mix was good, and overall, we would expect that margin to be fluctuating again between 25 and 30% per quarter as we go forward, George. So nothing specifically that would be a negative going into the third. It's more just returning to the norm.

Okay. Maybe one last question on that, then I'll leave it alone for now. When we think about the mix, what was so good about the mix in 2Q? Could you give us a little bit of clarity there?

Frankly, we sell -- we have generics. We sell to within the customer mix. We have branded drugs, and we have new drugs coming out.

There are different price points that we sell all of these together with our pumps and metering valves. So again, it's a mix across the whole board, depending on the products that we're selling. So there's nothing specific I can give you as to why.

Alright. So you know it was good, but you can't necessarily parse it just because of the diversity?

Correct. Again, that's the real plus that we've seen in the Pharma. It is a good diverse business for us. Frankly, all with good margin. I think that's the other relative standpoint, even when we talk about the low end of that margin at 25%, it's still an excellent margin.

Okay. Two quick ones and I'll turn it over. One, the pharmaceutical core growth rate, should we expect this to be the rate for the foreseeable future? I know it's very lumpy. I understand.

And then secondly, Closures, you saw some acceleration revenue. As you had suggested, back on the first quarter, but there was very little incremental profit, and you were still down year on year. Was most of that if you will, negative variance on EBIT driven by resin, and could you give us some color there? Thanks, guys.

Is I'll take the -- again with the -- first of all, let's deal with the Pharma side. The Pharma growth was reported, came in at 4%. But because we had had some decreased tooling, if you take organic growth, just on product sales, we were at the 6% level. That is at the lower end of the range that we expect long-term. We expect long-term growth to be in that 6% to 10% area.

So again, still our long-term expectations that we'll stay with that, but it will be lumpy, as you suggested, between the quarters. Looking at Closures in the quarter, really the one change that happened was frankly the resin price increase and the lag in the second quarter did have a negative impact with us, as well as some slowdown in the business at the end of the -- right at the end of the quarter in Europe.

But going into the third quarter we're seeing an improvement in our US operations which have been soft for the last nine months and also we're coming back, and we've got several new products coming back out into the food/beverage market. So overall we expect increased profitability in the Closures segment on a third to third quarter comparison.

Okay. Thanks, Steve. I'll turn it over.

Our next question comes from Ghansham Panjabi from Wachovia.

Hi guys, good morning.

Good morning.

The slowdown in consumer, was that specific to June or did you see a fade in May as well?

Good morning Ghansham. The turndown basically started at the beginning at the second quarter, especially in the US. We are seeing this spilling over now slowly also to the European -- western European market. It seems a general trend in this perfume, personal care market for the time being.

So as we look ahead to the holiday shopping season, understanding that we're in a borderline weaker consumer environment in the U.S., and certainly plenty of rhetoric on the slowdown spreading to Europe as well. Has customer sentiment changed in terms of the level of interest, new product introductions as it relates to your business? Or is it too early to tell at this point?

No, it's not. What we are seeing is that we are seeing some inventory correction for the time being, but we also hear from our customers that they are working on new products for the last part of the year going into the year 2009. So it's not -- the world is not coming to an end for the time being. There are a it lot of activities for new products coming out.

And Steve, if you could just quantify the impact of resin on 3Q guidance. How much do you expect to be behind, and do you expect to get caught up at the end of the quarter with price increases? Thank you.

Ghansham, it is a difficult one. We're estimating that the price increase in Q2 on resin, on the Closure segment, for example, was about 1%. The difficulty right now is we're -- excuse me, 4% for the Closures, 1% overall in terms of price impact for overall Aptar.

The difficulty right now is we've heard that the resin guys in the states have announced a -- about a 10% to 12% increase in resin pricing for July and potentially August. We're not sure if that's going to hold. So as usual we're continuing to pass these costs on in our Closures business on generally a 30 to a 90-day delay.

So it's really difficult for us to estimate how big the increase will be in the quarter, and we're starting to see, frankly, some of the other materials moving up, which would be some of the chemical costs, some of our steel and aluminum costs also moving up in the other sectors. And we've anticipated that some of those costs will be coming into the third quarter, and we'll be moving prices up to reflect those additional input costs.

Okay, great. Thanks so much, Steve.

Our next question comes from Ross Gilardi with Merrill Lynch.

Good morning. Good afternoon, Peter. Thanks, guys. Just had a couple of questions. If you could just elaborate a little bit more on bridging the gap from the $0.64 that you did in the second quarter it to the $0.55 to $0.58 that you're projecting for Q3. How much of that sequential decline would you attribute to volume and how much of it to raw materials, just roughly speaking?

It's difficult to come back and quantify, Ross. What we tried to do, certainly there's going to be a drop-off in volume in the Beauty & Home sectors, as Peter talked about in the personal care and fragrance markets, in western Europe and the states. Offsetting that is still an increase in the developing market.

So you're getting a drop-off, and we would estimate volume to be more flattish in that area rather than a dramatic downturn. Closures we expect to be up in volume. Again, a lot of that will be coming in the food/beverage market.

Margins in Pharma, as I mentioned, were about 30% in the quarter, the operating margin. We would expect that to be moderating back into kind of the mid-20s percentage, which accounts for a portion of that. And then the input costs, we've got a rough estimate at the back end, probably $0.01 or $0.02 just on the time lag on the input costs coming in.

Thanks. That's helpful. Peter, could you just talk about your level of confidence in the European economy overall right now, and you've commented that the emerging markets remained strong. Are you seeing any deceleration though in emerging markets as well?

First of all what we are seeing in Europe is that the weak economy of US is slowly spilling over to western Europe. We are seeing downturn a slowdown in France. The consumer confidence index in France was recently published, and has a very low rate, historical even. And we are seeing some slowdown also in Germany, where the economy is becoming a little bit more difficult.

Concerning the developing markets, Asia is doing very well, as does Latin America. They are still very fast growing, much more than the western world, and what we are also seeing is that the eastern Europe market is growing still. Russia is one of the fastest growing markets for us and for our customers.

But is it it growing if I slower than it was a quarter or two ago?

No, we don't see any change in the developing markets.

Ross, just as a point, one of the things that is difficult for us in that developing market is some of the product is shipped from western Europe.

Sometimes it's difficult for us to get a full impact. Our customers, whether it's L'Oreal or some of the other ones, continue to be very bullish about the growth. And frankly, that's where we get most of our data.

Sure. Then just on the pricing. Peter was careful to say that you will seek to get price increases, I think through automatic pass-throughs, where you can.

Is there any area -- are there any areas or where market conditions allow, are there any areas where market conditions might not allow to you get pricing? And as consumer branded companies have got to slug it out a little bit more on the retail shelf with weaker consumer spending, are you seeing potentially any price competition there that might flow back to your business?

What we are seeing is that our customers are very reluctant to accept price increases. But I'll tell you something. In a world of inflation, which we are seeing now much more in the states and also starting in Europe.

We have to push through our increases, cost increases, and this is true not only for us, it's true also for our competitors. The margins, though, do not allow to eat the cost increases in energy costs, in transportation, in resin costs, in metal, steel, and aluminum. So it has to come. And traditionally, in the fragrance, cosmetic market, we have price increases once a year.

In those situations, we are facing today, we have to do this several times in the year. So it's a big fight, but we are positive to be successful. Because also our customers, even the retailers are starting to increase prices. Procter & Gamble, Unilever, all these have announced price increases in front of the retailers.

Okay. Thank you.

Our next question comes from Chris Manuel from Keybanc Capital.

Good morning, Chris.

Good morning, Chris.

good morning, gentlemen. If I could go a little deeper into the temporary -- well, what you talked about, inventory adjustment by your customers. It kind of sounds like they continued to order at maybe a faster pace than what their sell-through was, through the second quarter, and now they've adjusted it downward.

Do you think that -- I guess, obviously, the organic growth rate for the third quarter will be a little challenged. Is it your view that the new order rate reflects the sell-through or do you think, in talking with some of your customers and what you're seeing in the markets, that particularly this personal care and perfume market is going to continue to be soft into the beginning of next year?

What we are seeing really is that there is some inventory corrections at our customers. Whether the weaker economy in the western world also will effect our sales in the fragrance cosmetic market is not yet sure. What will be the normal reaction of people in these kind of situations.

They will maybe buy less expensive products. That's what we are seeing. The private label market or the -- private label market is growing, maybe a little bit on the cost of the branded market, but since we are on both products, we are not really seeing dramatic reaction on that market.

Okay. Have you seen any changes to folks buying smaller size? Maybe there's a 1-ounce or 2-ounce version instead of the 5-ounce bottle or things of that nature?

This is one of the reactions of our customers. They are trying to make smaller packages so they can at the same prices, by the way, the market prices, so they can cover a bit of cost. But this is a good move for us because smaller packages means more packages, means also more dispensing closures and pumps and valves.

And to second that Chris, I think we're also saying, in addition to downsizing kind of the normal use package, the travel market continues to be an increasing segment where that, if you will, the three-ounce and less part of the market is still a positive.

Okay. And Steve, could you, I'm a little confused with the tooling numbers. It sounds like it was down in Pharma but up in Closures. Can you just give us, for the whole company, maybe what the tooling dollars were up or down year-over-year?

Yes. We were -- let me do it by segment, then we'll come down to the totals. For the Pharma segment, we were roughly 4.7 million in tooling in the second quarter of '08, compared to 6.1 million a year ago. So we were down about 1.3 million or so.

B & H, were about four million compared to 3.5 million, so up about 500,000. Closures was about 8.6 million compared to 3.2 million, an increase of 5.5 million. That gave us, for the quarter, total tooling sales in the second quarter -- or second quarter for us, around 17.5 million compared to about 12.8 million year, a Chris.

That's helpful. That's exactly what I was looking for.

And currency does impact that.

Okay. The new Pharma plan, are you at full commercial quantities or is there a little time lag between that gets all the way up? Can you help us, one, think about the incremental capacity. Two, comment -- I'm assuming that's predominantly going to be sold out as it comes on line. And then the last point, about the timing.

Again, when we talked about that facility a year ago, it had added about 25% of capacity in our French pharmaceutical operation. We have to remember, by just adding the building doesn't fill it up, so we've moved some equipment in there, and it's really to handle the increase in terms of both our pumps and metering valves as well as additional accessories.

So I would say you're going to see a quarter by quarter increase in our normal sales, and we'll be able to handle in the facility. We also think we're also going to get certain productivity improvements because we were very crowded before, and now with the new facility, we're going to be able to be more effective in our production.

But it's not like a one-time jump, when we open the door, we get 30% more capacity. So it's more of an incremental move, Chris should.

So, it will kind of slowly move up.

Correct.

Then the last point is, question I have is, in your press release, you talked about freight. And I don't -- if memory serves, I don't remember you guys ever talking about that you were experiencing slowness or having issues with freight pass-throughs, things of that nature. Can you give us a little color there? Is anything changed or different, or have you seeing a new pressure?

I think a couple things to remember in the freight area. You're seeing freight on two sides. One is shipments to our customers, and in some cases, our customers are picking up the freight, which is primarily in the US. So it has not been a bigger factor.

In Europe, we now do -- we also pay more freight in Europe, so as fuel costs move up, that is a higher cost to us, and we need to pass that on. Secondly, the input cost. Our suppliers, for the product being shipped to us, are now fuel surcharges. So again, it has not been a huge factor but we haven't seen, frankly, the type of increases in fuel that we've started to see over the last two quarters.

Okay. And do you have adjuster CPIs, PPIs, or do you need to go out and put surcharges in as well? Please help me with how the mechanism works.

We've been look at surcharges, looking at total kind of basket of overall costs. Right now we're looking at surcharges, which is a lot of what, frankly, our suppliers have come back and done to us, because they're saying it's just outside the normal scope. Again, it's more of a negotiated basis that we're going to have to do on a case-by-case basis.

Okay, perfect. Thank you much.

Our next question comes from Meggan Friedman with William Blair & Company.

Hi. Good morning and good afternoon.

Good morning.

Most of my questions have already been answered. I just have a couple of questions on the segments. First, on the fragrance and cosmetic slowdowns. Could you characterize where you're seeing slowing in the category? Is it across the board? Is it primarily high end? Is it primarily euro-denominated manufacturers, like a L'Oreal, for example?

We are seeing this basically across the board. There are some customers which are more affected than the others, but it seems to be a general trend, and it's only in western Europe and in the United States for the time being.

As I have already pointed out, the emerging market trend in eastern Europe is still going very well. Not enough to offset the changes in the western world.

And I think, Meggan, it's important to note that this is really more of a third quarter look, which we think is some inventory issues, because, frankly, fragrance for us, going into the quarter, we had a 7%, 6% growth. In that segment on an organic basis in the second quarter.

So this is more of a look forward rather than an existing position. And we do think that our customers, now we have to remember, as we get into Europe, we're going into the vacation period also. So there is some inventory adjustment factor we think that's built into the incoming orders.

That's helpful. And then just wanted to see if you could provide a little more color on what is driving the expected strength in food and beverage. Is that primarily new product? Is it package downsizing? If you could share a little bit more there.

It's really a couple areas. Number one, I think we've mentioned last quarter, the quarter before, we've seen some new product applications coming out. The example being we're now on Kraft's salad dressing with a new closure which took out 20% of the weight of the previous closure, which was, by the way, a non-dispensing system.

So we're seeing new product categories coming back up that we're being able to ship to. So we're seeing areas like mayonnaise, continued expansion into the condiment area. We are going to be now supplying almost all of the Hunts ketchup brand. We've seen Heinz converting over everything to SimpliSqueeze.

So we're seeing new categories coming out which are going to help us going into the second quarter with a lot of products. This is really an area when you sit back and you go, this is a consumer driven move. The consumer is looking for more convenience, and they're wanting an effective cost. So we're able to do that with cost effective dispensing systems.

Great. Thank you.

Our next question comes from Claudia Hueston from JPMorgan.

Hi. Thanks very much.

Good morning.

Most of my questions have been asked. I just have a couple. One was on the CapEx. I think the guidance had been for 170 million in CapEx before. Is the increase you expect now just currency driven, or is there something else going on there?

The majority, Claudia, is currency. In fact, you'll see that we had to move up D&A. When we started the year we were at 141, 145 Euro, and now with 158, 159. That's the majority of the issue.

okay, thanks. Then I was hoping you could comment just a little bit on the M&A environment, maybe a little bit just on valuations, and if they seem to have come back to more interesting levels for you, and if there's any real difference in terms of geographies or end markets, as you look out at the climate overall right now?

I think the M&A market continues to be, for us, with the balance sheet we have, very interesting. We have seen -- we have seen multiples come down over the last six to eight months. So, yes, there are more, I think more companies that today would make sense to acquire. It's still a challenging market. I'm not sure it's moved back to everything is in alignment, but given the strong balance sheet we think that the M&A market today is much more advantageous for Aptar than it's been over the last three to four years.

Okay and then --

On a geographic side, I don't know that there's major differences that we're seeing in any one geographic -- when I'm talking be graphic, primarily western Europe and the US. Certainly you see some of the Asian markets which have higher growth potentials, which is a really different valuation model we have to look at.

Okay. Thanks. Any comment on the recent acquisitions that you have done and how is Next Breath doing and folding into your operations?

They've done well. They've pretty much met expectation. As we said when we acquired them, they're relatively small. Didn't have a material impact.

Next breath continues to work with in terms of regulatory effort, and frankly it is continuing to provide us a great technical expertise which we didn't have as much in the past. The acquisition of the Bag-On-Valve has also met our expectations in the quarter. We're just coming off when they fill the sun care season, so we expect that to be somewhat slower until we get into the fourth quarter when they start filling again for the next summer season. So overall, done well.

Okay, great. Thanks very much.

Our next question comes from Mike Hamilton with RBC.

Good morning.

Good morning.

Was wondering if you could comment a little bit on your thinking on revenue components in the coming quarter? Issues like product mix factoring in at all on your thinking?

Well, I mean, we've tried to take a look -- certainly there were some product mix issues as we look at the business, and again, we have to always come back when we look at it compared to last year, we had a very strong third quarter, which was a record for us at the time. So we see a bit of a balancing.

We're seeing, as we talked about, some movement up in the Closures, down a little bye in Beauty and Home, and kind of market moderation in the Pharma. So I don't know there's any one area I could give you, Mike that would stand out.

Are you anticipating mix shift on the part of customers as a result of where consumers are going with their spending?

Well, we've seen some of that. I think Peter even made it -- he alluded to this. We have seen an increase in our store brand. Because the dispensing system is critical to the product, the store brands almost all use dispensing systems. So we have seen a movement up in terms of what we sell to that marketplace, which may be impacting negatively some of the bigger brands.

We're seeing a couple other areas we've seen some -- maybe some movement to smaller dispensing systems from a large cap to a small cap, as they look at cost. And in some cases, we are getting into the Costcos or the Sam's Clubs where you have, let's say, a bigger product that people are buying more for the value side. So you get a little bit of those. Not any of those are by themselves overly material, but you are getting small movements across each of those different sectors.

Anywhere in your broad product categories where your sense is that customer inventory levels are way out of balance going into the corrections?

I don't know that there's -- again what we get, the customers, when they see a bit of slowdown and certainly you've seen it in the states and we're seeing a little bit in Europe, kind of the first reaction is let's take a look at what we have in inventory, and we're not going to be building to that side.

So it tends to be -- most of our markets, the inventories are pretty -- they're not huge amounts of product that they're carrying. So I don't know if it's any one sector that would be bigger than the other. I'd have to say that the one area that we don't see it in, is in the pharmaceutical side, though.

Okay, thanks, Steve.

Our next question comes from Greg Halter with Great Lake Review.

Hello, guys. How are you?

Hi, Greg. Doing fine.

Relative to pricing for your products, is there a differential between generic products and brand-name products, in terms of the end item?

It will depend on the sector. In the Pharma sector, because the generics are generally less volume than the branded, we actually have higher pricing on the Pharma side.

It will be very dependent when you get into personal care, when you look at those, on the type of product we're selling. So I would tell you margins are not significantly different between the branded and the store brands, and in the Pharma they may even actually be higher. So there isn't a one size fits all for that.

Okay. And given the fact that you've announced the four million additional share repurchase authorization, does that signal that you'd be more aggressive in that regard?

No, I think if you would have looked -- before, we would have -- we've been buying back about a half million shares per quarter and that's been pretty consistent over the last three years. That authorization would have run out basically by the end of this year.

I don't think I would read into that we'll either be more or less aggressive in the share buyback because of the new increase. We will continue. The plan is to stay, to continue to be in the market on the share repurchase.

Okay. And is there any way that you can characterize the percentage increase that you saw both in the US and Europe in terms of resin costs?

Well, I can give you some numbers. Percentage-wise, for example, we're -- right now in Europe, let's take resin in Europe. Really that's been relatively flat, up until the end of the second quarter. We're starting to see some movement in the third but in the US, we're up, compared to the second quarter of last year, let's say we're up around 25%, round number.

Since the beginning of the year, we're up around 12 to 13% in resin and for the quarter alone we're up like 5% to 6%. The challenge in the US is that we're seeing announced increases anywhere in the 10% to 15% category in both July and August. At least, it's been talked about in increases. So that's on the resin side to give you kind of an order of magnitude.

Okay. Alright. I know in the French plant you had some issues there. Just wondering if that has been cleared up to your satisfaction at this point?

Well, I think you might be referring to the Closure facility.

Right.

Those continue to improve. We're not done with all the work we need to do there. But frankly operating results have improved from a year ago, and even more positive for us is that the operating efficiencies, which was one of the big areas, had made significant improvements. So we're pretty much along the line that we had expected from a budget standpoint, but we still have a ways to go.

Okay and one last one. I think on last quarter's conference call, you indicated that your new product pipeline was as strong as ever. Just wondering if you could characterize your thought process in that regard as we move into the third quarter here?

This is true especially for the pharmaceutical business, but I underlined already last quarter that this is a long-term issue. So we have a lot of new products, new projects going on, but you never know when the FDA is giving us the okay.

We are seeing and I mentioned this at the beginning of today's call, we are seeing new projects in the fragrance/cosmetic market for the fourth quarter going into the year 2009. So we are still very confident. The level of projects we have is still very strong. So we are pretty positive for the future in both segments.

Great. Thank you.

Our next question comes from Timothy Burns from Cranial Capital.

Hi, guys.

Good morning, Tim.

Hi Tim.

I had one question. Maybe I missed it in your comments. But the miscellaneous net in the third quarter was a positive swing, it looks like of over a million bucks. Is that where like the stock option expenses reside, or what are we missing there?

The biggest issue there, stock options, by the way, would be primarily up in SG&A. The biggest move in that was foreign exchange. That's where we end up booking the biggest changes. So it depends on where we've hedged foreign exchange on the pluses and minuses coming through. So that has some volatility in it based on where the rates are going.

I don't know if you can help me on this, Steve, but maybe Ralph can. What's an eye lift?

By the way, Ralph can't, because when I've looked at him, his eyes don't lift very well. To make you look more beautiful. We should send you some of this. So it's a beauty product that keep those wrinkles away from your eyes.

Alright, I'll try it. We've talked about kind of the move to private label and maybe smaller sizes.

What is happening at the consumer product companies, beverage companies, food companies, in terms of new product development? I mean, have they shut it off? Do they have programs going on, but not willing to release? What are your thoughts?

Well, on the food/beverage side, one of the growth these we see coming that's going to accelerate our Closures business, is a lot of food/beverage in different applications. So what we've seen is new back-offs to date in the process. Now the other side is, certainly what we are seeing is, if something was 15 ounces or 12 ounces, they may repackage that into a 10-ounce package at the same price point.

For us that's generally been a net positive. But as Peter talked about, at least on the food/beverage side, we're -- spray salad dressings, we're seen that continue to increase in terms of where that market has been moving. So in the sectors we're at, we haven't seen it back off at this point in any of our customers.

Okay. And we talked about smaller sizes. Couple of my teenage sons are now carrying around what look like [Gatling] Guns of Ax body spray. And I agree it is a favorable trend for -- the fact that you have instead of one closure for a large one-dispensing system for a large container, you now may have six.

Some people would say that consumption will be the say. I guess if these are mobile dispensers, consumption, in fact, should increase. Are you seeing that with the sales of the product?

That's true. The increase for smaller packages is true and in fact, certainly are sales for these packages. It makes a difference whether you have one big, only one closure or pump, or you have two or three, as you said. They are all equipped with the same kind of -- sometimes very sophisticated closure. So that's a trend which we are seeing. Very positive for us.

I think too, Tim, the other thing we're finding -- your teenage kids could probably see it -- they're carrying maybe even two different scents. So it's no longer just one, they're carrying two. So, again, at this point, we think that there may actually be even an increase in consumption, that you get people that weren't using much of the fragrance before and now using more of it.

Got you. So it's really up to what the girls do, to get this product sold. Is that a fair question?

If you come back, I think the MTV crowd, if you watch it, that's certainly how they're selling it.

Timothy, these companies are always selling dreams.

Well, if you can get something for my dream, give me a call. Hey, the last question is and some of our callers, analysts have talked about it, but historically, many industry analysts have thought that sales to the store brand were less profitable. But doesn't the selling model change a little bit where you become kind of the bigger fish again and have a little more leeway with these types of customers?

First of all, I think that for us, the margins to the store brands is not different from that to the brand, the branded products. What we are seeing, that those products are basically cheaper because they have less advertising to carry, so it's a reaction of the retailers to increase prices from the brands.

The other thing, Tim, that's been interesting that we've seen over the last -- that's been unusual, used to be the store brands wanted to be just like the brand. Johnson's baby shampoo had the one from Walgreen's, or whatever. We're actually now seeing that the store brands want even a distinct package. For example, there is a -- I think it's in Walgreens or CVS, there's now a Axe knock-off that is a store brand that has a different package than Axe. So they're even trying to go one step farther and differentiate their own product to create a little bit more branding image to us.

Got you. Listen, that answers my questions. Thanks a lot. Good luck in the second half, and I hope the vacation period in Europe is good to you, Peter.

Thank you very much, Timothy.

As you know, we only take three-day weekends here in the states.

You are lucky. I have less than you.

Take care.

Our next question comes from Brian Rafn from Morgan Dempsey.

Good morning, guys.

Good morning, Brian.

Question for you. Peter, you guys had talked about the fragrance side, and seeing kind of -- I thinks you said weakness, perhaps across the board, both high end and premium in the lower economy. Are you seeing any differences in the new product launches from the standpoint of either number of launches or the size of the units being launched?

No, really not. What we have seen this year, in the second and third quarter, the new products were a little slower than anticipated. They are catching up for the rest of the years, more the fourth quarter, year 2002 -- 2009. The amounts -- the, the volumes are not different from what is traditional. So you don't see a big change there.

Okay. Back to the -- you guys talked about the downsizing, certainly in packaging size. I think Peter you talked about having a net recovery in profitability and the sales have actually increased as you go down in size. Are you seeing, if you had two or three million of a 10-ounce size, are you seeing the manufacturers double the unit volumes, let's say they cut the per-ounce packaging size in half? I mean, I'm getting a sense of -- or do they keep a larger size and a smaller size? Are you seeing a stratified volume launch? Or kind of give me a sense as to what you're seeing.

It's a difficult question. I think generally we've seen an increase when they go down. I don't know if you go from ten to five, it's two. So you may end up being one and a half because the use-up rates, or whatever. So there tends to be an increase, but I think Brian, it's probably for us would be difficult to say. It's ratable for whatever decrease it goes up percentage-wise.

Okay. As you guys here specifically in the US see a shift more toward value sizes, which would be the warehouse clubs, the Costco's, and the Sam's Club and you have things that are on multiple gallon size that are on roller casters. Do you guys have have have the same penetration in caps and pumps in those mega sizes that you do in those smaller products that you may get in department stores?

On some of the dispensing systems, certainly there you have the opposite effect. Because if you have large items that have one dispensing system we're only selling one. We have pumps, for example, to serve hat we're not the largest producer of high output pumps. So we are in that market but we're not the largest producer of those. So generally the answer would be we don't lose a lot there, we only lose because they're not selling as many product on a throughput basis.

Okay. Is that an area going forward of interest to you, or is it more of a commodity side for you?

It's been a little of both. We've actually over the last year and a half we've added larger output size because we've used those for different product categories also, so it's an area that we'll continue to look.

One of our -- there's one competitor that frankly has had the majority share of what is a very small market, but they've had the majority of that. That we're continuing to look to increase that, particularly some of those areas in Asia have also been a plus for us. So we're looking to expand to that over the next couple years.

Okay. As you guys look at kind of cross-selling or migrating your dispensing systems, historically meter valves, pumps, have been kind of a pharmaceutical or perhaps a fragrance area, where caps and closures and that have been in package foods. With the sprayable salad dressing, do you see pumps going into new product areas, or caps and closures going into new product areas from what your historic experience has been?

I think we are always trying to cross-merchandise our products, which we have in the different markets. If we have a product solution in the pharmaceutical or in the personal care product, we try to sell this also in other areas, like food and beverage. This is traditionally one of the growth parts of AptarGroup. We are constantly searching for new fields of applications for our products.

Okay. Then just one for closing for Steve. What are you guys seeing as far as kind of wage and salary pressures across your global manufacturing base, maybe retention rates, turnover rates? Give me a sense of where you are.

Overall certainly with higher inflation we're seeing a lot of discussions we'll have come through -- toward the second half of the year, but on a worldwide basis there's certainly some upward pressure in terms of where wages are moving. That being said, the overall economies are still pretty soft and we're not seeing dramatic increases. In terms of retention, AptarGroup has she historically had outstanding retention and that continues to be the case. Not only here in the US but also through our international operations.

So I think it is a concern as overall inflation picks up in the second half of the year, that we see there's going to be some upward pressure on the wages from general retail areas, whether it's western Europe or the states. So we'll have to deal with that, along with all of our competitors, and frankly customers as we look forward.

Okay. You often commented in the past, I think off-line that Europe has had had, from the standpoint of product differentiation, packaging differentiation, branding imaging, a lead over the US, be it household cleaners or packaged food. Are you still seeing, is the gap closing, or you still see Europe leading?

I would say that the gap is practically closed. The markets are very similar and there are new ideas coming out of the United States, spilling over to Europe and vice versa.

Okay. Peter, are you seeing from the standpoint of you have a get product line launches, are you seeing that the lifecycle or the duration of that product packaging is that extending? Is it about the same? Or are you seeing faster turns to keep that differentiation edge?

What we are seeing, especially in the fragrance/cosmetic area, that the products, celebrity products, for example, are becoming much shorter, their life-cycle.

But our customers are trying to turn this trend and trying to bring new long-term products onto the market, because developing costs for these kind of products are pretty high, and you sometimes have problems to cover your costs during the lifetime of these kind of products.

Sure. What -- give me a time sense. How would you -- if you put a number on that, what's a long-term package cycle? Is it a couple years? Is it five years? Give me a sense.

If you look at the products like Channel Number Five, this is now, I don't know, 50 years old even older so it can be very long. I would say if a product stays longer than three to five years, then it's already a success. Many of those celebrity products, they last only for one or two years.

Okay.

I think, Brian, the other side would be, you've got to look it at personal care. You get a lot of new and improved packages that will turn after a couple years. And in the pharma business as I'm sure you're aware, it's really not an issue because those products, because of all the regulations, don't change almost at all.

I missed your opening five or ten minutes. Could you guys go back and maybe highlight across some of your newer product, Bag-On-Valve, SimpliSqueeze, meter valves, blister packs, anything new, new penetrations, new iterations across the world?

I think we continue to get new products. There were several new products that have come out in the allergy area that we're on in the pharmaceutical side. We talked about there's a new Gillette body wash for men, which is getting a lot of advertising with our dispensing system on.

We did talk about several new products that we have that continue to come out. We're going more into the cosmetic with some of our dispensing closure systems, so we've got quite a few new product that are out and positively impacting what we think will be the rest of the second half going into '09.

Thanks, guys. Appreciate it.

Our next question comes from George Staphos from Banc of America Securities.

This is obviously late in the call. I'll try to make these quick. First off, Steve, have you ever done anything like a general price increase? I know it goes against the nature of the products and niches that you serve, but as value-added as Aptar is and as you think it is and differentiated versus your competition. What would be wrong with the approach to rise pricing generally to improve your return?

We've done that George. Again, it's going to be very much depending on the sector. For example, we have come back, in the US, we have done a general price increase related to some of our aerosol products and some of our pump product that was effective July 1st.

Now that being said, there are contracts that we're going to have that come back and make that more difficult to do on a general basis, but -- so those we have announced, and we are going forward. Actually we have done that in the past. We haven't talked a lot about it, but that is something we do in the personal care categories, household care categories, and even in the food/beverage side, in addition to resin, we will also do general price increases.

Okay. Do you find it's a little bit more difficult to do these source of things these days, or really there's been no differentiation -- no closing of the gap, if you will, in your relative pricing power versus your competition?

Some of it it is size based on the customers. As Peter said, if there is any good news, the increases we're seeing in input costs, all of our competitors are seeing. It's not that we're buying poorly or whatever. So what we are right now, it's difficult to get through, but it's no longer a question of do we pass them through. It's a matter of when we can pass them through. So that tends to be the negotiation.

Okay, last question. Given -- I don't want to make this to be too big of a deal. You're just getting to a more normalized level of profitability it sounds like. But given the deceleration in pharmaceutical, which will on the margin dilute the progress of your returns, and based on our analysis, even the return on capital has gone up.

Your economic profit has been flat to slightly down because your invested capital has moved up more quickly than your margin growth. I'm wondering why you wouldn't necessarily be more aggressive with share repurchase in the next year or two?

I think we could be. It's partly going to -- George, I think we've talked about this in timing. Is, I do think the acquisition market is opening up more than it has been in the past.

Okay. So that's really the issue then.

Yes, and I think frankly, if you look at that right now, I think there are more opportunities that we are looking at than we were historically because of some of the pricing. So I do think there's a value to come back and say, instead of doing a very large share repurchase, let's take some time, see what that market is going to come back and open up for.

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

thank you very much.

Our next coach comes from Ross Gilardi from Merrill Lynch.

Hi guys, just had one more. Your key competitor in metered dose valves has quantified the revenue opportunity from dose counting devices at $40 to 60 million over the next three to five years. Since you have roughly equal market shares in the metered dose market, is there any reason why your opportunity shouldn't be similar and then could you just talk a little bit more about where we are in the evolution of is those products?

Well, I think first of all in the metered dose valve, I think our competitors continue to say that we have equal market shares. We actually in our data look like we have a larger market share. That being said we are both in agreement, both our competitor and ours, that the dose counter is a significant area for growth.

And I think that the volume that they talked about in the market potential is definitely a growth opportunity. We are today -- we have a product, as they do. We are working with several pharmaceutical companies, as they are. We think ours has certain technical advantages.

So I mean, right now I don't think there's going to be one product on the market. I think both companies will be out on the market, and we continue to be very bullish about it. So from that standpoint, Ross, we're absolutely in agreement that it's a good growth opportunity for both operations.

And remind me though, Steve, where -- I think you're in one of the products testing in stage three trials. Is that right? When might we start to see commercial sales on that product?

To be honest with you, under the confidential agreements we got on that, that's really an area that I can't get into.

Okay. Okay thanks, guys. Good luck.

Thanks.

Our next question comes from Susan McGarry from Granahan.

Hi. I just want to clarify something. Steve, did you say that the market is moderating in Pharma?

No, the margin percentage. Again, we were, I think, coming back, we've said that the operating margin percentage for Pharma will range from 25 to 30%.

We were at 26% in the first quarter, 30% in the second. Our expectations and again, we're looking out, is that we will not be at 30% in the third. It will be more to that, say, 25 to 27% range. So it's -- it tends to be that normal fluctuation we see quarter to quarter, Susan.

Okay. Because none of the other messages that you or Peter have been conveying during this call about Pharma have been negative in terms of the market.

It's not. I think -- again, I think it's important to note, we continue to have strong growth. Our long-term growth potential is 6% to 10% as we've said. We are still very bullish on the Pharma. I think it's also important to note last year, Pharma's organic growth in the third quarter of '07 was over 20%.

So the comparison growing that market even on a 20% previous year growth is still very good and I think it's still excellent opportunity for Aptar in the future. So again, we certainly wouldn't want to convey any negative. It's more that we're saying that we're not always -- 30% margin is not something we expect every quarter going out.

Thanks.

Our next question comes from Matt McGeary from Sentinel Asset Management.

Hi. Good morning.

Hi, Matt.

Just one quick one. You said 64% is sales to Europe. I think you've said before that a lot of those sales are to Europe, all those products don't always end up in European markets at the end of the day. Is that right?

Yes.

Do you have any guess as to how much of that goes elsewhere? I mean there's a lot of talk now about the European economy slowing down. Peter mentioned it earlier in the call. Just sort of interested in what your thoughts are there?

I think the -- it's difficult for us to -- because our customers, we show where we sell. A lot of our pharmaceutical sales go into Europe, for example, for Glaxo's [Ventaline] asthma spray. Half of that ends up in the US, because of just the way the US market is.

So if you take that 64, our guess is you get much more that the U.S., instead of being 20 some% is probably end market in the 40s, just because of where pharma and fragrance which gets exported. But it's no way we can really quantify it Matt. I don't have that kind of numbers.

Okay. Thanks guys. Appreciate it.

I am not showing any other questions at this time.

Thank you very much. I would like to thank everybody for participating in today's call. Thank you and good-bye.

Thank you. Ladies and gentlemen, that you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.