AptarGroup, Inc. F1Q09 Earnings Call Transcript

Apr.17.09 | About: AptarGroup Inc. (ATR)

AptarGroup, Inc. (NYSE:ATR)

F1Q09 Earnings Call

April 16, 2009 8:00 am ET

Executives

Ralph Poltermann - Executive Vice President and Treasurer

Peter Pfeiffer - President and Chief Executive Officer

Steve Hagge - Executive Vice President and Chief Operating Officer

Bob Kuhn - Executive Vice President and Chief Financial Officer

Analysts

Claudia Hueston - J.P. Morgan

George Staphos - Banc of America

Chris Manuel - KeyBanc Capital

Meggan Friedman - William Blair & Company

Mike Hamilton – RBC

Greg Halter - Great Lakes Review

Tim Burns – Cranial Capital

Operator

(Operator Instructions) Welcome to the AptarGroup's First Quarter 2009 Results Conference Call. Introducing today's conference call is Mr. Ralph Poltermann, Executive Vice President and Treasurer of AptarGroup.

Ralph Poltermann

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 its website 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 and forward looking information contained therein.

Participating on this call today, are Peter Pfeiffer, President and Chief Executive Officer of AptarGroup, Steve Hagge, Executive Vice President and Chief Operating Officer, and Bob Kuhn, Executive Vice President and Chief Financial Officer. I would now like to turn the conference over to Mr. Pfeiffer.

Peter Pfeiffer

I will briefly comment on our overall results and outlook and then provide some comments on the Beauty & Home segments. Steve will then provide insight in our Closure and Pharma segments and Bob will review our financials. Focusing on the quarter overall, presently we are in an unusual extended period of enriched consumers on a fairly broad basis tightening their purse strings and inventories throughout the channels are being drawn down sharply.

Our sales adversity affected by several items including the stronger dollar and decrease in overall demand in both the Beauty & Home and Closure segments. We are facing some increased price pressure in the Beauty & Home and Closure segments due to both weak economy situation and with raw material declines. However, offsetting this is market of demand for innovative systems to differentiate their products.

Although we have had success in our cost reduction efforts we could not complete the offset, the negative impact of weak demand on our quarterly results, primarily in the Beauty & Home segment. Looking at income on a segment basis, Beauty & Home segment decreased from both an absolute dollar and percentage of sales standpoint. We are encouraged by the increase Closures income both on an absolute dollar and percentage standpoint and Pharma segment income decreased from an absolute dollar standpoint entirely due to the strong dollar but this increase as a percentage of segment sales.

Because or focus our actions on reducing costs, we announced in the press release that we will be consolidating two dispensing closure manufacturing operations in France as well as several sales offices in North America and Europe. We have approached these cost reductions strategically and present that these actions are being undertaken to streamline our structure without sacrificing our ability to give innovative products or properly serve our customers and respond quickly to market demand.

Looking forward our visibility continues to be very limited. Presently we expect that the conditions we are experiencing in the first quarter will continue into the second quarter and the demand, particularly in the Beauty & Home and Closure segments will increase in the second half of this year.

Turning now to our Beauty & Home segment, reported first quarter sales for the segment decreased 35%. Changes in exchange rate adversely affected sales by 9%. Acquisitions accounted for an increase of about 1%. Excluding currency changes and acquisitions, sales declined by 17% in the quarter mainly due to the softness in the fragrance/cosmetic markets.

Our customers continue to be very cautious and we experienced weak demand in each market served by the Beauty & Home segment. Excluding changes in exchange rate sales to the fragrance/cosmetic market decreased 20%. Sales to the personal care market decreased 9% and sales to the household market decreased 19%. Underutilized capacity due to the drop in demand led to the decline in the Beauty & Home segments income.

Briefly turning to some examples of new applications of our products, our turning and locking actuator allows marketers to eliminate the use of overcasts on aerosol products. This patented system was recently introduced on Pledge cleaning product marketed by SC Johnson as well as dusting and cleaning spray from Sara Lee in their Endust line. Also our [inaudible] system is being used on a new ultra brand of sun care products.

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

Steve Hagge

I’ll provide my comments on both the Closures and the Pharma segments and then turn the call over to Bob to review our financial results. First of all, looking the Closure segment, compared to the prior year first quarter reported sales decreased 13%. Changes in exchange rates negatively impacted sales by approximately 10% and acquisition we made in the fourth quarter of last year accounted for 3% of sales. Excluding currency and acquisitions, sales declined by 6% in the quarter of which 3% of this 6% was due to pass through with the lower resin costs we saw worldwide.

Changes by market excluding currency impacts were as follows. We had a 5% decrease in sales to the personal care market, a 7% increase in sales to the food/beverage market and a 27% decrease in sales to the household market. There was a shift in custom tooling sales to the personal care from the food/beverage market compared to a year ago. Adjusting for this shift in tooling sales, sales to the personal care market would have decreased 12% versus the 5% previously mentioned. Sales to food/beverage market would have been up 22% versus the 7% increase previously mentioned.

Segment income increased mainly due to cost savings efforts and the benefits of the normal delay in the pass through of resin decreases. Focusing on new products, our dispensing closures in the past have been mainly used for dispensing liquids, but we’re now seeing interest for non-liquid applications. For example, our easy open jar lid was recently introduced on an Aveeno Daily Cleansing Pad product.

Looking at new liquid based products our push to open closure was recently introduced for the first time on a tanning product. Also our beverage closure was recently introduced on three different brands of water in Eastern Europe and two brands of water in the United States.

Now looking at the Pharma segment, when comparing this years Pharma segment results to the prior year please keep in mind that the first quarter last year for the Pharma segment was really strong with organic growth in the Pharma sales in that quarter being in the mid teens. Reported sales declined 10% due primarily to the negative impacted changes in exchange rates on the translation of sales. Segment income for the quarter was lower then the prior year entirely due to the negative impact of exchange rates but income as a percent of sales improved on a year to year basis.

Turning to new inhalation products, our metered dose valve is used on [Asrosedic] and Symbacort product which in the past has been used to treat asthma. During the first quarter Symbacort was approved by the US FDA in addition to asthma for twice daily maintenance treatment of airflow obstruction in patients with chronic obstructive pulmonary disease of COPD. Also one of our metered dose valves is used on the Glaxo Ventolin ReliOn asthma treatment that is sold exclusively through Wal-Mart.

Moving on to allergy medications, Glaxo’s Veramist which also uses one of our nasal sprays has now been approved and launched in the UK. Also one of our pumps is used on the [Astropro] Antihistamine nasal spray that is being heavily advertised in the US at the present time.

Now I’ll turn it over to Bob to discuss the financials.

Bob Kuhn

I will provide my comments and then Peter, Steve and I will be happy to answer your questions. First I’d like to comment on the results for the quarter. Beginning with the first quarter of this year we modified slightly the way we are reporting and affecting the performance of our segments. As footnoted in the press release we have revised previously reported segment income to be consistent with this year’s presentation. The revised segment income numbers on a quarterly basis for both 2000 and 2008 were included in the same 8-K for the press release we filed with the SEC yesterday.

As you’ve all seen, our overall reported sales decreased 19%. Changes in exchange rates were a drag of 10% and sales from acquisitions accounted for 1%, resulting in a decline on organic sales of 10% for the quarter. From a geographic standpoint, sales to customers by European operations represented approximately 60% of our net sales compared to 64% last year while sales of customer by our US operations accounted for 27% of sales this year versus 25% in the prior year.

Higher net interest expense was offset by the lower tax rate. Diluted earnings per share from continuing operations decreased to $0.38 per share from $0.52 per share in the prior year. Despite the decline in our net income in the first quarter of this year compared to last year free cash flow did increase significantly. Our cash flow from operations for the first quarter was $49 million compared to about $39 million in the prior year.

Capital expenditures were $35 million in the quarter compared to $42 million in the same quarter last year. Free cash flow which we define as cash flow from operations less capital expenditures was $14 million for the quarter versus a negative $3 million in the prior year. During the quarter we spent about $4.8 million to buy approximately 177,000 shares during the quarter. Our repurchase authorization at the end of the quarter was approximately 4.4 million shares.

The mix of debt at the end of the quarter is roughly 80% fixed versus 20% variable and the average interest rate is around 5.2%. On a growth basis debt to capital is about 22% while on a net basis it is approximately 8%. Looking forward, as Peter previously mentioned, we expect the conditions we saw in the first quarter to continue into the second quarter.

We announced that we’ll be taking some actions to reorganize some of our operations in this segment. We expect that the total costs to be incurred related to this to be in the area of $6 million. These charges will be recorded in the quarter in which they are recognizable for accounting purposes and we presently expect that the majority of these costs will be recorded in 2009. Once completed annual savings from these actions are projected to be in the area of $3 million pre-tax with most of the savings expected to be realized at the beginning of next year.

Presently we expect D&A for all of 2009 to be in the area of $130 million with capital expenditures expected to be at least $130 million or slightly less. I would like to point out that these 2009 amounts could vary depending upon changes in exchange rates. The effective tax rate for the full year 2009 is expected to be in the area of 28% to 30%. Lastly, I would like to emphasize that the range of EPS guidance that we mentioned in our press release does not include the previously mentioned reorganization charges.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Claudia Hueston - J.P. Morgan

Claudia Hueston - J.P. Morgan

First what you’re seeing in Beauty & Home, is it getting worse? How did it progress over the course of the quarter, are there big differences between Europe and the US and then what gives you confidence that a second half pickup is likely in that business?

Peter Pfeiffer

We have seen these tendencies both basically in both areas in Europe and in the United States. There are a lot of discussions on the part of our customers. The reason of this decline basically is coming from emptying of the supply chain. Inventories are going down in the whole supply chain and this is basically the reason also between the difference we see the consumer decline is between 2% and 6%, our business is going down by 17%, 10%, 3% there a big mismatch which tends to explain why supply chain reductions.

As I said in the United States, it’s in Europe, less effect in the Asian market which is still growing. The Chinese market is still positive and we are not seeing the same declines in Latin America.

Claudia Hueston - J.P. Morgan

In terms of the supply chain reductions do you feel like we’re sort of hitting a bottom in those or is there still inventory being worked down?

Peter Pfeiffer

For the time being it’s very difficult to predict but we are seeing decline in almost one and a half quarters. There has to come to an end. We have seen some answers from our customers. Some of them are saying that they will start re-ordering in the end of the second quarter to the third quarter. Keep in mind, some of our big customers have their financial year ending in end of June and they are trying to keep their inventories smaller, low till this point which is they might be starting ordering in the third quarter maybe.

Claudia Hueston - J.P. Morgan

You mentioned underutilized capacity in Beauty & Home and in the past you’ve talked about that as an issue in Closures. Has the situation gotten better in Closures in terms of the utilization of your capacity?

Steve Hagge

It has gotten somewhat better. The other thing we’ve done, frankly the consolidation of business units that we’re putting together in Closures our efficiencies have continued to improve. As a result of that we’ve been able to reduce one of our factories and consolidate that with another one here in France. The other thing I think in the Closures side that’s important is the mix of business.

While we’ve seen some softness in the personal care area which again we’re attributing to both consumer demand as well as inventory reductions, we’re seeing strong demand for our dispensing systems in the food/beverage market. On a comparable basis that market for example was up over 20% in the first quarter.

Operator

Your next question comes from George Staphos - Banc of America

George Staphos - Banc of America

Taking you back on the recovery question it would appear that in prior periods because of your customers perhaps building inventory to great of a degree with the supply chain the company might have been not through its own efforts but nonetheless following the customers over-earning. If we do see a recovery in orders in the second half would it be likely that customers really order much more limited levels then perhaps they were doing in 2008 and 2007?

Do you think then given the current run rate in earnings that you’d be able to post up comparison in earnings in the second half or would that really be a more of a 2010 phenomenon given what you can see right now?

Peter Pfeiffer

It’s very difficult to predict how much they will reorder. For example, it’s very interesting; the big drop is in the recurring business that means in products which are already on the market. We will see some pickup on this area because the pipeline is empty but we are also having a lot of new product launches being prepared for our customer’s maybe end of this year or beginning of the next year. It’s very difficult how much is coming this year and how much will go over the year 2010. For us it’s very difficult to predict because we do not know when our customers are starting to reorder.

George Staphos - Banc of America

The question I’m also asking you is I’m not asking you to say when they’re going to start reordering or the amount but if they do begin to reorder do you think that they would be ordering at smaller amounts then perhaps they have been in the last couple of years?

Peter Pfeiffer

It basically depends on how the psychology of the market is going. If they are feeling that the consumption of the consumer is going up they will stay at the same amount because they have to, to refill the supply chain. I suspect that we will see the same amount as is the past.

George Staphos - Banc of America

Can you add a little bit more detail perhaps it was in the footnotes but if you could add a little bit more detail on the shift in custom tooling and how it affected the two segments that you’d mentioned?

Bob Kuhn

Total custom tooling sales was roughly $12 million in this first quarter and it was about $15.7 million last year. Pharma was basically flat and D&H was down about $2 million and Closures was down about $1 million.

George Staphos - Banc of America

There was some adjustment that I think Steve referenced in his comments if you could share a bit more detail on that.

Steve Hagge

In the Closures which was about $8 million there was a shift of the custom tooling where last year it was in the food/beverage market. This year the custom tooling has shifted about $2 million of that shifted into the personal care side. When we strip that out the base organic growth of product sales that’s what I gave you in terms of numbers.

George Staphos - Banc of America

Of the new products that you are working on currently and you hope hit in the back half of the year, which are you most optimistic on?

Steve Hagge

Our customers are optimistic for a lot. I think the one we probably have the most confidence on going forward with would be the personal care area on some of those products that we see. That’s the one that when they get them launched up it’s a bigger issue on some of the fragrance because there’s a much longer lead time. A lot of our personal care products right now I think we’re probably more optimistic will get launched earlier then maybe some of the fragrance new launches.

Operator

Your next question comes from Chris Manuel - KeyBanc Capital

Chris Manuel - KeyBanc Capital

In the press release, one thing you sited was increased pricing pressure. I know there’s always price pressure from different folks but I just want to get a little more color there if I could. Was there incremental then what you’re normally seeing, what’s different now then what you’re normally seeing with price pressure?

Peter Pfeiffer

This increased price pressure is somehow twofold. One part of this increased price pressure is coming from the decline in the raw material and the customer asking that we are passing these declines through to them. Our response to this normally is that since the volumes of their orders are going down we are less able to pass these kinds of things through. By the way, in the Closures business there we have these pass through contracts and lag of the normal lag we will have these increases through. In the fragrance and cosmetic business it’s less usual to do this and that is always a very big discussion.

The other part of the price pressure is coming from certainly from our competitors because there is a certain over competitive in the markets and everybody’s trying to get volume to cover their facilities. This is reflected also in some decline in prices triggered by our competitors.

Chris Manuel - KeyBanc Capital

On some of your Closures business you may traditionally have let’s say a 60 to 90 day escalator, deescaltor and what you’re seeing is they’re coming back asking for some contraction earlier?

Steve Hagge

On the Closure side we’re still in the 60 to 90 day. What we’ve been more referenced we also have had general price increases both for the Beauty & Home and the Closure area. Those customers are coming back and asking us to take a look at. We haven’t accelerated our pass down of the raw material side of the Closure sector.

Chris Manuel - KeyBanc Capital

On the overcapacity piece I’m assuming that that would principally be given comments to questions earlier that would principally be in the US and Europe where you’re seeing the sharp declines in volumes and also principally in the Beauty & Home segment would that be fair or are there other areas that you’re seeing it as well?

Peter Pfeiffer

That’s correct. We are seeing this mainly in the US and Europe. Our response to this usually offering to our customer’s innovative products. We are trying to help them to get more value out of our sales to them. It’s not necessarily that we are following these price pressures when we are pricing our products we are trying to offer different solutions to our customers.

Chris Manuel - KeyBanc Capital

In the Pharma business we really haven’t seen any signs of slowness yet, it appears to me as though flatting out a bit this year on an organic basis is probably more indicative of the year over year comparison. Have you seen any signs that the Pharma business with consumers pocketbooks being so crimped have you seen any signs of discretionary component to Pharma or any pull back or potential for pull back in Pharma?

Steve Hagge

Right now we’ve, as you’ve pointed out, our sales were flat with last year and we think that’s primarily coming based on a very strong year in 2008. In the Pharma sector which is really less economically sensitive we’ve seen less of the impact. Within that sector for example, we’re seeing increases in our sales of generic products in the United States so we are seeing that maybe the consumer is buying prescription more on the generic side then the branded side. There is some movement within that. However, since those are equally profitable for us it hasn’t had a major impact at all on our profitability.

Operator

Your next question comes from Meggan Friedman - William Blair & Company

Meggan Friedman - William Blair & Company

Could you talk a little bit about the new product development? Looking back historically and for the first half of the year are you seeing delays here in the first quarter and the first half and are you lapping product introductions last year that may make for a tougher count?

Steve Hagge

It’s a difficult question. What we’re seeing more this year is rather then new product introductions is new products of our customers have been delayed. For example, in the fragrance area what we’ve seen is some launches which we had hoped would be coming out in March or April have not been cancelled but have been pushed back. Its more our customers have been more cautious in the first half then what we were originally hoping for.

That being said, we’re still seeing, Peter mentioned earlier, our customers are starting to have the concern that they’re even going to be able to get supplies because frankly if demand even stays flat, inventories are going lower and lower. That’s why I think we’re starting to see some optimism towards the second half.

Meggan Friedman - William Blair & Company

Could you talk a little bit about corporate expense? Its lower then prior periods and I think certainly lower then I had modeled. Can you maybe talk a little bit about why?

Bob Kuhn

The two main reasons on the corporate expense; one is obviously some cost reduction efforts on discretionary spend and secondly part of it is related to the currency effects. Some of our corporate expenses are denominated in Euros.

Meggan Friedman - William Blair & Company

Talking a little bit more about the Pharma segment, can you talk about the new product pipeline there maybe in historical context? In the past you’ve said each time we’ve talked about it, it’s been particularly strong, is that still the case?

Steve Hagge

Yes, in fact I would say that it’s been strong and it continues to be. We’ve talked to you in prior calls about our counting device on the asthma spray, those are continuing to increase in terms of work that we’re doing with our customers new products. As we’re seeing today, our customers are also introducing more recent drugs such as the Ventolin product with Glaxo now coming to the UK. Our pipeline continues to be very strong and hasn’t changed, if nothing else probably increased over the prior years.

Operator

Your next question comes from Mike Hamilton – RBC

Mike Hamilton – RBC

Could you comment on your assessment of what you think you’ve got in terms of share of the bottled water market?

Steve Hagge

Of the total market we are probably 2% or something like that. We’re relatively small; we really are a niche closure on that particularly here in the United States where we have a relatively limited side. We’re probably 2% to 3% of the total bottled water market. That right now has been one of our big growth criteria in that as we grow we’ll be able to take certain of these brands as they come back using our dispensing closure for that.

Mike Hamilton – RBC

I’m wondering if you could comment at all there have already been some questions along the line of tooling. A lot of the reduction in tooling year over year is in areas where you tend to get the quickest lift in terms of product to market. What are you thinking about, what are you seeing in the pipeline for coming quarter, how should we think about the issue there?

Steve Hagge

First of all we would view tooling as pretty comparable quarter to quarter about a $3 million difference. Some of that frankly relates to currency. When you looked at it we will get fluctuations between, for example, personal care and food/beverage which are the two biggest markets. We’ve not seen big changes to that and wouldn’t anticipate right now that being a lead indicator of a problem or frankly a positive.

Mike Hamilton – RBC

In areas like fragrance what are you seeing in terms of impact on product mix at the customer level and is it carrying any impact on you?

Peter Pfeiffer

Certainly, what we are seeing is the most hits from this economy probably we are facing are the high end of the fragrance market. There is the biggest drop and they are feeling most of this, which is, by the way different from the past economic problems we are seeing. The high end was less affected at that time; this time this is really where we are suffering the most. This is a big change. Certainly this also affected our business because we are pretty strong in this specific area.

Operator

Your next question comes from Greg Halter - Great Lakes Review

Greg Halter - Great Lakes Review

Can you comment if there was any kind of impact from the LIFO reserve adjustment in the quarter?

Bob Kuhn

If you remember we had about $5 million positive impact in the fourth quarter. We had very little impact slight negative in the first quarter but insignificant. If you’re comparing fourth to first there was a reduction if you will of the positive impact from the LIFO.

Greg Halter - Great Lakes Review

But really no impact to overall results for the quarter?

Bob Kuhn

No, it did not significantly impact the first quarter. It was more of a comparison fourth to first.

Greg Halter - Great Lakes Review

I believe you have said in the past that most of your cash is held in Europe. Is that still true and what is that invested in and what kind of rates are you earning on that?

Bob Kuhn

Yes, that’s correct it is still primarily invested in certificates of deposits and notes issued at strong European banks and currently we’re earning about 2% on those investments.

Greg Halter - Great Lakes Review

I believe you’re in the process of putting in an SAP system I just wondered if you could comment on how that is going.

Steve Hagge

Overall we’ve gone through what we would consider the blueprint phase of that and also getting the programs outlined and we’re just now starting the process of rolling that out to our business units. Basically we’re on time and in budget with that and the process of rolling it out will take the next couple years.

Greg Halter - Great Lakes Review

You did indicate that you bought some stock in the quarter so obviously you’ve resumed the repurchase. I just wondered if you could comment on your thoughts there going forward.

Bob Kuhn

I think we’ll continue to be in the market albeit on the left basis similar to what we did in the first quarter. We still have about 4.5 million shares remaining on the authorizations. We will continue to repurchase in the second quarter.

Greg Halter - Great Lakes Review

I don’t know if you specifically commented on the pinpoint product in the prepared remarks but if you did or didn’t if you could repeat that.

Steve Hagge

The pinpoint for us continues to do well, for us for people that don’t know, that is a closure device that has got a silicone tip on it, today is being used by companies such as Estee Lauder, we’ve got some other large brands, Johnson & Johnson I think is now out with one. It continues to expand. We didn’t have any major new introductions; we’re working on several big introductions coming up over the next three to six months. Its doing well, the consumer acceptance has been very good with that both for cosmetic and other skin type treatments.

Greg Halter - Great Lakes Review

Relative to the new product pipeline I know you’ve mentioned some of the products that you have there but have you had any cancellations of any new products that you’ve been working on or any delays?

Peter Pfeiffer

For the time being most of the new products are still on line, the customers are still working on it. They have had no cancellations. There are some postponements of product introductions but for the time being nobody has drawn back the development we are going to have.

Greg Halter - Great Lakes Review

I know your customer base is pretty diversified. Do you have anyone that’s over 2% of sales?

Steve Hagge

Yes, our largest customer runs about 7% of sales.

Greg Halter - Great Lakes Review

Have you mentioned who that is?

Steve Hagge

No, we have not. If you look at it its one of the major consumer product companies that are out there.

Operator

Your next question comes from Tim Burns – Cranial Capital

Tim Burns – Cranial Capital

In terms of corporate expense did the homeowners association fee go down at Crystal Lake I was curious about that?

Bob Kuhn

No, we had some unusual repair expenses in the quarter but no; the fees did not go down.

Tim Burns – Cranial Capital

Is it true or not that your drug delivery devices are favored in the hospital, nursing home care because of its cost and efficiency savings or is it just a wash with traditional delivery systems?

Steve Hagge

I’m not sure in the hospital setting. A lot of what we would be selling through would be more prescription drugs which have broader use not just the hospital. I think certainly it’s easier to use either on a nasal or a lung application or on oral applications. I don’t know that I would associate it to the hospital or nursing home but more from a patient convenience we feel our systems are certainly more patient friendly then for example a syringe.

Tim Burns – Cranial Capital

The cost savings really is getting the patient out of the hospital.

Steve Hagge

Correct and again what we’d be doing is if they’re taking our medication in the hospital for example asthma they would continue to take that when they’re home so it’s not just a hospital specific medication or a nursing home specific medication.

Tim Burns – Cranial Capital

You know how it is these days you have a heart transplant then it’s an outpatient procedure. In terms of the aggressive price that’s talk about out there it’s around all the industry as you know many industries. Are these opportunities for a strong company like Aptar to gain share and God forbid online to weaken competitors?

Peter Pfeiffer

It certainly is an opportunity for us but you know what, it’s interesting, talking to our customers they are appreciating to have a partner, a supplier which has the financial strength like AptarGroup and this also helps us in talking about pricing about new innovations. If you look at the press releases we have seen from some of our big clients like Estee Lauder or like Colgate, Proctor & Gamble they are concentrating their activities on new products and to strengthen their supply chain. In this respect we are really today the supplier of choice for many of these kinds of customers.

Tim Burns – Cranial Capital

With your large cash position, excellent debt ratios, maybe some sicker competitors, you’ve always been focused on technology, customers and geography. Wouldn’t the opportunities be much more available now like the vulture sitting over the carcass?

Peter Pfeiffer

We don’t like to be the vulture. I don’t know whether it would be made sense by additional capacity as you said. If there is not something strategic implied in such recent acquisitions I would rather say we would back off. We are looking for technologies still, we are looking for regional presence, we are looking for new products but necessary to increase the capacity or to get rid of a competitor that would not be something that we would do.

Steve Hagge

The support the other side, certainly the acquisition opportunities today are probably getting bigger then they were both of the last couple years, given the strength of the balance sheet we have.

Tim Burns – Cranial Capital

In terms of broadening the product line, I know you guys are very, very particular with regard to what you’ll do. In drug delivery I know there are five or six categories from nasal to bronchial to various other things. Syringes and pens are these areas that are sensible for you or are they just too far out of your scope?

Steve Hagge

We would like to stay with the dispensing systems. I think you’re right; there are much broader opportunities in the dispensing system area. We’re not looking to get into can business or the bottle business. In the other dispensing areas whether, again it would have to be technology driven, looking at syringes would be more not just buying a syringe company but if there’s new technology its certainly something that we will end up looking at.

Peter Pfeiffer

Usually we are looking for products which are patented or at least have a certain kind of IPR which is linked to protect our market. The products you mentioned would not be out of scope but they have to fulfill some requirements.

Tim Burns – Cranial Capital

To fill out a portfolio that’s used for drug delivery on its own is not the strategy its high value, patented components within.

Peter Pfeiffer

True.

Operator

Your next question comes from George Staphos - Banc of America

George Staphos - Banc of America

For all of the new product development efforts and leadership that you have in dispensing systems, if I look back at our models over the last 10 plus years, Aptar, which traditionally versus all the packaging group and which had higher margins, higher turns on capital has seen a steady erosion to now more of an average both return and EBITDA margin. It hasn’t just occurred in the last couple years where we could say it’s something about the cycle.

As we think about that, what do you think the biggest drivers have been, is it just the fact that your competition, even though they’re trailing you they’ve been able to close the gap technologically with you or are there some other factors at work in terms of why your returns and margins haven’t actually kept up with the rest of the industry?

Peter Pfeiffer

A big part of the decline of the margins I think is coming from our investment into the emerging markets. We have had the strategy to be a global player with our customers and I think we have invested quite a bit in the Asian market and the Latin American market. We also are somehow affected by the currency. If you look at the development of the dollar in the last year this also has had an effect on our margins.

Steve Hagge

Going back a couple years back in like 2006 we added about another 100 basis points in terms of option expense that was added that wasn’t there before. The currency frankly what we would hope to see is the dollar now starts to strengthen. When the dollar was weaker we actually saw negative 50 because of the translation transaction percentage.

Also with the tooling increase which we’ve seen go up probably from around $4 to $5 million up to $50 million. There have been some areas, certainly we saw in 2007 and 2008 some increase in returns that have been negatively impacted with this new economic issue.

George Staphos - Banc of America

As I said, it’s not just based on the last couple years it’s a much longer term history that we have from our model etc. When we look then out into the next two or three years, realizing we’re in uncertain times let’s adjust for that for the moment, what do you think the biggest source of improving return on capital then will be for Aptar on a going forward basis? Will it be the effect that you finally get more lift in return in the investment you’ve made in emerging markets? Will it come from a specific product category? How should we think about that?

Steve Hagge

If you look at it a couple ways. Number one I think you are correct, we are starting to see developing markets continue to increase, and in fact they’re the ones the least effected by this economic crisis that we’re seeing in other parts of the world. Secondly, our Pharma growth continues to outpace without any acquisitions now, outpace our Beauty & Home and Closure business. Third, even within the Closure business we’re starting to see the food/beverage market open up which also is giving us more volume through put.

I think coupling to those together with the general innovation with the products we still think we’ll be able to generate increase in returns outside of the unusual economic activity we have today.

George Staphos - Banc of America

If we think about price competition and whether it’s a little bit more intense then in prior years or not, are you seeing it more from new entrants, in other words, companies that have decided they want to be specialty packaging too in the last several years? Is it coming from smaller players that have always been around who maybe have less balance sheet strength and therefore become a bit more desperate in recent years? How would you categorize, if its possible to where does increased competition come from?

Steve Hagge

Let’s go back and break that down a little bit. First of all, the competition we have to take the Pharma segment out of that because it’s a very different segment. When talking to price competition its Beauty & Home and Closures. Primarily what we’re seeing the competition there are some new entrants coming in. They tend to have been smaller but it tends to be a lot more the existing guys that have been in the business. Keep in mind, some of those have made some acquisitions in the past that now they’ve got to make sure that they pay for.

It’s a little bit of a balance in Beauty & Home, there are some new entrants but I think the majority of what we’re seeing are frankly the existing players.

Peter Pfeiffer

I think it less the Asian market, in the past we have seen more price competition coming from the Asian market which has gone down a little bit in the past month I would say.

Operator

Your next question comes from Mike Hamilton – RBC

Mike Hamilton – RBC

Following up on George’s line there its always murky in what we’re seeing but can you comment at all on where you feel best on market share gains and as you look forward over the next couple years where you anticipate you’re going to get the best tailwind in that area?

Peter Pfeiffer

We are pretty well positioned in almost all of our markets we are serving. We are number one or number two in most of the markets we are serving. Its pretty broad based. After this financial crisis we will see some turn back in the Beauty & Home area, this will increase again; people will start to use more of these kinds of products. We are looking forward for quite some increases in the Pharma area because there we have a very strong position and we are looking for new opportunities there.

As already mentioned, I think the worldwide developments in the emerging markets in Latin America and Asia will help us to strengthen our position in the market.

Steve Hagge

The other thing that helps us too is we are today one of our smaller markets but one of our fastest growing is the food/beverage market. In that market we continue to see innovation being drivers and we continue to open up new categories in terms of products. That also, in addition to what Peter said, is something we’re looking forward to.

Operator

I’m showing no more questions at this time. I’ll turn the conference back over to Mr. Pfeiffer.

Peter Pfeiffer

I would like to thank everyone for participating in today’s call. Thank you very much and see you next time.

Operator

Thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.

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