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AptarGroup, Inc. (NYSE:ATR)

Q2 2011 Earnings Call

July 20, 2011 8:00 am ET

Executives

Ralph Poltermann - EVP and Treasurer

Peter Pfeiffer - President and CEO

Steve Hagge - EVP and COO

Bob Kuhn - EVP and CFO

Analysts

Chip Dillon - Vertical Research Partners

Ghansham Panjabi - Robert W. Baird

George Staphos - Merrill Lynch

Mark Wilde - Deutsche Bank

Chris Manuel - KeyBanc Capital Markets

Brian Rafn - Morgan Dempsey Capital

Greg Halter - Great Lakes Review

Michael Hamilton - RBC

Gregory Macosko - Lord Abbett

Timothy Burns - Cranial Capital

Operator

Welcome to AptarGroup's second quarter 2011 results conference call. (Operator Instructions) 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 were not able to listen today, the information contained in the replay will be dated and should be used for background information only. The company undertakes no obligation to update material changes in forward-looking information contained therein.

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 Peter.

Peter Pfeiffer

Good morning, everyone. Before beginning our usual discussion regarding our operational results and outlook, I would like to take a moment to discuss the announcements in the press release regarding the increase of both our cash dividend rate and our share repurchase authorization as well as my decision to retire at the end of this year.

First turning to the increases, the Board approved a 22% increase in the annual dividend rate from $0.72 per share to $0.88 per share, and the Board also approved a 4 million increase in our share repurchase authorization. Our cash generating ability and strong balance sheet allowed us to improve shareholder value with these actions. And at the same time, we remain well-positioned to take advantage of strategic opportunities in the future.

On a personal note, my decision to retire at the end of the year was announced, as well as effective upon my retirement the appointment of Steve Hagge to succeed me as President and CEO.

After more than 40 meaningful years of working for the company, I have decided to retire at the end of this year. I would like to point out that I am in good health and retiring now will allow me to spend more time with my family and to pursue other interests. I plan to continue my present role in the day-to-day management of the company through the end of the year and assist with the smooth transition. I plan on continuing to be associated to the company by serving as a Director.

I'm proud of my contribution to the development of our strong management team and the success of the recent realignment of our segments. I'm confident that AptarGroup will continue on the same successful cause in the future under Steve's leadership.

Now I would like to briefly comment on our overall results and outlook and then discuss our Beauty & Home segment. Steve will follow me with the comments on Pharma and Food and Beverage segment, and then Bob will review our financials.

Focusing on the quarter overall, positive momentum continued into the second quarter. And as result, we achieved all-time record high quarterly sales and earnings per share. Looking forward, we continue to be encouraged by the high level of new product activity across the board, largely due to the success from the recent realignment of our segments. We have had a strong first six-month start to the year, and we expect growth in the second half of this year to return to more normal levels.

Bottomline, earnings per share for the third quarter of this year are projected to be in the range of $0.70 to $0.75 per share compared to a prior all-time quarterly high earnings of $0.68 per share posted in the third quarter of last year.

Turning now to our Beauty & Home segment, compared to the prior year, reported sales of the second quarter increased 17%. Changes in exchange rate positively affected sales by 9%. Excluding currency changes, sales increased 18%. Excluding changes in exchange rates, sales to the personal care market increased 5%, sales to the fragrance/cosmetic market increased 15%, and sales to the household market increased 4%.

Overall segment income in dollars increased as a percent of sales, negatively impacted by higher professional expenses and the delay in the pass-through of higher resin costs on Closures.

Turning to the products, we received the DuPont Gold Award for Packaging Innovation for our all-plastic airless dispenser called Eden. It is the first airless dispenser with certified recyclability because it's composed of only one family of plastic. Also, it's well-adapted for organic cosmetic because of the conformity of the materials and its protection for low-preservative formula.

Gold Bond has introduced a new line of body lotions under the Sheer Ribbons name that uses compressed air with our Bag-on-Valve aerosol system to dispense ribbons of moisturizing formulas of body lotion. This represents a new application for Bag-on-Valve system.

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

Steve Hagge

I'll provide my comments on the Pharma and our Food & Beverage segments and then turn the call over to Bob to review our financial results.

First looking at the Pharma segment, we had another very strong quarter in pharma. Reported sales increased 18%. While excluding currency, core sales increased by 5% in the quarter. Lower custom tooling sales negatively impacted core sales growth by 3%. On a constant currency basis, sales for the RX market increased 2%, whereas sales to the consumer healthcare market increased 14%.

Now turning briefly to the products, Nycomed received European approval of their breakthrough cancer pain medication called Instanyl in a single-dose nasal spray form versus their previously approved version that had a multi-dose system.

Archimedes Pharma received FDA approval to market Lazanda, which uses one of our pumps. It's the first fentanyl nasal spray medication in the U.S., again for the management of breakthrough pain in cancer patients.

There is a lot of new project activity for marketers of consumer healthcare products due to the success of our most recent realignment, which increased our focus on consumer healthcare applications. For example we're seeing several new projects for cough and cold applications as well as ophthalmic applications.

Now looking at our Food & Beverage segment, compared to the prior year, reported sales in the quarter increased 20%. And excluding currency impacts, the sales increased 14%. An increase in custom tooling accounted for 7% of the increase, while the pass-through of the higher resin cost on sales of Closures accounted for another 3% of the increase.

Sales for the food market, excluding currency changes, increased by 16%, while sales for the beverage market again excluding currency changes increased by 14%. The delay in the pass-through of higher resin cost and higher personnel cost associated with the establishing a separate organization for the Food & Beverage segment resulted in segment income being slightly less than the prior year.

Now looking at new products, Britvic, a UK company, is launching a drink targeted at teenagers called Turbo Tango in an aerosol package that uses one of our systems to deliver a rush of orange-flavored foam into the market.

MH Foods, who is a market leader for pan spray in the UK, launched a product named Fry Light that uses one of our pumps to deliver a one-calorie-per-spray dose.

We expect the Food & Beverage segment to continue to be our best and strong segment. And during the quarter, we closed on the purchase of a new facility in North Carolina that will be dedicated to this segment.

Now I'll turn it over to Bob to discuss our financials.

Bob Kuhn

I'll provide my comments, and then Peter, Steve and I will be happy to answer your questions.

First, commenting on the results for the quarter, as you've seen, our overall reported sales increased 18%; and excluding currency changes, sales increased 8%.

From a geographic standpoint, sales to customers by our European operations represented approximately 58% of sales this year versus 56% of sales in the prior year, while sales to customers by our U.S. operations accounted for 27% of sales versus 30% last year.

Reported diluted earnings per share increased 10% to an all-time quarterly high of $0.74 per share compared to the $0.67 per share in the prior year.

Free cash flow, which we define as cash flow from operations less capital expenditures, was approximately $13 million for the quarter versus roughly $60 million in the prior year. Our cash flow from operations for the quarter was approximately $68 million compared to $90 million in the prior year. And capital expenditures were approximately $55 million in the quarter compared to $30 million in the same quarter of last year.

During the quarter, we spent $31.2 million to buy back 600,000 shares of our stock, and our repurchase authorization presently stands at approximately 4.9 million shares, including the 4 million share increase in the repurchase authorization that was announced in the press release.

The mix of debt at the end of the quarter is roughly 70% fixed versus 30% variable, and the average interest rate is around 4%. On a gross basis, debt-to-capital is about 20%, while on a net basis it is roughly 2%.

Speaking about the first six months, reported sales increased approximately 16%, and changes in exchange rates accounted for 6% of the increase, resulting in an organic sales increase of 10%. Reported diluted earnings per share year-to-date increased 12% to $1.37 per share versus $1.22 per share last year.

Looking forward, presently we expect the depreciation and amortization for 2011 to be in the area of $135 million with capital expenditures to be in the area of $170 million to $180 million. I'd like to point out that these amounts could vary depending upon the changes in exchange rates.

The effective tax rate for the full year 2011 is expected to be between 33% and 34%. And lastly, we currently estimate that diluted earnings per share for the third quarter of 2011 will be in the range of $0.70 to $0.75 per share compared to the $0.68 per share reported in the prior year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Chip Dillon of Vertical Research Partners.

Chip Dillon - Vertical Research Partners

You mentioned that resin cost pass-throughs were pretty significant in Food & Beverage. But in the other two segments, did you have pass-through components that were meaningful in terms of the sales increase?

Peter Pfeiffer

Yes, we have the pass-through, but primarily on the Closure product range which for us covers both Beauty & Home segment and the Food & Beverage segment.

In terms of the resin and the pharma, it's not a significant portion of the overall raw material cost. But the pass-through would have been also affecting both Beauty & Home and Food & beverage.

Steve Hagge

And in the Beauty & Home side, maybe about a percent of the sales increase overall would have been due to the resin pass-through.

Chip Dillon - Vertical Research Partners

And then secondly, the Food & Beverage growth there which looks pretty terrific, it seems like most of the new products that we heard about tend to be on the beverage side and not as much on food. Maybe that's just my perception. But could you talk a little bit about what the rough split is between food on one hand and beverage on the other and maybe some of the new products that might be coming down the pipe on the food side as well?

Steve Hagge

I think overall today, our balance between food and beverage is around 75% of our sales are to food and around 25% to beverage. In terms of new projects, Chip, it's becoming pretty well split though in terms of products both on the food and beverage side. So we are really very happy that we're seeing growth in terms of new projects in both of those two sub-segments.

Operator

Our next question is from Ghansham Panjabi of Robert W. Baird.

Ghansham Panjabi - Robert W. Baird

Just speaking of some of the trends that we've seen, some of your peers have commented on sluggish volumes on the CPG customer side as selling prices have increased at the retailer level, perhaps underlying a reduction in inventory along the supply chain. You touched many different product categories and end-markets on a consumer side, just in your own businesses, have you seen anything along those lines?

Peter Pfeiffer

I didn't really get the beginning of the question, Ghansham. Could you repeat it?

Ghansham Panjabi - Robert W. Baird

Yes, sure. Some of your pears have commented on sluggish volumes on the CPG customer side. As they increase selling prices at the retailer level. And they've commented on reduction in inventory along the supply chain. Have you seen anything comparable?

Peter Pfeiffer

For the time being, we are not seeing this. We are still having increases in this area. So the inventory is going up, but the sell-through in many of our customer is pretty good.

Ghansham Panjabi - Robert W. Baird

So just to confirm, no variation in inter-quarter trends during the second quarter and nothing so far in 3Q either?

Steve Hagge

What we did highlight, Ghansham, was that our fragrance/cosmetic sector has been growing really well into the double digits even in 20% probably over the last year. And what we're seeing is that we're not going to continue with that, right. That's coming down to a more normal rate that Peter talked about kind of in his earlier discussions.

Peter Pfeiffer

It's the fact that in the last four quarters, the fragrances/cosmetic growth was pretty big. If I could rewind you in the quarter, in the third quarter of 2010, it was 25%; fourth quarter was 20%; third quarter this year was 17%; and second quarter was 50%. These growth rates are certainly not sustainable for the future. We will come back to the normal rate of growth in this area.

Ghansham Panjabi - Robert W. Baird

And just on the guidance for the third quarter, it seems like you're behind on the pricing side in the second quarter, which I think you'll recover during the third quarter (inaudible). And I think seasonally 3Q is really no different than 2Q historically. Why than the conservatism on the range?

Steve Hagge

Well I think, first of all the third quarter for us, if you go back over time, because of the vacation period is a bit slower than the second. So there is a slowdown, primarily even in our European sales, because some of our customers plan shutdown period. So that together with what Peter talked about in the fragrance/cosmetic coming to more normalized is really kind of where we base the projections are.

Operator

Our next question is form George Staphos of Merrill Lynch.

George Staphos - Merrill Lynch

Peter I had a question for you maybe to start, and again we appreciate the color and the details in term of your thought process in terms of retiring. You've been in the job for about three or four years, obviously you've been associated with the company for a number of years, 48 as I recall. Is the current year when you really originally anticipated retiring? Or have your personal interest or desire is still to do something different, increased in recent year? Can you give us a bit more color on that?

Peter Pfeiffer

I think the company is now very well prepared for the future, and I thought this is now the right time to retire. Give the young lines a way and run the company. I have been with AptarGroup since the beginning. So it's a end in the top management, since now 18 years. I think it's enough, it's simply enough.

George Staphos - Merrill Lynch

I've appreciated the additional color there. The other question I had, if it for a turn over, if we think about capital allocation priorities for Aptar on a going-forward basis, and if you had to stack ranks in at the current time, would M&A still come ahead of value return to shareholders, where would investments on new capacity or new technology shouldn't help us consider how your prioritizing capital deployment over the new next six to 12 months? Thanks.

Peter Pfeiffer

I think it's still viewed as acquisition of the new companies is one of the major target for us. We are still looking for new markets for increased market share and we are still looking for new areas to be in. So this is the primary target for our capital spend. Certainly, there is also capacity increases, the new products, especially where we are spending most of the money.

Operator

Our next question is form Mark Wilde of Deutsche Bank.

Mark Wilde - Deutsche Bank

Is it possible to just give a little bit of an update on what you're seeing in terms of the acquisition pipeline right now?

Peter Pfeiffer

It's always very difficult. You have a long list of potential acquisitions. We will not talk about the detail certainly. Traditionally, AptarGroup is very patient in going after these kind of companies. You never know when it really materializes. So it's difficult to predict, because I always say it needs two to tango, it needs somebody who is selling his business and it needs somebody who is buying the business.

Mark Wilde - Deutsche Bank

This is kind of a follow-on to that, Peter. I mean it's the quarter where you've announced a lot of return of cash, incremental cash to shareholders with purchase activity, the increase in the authorization and in the big jump in the dividend. Should we need anything in to all of those decisions this quarter, relative to what you think will be acquisition activity over the next six months?

Peter Pfeiffer

I think in spite of the activities we have announced in our report, we are still investing great. So it's not changing the general ideas.

Steve Hagge

To reinforce that market, I think it really does, it sets up the strength of the balance sheet that we're able to return cash back to the shareholders and continue to be in excellent position, to be able to do significant any M&A transactions.

Operator

Our next question is from Chris Manuel of KeyBanc Capital Markets.

Chris Manuel - KeyBanc Capital Markets

A couple of questions for you, first of all, could you help upon, I'm looking for, maybe Bob you can help me with just quantify a couple of components. One, what do you think the resin impact was in 2Q, that you were behind. So that we can maybe kind of calibrate back half of the year, how that might be different?

Bob Kuhn

We have to think off to beyond resin. I mean also there's been some other increases to the other input cost like aluminum as well. But I would say on an overall basis, on a consolidated basis, it's roughly $2 million impact on the Q2. So obviously, as you know, resin is abated a little bit. In May we should start seeing that come down in the third quarter.

But you really have to look back to Q2 of last year also to understand that looking at resin, resin was decreasing in the second quarter last year, while it was increasing pretty significantly this year. So it was a pretty good impact in this quarter.

Chris Manuel - KeyBanc Capital Markets

And then secondly, you guys cited startup cost and realignment cost. I think you have a new plan that you're starting to outfit. Do you have any senses as to, could you quantify it for us, what the negative impact there was in 2Q? And how that makes phase over the balance of the year?

Bob Kuhn

If we look at in, it's hard to breakout the two. But I mean, if I look at the increased structure cost along with the new facility, it was about $1.1 million in the second quarter. We would expect that to pick up just a little bit in Q3, maybe $1.2 million, and then maybe $1.2 million to $1.3 million in the fourth quarter, so pretty consistent second quarter, third and fourth.

Christopher Manuel - KeyBanc Capital Markets

And then is it primarily done by the time you rollout of 4Q?

Bob Kuhn

Well, we shouldn't be adverse here when we started to add the new structure cost. And the segment will also be operational and shipping products out of the facility in Q1 of 2012.

Christopher Manuel - KeyBanc Capital Markets

And next question I had was, when I go back through some of the numbers you gave us pulling out tooling. It really looks like the pharma business had about 2% growth that's tooling and Food & Beverage really on the 4%. So when you talk about in your prepared remarks and in press release that organic level is going back to more normalized, I am assuming you're kind of implying that those are going to accelerate a bit as the year progresses. Am I thinking about that the right way?

Steve Hagge

I think, again in the tooling side on the Pharma, we were ex-tooling, I think we were up about 5%, 6% with the tooling decrease included. So that side is pretty normalized. We've always said between 5% and 10%. We would expect Food & Beverage to continue to increase with the new projects we've got.

Bob Kuhn

And I think, Chris, generally I mean if you looked at what I said for the first six months, I mean organically we were up about 10%.

Christopher Manuel - KeyBanc Capital Markets

I might have misunderstood that. The tooling in Pharma was a drag or was it higher this quarter?

Bob Kuhn

It was a drag this quarter.

Operator

Our next question is from Brian Rafn of Morgan Dempsey Capital.

Brian Rafn - Morgan Dempsey Capital

A question, what are you guys seeing, maybe a question for Peter, unit volume in the fragrance and cosmetic area. Are you seeing new product launches more regional, more global? Are you seeing product launches in the fragrance/cosmetics in the new products in the hundreds of thousands of units or you're back to kind of the million plus there as the market recovers?

Peter Pfeiffer

I think I answered this question already last time. We are seeing new launches in all the areas, first of all. So it's not only linked to run one region or one segment. In the perfume and cosmetic area, we are seeing more global launches that also means that this will be the higher number. But once again, it's very dependent on the customer and also on the region.

Brian Rafn - Morgan Dempsey Capital

Kuhn or Peter, when do you start seeing your order backlogs start to shape up for the Christmas 2012 season for fragrance and cosmetics? When do you get some visibility and how the holiday seasons are going to look?

Peter Pfeiffer

Usually, it's end of July and it goes over to September. Obviously, it's holiday season and especially in regions which are frequented, especially in France. So normally we are having a better picture at the end of September.

Brian Rafn - Morgan Dempsey Capital

Okay, so it's a little too early right now.

Peter Pfeiffer

Yes.

Brian Rafn - Morgan Dempsey Capital

I had a question maybe for Steve. Any progress in the dispense area for dairy and milk, and that kind of quick single serve type things out of the cooler?

Steve Hagge

We continue to expand in that category. International Delights has expanded their capacity with us on their non-dairy creamer, and we're continuing to look at different projects. And now we have several interesting projects in that kind of a juiced-milk, that whole area. We can't really comment on those until they finally get to the market, Brian.

Brian Rafn - Morgan Dempsey Capital

Is some of your organic growth, talk a little bit about Food & Beverage, is that an area that organically has been growing in the world and you guys are going after that. Or is that something that because of the particular technologies that you've launched, you have been position to take advantage of going after?

Steve Hagge

It's really a conversion side. I don't think people are necessarily consuming more food or beverage. But what we're doing is converting non-convenient or inconvenient dispensing to more convenient. And we see that in category-by-category. And that's what we're really excited about going forward. And that's what a lot of our new projects are based on with our customers.

Brian Rafn - Morgan Dempsey Capital

If you look, Steve, back at some of the new technologies you guys have launched, Bag-on-Valve and Blister packs and aluminum bonding and some of that, what specific area looks like one of the strongest?

Steve Hagge

Again I think you're starting to see lots of different activities with Bag-on-Valve. We don't do Blister packing today. But the other one is on the bonded aluminum-to-plastic, we see significant potential for. So that's an area that we're seeing a lot of growth. And we see a lot on things coming back. So I think again, we're seeing lots of new technology and lots of interest going forward.

Brian Rafn - Morgan Dempsey Capital

And then one follow-up. Where are you investing the cash reserves in this market of dearth of yield?

Bob Kuhn

For us, they're primarily in very safe deposits with strong European banks, which is where most of our cash is. So very, very low risk investments.

Operator

Our next question is from Greg Halter of Great Lakes Review.

Greg Halter - Great Lakes Review

I'm looking at your balance sheet, and I know currency has an impact here, and maybe this is a part of the answer and I wonder if you could maybe parse this out a little. But both receivables up 28% year-over-year, I believe, and inventory up 37%. Just wanted to get your thoughts in regards to both of those.

Bob Kuhn

Yes, you're right, Greg. Part of it is currency related. Part of it is really due on the receivables side is that the timing of when the monthly sales came in. So depending on where we were last year versus this year and the region of where the sales occur. So as we said, the strength of the fragrance/cosmetic business, which for us is primarily out of Europe, typically has a little bit longer payment terms. So we do see sometimes when the strength is coming from European base that that receivable tends to creep up a little bit.

And on the inventory side, it really just for us has been to capture and be prepared for the growth that we were seeing in the first part of the year.

Greg Halter - Great Lakes Review

Is there any way to maybe strip out the FX impact and provide a year-over-year percentage number?

Bob Kuhn

You will see that when we publish the Q, when there is completion of the cash flow statement. And essentially, that's driven out currency.

Greg Halter - Great Lakes Review

Okay. And on the Food & Beverage area, Steve, I think I missed what you said about the percentage. Was it 25% food and 75% beverage?

Steve Hagge

In terms of our total mix of business today, it's about 75% food and 25% beverage in terms of the full split.

Operator

Our next question is from Michael Hamilton of RBC.

Michael Hamilton - RBC

Could you comment a little bit on what you're seeing by geography?

Peter Pfeiffer

Basically the growth in the different geographies in the last two or three quarters hasn't changed. We are seeing there is some big growth in the Asian area. We are seeing some mixed growth in Europe. There are some countries which are facing problems. Others are running very well. We're seeing a flattish growth in the North American market, and we're seeing good growth in Latin America. So this is basically the same picture as we have had in last two or three quarters.

Michael Hamilton - RBC

If we could shift over to the manufacturing side, is there any way where you're running capacity-constrained and are you feeling like you're fairly optimized in terms of plant manufacturing at this stage?

Peter Pfeiffer

We are seeing still in some of our products some delays the capacity is taking, especially in the fragrance area and in some of our pharmaceutical products. Other than that, we have very well good sales all over the world.

Operator

Our next quarter is from Gregory Macosko of Lord Abbett.

Gregory Macosko - Lord Abbett

Could you talk just a little bit about any outsourcing you may be doing. I know that you've talked significantly about the design and obviously complete packaging. Is there opportunity or have you been looking at possibly outsourcing, say, caps, pumps, valves or different components?

Bob Kuhn

From our side, Gregory, we will outsource some of our molding to make sure that our molding facilities are as fully utilized as possible. Typically we do not outsource any of our assembly. We do about 100% inside. And as far as the design work, we're doing most of that, almost all of that inside. And occasionally we bring in consultants from time to time to help us in the project. But we're doing all the design work inside.

Steve Hagge

Gregory, I guess the other issue to that too is we also do quite a bit of work with our co-suppliers. So it's quite a bit of coordination between the bottle guys and other parts of the supply chain. We're not actually responsible for those.

Operator

(Operator Instruction) Our next question is from George Staphos of Merrill Lynch.

George Staphos - Merrill Lynch

A couple of follow-ons. When you look at Food & Beverage and we adjust for tooling and resin, the adjusted rate of growth was 4%. Now, clearly we know that tooling is really a window on your future growth. So in fact, the tooling is up 7% is a good barometer for the future. But were you actually pleased with the Food & Beverage performance this quarter? One could suggest that the revenues may be just not where you would have expected.

Steve Hagge

That's a good statement, George. It was lower than what we had anticipated coming in. Frankly, tooling was bit higher than what we thought. So as you said, it's a good barometer on the future together with tooling we saw in the first quarter. But volumes, we saw some inventory contraction with a couple of our customers and also some seasonality that we see into the business. But the 4% was a bit lower than what we had anticipated at the beginning of the quarter.

George Staphos - Merrill Lynch

So back to question that was asked earlier where you said you really weren't seeing much adjustment in your customers' planning and behavior. Was there maybe some adjustment in inventory levels at the customer level? And if that's true, how long do you think that that continues?

Steve Hagge

Again, I think on the Food & Beverage side, there may have been a little, but it's hard for us to gage that. We certainly don't see that as a long-term trend, a several quarter trend.

Peter Pfeiffer

And I think that, George, if you look back to the recast of the realigned figures, the second quarter of 2010 was really a record in the Food & Beverage area. So while it was a little bit down, it was pretty difficult comps coming into Q2.

George Staphos - Merrill Lynch

If we ultimately consider fragrance and cosmetics decelerating from its significant double-digit growth rate over the last several quarters, do you think that will have any effect at all on your forward margins in terms of operating leverage? Help us think about how we should perhaps project or consider the operating leverage there.

Bob Kuhn

It shouldn't have a significant impact, because as we talked about, we do buffer some of the peaks with some temporary labor and what not. But also offsetting any of that, we should hopefully see the abatement on the resin side hopefully offsetting any of that. But I wouldn't expect a significant negative drag at all.

Operator

Our next question is from Brian Rafn of Morgan Dempsey Capital.

Brian Rafn - Morgan Dempsey Capital

Just a couple of follow-ups. Everybody is talking about jobs, jobs and jobs. Are you guys doing anything from the standpoint of rehiring headcount and kind of tell us what are you running on kind of a labor shift globally?

Steve Hagge

Well, I think overall certainly as we've added the North Carolina facility, we have indicated we will be adding new jobs at that facility as we go through the third and fourth quarters and into next year. The rest of the facilities, we have added people to deal with direct labor people that we've had to fill our needs in terms of each of the segments. So if anything, we've had in-depth hiring over the first two quarters as we compare it to a year ago, but not significantly up from where we were.

Brian Rafn - Morgan Dempsey Capital

Anything on overtime you are paying, Steve?

Steve Hagge

Yes, I think the other side is, as Peter said, we've stretched this capacity in a couple of areas, high-end fragrance\cosmetics, some of our pharmaceutical. Because of that, we're actually staffed overtime. Instead of making the hires, we try to deal with that on an overtime basis. So that has a certain pressure on some of the margins as we go into that. As we see that coming back down to more normalized level, that should help us going forward.

Brian Rafn - Morgan Dempsey Capital

You guys mentioned, Steve, this Turbo Tango, this orange foam spray. Is that a new type of a product versus just a standard kind of a liquid beverage, or is that something that you've done before?

Steve Hagge

It's a whole new category. Britvic comes back to aerosolized product. It actually shoots a foam of stuff in your mouth on a pressurized basis. So it's an interesting category they are trying to market. We've talked about in the previous calls, (Meo) was a class product, which is a whole new category for us on corn-flavored water. Both new categories will see how successfully they are in the future, but opens up good potential for us.

Operator

Our next question is from Timothy Burns of Cranial Capital.

Timothy Burns - Cranial Capital.

There certainly was a big article in the New York Times on how Germany in particular is actually starting to outgrow Europe; in other words, Spain, France and some of its traditional trading partners are being replaced by China in particular. We haven't talked about China much on the call. How do you use China? Is it a local market? Is it a re-export market? Is it a business where you'll export components and assemblies to your other local factories in the country? Could you put some light on that?

Peter Pfeiffer

All of our facilities in the emerging markets, the developing markets are (inaudible) to serve the local market. It's the primary idea; China is especially is a hub for us for the Asian market. So we are certainly exporting to some of the other Asian countries, but not to the western rule. So it's all staying in the region.

In the Pharma business, we are supplying pumps and valves to India, for example. But the rest is all staying in the region.

Timothy Burns - Cranial Capital.

There is thousands of molders over there from what I can ascertain now. And I guess they're certainly not adept to our quality today. But are they a threat to the globe in terms of ultimate capability and capacity? Is there something that you guys worry about?

Peter Pfeiffer

Not really. We have seen some of those guys exporting their products to Europe and the United States, but this is five years ago. It has stopped, because it's difficult to serve markets in the western world from a few thousand miles away or even more. So service is a key for our customers. It was not really addressed. And it will I think ultimately be a trend in the future. In view of the environmental issues, transportation costs and all of these kind of things, local manufacturing will be the future trend globally.

Bob Kuhn

Tim, on the molding side as well, it's not very labor-intensive. So if were to tour one of our facilities, you wouldn't see thousands of people on the molding floor. I mean it's much more capital-based and with the process improvements and the technologies you've got, bigger presses, bigger molds, really innovation on the process side. So labor is not a significant component of it.

Operator

I am showing no further questions in the queue at this time. I would now like to turn the conference over to Mr. Pfeiffer for any closing remarks.

Peter Pfeiffer

Thank you very much. I would like to thank everyone for participation on the today's call, and I look forward for the next conference call. Have a good day. Good bye.

Operator

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect and have a wonderful day.

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