Feb 8, 2008
Operator
Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's fourth quarter 2007 results conference call.
(Operator Instructions) Introducing today's conference call is Mr. Ralph Poltermann, Vice President and Treasurer of AptarGroup.
Please go ahead, sir.
Ralph Poltermann
Thank you, [Giovanni]. 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 day of this live call.
Although the company will post a replay of this conference call on its web site as a service to those investors who were 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 today are Peter Pfeiffer, President and Chief Executive Officer of AptarGroup, and Steve Hagge, Executive Vice President, Chief Operating Officer, and Chief Financial Officer. I would now like to turn the conference over to Mr.
Pfeiffer.
Peter H. Pfeiffer
Good morning, everyone. This is Peter Pfeiffer.
I realize that I have a strong German accent and that my English is certainly not as good as Carl Siebel. In light of this, I would not take it personally if you ask me for clarification when we get to the question-and-answer section.
I will briefly summarize our [processes] and then comment on our Beauty & Home segments. Steve will then provide insight on our Pharma and Closures segments, and follow his statements specific comment with his usual review of our financials.
I would like to take a moment to point out that the results we will be discussing were achieved under the leadership of Carl, who retired at the end of the year from his position of President and CEO of AptarGroup. He deserves recognition for these exceptional results, as well as for developing the strong senior management team that will continue to execute the company's strategy for future success.
Fortunately, we will continue to profit from his experience while he continues to serve as a Director of the company. Turning to the results, I'm pleased to report that 2007 was our 42nd consecutive year of increased sales and the strongest year in the history of the company.
We topped off the year with a record fourth quarter, which is noteworthy in the light of the tough comparison to the strong fourth quarter of the prior year. Sales and profits increased in every segment.
As we highlighted in the press release, we also benefited from gain on the sales of our Australian operation. This action was taken with the intention of further unlocking the strategic growth opportunities in Australia by selling this unit to a recognized leader in Australia.
I would like to point out that we are not abandoning this market. Rather, the direct presence we have had there in the past will effectively change to an indirect form through license and distribution agreements we have in place with the buyer of the business.
Now I would like to provide some color on the largest segment - the Beauty & Home segment. For the fourth quarter of 2007 excluding changes in exchange rates Beauty & Home segment sales increased 6% over the prior year.
This is mainly comprised of a 7% increase in sales to the personal care market, a 5% increase in sales to the fragrance/cosmetic market, and an 8% decrease in sales to the household market. In the personal care market interest continues to grow for our bagandvalve systems and our twist-to-lock aerosol valve actuator technology that eliminates the need for overcaps.
Strong demand continues for our fragrance sample systems, including our miniature spray pumps for vials as well as our thin, spring sample system known as [Imagine]. We will be expanding our product offering by introducing to the market new systems for cosmetic lotion samples.
Interest in the use of our pumps for salad dressing sprays continues to grow. We previously mentioned that Wishbone and [inaudible] are marketing salad dressing products in spray form using our pumps.
I'm happy to say that Newman's Own has just introduced several flavors of natural salad mist using our pump. Lastly, I would like to mention that to position ourselves for the future we have recently begun a business process improvement initiative including a new SAP system that will allow us to better manage our businesses by providing more visibility across all of our operations, to leverage better practice worldwide, and, most importantly, to better serve our customers.
I would now like to turn the call over to Steve.
Stephen J. Hagge
Thanks, Peter, 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 Pharma market, the fourth quarter of 2007 continued to be strong for this segment. Excluding changes in exchange rates, the Pharma segment sales increased 8% in the quarter mainly due to increased sales of pumps.
The improved profitability of the Pharma sector in the quarter reflects operation improvements in addition to higher product sales. From a new products standpoint, near the middle of last month Glaxo Veramyst Nasal Spray for the treatment of allergies that we've discussed in the past was approved in Europe under a different brand name.
Now looking at our Closures segment, overall both sales and income increased in the quarter. We continued to experience some weakness in demand in the personal care market in the U.S., and this resulted in some underutilization of capacity in the U.S.
Excluding changes in exchange rates, Closures segment sales increased 4%. This was comprised of a 4% decrease in sales to the personal care market, a 21% increase in sales to the food/beverage, and an 8% increase in sales to the household market.
Looking at new products in the segment, we saw increased interest in our Simply Squeeze closures for beverages, our Easy Open Jar Lids that replace large screw-off caps, and finally our new Pinpoint system for cosmetic applications. Now I'd like to summarize our consolidated results for the quarter.
As you've seen, our overall reported sales increased approximately 15%. Changes in exchange rates accounted for 9% of the increase, resulting in organic growth for the quarter of 6%.
Since we're on LIFO in the U.S., higher material costs negatively impacted the quarter by about $2 million on a pre-tax basis compared to the prior year. From a geographic standpoint, sales to customers by our European operations represented approximately 63% of net sales this year versus 62% of sales last year, while sales to our customers by U.S.
operations accounted for 26% of sales this year versus 28% of sales last year. Diluted earnings per share from continuing operations increased 24% to $0.47 per share, up from $0.38 per share in the prior year.
And our total reported earnings per share was $0.50, which includes a $0.03 per share gain on the sale of our Australian operation. Now because this operation was immaterial, we only are reflecting the gain on the sale in our discontinued operations line.
Free cash flow, which we define as cash flow from operations less capital expenditures, continued to be strong in the quarter, with $39 million generated compared to $23 million generated a year ago. Our cash flow from operations for the quarter was roughly $86 million in the current year compared to $49 million in the prior year.
And our capital expenditures were around $47 million in the quarter compared to $26 million in the fourth quarter of last year. We spent approximately $19.6 million to repurchase roughly 473,000 shares during the quarter at an average cost of a little over $41 per share.
And at the end of the quarter, the remaining shares authorized for repurchase was around 2 million. The mix of debt at the end of the quarter comes to be roughly 40% fixed versus 60% variable, with an average interest rate of about 5.5%.
On a gross basis, our debt-to-capital is around 24%, and on a net basis debt-to-cap is approximately 4%. Now briefly looking at the full year of 2007, as Peter talked about, 2007 was an outstanding year for the company, with increases in both sales and profitability.
Reported sales increased approximately 18%. Changes in exchange rates accounted for about 7% of this increase, acquisitions about 1%, leaving an organic growth rate for the year of around 10%.
Our preliminary breakdown of sales by product for the year would be that pumps will remain about 50% of our total sales for the company, closures will be about 24% of our overall sales - that's down from 26% a year ago - while valves will be about 15% of sales compared to 14% a year ago, and other about 11% compared to 10% a year ago. From a geographic standpoint, sales to our European operations represented approximately 62% of net sales this year compared to 61% last year, while sales to customers by our U.S.
operations accounted for 27% of the sales this year compared to 29% last year. Free cash flow for the year was approximately $135 million versus $90 million in the prior, or an increase of 50%.
Our cash flow from operations was $273 million in the current year compared to over $198 million in the prior year, while our capital expenditures were around $138 million compared to $108 million in 2006. Diluted earnings per share from continuing operations for the year increased 36% to $1.95 per share from $1.43 per share in the prior year.
Now looking forward into 2008, presently we expect our depreciation and amortization in 2008 to be in the area of about $130 million. We expect our cash outlays for capital expenditures in 2008 to be in the area of $170 million.
And again, both of these may vary based on where exchange rates for the year end up. Now there're two major items that cause our projected 2008 capital expenditures to exceed depreciation and amortization.
The first is about $25 million for the new SAP system that Peter talked about. And secondly, we have a facility in the United States in the New York area which is coming off lease in the middle of 2008, and that's about $10 million and we will be acquiring that facility.
Our effective tax rate for 2008 is expected to be in the area of $0.30 to $0.31 a share. Now looking forward, diluted earnings per share for the upcoming quarter are expected to be in the range of $0.46 to $0.49 per share versus $0.41 per share in the first quarter of 2007.
This represents an increase in the range of 12% to 20% for the quarter. At this time, Peter and I would be glad to answer any of your questions.
Operator
(Operator Instructions) Our first question comes from Chris Manuel from Keybanc Capital Markets.
Stephen J. Hagge
Good morning, Chris.
Christopher Manuel
Good morning, gentlemen.
Peter H. Pfeiffer
Hi, Chris.
Christopher Manuel
I guess good afternoon to you, Peter.
Peter H. Pfeiffer
I'm here in the States, so it's good morning for me, too.
Christopher Manuel
Good morning for you. All right.
Hey, a couple questions for you. First, congratulations on a terrific quarter, and I wanted to ask about, with a number of the fragrance/cosmetic and personal care companies reporting some disappointing results through the end of the year, and we're hearing of a pending slowdown in consumer spending, could you maybe give us a little color as to what you think or how you view the market here in North America and how your business could potentially stand up in such an environment?
Peter H. Pfeiffer
Yeah, Chris. It's right.
We have seen some weakness in the U.S. market, especially for the Closures markets.
We have not seen the same weakness in the Beauty & Home, the pump market. As you know, AptarGroup is very diversified in our markets regionally, we are selling, so we are seeing good growth in other markets than the United States.
For example, Europe is still doing very well. We are growing in our sales in the developing markets like South America and Asia, and we are seeing good growth also in the Eastern Europe markets, especially in Russia.
As our customers also see, you have seen maybe some of the announcements of L'Oreal and others which are in the same situation. So yes, it's difficult for the time being in the States, but we are less hurt worldwide.
Christopher Manuel
Okay. Very good.
And would there be any - as a follow up to that, would there be any reason to expect that - I know last year your organic growth was roughly 10% for the full year, and we've often talked about a long-term rate being something in the 6% to 8% range. With the new product pipeline that you have, would there be any reason to anticipate that, even in spite of some of this maybe just U.S.-based softness that 2008 couldn't as well be something in more of a normalized 6% to 8% range?
Does that still sound realistic?
Stephen J. Hagge
I think, Chris, as we go into 2008, we expect that it would be somewhat more normalized. It's difficult to predict where the full year's going to come out, but as you can see, as we've looked at our earnings coming into the first quarter, we're still pretty cautiously optimistic that it's going to be a good year.
Peter H. Pfeiffer
And we have very tough comparisons to the last increase in 2007, which was 13% year-to-date.
Christopher Manuel
Yeah. Okay, perfect.
I'll jump back into queue. Thanks.
Operator
Our next question comes from [Unidentified Analyst] from Wachovia Securities.
Unidentified Analyst
Good morning, guys. This is actually [Phil] calling in for [Ganchan].
A quick question. In the press release it appears that the language around the competitive environment was a little more pronounced, I guess.
Have you see activity pick up on the competition front, and are you seeing less discipline on the pricing from your competitors and have you lost any market share potentially?
Peter H. Pfeiffer
First of all, Ganchan, we are still market leader, especially in all fields where we are serving, so we have seen quite a big growth. The competitive environment is difficult and still will be difficult into the future, but with the growth rate we have achieved in the past, we think we have not lost market share.
Unidentified Analyst
Okay, but what about on the pricing front? I mean, are you seeing any less discipline on the pricing front from your competitors potentially?
Stephen J. Hagge
I think when you look at the whole pricing environment, I don't know that we've seen it increase significantly. What we have and AptarGroup will continue to do is to focus on new innovative products.
That continues to distinguish us in the marketplace and gives us our best competitive advantage.
Unidentified Analyst
Okay. On that front, do you have any new game changes for '08, you know, similar to your very successful platform Simply Squeeze?
Stephen J. Hagge
Again, I think if you go back and look at it across the board, we've had always, I think, in the past we do small, a lot of small, incremental changes.
Unidentified Analyst
Okay.
Stephen J. Hagge
We talked about the sampling system. Peter, again, alluded to that.
We'll be introducing new sample systems for lotion products in 2008. Our bag-and-valve system continues to expand, and we talked about that in the third quarter with the GlaxoSmithKline toothpaste introduction for Aquafresh.
So we see lots of new applications coming back in. In our food/beverage business, we're seeing that, you know, the new salad dressing, we're now expanding in spray from.
So there's lots of new what I'd call smaller opportunity.
Unidentified Analyst
Okay.
Stephen J. Hagge
Just not one huge opportunity to talk to.
Unidentified Analyst
Okay. Thank you very much.
Operator
Our next question comes from Ross Gilardi from Merrill Lynch.
Ross Gilardi
Good morning. Thank you.
Stephen J. Hagge
Good morning, Ross.
Ross Gilardi
I just had a couple of questions just, you know, going back to fragrance/cosmetic. I mean, I see you called out softness in the U.S.
personal care market. You didn't specifically call out weakening in the fragrance/cosmetic business.
Could you just, you know, address that a little bit, and then just talk a little more about what you're seeing in term of customer inventories in the chain and so forth.
Peter H. Pfeiffer
I mentioned already that we have seen some weakness in the Closures business, not so much in the Pharma business. One of the reasons might be that we are seeing some shift in the packaging from closures - dispensing closures - to, for example, our well systems.
One example is the sun care market, where our bag-and-valve systems are used instead of dispensing closures. So there is a shift between different packagings.
Going forward, I don't know. There will be - we are seeing this market growing as in the past, so we are not seeing any different or any change in the market specifics.
Stephen J. Hagge
I think also, Ross, just going back directly to your question, too, on the fragrance side, again, I think a lot of the, you know, the major fragrances still are European-based and we're still seeing a lot of growth to that. So when we're hearing slowing of sales, it tends to be more slowing of sales to U.S.
consumers as opposed to necessarily our customers, who are also doing a lot of exports themselves. So frankly, our backlog in the fragrance/cosmetic area continues to be pretty strong, particularly in light of the strong 2007 we had.
Ross Gilardi
Okay. Thank you.
And then on Pharma, could you just talk a little bit more about, you know, the outlook for, you know, for new drugs? Lots of Pharma companies seem to be complaining about a weak cold and flu season in the fourth quarter.
Do you think that impacted your volumes at all?
Stephen J. Hagge
Well, I think, you know, first of all, I think if you look at our Pharma business in 2007 as a whole, we're very pleased with it given its growth, so we had strong organic growth in 2007. As I mentioned in my remarks, the other plus that we saw was this new Veramyst allergy product of GlaxoSmithKline, in January of this year just received approval in Europe.
We've also - there's a product that you may have seen on an over-the-counter product called Mucinex that's getting a lot of advertisement. It's now in pump from, and we're on that product.
So I think when you see general comments on the Pharma market it's important to note that AptarGroup deals in a very specific niche of that market, and frankly, when we go back in and look at sales from Glaxo and AstraZeneca in our niches, those seem to be doing pretty well.
Ross Gilardi
Okay, thank you. And then just a quick, quick, you know, question on your balance sheet.
I mean, you've got over $300 million in cash sitting on your balance sheet and the stock has come in. It looks like you were buying back stock at, you know, at $41 a share in the fourth quarter.
You know, at this point, what's preventing you guys from doing a much more aggressive buyback in this environment?
Stephen J. Hagge
As we said in the past, it's an area we continue to look at. And frankly, we continue to spend money on the buyback, together with dividends.
But you're right. Our first priority still continues to be acquisitions.
And as you look at the market today, with the changes in the credit market and some of the other things going on externally, we think that the acquisition front is a net positive for AptarGroup given the strength of the balance sheet. So the Board of Directors is certainly very much aware of the cash position and continues to look on it, you know, each meeting, at what the various alternatives are.
And we will continue - we've got about 2 million shares left in the buyback, and we will continue to be in the marketplace.
Ross Gilardi
Are there any particular - you talked about some of your priorities for acquisitions or some of the characteristics that you look for in terms of, you know, opportunities to leverage some of your core technologies and geographic expansion and so forth, but is one of the segments more of a priority for you in terms of making acquisitions at this point?
Stephen J. Hagge
You know, I think we look at opportunities in all the segments. I mean, it tends to be not segment-based.
Certainly in the Pharma, Beauty & Home and Closures we've made acquisitions, mostly in the Beauty & Home and Closures segment in the past. We continue to look at the Pharma segment in areas to ways to expand.
So I wouldn't say that there's a priority of one over the other.
Ross Gilardi
Okay. Thanks a lot, guys.
Operator
Our next question comes from Megan Friedman with William Blair.
Megan Friedman
Hi, guys. A couple of questions.
First of all, you talked in the press release about being committed to pass raw material cost increases along where possible. Is there any sense from or do you have any sense from customers on their ability to pass along increasing raw materials costs?
Peter H. Pfeiffer
I think one of the reasons - how they could do this is introducing new products. So with using new packaging systems, they are able to increase their prices and put in there the raw material increases.
Stephen J. Hagge
I think also, Megan, when you get some of the size of the increases in raw materials, it frankly is not an option for us not to be able to pass it through to maintain any kind of profitability, and that's certainly evident with our customers. That doesn’t make it easy, but it does at least make it everyone else - their other suppliers are in the same position.
Megan Friedman
And then can you talk a little bit about Pharma margin trends? You've talked in the past about 25%, I believe, as kind of a base margin target.
Last quarter you did about 29%. Can you just talk a little bit about the fluctuation there and how we should be thinking about that?
Stephen J. Hagge
Well, again, I think - we're very happy with the overall margins in the Pharma market which, as you said, has exceeded 25%. It will vary from quarter to quarter based on the mix of products, which includes tooling and some of the other mixes in our product category.
So, you know, we're still targeting to be above the 25%. Couldn't give you any more specifics than that.
Megan Friedman
Okay. And then just a housekeeping question.
Can you provide any color on tooling revenue for the quarter?
Stephen J. Hagge
It's about the same as last year. I think it was around $24 million in both quarters.
Megan Friedman
Great. Thank you.
Operator
Our next question comes from Claudia Hueston from J.P. Morgan.
Claudia Shank Hueston
Hi. Thanks very much.
Good morning.
Stephen J. Hagge
Good morning, Claudia.
Peter H. Pfeiffer
Hi, Claudia.
Claudia Shank Hueston
Just a couple of questions. One, you mentioned underutilized capacity in the Closures business, and I wondered if you could just elaborate a little bit there.
And then are there ways to adjust your production systems to maybe better optimize that going forward or improve efficiency there, or is that something that's sort of likely to continue in the next couple of quarters?
Stephen J. Hagge
Well, I mean, what we've seen - and we've seen this actually starting a little bit in the third quarter, late second quarter - was some softness in the U.S. Closures market that continued into the fourth - we right now anticipate that that's cost us about $2 million in terms of underutilized absorption.
Now what we are doing is we're readjusting what we mold on the outside because this is primarily plastic injection molding. We continue to monitor that from quarter to quarter, try to move product in from our outside suppliers.
And the other thing, what we're seeing, though, as we go from the fourth to the first quarter, we're also seeing some of that business start to pick up a little bit. So we expect to see improvements from the fourth to the first quarter in that business cycling.
Claudia Shank Hueston
Okay. That's helpful.
Great. And then just on the business process improvement, can you just comment a little bit on the timing of that rollout, and then any sense of the potential savings from it over time?
Peter H. Pfeiffer
The reason why we have done it, by the way, is that AptarGroup uses several different ERP systems worldwide, and we were facing the problem that we have to update these systems in the near future, so this we decided to change the whole system and introduce a new SAP system in the course of business process improvements. We will see business, new systems, some synergies in the different divisions, and we are also seeing better visibility through all of the operation, so we will be able to, for example, calibrate the capacities worldwide and these kind of things which we today, because the systems are not harmonized, are not always able to do.
Claudia Shank Hueston
And those savings should start to filter through this year?
Stephen J. Hagge
We'll be mostly - we're going to - you know, we're doing most of the expending in 2008. It's more of a 2009 future before we'll start to see significant savings.
Claudia Shank Hueston
Perfect. Thanks very much.
And then just, Steve, I wondered if you had any guidance on the corporate costs and how we should think about the option expense in 2008?
Stephen J. Hagge
Again, I think option expense will be somewhat lower going into 2008. We haven't made a calculation of that.
The key issue is, as you know, Claudia, is that because we issue options in January and the timing of how the accounting works, we take a bigger hit for the option expense in the first quarter than we do for the rest of the year. But I would expect it to be somewhat lower than it's been in the past.
Claudia Shank Hueston
Okay, thanks a lot.
Operator
Our next question comes from Greg Halter with Great Lakes Review.
Greg Halter
Good morning, guys.
Stephen J. Hagge
Good morning, Greg.
Peter H. Pfeiffer
Good morning, Greg.
Greg Halter
Regarding the Australian business, I just want to make sure I have this right that, as you present it, the income from discontinued operations, does that include the operation as well as the gain on the sale of the business?
Stephen J. Hagge
No, Greg, because it's been so immaterial for us, it was actually on a gross basis less than $10 million in revenue, and since we will continue to sell in that region around $6 million net impact, we don't show any of the continuing operations in that discontinued line. The only thing that's in there is the gain on the sale.
Greg Halter
Okay, so only the gain. Okay.
And I know we've talked about this in the past relative to the plant in France. I think it's a closure plant that was having some trouble.
Just wondering if you could provide a status update there?
Stephen J. Hagge
The good news on the facility is we've made significant operational improvements to the facility. We are seeing year-to-year improvements in terms of where our financial position are.
The negative has been we've seen some movement - we've seen a lot of growth in Europe today in the beverage area. That tends to be produced out of our German facility, so net impact we're seeing some reduction in sales out of French operation which has somewhat mitigated some of the operational side.
However what we have come back and been able to demonstrate is we've been able to turn it around from an operational side and continue to see year-onyear improvements.
Greg Halter
Okay. And you gave the tooling for the quarter.
What was it for the full year?
Stephen J. Hagge
Again, it's about the same. It's right around $60 million, give or take a little bit.
That's consistent between both years.
Greg Halter
Okay. And relative to the SAP system, I think, Peter, you had mentioned that you already use several of them, so I presume that means you have some experience.
We've had some bad experiences with other companies putting in SAP systems, but just wondering - or just in general, ERP systems - just wondering what you guys are doing, either on an external basis or internal, to make sure the system gets deployed the way it should, at least, and does not disrupt your business?
Peter H. Pfeiffer
First of all, Greg, we have already introduced SAPs in the past in several of our divisions. The problem was that they did not really talk to each other very well.
That's one change. We are using outside consultants to do this also.
We are including experts in doing this. By the way, we had never had a bad experience with the introduction of SAP in the past.
Greg Halter
Well, let's keep it that way. Just wondered if you had any kind of market share data between the three divisions on whether or not you feel you've gained or lost share within the last year in 2007?
Stephen J. Hagge
I think, you know, there's nothing that we've got that would come back if it's from an outside source. I think if you look at the sales growth, though, Greg, in terms of the organic sales growth, we're very comfortable that we've actually gained share in all of our market segments.
The growth rates themselves have been very strong in 2008 - or 2007, excuse me.
Greg Halter
Okay. And I think on the last quarter in the personal care market you had talked about a possible inventory contraction, and I'm just wondering if that's real or not or how you would phrase it or couch that now?
Stephen J. Hagge
You know, we continue to hear from some customers that there is some inventory being taken out of the channel. Remember, when we're talking out of the channel it's all the way through the end consumer.
So we think that that's still a factor, at least we're hearing that from even some of our other competitors in the sector. But it's hard for us to come back and quantify it, so I don't know how much it would be impacting the quarter.
Greg Halter
Okay, and one last one on the resin costs. If you had to put a figure on a year-over-year increase, where would you say that's looking, and just wondering if you're having any increased difficulties or changes in terms of getting that on a pass-through basis, and if there's been any difference in the time lags?
Stephen J. Hagge
Time lags are basically the same as what they've been in the past. It is very different in terms of the resin increase between the U.S.
and Europe. I don't have a number.
Europe has been, you know, maybe - it depends on points in the year because if you remember, in the States, when we started '07, resin went down for a couple months and then started to spike, and spiked up pretty considerably as we get into the end of the quarter. So I think a year-on-year - we may be as much as 20% over last year.
Europe is certainly somewhat less than that because they've been insulated to the oil cost, I think. So I don't have that number in front of me, Greg.
Greg Halter
Okay. Thank you.
That's helpful, though.
Operator
Our next question comes from Mike Hamilton with RBC Dain.
Stephen J. Hagge
Good morning, Mike.
Peter H. Pfeiffer
Hi, Mike.
Michael Hamilton
Here I thought Carl had lost his stadium, and he's still doing victory laps. A couple questions.
The first one is just if you can give a little bit of perspective and detail on tooling. What was the relative mix across businesses, and are there any products flowing near-term here that you're able to talk about from that?
Stephen J. Hagge
Well, I think, you know, again, as I said, tooling overall is about the same. If you look at it, we've got tooling coming out of the Pharma market down a little bit from year to year.
It's down about $1.5 million. If you look at where in the Beauty & Home area, we're down about $2 million, so we'd be up in those things, since they were about equal, we're about up $3 - $4 million in the overall Pharma side or Closures side, excuse me.
Michael Hamilton
Which typically has a lot nearer lead time to product launch?
Stephen J. Hagge
There's no question. If you look at - I think when you take the tooling, both Closures and Beauty & Home tend to end up following very quickly on with products.
The Pharma's a much longer lead time as they may be getting ready for new product introductions one to two years out.
Michael Hamilton
Right. So basically things, front half of '08 that we should be seeing that you'll be able to talk about?
Stephen J. Hagge
Well, I think you've got two things, though, again. When you look at tooling for us, it's a positive - we look at it as a positive because we have the new products.
Sometimes, however, it's replacing existing products, so it may not be all incremental sales. It may be replacing sales that we had with other tooling in the past.
We look at it as positive because we're going to continue to have the sales, but I'd be cautionary to say it's all incremental.
Michael Hamilton
Yeah. Next question is kind of a bigger picture on emerging market activity.
Historically going through your customer you've had a fairly limited window on a lot of these markets in terms of where inventory is stacked and pipelines, et cetera. Is the visibility getting better as some of these areas mature?
Stephen J. Hagge
That's a tough question. I think what we're doing is when we - what we are hearing from our customers, like Peter mentioned before, LVMH, they continue to say that they're getting good sell through in these markets.
It's for us almost impossible to find out if they've got that sitting in inventory or it's to the consumer. But there's a consistent theme from our major customers that they are selling more and more product, so our assumption is they're getting a better handle on that inventory.
But frankly, that's more of a guess than it anything that we can see factually.
Michael Hamilton
Right. Okay, thanks.
That's it for me.
Operator
Our next question comes from Chris Manuel with Keybanc Capital Markets.
Christopher Manuel
Good morning again. Just a couple quick follow ups.
In the press release you talked about some cost containment efforts, I think, that you were working on here. Can you elaborate on those?
Is there anything in particular that you're doing along those lines?
Stephen J. Hagge
Really, Chris, I think it's pretty broad based. I mean, if you come across what we're doing is our efficiencies, we talked about the French facility and Closures, our operations are quite a bit up in terms of our through put that we're looking at.
We're doing new technologies, for example, in our molding to be able to give us more product coming out. I wouldn't say that there's one thing.
We're looking at capacity utilizations. One of the things that's helped us this year and helped the margins is as we've expanded in our developing markets, we're not getting better at filling those facilities, utilizing some of those fixed costs.
So I don't know that there's one initiative other than this new initiative Peter talked about in terms of the business process that's out there, but there's not one initiative in 2007 that we could isolate as being the main driver of the cost containment.
Christopher Manuel
That's very good. And then my second follow-up question was, can you elaborate a little more onto the - it sounds like a brand-new sample system for lotion, and I think you mentioned similar to the Imagine system that you use for fragrance.
Can you elaborate on that a little bit? I'm assuming it would be a market that's smaller than the fragrance opportunity but could be pretty sizeable nonetheless?
Peter H. Pfeiffer
By the way, Chris, we are having two systems for lotions, for the lotion assembly system. One is a miniature pump with a vial - which is already offered to the market and the other one is not yet really on the market.
It's a system, a flat system, which is resealable which goes a little bit like the Imagine, and we are seeing a big market for this in the future. So we are pretty optimistic, as we are for the whole sampling market.
We are growing quite well in this area.
Christopher Manuel
And when will that project or product be commercially available?
Peter H. Pfeiffer
The miniature pump with the vial is already available, and the next one will be in the course of this year or the beginning of next year.
Christopher Manuel
Okay. Good.
And then the final question, Peter, is I believe you have a new Pharma plant coming online late '08 and it's primarily to serve the new Landmark system. Could you give us an update there?
I'm assuming that's also a piece of why Capex is up a bit year-over-year. Can you maybe give us a little more of an update there?
Is the timing of that still third, fourth quarter? When should we expect some contribution from that to start to come online?
Peter H. Pfeiffer
Yes, we are going to - we are on schedule with the new Pharma facility in France, and we hope that this will be operational in the course of next year so we will be moving into this operation because we need the increase of capacity, especially in the valve business, the metering valve business. And Landmark, as you mentioned, is another product which is foreseen to be produced at this facility.
Stephen J. Hagge
Chris, I was just there a couple weeks ago, and we're pretty much on target and I think we will be operational in the third quarter.
Christopher Manuel
Okay, so operational in the third quarter. And then the last question is: I know you cant comment on any particular things that you may or may not be looking at, but would you characterize the acquisition pipeline today as better, the same, you know, bigger, the same or smaller than it would have been, say, six months or a year or so ago?
Stephen J. Hagge
I think for us it's probably bigger. And when I say bigger, it means maybe not necessarily in number of companies, but companies that I think are realistic now in terms of what we could buy in terms of pricing.
I think if you look at Aptar's balance sheet, it's a very strong balance sheet, and given the way the credit markets are today positions us very well for the future. So I think today as we go through the remainder of 2008, I think that market is actually bigger practically than what it was.
As then in the past, we will and have been continuing to focus on in a lot of case smaller acquisitions that are tuck-in acquisitions which we are able then to expand geographically or product-wise. So again, the market, I would view right now, is more opportunistic for Aptar than it's been in the past couple years.
Christopher Manuel
Okay. Thank you very much, and good luck in the rest of the year.
Peter H. Pfeiffer
Thank you.
Stephen J. Hagge
Thank you.
Operator
Our next question comes from Brian Rafn from Morgan Dempsey.
Brian G. Rafn
Good morning, guys.
Peter H. Pfeiffer
Good morning, Brian.
Stephen J. Hagge
Good morning, Brian.
Brian G. Rafn
Can you give us a sense - you guys had talked about, you know, some of your lead-edge technology and customers moving over to new packaging systems like your bag-and-valve. Is that a process of you having to educate your customers, or is their awareness of what's available, does that pull that demand through?
Peter H. Pfeiffer
Usually, Brian, we are educating our customers. We are presenting them our new product, our new inventions in presentations.
We are going to their marketing people, to their purchasing people. So the input is coming in most cases from our side, but we also use them as a source for new ideas.
The requirements from their side, the final consumer needs, are one of the resources for new ideas for us. It's both ways basically, I would say.
Brian G. Rafn
Okay. Peter, also, are you seeing in this kind of ability - and Steve has talked in the past about the Europeans are very good at trying to diversify their products and give it through packaging different venues.
Are you seeing from your clients' adoption cycles accelerating, say, maybe over the last five or six years in adopting new packaging or is it still about the same?
Peter H. Pfeiffer
I would say that it's a clear trend to improve the packaging. You see, the packaging is one of the distinction of factors of - if you want to have a brand emerge, one of the ways to do this is to use innovative packaging, and people realize this more and more, in using our ideas.
By the way, the ideas are also spilling over from the different markets. There is an exchange of ideas between pharmaceuticals and cosmetics, also.
Brian G. Rafn
Okay. Peter, is there any difference between the brand image differentiation between U.S.
companies versus European? Are the adoptions of that about the same [break in audio] or better awareness?
Peter H. Pfeiffer
I think they are approaching each other. In the past, there was much more personalized packaging in Europe.
This is now spilling over more and more to the United States, so it's basically the same I would say.
Brian G. Rafn
Okay. Okay.
Correct me if I'm redundant in this, on the cosmetic side, what are you guys seeing on new product launches, maybe high end versus, you know, lower end more economy brands?
Peter H. Pfeiffer
You have still the products which are very successful, like bag-and-valve is one of the products. Talking about another new product which will come out is a product for the wrinkle creams.
Wrinkle creams and organic formulations is a big trend in the cosmetic areas, and there we are using ideas from the pharmaceutical area. So we will introduce a pump which give the possibility to have preservative-free formulations, which is very important in the organic formulations, for example.
We are using technologies which are already introduced in the pharmaceutical market. We have preservative-free pumps there.
We will use this technology in the personal care area.
Brian G. Rafn
Okay. Let me ask you, jumping over to kind of the packaged food and the beauty side or the personal care side, with the rise in pricing from commodities you're seeing at the retail level, if companies can't raise prices they're playing around with packaging sizes, you know, whether it be shampoo or milk or, you know, you used to get 16 ounces for $2.69 in the U.S., now it's 12 or 10 ounces.
Are you seeing much demand in maybe the packaging staying the same but the size of the profile changing?
Stephen J. Hagge
Well, I think you've got a couple things going on in that area, Brian. One is actually - I don't think there's one trend.
You've got two trends that are happening. One if you take the discount scores, the Sam's, the Costco's, you're actually seeing bigger sizes with - in this case using pumps as opposed to a dispensing closure.
Then you go down to the whole travel market - and for us that's becoming a bigger segment - where that 3 ounces or less becomes a much bigger sector, and what we're seeing is new package developed around shampoos, conditions, fragrances that meet that travel size. And that's a real plus because those tend to get used up much quicker.
The use-up rate - and actually for our customers, the pricing is much more elastic there. They've got much more pricing capability.
Brian G. Rafn
Okay. Okay.
Steve, you were talking about the M&A pipeline. Can you give us a sense, you know, today versus, say, five years ago, what the size maybe in dollar-term sales - you're always talking about these kind of, you know, niche bolt-on acquisitions, but what is, given the size of Aptar's sales revenue base, what is consumable now in an acquisition, say, today in '08 versus maybe five years ago?
Stephen J. Hagge
I think if you look - I mean, certainly, it's a good point because as we've gotten bigger. I mean, we've always said to the street that we want to keep the balance sheet investment grade, but we don't have investment grade debt out there today.
When we run through the metrics on that, again, in today's market it's realistic we would probably - we could end up borrowing up to $8, $900 million dollars and still be in that. So I think our practical side is we can do deals $750, $800 million on the high side, but I think it's the most important to come back, it's less - it is not a size factor that we're looking for.
It is really does it fit strategic with us? And if it's a big acquisition, that's fine if it fits strategically, but we don't need the acquisitions just for growth's sake.
We've got a lot of internal organic growth that can still come from our existing product lines.
Brian G. Rafn
Okay. Okay.
Anything on where you've seen, say, the last - since perhaps the August meltdown in the credit markets, are you seeing multiples on EBITDA come down at all?
Stephen J. Hagge
Yes. I think you have two things.
You have - I think that's a slower process. The sellers a lot of times are looking back in early 2007 saying these were the multiples that were paid.
I'd still like those. I think the reality of that, those tend to be coming - smaller the multiples tend to be coming back to more of the range, frankly, where Aptar paid.
So I think that's a time process, and I think the reality's becoming more and more that the multiples are coming in line with where we've been in the past.
Brian G. Rafn
Can you put a number on that, Steve? I mean, is it coming down from 12 to 14 to 8 or what?
Can you give us a sense?
Stephen J. Hagge
You know, it's all over the board. I mean, you've seen some in our sector that were at 9 to 10, 11, 12.
They're probably moving back 6, 7, in those - 8 - areas. But, I mean, it's very dependent on the deal.
Brian G. Rafn
Okay. Okay.
Can you also give us a sense what you're seeing in, you know, SG&A, salary and wage inflation and then healthcare costs, both in Europe and the U.S.?
Stephen J. Hagge
The U.S., well, in Europe, you know, a lot of the healthcare costs, for example, is built into the social system, so it's part of the normal social cost so it's not as much of a fluctuating element as you have in the U.S. In the States we're seeing pretty much typical medical inflation, and we're pretty much experience-based in that area in terms of we pay based on the claims.
So we've been - I think we were last year up, you know, 4% to 5%. We're expecting maybe a 3% to 4% increase this year with the cost containment area overall.
And then the rest, I think salaries, et cetera, are inflation based.
Brian G. Rafn
Inflation based. Okay.
Superb job, guys, as always. Thanks.
Peter H. Pfeiffer
Thank you.
Operator
Our next question is a follow up from Greg Halter.
Greg Halter
Yes, you have over $300 million in cash now. Just wondering where that's held and what it's invested in?
Stephen J. Hagge
The bulk of that is held in our European operations, and it's all AAA-rated short-term securities, so we have pretty strong, if you look back, financial controls around that so, you know, we're not looking at mortgage-backed securities. Now, the world continues to change as everyone knows, depending on what you find, what may be AAA-rated yesterday may not be that today.
But right now we have a very short-term philosophy on the investments with high investment grade opportunities.
Greg Halter
Okay, so there's no IOs or POs or anything like that?
Stephen J. Hagge
No.
Greg Halter
Okay, great. Thank you.
Operator
Next up we have a question from Susan McGary from Granahan.
Susan McGary
Hi. It sounds like you're not seeing any weakness in any markets in Europe, but I was wondering if you could go into a little more detail about what you are seeing in Europe, which markets are stronger, which markets maybe are decelerating a bit?
Peter H. Pfeiffer
For Europe, you might be aware, Germany is doing reasonably well in the past year since many, many years we have overcome a recession there. We are seeing some slowdown in Italy and in France, but not really severe for the time being.
I mentioned already the Eastern Europe countries, which are doing very well, especially Russia and especially in the high end of the market. So the growth rates are coming down a little bit, but not really comparable to what we are seeing in the downturn in the United States.
Stephen J. Hagge
I think the other thing, Susan, that's important to note that, you know, when we talk our European sales, a lot of those sales also go to European customers who then take those around the world - the French perfumers being one and our Pharma companies who distribute their products. So our products tend to be more world-based then they are, you know, just economic based in that sector.
Susan McGary
Thanks.
Operator
Our next question comes from Ross Gilardi from Merrill Lynch.
Ross Gilardi
Hi, guys. Just a quick follow up.
On the Pharma expansion in France, to fill that facility up are you still waiting for, you know, FDA - do you still need some of your customers to get FDA approval for some of their products?
Stephen J. Hagge
Yeah, I mean, the Landmark, for example, needs to go through that process. Now, the advantage we have is we are still seeing significant growth in our metered dose valves, which are used on the asthma product.
That growth itself, we needed additional space. So there you get some immediate benefit for.
Some of the other ones, we will be waiting for the approval processes for our customers over the next couple years.
Ross Gilardi
Well, given your expectation of having the facility operational by the third quarter, what's baked into that for Landmark? What was your expectation there?
Stephen J. Hagge
We won't have significant - in fact, I don't know if we'll have any sales of Landmark this year, and we'll be doing some - what we would call, you know, sales for testing for our customers in the market, you know, for approval side for the FDA. But in terms of market sales, we won't have any.
What's baked into our plan is actually sales continuing with the increase in terms of the metered valve, which is our biggest growth side for that particular expansion short term.
Ross Gilardi
Whose product is Landmark again?
Stephen J. Hagge
I mean, right now we're looking at it from - there's like three to four different companies who are looking at it.
Ross Gilardi
Oh, I see. Okay, and do you - are there any significant start-up costs that we need to think about for the second half of the year with that facility?
Stephen J. Hagge
They shouldn't be significant. I mean, we'll be starting running into depreciation, but we'll staff that as we need additional people rather than just, you know, adding people wholesale.
So if anything, it would be a slight increase in the depreciation side, which, again, we've included in the estimates for depreciation for the year.
Ross Gilardi
Okay, and then just Claudia was asking about option expense earlier and you said it was going to be a little bit less. When you say a little bit, is that $0.01 or $0.02, or is it more than that?
Stephen J. Hagge
You know, at this point it's still early enough - we haven't gone through all the final calculations on it, Ross. I don't have that number for you.
But right now, again, we're expecting it to be less than what it was last year. That's the only thing I - directionally, I know that's which way it's going.
Ross Gilardi
Okay. All right, thanks, guys.
Operator
(Operator Instructions) And sir, I'm showing no further questions.
Peter H. Pfeiffer
In this case, I would like to thank everyone for participating in today's call. Thank you very much and goodbye.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program.
You may all disconnect. Everyone have a great day.