Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Q4 2019 West Pharmaceutical services earnings Conference call at this time, a participant lines on the listen only mode. After the speakers presentation, there will be a question and answer session.
Ask a question during the session you wanted to press Star one on your telephone. Please be advised of today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Quintin Lai Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you Julie.
Good morning, and welcome to West fourth quarter and for your 2019 conference call.
We issued our financial results. This morning, and the release has been posted in the Investor section on the company's website located at Www Dot West pharma Dot com.
This morning, CEO, Eric Green and CFO Bernard Birkett will review our results provide an update on our business and present, our financial outlook for the full year 2020.
There's a slide presentation that accompanies todays call and a copy of the presentation is available on the Investor section of our website.
On slide two is the safe Harbor statement statements made by management on this call and then the accompanying presentation contain forward looking statements within the meaning of U.S. Federal Securities law.
These statements are based on our beliefs and assumptions current expectations estimates and forecast.
The company's future results are influenced by many factors beyond the control the company and actual results could differ materially from past results as well as those expressed or implied in any forward looking statement made here.
Please refer to todays press release as well as any other disclosures made by the company regarding the risk to what she's this subject, including our 10-K 10-Q, an 8-K report.
During today's call management will make reference to non-GAAP financial measures, including organic sales growth.
Adjusted operating profit adjusted operating profit margin and adjusted diluted deep yes.
Reconciliations and limitations of the non-GAAP financial measure to the most comparable financial results prepared in conformity gap are provided in this morning's or.
I'd now turn the call owner to watch CEO and President there are great great. Thank you Quentin and good morning, everyone. Thank you for joining us today.
I'm pleased to report that we had a strong finish to 2018 and we're entering 2020 with good momentum.
Thanks to the solid execution of our market led strategy.
Overall, our 2019 performance demonstrated the favorable market conditions and durability of our business.
The commitment and focus of our one whats the team is delivering superior value to customers.
Through our high quality products and solutions is what differentiates west as the global leader for containment and delivery of injectable medicines.
We ended the year with 13% organic sales growth in the fourth quarter.
And 10% for the full year.
We expanded gross and operating profit margins largely through strong high value product sales growth and great results from our global operations initiatives.
This resulted in double digit growth in adjusted EPS for the fourth quarter.
And full year 2019.
And we generated strong year over year girls and operating cash flow.
As we enter 2020, we're building on the positive momentum we generated in 2018.
We are introducing full your 2020 financial guidance that assumes organic sales growth of 7% to 8%, which is at the upper end of our usual, 6% to 8% range.
We're also forecasting double digit earnings growth adjusted for tax benefits from stock based compensation.
Bernard will go into greater detail on her 2020 guidance shortly.
Slide four shows a detailed summary of the sales performance in 2019.
Hi, sorry product sales grew organically by 14.7% in the quarter.
High value products, which make up more than 60% of proprietary product sales grew double digits and had solid momentum across all market units throughout the year.
Take a look at the performance of the market units for the quarter.
Starting with biologics this market unit delivered strong double digit growth our biologic customers.
Many emerging biotech to large biopharma continue to come to west and our partner Daikyo as the preferred choice for high value product offerings.
This is reinforced by the very high participation rate, we continue to experience with all new biologic and bio similar approvals in 2019.
The generics market unit finished the year on the solid note would double digit growth in the fourth quarter led by sales of west our components and products from or self injection delivery platforms.
As we have discussed some past calls our self injection delivery platforms are being adopted by not only biologic customers, but also by small molecule generic customers looking to differentiate their drugs with our devices.
Our pharma market unit side double digit growth in the fourth quarter strong high value product sales growth was the driver combined with a favorable year over year comparison due to the impact from the previously reported voluntary recall over by all the big product.
And contract manufacturing ended the year with high single digit organic sales growth for the fourth quarter led once again by sales of health care related injection and diagnostic devices.
On slide five.
We had several exciting product launches that positions the company for continued growth.
Such as notebook your three M.L. cartridge components that satisfy an unmet market needs with the increased insensitive sensitive biologic products being developed in dosage is largely the one ml.
We expanded our self injection platform with Smartdose gentoo injector with a patient experience than mine, enabling subcu delivery of high viscosity drugs at dosages up to 10 themselves.
We also introduced in advanced elastomer formulation, which enhances performance and reliability feature in West starts Blair quality and low particular at levels, while mitigating risk for our customers.
And we launched Celtra select a line of products that provides generic customers with high quality ready to use components with market leading delivery times.
Turning to slide six we outline or one west global operation strategy and management system.
[laughter] operating with the excellence inefficiencies as inherent in our one what system has enabled our success and growth in 2018, and we'll do so for the foreseeable future.
Our global operations team had another excellent year, the team's focus on continuous improvements related to service quality and safety while at the same time driving efficiency gains.
Over the past year, we've completed the restructuring program that was announced in early 2018 and reduced our global manufacturing footprint to 25 sites.
We are improving productivity, making more informed choices in capital investments and have set the stage for the next phase of improvements through automation in advanced manufacturing systems.
Efficiencies, we have gained by employing this new global operating system has met we have additional cash available to reinvest in the business.
Highlighted on slide seven our investments we completed in 2019 that will drive growth going forward.
The acquisition of a Korean distributor creates the direct presence for west in a market seeing strong growth.
Especially in biologic drug manufacturing.
We also increased a minority stake to 49% in dike, you'll stay cool Japan after more than 40 years. A partnership we know that are two companies share a unique committed to science quality and technical expertise that continues to prove valuable to the customers in patients we serve together.
In addition in 2018, we enhanced our global digital capabilities with the opening of our digital Technology Center in India.
The DTC serves as a center of excellence for global digital transformation team supporting many areas of our business, including digital marketing data analytics and supporting the future of digital manufacturing and automation capabilities.
Driving sustainable business practices has been a longstanding imperative at west as shown on slide eight.
In 2018, we received several accolades for our efforts across the six pillars of our corporate responsibility program.
At West we're committed to nurturing a cultural diversity and inclusion along with supporting the communities in which our team members live and work through both philanthropy and sustainable business practices.
We made great strides in both areas in 2019.
Now I'll turn it over to our CFO burner per cap will provide more detail in her financial performance 2020 guidance and our long term outlook Bernard.
Thank you, Eric and good morning, everybody.
Let's review the numbers in more detail will first look at Q4, 2019 revenues and profits, where we saw strong sales and Dps growth led by strong revenue performance in all four market units.
I will take you through the margin growth, we sell in the quarter as well as some year end balance sheet takeaways and finally, we will review guidance for 2020.
First up Q4.
Our financial results are summarized on slide nine and the reconciliation of non U.S. GAAP measures are described in slide 15 to 20.
We recorded net sales of $470.6 million, representing organic sales growth of 12.7% and 30 basis points of inorganic growth.
We also saw double digit organic sales growth in.
In our three proprietary product market unit and high single digit organic sales growth in contract manufacturing.
For the full year, we recorded net sales of $1.84 billion, representing organic sales growth of 10% and 10 basis points of inorganic growth.
We continue to see improvements in gross profit.
We recorded $153.2 million and girls profit 20 million or 15% above Q4 of last year.
And our gross profit margin of 32.5% was 100 basis point expansion from the same period last year.
Gross profit margin for the full year of 32.9% was a 110 basis point expansion from the previous year.
We saw improvement in adjusted operating profits with 73.1 million recorded this quarter compared to 67.1 million in the same period last year for a 9% increase.
Our adjusted operating profit margin, 15.5% was a 40 basis point reduction from the same period last year.
As mentioned on our Q3 call SGN a expenses for Q4 2018 were low due to the release of bonuses, primarily as a result, the bilderback recalls.
Adjusting for this we would have seen adjusted operating profit margin expand by approximately 100 basis points.
Adjusted operating profit margin of 16.1% for the year was 160 basis points any increased from 2018.
Finally, adjusted diluted EPS grew 12% for the quarter.
Approximately 15% for the year.
Excluding stock tax benefit he P.S. group right by approximately 13% for the quarter, an 18% for the full year.
So what's driving the growth in both revenue and profit.
On slide 10, we show the contributions to sales growth in the quarter.
Volume and mix contribution at $51.7 million or 12.2% percentage points of growth.
Sales price increases contribution to $3.3 million <unk> 0.8 percentage points of growth and changes in foreign currency exchange rate reduced sales by $6.9 million or a reduction of 1.6 percentage points.
Looking at margin performance Slide 11 shows our consolidated gross profit margin of 32.5% for them for Q4 2019 up from 31.5% in Q4, 2018, [laughter] proprietary products fourth quarter gross profit margin of 38% was 100.
Bases points above the margin achieved in the fourth quarter of 2018.
Proprietary products full year gross profit of 38.6% was 150 basis points above the margin achieved in 2018.
The key drivers for the continued improvement in proprietary products gross profit margin for the fourth quarter.
Our favorable mix of products sold.
Production efficiencies and sales price increases.
Partially offset by increased overhead costs.
Our high value products represented 63% Q4 proprietary product sales and generate a double digit organic sales growth.
Contract manufacturing fourth quarter gross profit margin of 16.4% was flat compared to the prior year quarter.
However, we saw a contract manufacturing margin show sequential quarter over quarter improvement.
Now, let's look at our balance sheet and review, how we've done in terms of generating more cash for the business.
On slide 12, we have listed some key cash flow metric.
Operating cash flow was $367.2 million for the full year 2019.
An increase of 78.6 million compared to the full year 2018.
27% increase.
Or 2019 capital spending was $126.4 million 21.7 million higher than a year ago, but in line with guidance.
Working capital of 717.1 million at December 31, 2019 was $106.4 million higher than at December 30, 120, aging primarily due to an increase in our cash and cash equivalents.
Our cash balance at December 31, a $439.1 million was 101.7 million more than our December 2018 balance primarily due to improved operating results.
Turning to guidance Slide 13 provides a high level summary.
We expect our full year Twentytwenty net sales guidance to be in a range of between $1.95 billion and 1.97 billion.
Including an estimate of headwind of $15 million based on current foreign exchange rates.
We expect organic sales growth to be in a range of 7% to 8%.
We expect our full year Twentytwenty reported diluted EPS guidance to be in a range of $3 45 to $3 55.
Capital expenditures will be in a range of $130 million to $140 million.
There are some key elements I want to bring your attention too as you review our EPS guidance.
Estimated FX headwind has an impact of approximately four cents based on current foreign currency exchange rate.
And it also includes ex it also excludes future tax benefits from stock based compensation.
To summarize the key takeaways for the year.
Strong topline growth in both proprietary and contract manufacturing.
Gross profit margin improvement growth in operating profit margin growth in adjusted diluted EPS growth in full year, 2019, operating and free cash flow.
Our sales and EPS projections for 2020 and performance are inline with our long term construct of continued organic sales growth and operating margin and EPS expansion.
I'd now like to turn the call back over to Eric.
Thank you Bernard our execution in 2019 has positioned us well for the year ahead.
We're making significant progress on many fronts our market led strategy is delivering unique value propositions to our customers.
Our deliberate global operations team is delivering efficiencies and improvements in service and quality.
And we're reinvesting in our business with digital technology automation across our operations and strategic partnerships to fuel our future growth.
Our mission to improve patient lives propels us each and every day.
We do not take this for granted we realize that our products are used by millions of patients across the globe on a daily basis, which is why we're so dedicated to continuously improving our capabilities.
As we look to the future and the new drugs are being launched by our customers. We know that west will play an integral part and bring those medicines to market.
We are committed in the growth strategy. We're excited about the opportunities ahead of us and we look forward to a successful 2020.
Gee, we're ready to take questions. Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound <unk>. Please standby will we compile the Q and a roster.
And our first question comes from the line of Paul Knight from Janney Montgomery. Your line is now open.
Are you guys. Congratulations on the quarter could you talk to a Eric where or what your what capacity expansions.
You are targeting is it more.
Space, and Waterford or et cetera, and then I guess the first question really should be where do you think you are with yours six Sigma program.
That a you've implemented it was last year. Your first full year of it or was that your first year, you really thought it was gaining traction.
Could you talk about kind of where you are with that that program in your mind and then the question on where the Capex is going.
Okay, well well first of all thank you Paul and good morning.
Absolutely I think we're early in the the stays of lean a implementations across the globe I've had the chance to travel to number of our states as you know across the globe have continues to be impressed on the momentum the focus the energy and the capabilities of watch those one was a lean imply.
Movements system.
So I'd say, we are in early stages, but we're seeing some excellent traction as we go forward and I expect that this is not just the onetime impact but this is an annual benefit that we'll see going forward and just puts us in a much better position as we think about future investments for west.
In regards to capacity expansions, what what we're looking at and what we're investing towards is more expansion of capacity on current existing platforms. Giving example, we're investing in additional growth capacity in crystal zenith over one ml uncertainty udall prefilled syringe out of.
Out of Scottsdale, We're also investing in further expansions in these self injection devices of self dose and smart dose based on current demand that we have committed by customers. So these type of investments will continue to go into our high value products like Kinston Waterford in other.
Locations around the globe, but these it's less than a land and buildings is more about technology automation and more modular cell manufacturing.
Thank you very much.
People.
Thank you. Our next question comes from the line of David Windley from Jefferies. Your line is now fan.
Hi, Thanks, Congratulations on a really strong year appreciate you're taking my questions and one of those is a follow up to Paul come out. This this capex spending a little bit different you've you've talked a really from the time burner joined.
The Capex budget has come down pretty dramatically hit.
Maybe a lower point than we expected.
In in 2018.
Up a little bit in 2019, I think your 7%.
Target means it goes up another 15 or 17 million.
2020.
Can you can you talk maybe about the additional context of what is not not only where that those dollars are going as you just answered, but what's driving the the re increase of those dollars.
Hi, Good morning, Dave and it's.
It's pretty much the Spain is pretty much in line.
Percentage of revenues between 2019 to 2020, we're pretty close and.
When we look at the opportunities there that are in front of was more than half of that capex budget is going to be focused on growth opportunities and which tie back to the ones. Eric have just spoken about so it's driven by customer demand that customer interest. So we typically spend between $40 million to $50 million on.
Maintenance Capex.
And on I T. We're looking at about $10 million to $15 million. So the balance is really on old growth opportunities and again, it's an on expanding capacity primarily through introducing.
You spend on equipment.
Got it and then kind of related to that the the digital rollout I think automation kinda is would be part of that definition.
We and our trip saw the that Kinston is kind of a base case for that I wondered if you could talk about.
What you see is as the timeframe for rolling now some automated manufacturing through some of your other key sites.
And then what.
I like margin benefit what kind of efficiency power that has for the business as you do that.
Yeah, No David we implemented as you know the.
Animated worked sell in since then.
Last year, we had as a pilot and validated with with the customers. We're actually in 2020 were expanding that capability and we're looking at a three additional locations in Ireland, Germany and also in Singapore.
To allow us to have more reached to certain products certain customers across the globe. So we're actually quite encouraged by the initial success. We've had a in 2019 and we'll be expanding that as we go forward. What's really also important is that the digital aspect of that.
With the the team that we built in India.
They're able to actually start capturing the data, making it much more effective and efficient as we go forward. So Bernie wanted to talk a bit about the.
Yes, so Dave this is it's a multiyear process and we have developed.
Automation for some of our product lines and we will continue to develop further develop that over the next number of years and it will be rolled out on a phased basis.
On the objective of doing that is obviously is to create more efficiencies and supports the long term construct that we have all driving 100 basis points improvement year over year and so it's to facilitate that and also to keep up with the demand that we're seeing more customers and also to drive higher quality. So automation brings us.
A number of benefit and again, though it is a multiyear process.
Last quick question.
The could you quantify maybe you didn't I missed it but could you quantify.
The benefit to E. P S in 2019 from stock comp.
That would be equivalent to kind of what you're right. That's not the right way to ask a benefit from stock comp that you're not including 2020 guidance.
For the year it was 14 cents.
Okay great.
Thank you.
Thank you to.
Thank you know our next question comes from the line of Larry So low from CJS Securities. Your line is now open.
Great just real quick follow up 14 cents for the year for the stock comp benefit but was it in the quarter.
Q4, two to two cents, okay, great Oh, okay, great. So just.
Taking a step back so really great quarter, great job, obviously it outlook just looking on the proprietary segment a little.
A little bit surprised on the generic side that you know a high single digits for full year in double digit growth.
Peter.
Do you see that continuing and what is driving <unk> second part of the question can you give us we'll update 'em annex celtra and how that's progressing is that still sort of in the early stages.
Yes, so Larry Thank you for that we are seeing a couple of key drivers and the generic space. We do believe we think long term, we always talk about mid to high single digit growth and the generic space and what we're seeing is very strong high value product, which is being led by a couple areas. One is as you pointed out to.
Transitioning the work we have around axell through and moving customers from standard to high value product.
Portfolio the second to area, we're seeing a uptick in into demand are around self injection or the platform and particularly when you start thinking about smartdose and self dose. So there's an uptake.
Demand that we see right now that we were pretty confident as we go forward, we'll continue to see that that growth. So I'm pleased with the success of.
Of generics what for the full year 2018, we saw the growth not just with the large generic clients, but also the mid two small customers also which is very encouraging that we're increasing penetration.
Great and you mentioned Smartdose, obviously accelerating a lot lot of a lot more trials like us getting underway last quarter, you spoke about some pretty good momentum in CZ I think.
Daytrip Q3 at five approvals can you maybe just give us a little update on how CZ is going and outlook into 2020.
Yeah, that's one of the areas, we're investing in actually manufacturing expansion as we speak because demand is is pushing our limits on capacity. So we are currently in process of expanding capacity in our facilities.
And we're very encouraged with the number of not just products. It's just been approved and launched but also what's in the pipeline. So it does go back to unfortunately, it goes back a few years ago, we talked about once you get one or two clients comfortable when you commercialize theres been a a wave of interest and spoke.
Finally, with its sensitivity of new biologics coming to the market, where we're crystals is the really a the true configuration that they're looking for a long term.
Okay, great and interest on the on the margin expansion. Obviously, you had I think 160 Bips you mentioned for the year, a little more that on drugs on the gross side.
As we look out.
With the restructuring to do you see in 2020, I assume you still sort of targeted at 150, plus overall margin expansion.
Do you see it favoring the.
Gross profit line more than.
My phone or any color on that.
Yes, so we again a lot of it is.
Driven by mix and high value products, and then that that's supported with improvements and efficiencies. So we would look at probably.
70, 70% to 80% of the growth coming from the gross margin line and then the balance coming from leveraging Opex.
Okay, and then in years past SG, there's been a little bit backend loaded.
It's not.
Part of your is a little bit more.
Little flipped more flat I'm kidding can you maybe just give us any color you have on sort of cadence for the year for that.
Yeah, we were were.
We were managing SGN, a is to keep it pretty consistent quarter over quarter, we shouldn't have very large spikes and if there are any spike sonicone <unk>, we will attempt to called them out before they actually happened to give you visibility on that but you could see that the way it was managed and throughout.
2019, it was pretty consistent quarter over quarter.
Okay and then just last question on the on the high value products for I think that you said.
It was 60% of [noise].
Revenue dollars can you tell us what.
Was in terms of volume and proprietary products or as a whole company want to do it.
Yeah, when you when it was that type of.
Growth that we're experiencing strong double digits, it's it's over a little over 100 basis points.
Increased from prior year.
Got it great. Thanks, Erik I appreciate it.
Thank you. Our next question comes from the line of Kuan Archer Daniels from Bank of America. Your line is now fan.
Hey, guys congrats on the quarter and guidance as well important 20, I had a few questions I guess.
You ended 2019 per strong I guess now I think that it would be appropriate or if you could please give an update on the market penetration level for high value products overall and across some of your amadeus, including worth power floor attack on the vision over PR and to what level do you see that going through.
Yeah, one thank you for the <unk> for participating I think when we look at the high value product portfolio and we're the penetration is you're absolutely correct.
If you look at majority of the revenues or more of the products. We introduced several years ago, and you think about Nova pure which has been launched with the uptake is significant in fact, that's the other area capacity expansion, we have going on both in U.S. in Europe to keep up with demand so well.
Well the percentages that this is a smaller like I see less than 10% or the high value product portfolio, that's going to be much more meaningful over the next few years to calm.
So we're really confident of the runway we have ahead of us.
And the penetration of when you go from envision, albeit the novapure.
Through what we've seen the pipeline will only increase and.
That's really all I can say at this point of time, we believe it's a double digit growth portfolio driven by the high value products on the Nov appear higher end products in that portfolio and it's going to be about 100 plus basis points volume expansion every year or just to keep up with that demand.
Okay.
And I guess, we'll see this when you file your 10-K part can you give us on idea of how your backlog of committed orders and proprietary products and importantly in 19 compares to 2018.
Yeah, we continue to see.
That grow or seen a lot of strong demands and again, it's across Britain, particularly into biologic space and based on number of they products that Eric has spoken about so and that you know that when we talk about competence, that's where we are getting a lot of our confidence from is the growth in that order book.
Okay and regarding the volumes to bag recall, how source solution or for that matter. A growing have you included any vial bag or revenue in your 2020 guidance. It we have not included anything in our 2020 guidance and and it's primarily based on the approval process.
And the regulatory process of getting back into the market. Some of that is outside of our control. So we just took a conservative approach on that.
That back and say well when we get regulatory approval, then we'll add it into our guidance.
Again, we don't want to be making excuses after the fact.
Okay, and I might've missed this how many basis points of operating margin expansion are you looking to realizing 2020, what's embedded in your guidance in the guidance as an appliance implied range between 90 to 120.
All right and torn part of your my last one Oh Im sorry brought out given the strength and you're seeing crystals enough and the fact that you're spending capex to build capacity. There I guess, if you could tell us what was what is the revenue of proprietary delivery devices. I guess, you had him and for UQM and.
Well, how do you see that in important Barney.
[noise], Hey, one we don't break it down to that level, but you know what we can say is that proprietary devices.
Strong double digits, Okay. The last topic I got was about 40 million a quarter was the primary a couple of years ago and so I mean are you significantly above that now.
Well the that part of the business has been growing really strong double digits. So yes were significantly higher than that.
Okay. Thank you.
Thanks.
Thank you. Our next question comes from the line of Courtney Oh went from William Blair. Your line is now fan.
Hi, guys good morning.
Morning.
Good morning, and the press release, you guys mentioned as well as acquisition contribution can you expand on like what that actually was this quarter.
And I guess like what the acquisition was not yet contribution.
Right. So we we had two well actually one investment from an acquisition point of view small, but it was done in Q2 of Oh.
Earlier in 2018, we just called <unk> contribution that has had on the quarters. Following the close of that acquisition is G.I.S. Korea, which is their entry strategy into the Korean market place. So now we have a direct presence.
There were going directly to the to the bio biopharma manufactures in that region.
Got it Okay and then just if you could maybe just talk about.
Any M&A opportunities our priorities that you guys are kind of considering looking looking towards over the next 12 months that'd be great as well thanks.
The only thing I can comment there is that we'll continuously look at the landscape and see what assets if available would make sense to be part of west that enables us to provide more comprehensive solution to our customers. So I can't comment any further about any any specific targets, but we.
We are constantly looking at the horizon, saying what would be the right fit with less.
Okay. Thanks, and then my last question.
Factoring segment came in a little bit stronger than we were expecting this quarter. I know you kinda talk about I guess the dynamics in the proprietary business that drove that gross margin expansion can you talk a little bit about kind of what were the drivers behind.
The sequential expansion in that contract manufacturing business.
It's purely accelerated customer demand and coming from specific customers.
The really positive thing a pause at west was able to respond quickly to that customer demand and supply it when it was need us.
And so it's again, it's just purely demand in that market on it.
It was a little bit stronger than we would have a expected it to be and but again positive thing as we were able to respond to that.
Okay, great. Thanks, guys.
Thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Quintin Lai for closing remarks.
Thanks, Gigi and thank everyone for joining us on todays conference call and online archive of the broadcast will be available on our website at west pharma Dot com and the Investor section. Additionally, you can access a replay through Thursday February twentyth by dialing the numbers and conference I'd.
At the end of todays earnings release, So that concludes this call Abbott I stat.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].