Q3 2020 West Pharmaceutical Services Inc Earnings Call
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I would now like to hand, the conference over to your speaker today, Mr. Quintin Lai Vice President corporate development strategy and Investor Relations. Thank you. Please go ahead Sir.
Thank you Liz good morning, and welcome to US third quarter 2020 conference call, we issued our financial results. This morning.
In the release has been posted in the investors section on the company's website located at West Pharma Dot Com. This.
This morning, CEO, Eric Green and CFO, Bernard Birkett will review our financial results provide an update on our business and present, our updated outlook for the remaining year of 2020, there's a slide presentation that accompanies today's call and a copy of the presentation is available on the investors section of our website.
On slide two is the safe Harbor statement statements made by management on this call and in the accompanying presentation presentation contain forward looking statements within the meaning of us Federal Securities law.
These statements are based on our beliefs and assumptions current expectations estimates and forecasts the come.
The company's future results are influenced by many factors beyond the control of the company.
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 the press release as well as any other disclosures made by the company regarding the risks to which it is subject, including our 10-K 10-Q and 8-K reports.
During today's call management will make reference to non-GAAP financial measures, including organic sales growth operating adjusted adjusted operating profit adjusted operating profit margin and adjusted diluted EPS.
Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results.
Prepared in conformity to GAAP.
Provided in this morning's earnings release.
I'll now turn the call over to West CEO and President Eric Green.
Great. Thank you coincident and good morning, everyone. Thank you for joining us today, but.
Before we dive into our Q3 results and raised 2020 guidance I'd like to make clear to the importance of our mission at west and the values that formed the pillars in which we operate.
In today's uncertain environment, and what seems like a new set of challenges each day, we remain.
We remain focused on two key priorities.
Keeping our team members save.
And ensuring uninterrupted supply of high quality containment and delivery devices required by our customers and the patients we jointly serve.
Moving to slide five.
West is uniquely positioned to satisfy increasing market demand by leveraging our global operations scale and resources.
Our team recognize at the outset of the pandemic the need to increase production capacity.
We were already supporting the growth trajectory of our base business and the future demand for our products required for COVID-19 vaccines and therapeutics meant that we needed to act quickly and decisively.
To address the increase in demand we brought forward planned capital investments in production capacity early.
Earlier this month, we installed new manufacturing equipment at one of our HBP sites to prepare for the future demand of Flotek in Nova Pier.
As of this week that capacity is operational and we have additional equipment being installed at a second HVP site with more installations planned in the coming months and other global sites.
The strength of our performance this past quarter demonstrates the forward momentum we have built over time with our market led strategy and the one west team approach to satisfy market demand now.
Now turning to slide six that does.
The disruption caused by the pandemic has impacted the way all of us conduct business.
And our daily lives West is no exception.
Thankfully the changes we have been making over the past several years. The way we do business have enabled us to address these disruptions from a position of strength.
Customers come to us for our scientific and technical expertise and this differentiates us in the market.
Despite the pandemic, we continue to share our expertise through our enhanced knowledge center Webinars published articles and technical presentations at virtual conferences.
We have been investing in digital technology and automation with two objectives of mine, bringing a new connected products to market as well as enhancing the productivity of our operations at every level of the organization.
While we're early in our digital journey I would like to share a few examples of our recent success.
Starting with our manufacturing automation strategy, we made great strides over the past year in helping us achieve continuous improvements in quality safety service and cost for example, our Saint Petersburg, Florida site has developed an automation process for robotically loading and unloading molding presses.
This has considerably reduced idle production time associated with product changeovers and improved operating efficiency.
And our Kinston site has automated molding trimming rinsing processes, which will drive higher quality and final product and greater efficiency gains.
And I'm, especially pleased with the team's agility and bringing forward the production capacity expansion I mentioned earlier.
Great deal planning and engineering went into this initiative to help us meet our customers' requirements.
On the digital front, we've just introduced west virtual the.
The future of customer interactions with a truly immersive fully interactive online experience.
We expect this tool to be our primary customer interface, even beyond the current pandemic.
Turning to slide seven and our performance in the third quarter.
Our financial results remained strong im pleased to say that the growth trends, we have experienced over the past several quarters continued in the third quarter and the outlook for the fourth quarter remains positive.
We had over 18% organic sales growth in the third quarter, driven again by robust high value product sales as well as sales and contract manufacturing as.
And we experienced solid gross and operating profit margin expansion.
This resulted in a strong adjusted EPS and free cash flow for the third quarter.
Similar to the second quarter, our base business had solid organic sales growth in the third quarter. We also had incremental sales associated with many COVID-19 development projects, we are supporting for both therapeutics and vaccines.
Specifically for vaccines towards the back end of the quarter, we were asked by our customers to accelerate initial deliveries of components.
It is more than offset continued sales decline of products associated with injectable drugs and treatments such as dental and elective surgeries that have been impacted negatively by the pandemic.
As for guidance for the remainder of the year, we are confident that we're well positioned with the strength and resiliency of our core underlying business and the incremental opportunities being presented to support our customers with pandemic solutions there.
Therefore, we are raising our sales and EPS guidance for the remainder the remainder of the year.
And with that I'll turn it over to our CFO burner, briquette, who will provide more detail on our financial performance and guidance Bernard Thank you, Eric and good morning.
Now, let's review the numbers in more detail. The first look at Q3, 2020 revenues and profits, where we saw strong sales and EPS growth led by strong revenue performance, primarily in our biologics and generics market units and contract manufacturing.
I will take you through the margin growth, we saw in the quarter as well as some balance sheet takeaways.
And finally, we will review our updated 2020 guidance.
First up Q3 are fine.
Our financial results are summarized on slide eight and the reconciliation of non US GAAP measure are described in slide 16% to 20.
We recorded net sales of $548 million, representing organic sales growth 18.2%.
Cobot related net revenues are estimated to have been approximately $32 million in the quarter.
These net revenues include our assessment of components associated with treatments and diagnosis of COVID-19 patients offset by lower sales to customers affected by lower volumes due to the pandemic.
Excluding net coal, but impact organic sales grew by approximately 11%.
Looking at slide nine proprietary product sales grew organically by 20.3% in the quarter.
Value products, which made up more than 65% of proprietary product sales in the quarter grew double digits and had solid momentum across all market units throughout Q3.
Looking at the performance of the market units.
Biologics market units delivered strong double digit growth we.
We continue to work with many biotech biopharma customers were using Wes and Daikyo high value product offerings.
The generics market unit experienced high single digit growth led by sales of TEP on stoppers and Lora Tech component.
Our pharma market units on mid single digit growth with sales led by high value products and services, including Weststar Orbotech components.
And contract manufacturing and double digit organic sales growth for the third quarter led once again by sales of diagnostic and healthcare relations injection device.
We continue to see improvements in gross profit, we record at $194.6 million and gross profit.
46.8 million or 31.7% above Q3 of last year.
And our gross profit margin of 35.5% was a 310 basis point expansion from the same period last year.
We saw improvement in adjusted operating profit was $103.9 million recorded this quarter compared to $70.1 million in the same period last year for a 48.2% increase.
Our adjusted operating profit margin of 19% was a 360 basis point increase on the same period last year.
Finally, adjusted diluted EPS grew 46% for Q3 excuse.
Excluding stock tax benefit of two cents in Q3 EPS grew by approximately 53%.
Let's review the growth drivers in both revenue and profit on site.
On slide 10, we show the contributions to sales growth in the quarter.
Volume and mix contribution at $77.1 million.
Or 16.9 percentage points of growth.
Including approximately $32 million of volume driven by coal with 19 related net demand.
Sales price increases contribution at $6.1 million or 1.3 percentage points of growth.
And changes in foreign currency exchange rate increased sales by 8.7 million or an increase of 1.9 percentage point.
Looking at margin performance.
Slide 11 shows our consolidated gross profit margin of 35.5% for Q3 2020.
Up from 32.4% in Q3 2019.
Proprietary products third quarter gross profit margin of 40.8% was 260 basis points above the margin achieved in the third quarter of 2019.
The key drivers of the continued improvement in proprietary products gross profit margin more favorable mix of products sold driven by the growth in high value products production efficiencies and sales price increases.
Partially offset by increased overhead costs.
Contract manufacturing third quarter gross profit margin of 17.9% was 350 basis points above the margin achieved in the third quarter of 2019.
This is a result of improved efficiencies and plant utilization.
Now, let's look at our balance sheet and review, how we've done in terms of generating more cash.
On slide 12, we have listed some key cash flow metrics.
Operating cash flow was $323.8 million for the year to date 2020.
An increase of $63 million compared to the same period last year, a 24.2% increase.
Our year to date capital spending was $116.7 million 27.9 million higher than the same period last year and in line with guidance.
Working capital of $790.6 million at September Thirtyth, 2020 was 73.5 million higher than at December 31, 2019 primary.
Primarily due to an increase in accounts receivable due to increased sales activity and inventory, mainly as a result of increasing safety stock.
Our cash balance at September Thirtyth of $519.4 million was 80.3 million more than or December 2019 balance primarily due to our positive operating results.
Our capital and financial resources, including overall liquidity remained strong.
Turning to guidance Slide 13 provides a high.
High level summary.
Full year 2020, net sales guidance, we'll be in a range of between 2.1 and $2.11 billion. This includes estimated net coal with incremental revenues of approximately $85 million.
There is an estimated headwind of $4 million based on current foreign exchange rates.
We expect organic sales growth to be approximately 14% to 15%. This.
This compares to prior guidance of 2.03 fight to $2.055 billion and growth of approximately 12%.
We expect our full year 2020, adjusted diluted EPS guidance to be in a range of $4, 50% to $4 55 compared to prior guidance of $4 15 to $4 25.
As Eric discussed we are expanding our HBP manufacturing capacity at our existing sites to meet anticipated 2021, cobot vaccine demand capex.
Capex guidance remains at $170 million to $180 million.
There are some key elements I want to bring your attention to as you review our revised guidance.
Estimated FX headwind on EPS as an impact of approximately two cents based on current foreign currency exchange rates.
The revised guidance also includes 18 cents EPS impact from our tax benefits from stock based compensation.
So to summarize the key takeaways for the third quarter. So.
Strong topline growth in both proprietary and contract manufacturing.
Gross profit margin improvement growth in operating profit margin growth in adjusted diluted EPS and growth in operating and free cash flow.
Our sales and EPS projections for 2020 and performance are in line with our long term constructs of approximately 6% to 8% organic sales growth and EPS expansion.
I'd now like to turn the call back over to Eric.
Thank you Bernard.
Before I close I am pleased to share that last evening, we received FDA clearance for west to market, our 20 millimeter buyout to beg advanced product the team.
The team is excited to bring this innovative product to the healthcare professionals.
To conclude there are many challenges ahead of us, but we are resolute in our mission focus systems and most importantly, the team to address these challenges.
We see strength in our core business and we're confident in our long term growth strategy.
Our market led strategy is delivering unique value propositions to our customers.
Our global operations network is able to flex and respond to the demand, while driving market, leading service and quality.
And our investments in digital technology and automation, we will continue to keep us on the forefront of the industry.
We remain focused on delivering value to all our stakeholders on a sustainable basis and doing our part to support the healthcare industry as it works to resolve this global pandemic.
On behalf of the team members at West we continue to wish you well in the days ahead due to them, we're ready to take questions. Thank you.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone to withdraw your question. Please press the pound key.
The standby, while we compiled acuity roster.
I show. Our first question comes from the line of Juan Avendano from Bank of America. Please go ahead.
Hello, Thank you congratulations on the quarter again, our western everybody.
My first question is it seems like the net covered related revenue that benefit, but you've been seeing over the last couple of quarters increased QM and for Q is anywhere between 30 and $35 million per quarter, why would you or would you not advise against Annualizing This quarterly run rate.
In the out years.
Talking about 2021 and beyond.
Yeah one.
So first of all thank you and we look at Q2 was approximately $19 million Q3 was around roughly around $32 million net coal that impact and a lot of that has been around our therapeutics.
And supporting therapies, and Q3 saw a little bit of.
Demand in regard regarding these vaccines to support the vaccines, but until we have visibility as our customers.
And get product Thats approved for human use we are not able to guide.
Any further.
Particularly around the vaccines, so Bernard Didnt mentioned that for the for the full year were looking about $85 million net impact of Covance.
19, Thats just based on what we know today and what we have visibility.
Thank you and would you be willing to give us the split in the third quarter between therapeutics and vaccines out of those 32 million how much was attributable to vaccines.
Yes, so a plus and the majority of it was around therapeutics and Thats still what we are seeing that now we have seen towards the back ended the quarter some customers and pull some of their demand for vaccines forward, a little bit and we have been responding to those demands and book.
Primarily in Q3, and mainly around therapeutics and some puts some vaccine.
Im revenues.
Got it and within the vaccine revenue is this vaccine revenue associated with clinical trial activity or were at greatest manufacturing activity.
Yes, while we don't we won't comment on exactly what the.
Stages, our how our customers are.
Ramping up so we just can't comment on exactly the use at this point in time.
All right got it and my very last question, if I may I am too.
Im to margin expansion and congratulations on the margin expansion.
Gross margin expansion that you are seeing on the contract manufacture products segment its been two quarters of high teens gross margin.
My question is how sustainable is this and given the comments that you had in your prepared remarks.
Around the digital and automation improvements that you're making operational best is set up well to deliver more than 100 basis points of operating margin expansion in the upcoming years.
So to answer your first question on contract manufacturing and.
As we called out in Q2, we have seen significant improvement some of the Q2.
Bump in margins was related to some onetime engineering and.
Revenues and the associated profitability, we saw with those.
And we did see it.
Further improvements in Q3, if I was to look out between now and the ended the year I would think the margin maybe a little bit lighter than that quoted a showing again significant improvements proven to on previous years, and then as we roll forward into 2021 and beyond I would start to see.
See the 18% plus being more sustainable over the long term.
But I went when we're looking to address Q4, I would and damp.
Dampened down expectations, a little bit on that one.
Okay got it and then BRL 100 basis points upside to that given that digital transformation that are good trends on the high value products and Im obviously to increase utilization member CMO segments.
Yes on our long term cost structure, we have continuously said that were targeting 100 basis points plus.
And in.
Improvements year over year, and we we continue to make the investments to make sure that we can sustain that level of improvements over the long term and digital as part of that.
Thank you I'll leave it at that I'll follow up offline. Thanks.
Thank you if you will.
Thank you.
Our next question comes from the line of Larry Solow from CJS Securities. Please go ahead.
Great. Good morning, Thanks for taking my questions Congrats.
Congrats on the quarter can you heard you mention the ball to bag approval. There at the end, maybe just elaborate a little more on that so does that mean that the whole product line will be coming back in 21 or.
Yes, whats coming back is the 20 millimeter version of the while the bag, which is more is majority of the demand in the addressable market.
So we are now as we got the approval late last night.
In the mode of ramping up and to reenter the market or into the market with a new innovative product that we're very comfortable and confident on we will be.
Really solid solution, we sort of think about transferring vial.
Drugs from bile into a big.
Duration environment, so in essence of the bed side of a patient. So we're excited about this launch and.
And we're ready to move forward and thankfully the FDA supporters on this journey.
And obviously you just to follow up on Juans question.
Yes.
Very nice margin improvement.
And you mentioned.
Yeah, No, we'll pure and divisions could you just speak to those to your higher margin highest margin products are sort of.
Sort of.
On our skin a slug of global look what penetration is of those two services compared to some of the less and less so on the floor.
Flotek and how much room, we got to run between the two.
Yes for Tech is really kind of a foundational element, we started thinking about particularly the biologics area. So the flotek coating that is used on both stoppers and plungers and so therefore as somewhat foundational and that has been.
The demand as obviously increase due to the low the current pandemic, we started thinking about penetration of envision which continues to grow nicely.
And then Nova peer, which is the highest level quality of product that we provide in the marketplace as.
And that is the adoption rate is starting to continue to it continues to accelerate.
It is still less than 10% or frankly less than 5% of our sales and proprietary but the highest growth that we're seeing and what's really encouraging as you know we have good visibility whats in the pipeline and what our customers are looking to use for primary containment Nova peer is now.
I'll be coming.
Quite a.
I'd call it a staple in the biologics space. So we anticipate strong growth in over a period not just near term, but more long term on the base business and in addition to that we sort of think about some of vaccines are being looked at and being developed.
For co bid we are seeing interest levels are on the ground over here.
And you spoke to the increased capacity, particularly on.
No the pure and floor attack.
And I realized that acceleration is.
Partially driven by the vaccine demand in the short run how about in the long run.
This is these actions are.
Not here forever in orders. However, there are other options for these vaccine providers.
Do you run the risk of Ics.
We were headed or unused.
Overhead absorption.
With some of this increase capacity.
Larry the capacity that Weve Addus and was already.
Baked into our five year strap plan, so really what weve done is accelerated that capex by probably two to three years. So that this is capacity we were going to add in any case and.
No.
Save a vaccine didnt happen and we all want vaccines to be successful, but if it didnt that there would be some cost to cover really in the short term, but that it's perfectly and within our capabilities to do that.
And so we don't see any am.
Pacific risk with this it's technologies that we already have in our business and that we are running today. So it's really expanding.
The current technology base. So from from that perspective, there is not a huge risk and we would not see that capacity has to be sitting there idle for within the medium to long term if that vaccines were not success.
Got it and then just last question just to clarify actually schedule.
You mentioned I think you said 95 million now for co good related.
Sales of 85, Okay. So up from 60 cell that 25, and I think you sort of reverted back a little bit on the FX impact by about another 20 to sell so thats about the recorded the year increase on the guidance and the rest I guess is the base business.
Yeah.
Yes, and so so where we are seeing strong growth across all areas areas of our business and.
Wait coal, but an ex covidien. If you look at the growth rates, excluding Covance works were at double digit growth rates.
Right. So it's a it's strong across all areas of the business and we've been showing growth in each of the market units and contract manufacturing.
Got it great. Thanks, very much appreciate it.
Thank you.
Our next question comes from the line of Jacob Johnson from Stephens. Please go ahead.
Hey, thanks, congrats on the quarter.
Just maybe one question on Covance vaccines and in terms of customer demand I don't think you experienced stocking earlier this year, just generally but as we think about the ramp up of these vaccines do you anticipate customers building up inventories ahead of a potential launch or should.
We anticipate this vaccine work being largely made to order.
Lot of our businesses make to order.
But we are in active discussion with several customers.
Of if and when a vaccine is approved and how we can respond. So I think earlier in the prepared remarks, Bernard mentioned, a little bit about inventory.
Has increase and some of that is due to build on on some components that thats or inventory, that's right inventory with a customer that was the customer is it's our own in inventory as we prepare so we're we're well positioned to bill react quickly.
And meet the requirements of the customers have we have agreed upon with our customers.
So again were made to order so we'll respond once those if and.
If and when those approvals come.
Got it and then.
Maybe maybe a bigger picture question I mean in this current environment, we're seeing a lot of healthcare moves into the house setting. It maybe it's too soon on on the drug delivery side, but are you seeing any uptick in interest in products like smartdose or self dose.
And is this a trend do you think that could maybe accelerate in coming years as we come out of coated.
Jacob that's exactly one of the areas. We're starting to have further discussions with our customers in particularly a couple of the development agreements recently signed and we just commenced on with customers is exactly what you just referenced ability to.
Take it away from infusions setting into a delivery device environment that smartdose is capable of doing now it does take time.
To ensure that.
It's compatible and we obviously works as required.
And we're confident in that area, but these development agreements do take time to to get through over the line. We're seeing both mixture of new molecules in the pipeline, but also molecules that are already in the marketplace, but using other types of modality is for delivery.
Got it I'll leave it there thanks for taking the questions. Thank you.
Thank you. Our next question comes from the line of John Kreger from William Blair. Please go ahead.
Hi, Thanks, Bernard could you just expand a bit more on your comments about accelerated capex.
When would we expect that that program to sort of come online I think you said one plant has come online already but can you just give us a little bit more detail about when the other accelerated programs are coming on and I'm curious if that is impacting your expense levels as well, obviously, it's impacting capex, but are you to what degree you.
Running sort of elevated spending through the pan out too.
Yes, so the where were on boarding and the equipment as we speak and each week and over the next coming weeks, we'd be layering in more and as we move into 2021 will be layering in more capacity.
And there is some expense around us regarding some engineering support validation support but it it's not overly material as we've already a commentary that that the equipment and the technologies are where our on boarding our technologies and equipment that we have.
Used in the past so its not anything new for us. So we had the systems and the people in place already to be able to do that.
So it's not.
Overly material and.
On our results at this point.
Great. Thanks, and then the the the net covert benefit can we assume that is.
It is mostly flowing through the biologics segment.
Thats correct Biologics and then just.
Generics has seen some.
Got it okay and curious.
Obviously, you've gotten a really nice lift from from pandemic in terms of demand can you talk about sort of the non co that pipeline that you're seeing.
And are you able to to meet the underlying demand levels. There are you having any capacity issues.
No you're absolutely right our intellects.
And then the last quarter, we had double digit growth on the ex co bid and both in proprietary which is really the area that were impacted the most.
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Which market units placed supported in the malls.
And when you think about the pipeline in our biologics business is very robust so not just molecules that have been launched and and continue to.
Have higher uptake in them in the marketplace, but it's new molecules are being developed and were purchased height. We have very high participation rate also in biologics. So the underlying growth rate of the of the Threed market units continue to do quite well.
And that does put as you referenced additional capacity pressures on our on our capabilities, but that is for these investments were bringing in and were able to quickly install validate and move it into operational productivity.
So the underlying business when we believe that will continue to to.
Continue to go forward as is based on our current participation rates on new molecules coming through the pipeline.
Great. Thanks, and just one last thing to clarify can you remind us.
At what point and.
Drug development process are you typically getting engaged by by the innovator is it preclinical or early stage clinical.
This preclinical so we're very early on and a lot in many cases, if theyre not using as you know we have a pretty high participation rate on many of our customers drug portfolio. So if they're looking to add moving away from some an element or.
Product set they're already using within the other parts of their portfolio than that we will obviously alter and move to higher higher value product like Nova here, but it's very early on with our.
With our customers.
Great. Thank you.
Thank you.
I show. Our next question comes from the line of Stanley Yang from Jefferies. Please go ahead.
Hi, good morning, Thanks for taking my questions.
This is just have one that hasn't been asked already as cash builds how is how.
How are you thinking about prioritizing deployment of capital.
So am I.
Right now, we're focusing on making sure that we're adding the additional capacity the required capacity thats need as you can see the that we've increased our had increased our capex guidance am.
And that that's in the short to medium term as we look at where we deploy capital in the future.
And yes, we are we will look at M&A and but again, we take a very disciplined approach to looking at that and how we deploy capital in that area based on water. The strategic objectives that we have and want incremental value and cannot bring to our customers and how we will create value from those acquisitions and add stakeholder.
Our value and so we have a pretty robust construct around the hurdle rates that we have to be to meet and.
And but that is something that we add has to.
We have started to low gas and.
And you know if we.
If we have any updates for issue in the future, we'll obviously and communicate those to you. The one thing that we are cognizant of is that we have a very strong and robust organic growth story and strategic plan in place and am our priority is to make sure that we continue to to deliver on that.
And not get distracted us so.
Hopefully that answers your question.
Great. Thank you and as it does.
Thank you.
I show no further questions in the queue at this time I would like to turn the call back over to Mr. Quintin Lai for closing remarks. Please go ahead.
Thank you Julien thank.
Thank you everyone for joining us on todays conference call an online archive of the broadcast will be available on our website at was pharma dot com in the investors section.
Additionally, you may access the replay through Thursday October 29 by using the dial in numbers and conference I'd provided at the end of today's earnings release that concludes this call have a nice day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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