Q1 2022 West Pharmaceutical Services Inc Earnings Call
Good day and thank you for standing by welcome to the Q1 West Pharmaceutical services earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to you.
Our speaker today Quintin Lai.
President of Investor Relations. Please go ahead.
Thank you Debbie.
Good morning, and welcome to Western first quarter 2022 conference call.
We issued our financial results. This morning, and the release has been posted in the investors section on the company's website located at West pharma Dot com.
This morning, CEO , Eric Green and CFO burning Briquette will review our financial results.
Provided an update on our business and presented an update on our financial outlook for the full year of 2022.
There's a slide presentation that accompanies today's call and a copy of that presentation is available on the investors section of our website.
On slide four is our safe Harbor statement statements made by management on this call and in 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 forecasts.
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 today's 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 adjusted operating profit adjusted operating profit margin and adjusted diluted EPS reconciliation.
<unk> and limitations of the non-GAAP financial measures to the most comparable financial results.
Parity in conformity to GAAP are provided in this morning's earnings release I'll now turn the call over to our CEO and President Eric Green, Eric. Thank you Quintin and good morning, everyone. Thanks for joining US today, we will start on slide five mm.
I'm pleased to report that we delivered a strong first quarter. This was driven by double digit organic sales growth with increasing demand for our high value products.
Confirmed order book for the rest of 2022 and then into 'twenty 'twenty three remains as strong as ever primarily driven by non Covid based business.
And to provide you more color over half of the order book is coming from biologics demand. These results were delivered despite several macroeconomic challenges that are impacting all companies and sectors.
We have taken proactive measures to mitigate the risk of these challenges and ensure the continuity of critical components to our customers. For example, inflation, we're adjusting our pricing strategy and have enacted surcharges as a pass through to offset increasing costs of raw materials.
Energy and transportation.
Supply chain of raw material and proprietary medical device components are sourced from across the globe. We have increased our inventory of these key raw materials to minimize any supply disruption and we continue to execute and monitor our business continuity plans with respect to these issues.
The warranty Ukraine, and the recent pandemic surge in China.
Turning to slide six.
Our team members across the globe continue to demonstrate their passion to improve patient lives as they remain focused on our strategic initiatives of execute innovate and grow star.
Starting with the first pillar of execute we continued to deliver the key drivers of growth in Q1 with strong customer demand of H P V P components, including Nova peer and Westar, there was solid demand in the quarter across all market units and a positive outlook remains for the rest of the year and then.
In particular for our biologics market segment, which is now greater than 42% of our total sales, we see both existing and new customers continue to spec our highest level of components by west or a partner day Q4 this sensitive molecules.
Our capital spending investments through expansions and optimizing productivity across our global operations remain on track.
To date, almost all of our 'twenty 'twenty expansion phases have been installed validated and in production and we're making good progress on the 2021 capital expansion plans summer, which will come online in the second half of 'twenty to 'twenty two and throughout 2023.
With the accelerated biologics demand for Nova peer we have executed additional support for Nova peer future demand as well as other H P. P. Finishing capabilities expansion construction is underway and will be online towards the back half of this year with commercial production in 2023.
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Shifting to west team of scientific and technical experts, we continue to educate and share insights in biologics combination products and container closure integrity, which are priority areas and pharmaceutical packaging at the recent P. D. A annual meeting.
Several of our west experts were recipients of prestigious awards.
Now to innovate we need to fuel innovation to develop future products solutions and services that connect the dots across science and technology to create customer value.
We're doing so by investing in external opportunities that complement our current business needs such as our partnership with Teck in to create a research center of excellence in combination with Wes scientific expertise.
The Corning collaboration as we expand our H P. P value proposition to lead the industry from components to a truly integrated system of a last spring glass.
In building technologies like the recent collaboration with Newmar systems to develop a family of fluid flow technologies for drug delivery.
I'm pleased on the progress on our R&D team is making around innovate.
Moving to the final pillar grow which includes uses of cash were working from a position of strength as we believe we have a long horizon of continued strong organic sales growth and margin expansion.
As we have demonstrated over the past two years, we have increased our capital spending for capacity expansion at existing sites across our global network to support our organic growth initiatives. In addition, we have made inorganic investments such as partnerships with Corning.
Our continued focus within these three strategic pillars execute innovate and grow all of us as it allows us to be more responsive leverage your assets more effectively and support the trends that are happening in the industry today.
This was most evident from our recent site visits in Dublin in Waterford, Ireland for example, in Dublin I saw firsthand, how the digitalization of our manufacturing technologies is providing real time data, enabling our team to raise the bar in operational performance with higher yields and efficiencies.
Waterford the capital investments over the last year and a half have significantly increased capacity with additional lines producing H P. P product to meet increased demand and we're seeing early success with their next generation fully integrated automation that we believe will skill and transfer are crossing that.
I work for a combined benefit of higher quality production and higher manufacturing throughput.
Lastly, and probably the hard work of our Waterford team was acknowledged by the Ireland U S Counsel as we received the global Public Service award for our commitment during the pandemic.
Now I'll turn it over to our CFO , Bernard Birkett, who will provide more detail on our financial performance.
Thank you Eric and good morning, Let's review the numbers in more detail. The first look at Q1, 2022 revenues and profits, where we saw continued strong sales and EPS growth led by strong revenue performance in our biologics and pharma market units.
It will take you through the profit growth, we saw in the quarter as well as some balance sheet takeaways.
And finally, we will provide an update to our 2022 guidance.
First off Q1 or financial results are summarized on slide seven and the reconciliation of non U S. GAAP measures are described in slides 15 to 18.
We recorded net sales of $720 million, representing organic sales growth of 11%.
Looking at slide eight proprietary products sales grew organically by 14, 4% in the quarter.
High value products, which made up approximately 73% of proprietary product sales in the quarter grew double digits and had solid momentum across biologics department market units in Q1.
Looking at the performance of the market units buyer.
Biologics market unit delivered strong double digit growth.
We continue to work with many biotech and Biopharma customers, who are using west Nike or high value product offerings.
The generics market unit experienced mid single digit growth led by sales of flora attack Westar components.
Our pharma market unit saw high single digit growth with sales led by high value products, including <unk> and Nova pure component.
And contract manufacturing declined three 8% for the first quarter due to a reduction in sales of components for diagnostic devices.
We recorded a $284 $6 million and gross profit 12.
$12 7 million or 7% above Q1 of last year.
Gross profit margin of 39.5% with a 100 basis point decline from the same period last year.
We saw improvement in adjusted operating profit was $189 $9 million reported this quarter compared to $179 2 million in the same period last year for a 6% increase.
However, our adjusted operating profit margin of 26, 4% was a 30 basis point decrease from the same period last year.
Finally, adjusted diluted EPS grew 12% for Q1 <unk>.
Excluding stock based compensation tax benefit of 12 cents in Q1 EPS grew by approximately 15%.
So let's review the drivers in both revenue and profit.
On slide nine we show the contributions to sales growth in the quarter.
Volume and mix contributed $49 9 million or seven four percentage points of growth.
And sales price increases contributed $23 6 million or three five percentage points of growth in the quarter.
Looking at margin performance Slide 10 shows our consolidated gross profit margin of 39, 5% for Q1 2022 slightly down from 45% in Q1 2021.
Proprietary products first quarter gross profit margin of 43, 4% was 290 basis points lower than the margin achieved in the first quarter of 2021.
The decline in proprietary products gross profit margin.
It's caused by several factors, including lower levels of absorption during the early part of the quarter due to short term labor constraint.
Increases in raw material and overhead costs.
In addition, our 2021 gross profit margin included approximately 150 basis points of benefit.
In the prior year associated with onetime fees from Covid and other supply agreements.
Which did not reoccur in the first quarter of 2022.
These fees had approximately 160 basis points of benefit in Q1, 2021 operating margin.
Contract manufacturing first quarter gross profit margin of 21% was 440 basis points above the margin achieved in the first quarter of 2021.
The increase in margin is largely attributed to pass through inflationary costs in components in the quarter.
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 11, we have listed some key cash flow metrics.
Operating cash flow was $151 $2 million for the first quarter of 2022, an increase of $62 5 million compared to the same period last year.
75% increase or.
Our operating cash flow in the period benefited from a working capital performance.
Our first quarter 2022 year to date capital spending of $65 $8 million.
$11 1 million higher than the same period last year.
Working capital of approximately $1 $1 billion March 31, 2022 decreased slightly by $42 2 million.
Dollars from December 31, 2021, primarily due to the net reduction of our cash offset by an increase in inventory levels.
Our cash balance at March 31, $667 7 million was.
Was $94 9 million lower than our December 2021 balance.
The decrease in cash is primarily due to our share repurchase program and higher capex offset by our strong operating results in the period.
Turning to guidance slide on Slide 12 provides a high level summary.
We are reaffirming our full year 2022, net sales guidance, we expect net sales to be in a range of 3.05 billion to $3.075 billion.
There was an estimated FX.
FX headwind of $115 million based on current foreign exchange strained exchange rates compared to our prior estimated headwind of $17 million.
We expect organic sales growth to be in a range of 11% to 12% compared to our prior guidance of approximately 10%.
We expect our full year 2022, adjusted diluted EPS guidance to be in a range of $9 30 to $9 45 compared to our prior range of $9 20 to $9 35.
This revised guidance includes our first quarter 12 cent EPS positive impact of tax benefits from stock based compensation.
Also our Capex guidance remains at $380 million for the year.
There are some key elements I want to bring your attention to as you review our guidance.
Estimated FX headwind on EPS has an increased impact of approximately 38 cents.
Based on current foreign currency exchange rates compared to our prior estimated headwind of 21.
And our guidance excludes future tax benefits from stock based compensation.
So to summarize the key takeaways for the first quarter.
<unk> top line growth in proprietary growth in operating profit growth in adjusted diluted EPS and growth in operating cash flow delivering in line with our pillars of execute innovate and grow.
Now I would like to turn the call back over to Eric.
Thank you Bernard.
To summarize on slide 13, our execution in Q1 has positioned us well for the year ahead, we continue to have a strong base business. Despite the current macro environment in which we operate.
We remain well positioned with the right market led strategy around execute innovate and grow we have a robust book of committed orders with momentum in 2022 and continued into 2023, we continue to realize the benefits of our global operating model and we're continue to accelerate capital spending.
Across our operations to meet current and anticipated future growth are.
Great Pride, we realized the criticality of our products for health care across the globe, which is why our purpose to improve patient lives propels us each and every day D. D. 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 key.
Standby, while we compile the Q&A roster one moment.
Our first question comes from Larry Solow of T. J S Securities. Please proceed.
Great. Good morning, guys did you did you get the real quick housekeeping question did you give the COVID-19 .
Covid related sales number that I missed that.
We didn't call it out but it was approximately one <unk>.
110 million, which shows growth over Q1 2021.
Got it so there's no change to that this year the outlook for that it sounds like.
Okay.
First question is just on the cost side. So you know everybody's facing this varying degrees of them.
From inflation and supply chain issues and you guys have done a fabulous job.
Offsetting a lot of them I think but obviously.
Not only you can only have so much I'm just curious what the.
The surcharges you've put in today I don't want you already kind of is this just sort of expediting increases to keep up with the rapid.
Fluid situation with the costs coming up I know normally I think you have like Kickers in there and you saw a lot of your contract because it's more of a broader base.
In a more aggressive reaction to some of these inflationary issues.
Yeah, Larry there's two elements you're right on the contract manufacturing side of our business, which is a little bit less than 20%. We do have with her agreements with our customers. We are passing on inflationary costs are for the most part.
Whether it's raw materials and et cetera.
I'm Gonna proprietary side, that's more of a recent phenomena those two elements of that though one as we've mentioned before that we are revisiting our pricing strategy and we started executing upon that last.
Last year building up for this year, so we're seeing the element of.
More long term pricing strategy around value capture that is now coming in to the equation. In addition to that in the prepared Terry business, we have implemented surcharges as well and that typically is really around transportation and increase in raw materials. So there's two levers.
That have occurred but I just want to be very clear that there is an element underlying base price increase strategy is now.
Being rolled into the ongoing business.
Okay.
Was this kind of just enacted at the beginning of this year I guess and I assume there's some kind of a lag right then margins were down a little bit I know year over year there was.
Some more you had this onetime $12 million, one time payment I know that skewed the margins, but even if we look sequentially margins are down a little bit right.
That mostly a function of these of these higher cost and maybe you can offset all of them, but hopefully maybe you get a little improvement as we look out as you enact some of these surcharges.
It's partly related to the cost and the lag in passing them on so it's not always instantaneous in the quarter when you see the pricing or the cost increases and we will.
We work with our customers to layer that in over time, and that's what we have been doing.
And the other thing that we kind of called out Larry as well we did see.
Some lower levels of absorption in the probably the first half of the quarter and based on labor supply in one of our two of our plants.
That was a short term blip and then we've seen the absorption levels get back to normal where we would expect them to be in the latter half of the quarter, but again that does impact margin in the short term.
Right, Yes that was kind of my next question was.
The cost impact in the and the labor issue you called out a sort of temporary.
Are you guys, having any major.
Or increasing problems, just retaining labor or supply chain issues.
<unk> been able to sort of even though things are not getting any better right now.
I wouldn't think there is an increasing problems, we're retaining labor you know what it has been challenging I think for everybody, but we haven't seen any spike in that.
So we have a number of initiatives with our HR teams to make sure we had the labor in the right places so it wasn't really around retention.
Our retention problem.
<unk>.
Phil.
The.
Long term, that's not a big issue for US and then if you look at.
The implied guidance we are forecasting.
Operating margin expansion and to do that we have to be able to do gross margin expansion at the same time to feed into it so.
So you know we believe some of these short term impacts we saw it.
And the early part of the year are now behind us.
Okay. Okay, Great and then just last question on just on back to the Covid any you know obviously, there's a lot of it.
Quickly changing situation, but it sounds like for you guys.
Again, we've talked about it's not a matter of overall volume, but sort of that shift in lifecycle management have you seen any incremental you know.
Incremental evident that this is occurring or you know any thoughts any update on that front.
What we can share with you said, we are seeing the more of the forecasting.
Uh huh.
Looking later in the 2022 of our of a shift from larger vial configuration to a smaller vial configuration, but that isn't flowing into our operations as we speak today, but that's more of a forecasted where.
And with our customers and throughout the year.
Right right. Okay. Okay, great. Thanks, guys I appreciate it.
Thank you.
Thank you. Our next question comes from Justin Lin of William Blair. Please proceed.
Hi, Good morning, Thank you for taking my questions.
Yes.
Replica and came out and.
Yesterday.
<unk> Covid vaccine cancellations in orders as we pushed to 2023 and we some of it some of them.
I guess what are you seeing in your order books and if.
If you could share your outlook for Covid, both short term and long term that would be great.
Well, there's two ways to look at it one is if you think about for 2022.
Yes.
Our order are confirmed order book for the balance of the year.
As we mentioned earlier is it's a very it's much stronger than it was the same time periods last year, but.
But if you if you if you split that out the COVID-19 ratio within that larger order book is relatively the same as it is relatively steady as it was last year.
Really the expansion of that order book is really a heavy around the H P. P and also due to over half of it is due to the success of various drug launches.
In our biologics space. So you know there there are some.
COVID-19 customers that are adjusting their forecast, but overall, we're seeing a steady flow throughout throughout the balance of the year.
Got it. So you are currently not sort of changing your outlook for tight.
Sounds like no we're not we're not based on what we.
Current compare recessions with customers.
Got it.
<unk>.
Thank you margins, both gross and operating kind of slightly below the street.
Can you help us think through how much of that is <unk>.
Product mix versus currency versus supply chain headwinds.
Gross profit is a bit lower than you're used to seeing but some of that is offset by a lower SG&A spend as well.
Yeah, so on the gross margin really.
What I called out earlier in response to Larry's question part of that was on the lower levels of absorption that we did see in the.
First half of the quarter.
And again that that was more of a one time event.
<unk>.
And what we're actually seeing in operating margin. If you look at our business on a normalized basis, if you back off.
The one time take or pay that we got in Q1 2021.
And compared.
Operating results excluding Nash.
Operating margin would have expanded by about 130 basis points.
So that it had 160 basis point impact on operating margin so.
No.
So when we look out for the balance of the year. We are forecasting continued operating margin expansion. So the dot com made it very very difficult to expand the margin in the period.
Got it.
Thank you very much.
Thank you.
Yes.
Thank you. Our next question comes from Paul Knight of Keybanc. Please proceed.
Hi, Eric your 380 million of Capex, obviously shows.
No.
I guess, a very strong building book for biologics ex Covid.
Can you talk about 42% of biologics.
Sales of our biologics this year what was it last year and can you talk about what you're seeing that's driving your capex level.
Yeah. So when you look at it Paul it's less than 40% and we're seeing the biologics become a larger piece of the obviously, it's the largest unit today.
With the highest growth even ex COVID-19 .
In the equation.
And so when you think about our investments that we are currently making.
A lot of the capital over 70% of the capital is really growth oriented it which I think historically was play closer to the <unk>.
Percentage and it's really focused around Nova peer in Florida, particularly Plunger's and stoppers.
And what we're seeing is really a buildup. It was we talked earlier about the capital that we're spending.
The last couple of years really is was already built in our five year plan and we're just bringing it forward to to support the Covid vaccines, but now what we're seeing is that the demand in the biologics continues to increase and accelerate and I mentioned, a little bit earlier, but just to reiterate I mean, if I look at.
The details of the confirm order book over half of it is of drug molecules in market that we're seeing a ramp up of our acceleration of adoption and so and it's not just one molecules. Many so we've seen that the pull effect of increasing.
Volume out of west to support those the continuation of the drug in the supply chain. So we're very very excited to see the the focus around biologics.
High penetration of of successes of our new B L. As our enemies and and our participation is remains very very high and this is the impact that we're seeing.
And.
Regarding the Corning JV, what I know you indicated capex of $50 million, but once the multi year kind of timeline in your view with that JV.
While the investments are more in the next couple of years.
And it maintenance is a very long term arrangement and we will have various launches over the next couple of years, starting this year in 2022, new new solutions to customers, but these investments will take place on the capital side.
Over the next couple of years to increase capacity, particularly around pre filled syringe.
Yeah, So that's going to be a number a number of years before we see from a revenue and profitability perspective.
You know that that's not immediate so it's going to take time to build that house and but in the interim there are other configurations as Eric said, the putting together, but they won't be overly material on our numbers in the short term.
Okay. Thank you.
Thank you.
Our next question comes from Jacob Johnson of Stephens. Please proceed.
Hey, Thanks. Good morning, maybe first just a couple of clarifying questions first just on the Covid side.
Heard you correctly it sounds like your expectations for 2022 on the revenues there are unchanged, but has the composition of those revenues changed.
Assuming it sounds like maybe the back half of the year.
Maybe a little more of a benefit from a configuration changes is it fair to say that maybe the composition of those revenues have shifted versus prior expectations.
No I think it's pretty consistent I think.
What we're seeing is absolutely what do you do lifecycle management different violet configuration, there will be a change and that was really more towards the back half of the year, but when we look at the growth orientation of where we are today.
And look at the balance of 2022.
The ex COVID-19 or the non COVID-19 related growth it will will outpace.
The COVID-19 growth and as you recall last year the year before was.
Really quick acceleration because of our response to the market.
But it's for us steady.
We get a steady state its more of a lower end, but still growth.
Overall for <unk> for west, but the but the.
The higher element of girls and proprietary is definitely going to come from right now the our view is non COVID-19 related.
Okay got it thanks for that Eric and then just on the decline in gross margins sequentially.
Sounds like this was largely related to labor and absorption.
If I heard you correctly it sounds like that was the first half of the quarter and that's been resolved. So is it fair to assume that we should see gross margins kind of bounce back now.
With <unk> and beyond.
Yeah.
And that's implied in the guidance.
And for that to happen and.
We're confident that that will take place and as he is Eric.
<unk>, we're continuing to see very strong growth within biologics and that mix shift within our business and that drives a lot of that margin improvement.
And we're also picking up various levels of efficiencies throughout our operations. So we would expect to see margins continue to improve throughout the year.
Okay.
And then just last question kind of getting to the point I think you both want to make.
Eric You mentioned a long horizon.
Gross.
I guess the question there would be helpful, just remind us kind of where high value product.
Unit stand in terms of percentage of units today.
That number looks like and and maybe how that what that could look like maybe five years from now.
Yes, if you think about the the algorithm that we have with the greater than 70% of our sales and proprietary is.
As high value products.
The units number of units that we are producing for high value products is roughly around 22, 23%.
And the way. It works is about 100 basis point expansion on the units is strong double digit growth in high value products and if you think about how biologics is becoming a larger portion of the portfolio again across many different customers. So it's not really concentrated on one customer.
One drug.
It's across the whole portfolio.
Of the market.
That will continuously drive.
Higher higher revenues higher profits with not a lot of increase on units per se 100, 100 plus basis points. So that's the equation and.
And we expect that to continue its the fastest growing sub segment within injectable medicines space. The pipeline's very robust it was very.
Encouraging to see the number of new approvals over the last 12 18.
18 months in this particular space and our participation rate is as high as ever. So all of this equates to an it translates into our confirm order book.
For future launches. So this all translates into continued growth for the next five years of Hps for West.
Perfect I'll leave it there thanks for taking my questions. Thank.
Thank you.
Thank you. Our next question comes from Derik de Bruin of Bank of America. Please proceed.
Hi, good morning, everyone.
I won't embarrass jumped on.
My apologies, if I'm going to repeat some stuff, but can you.
Can you just sort of.
Talk about the.
Organic revenue growth guide.
If you were a little bit below in our numbers in the first quarter, yet you're raising a four 1% for the full year.
Like that which is which is surprising given the Q1 can you sort of walk through me it keeps sort of walk through the math on your confidence in sort of getting that increase given the good start.
Yeah. So the when we look at it and it goes back to the points I made earlier about the absorption rates that we experienced in the first half of the year due to some of our labor constraints and that was primarily around all micron.
And it impacted us in walnuts and a couple of different sites.
Again that was a short term problems that that impacts our ability to produce in the short term. So then that kind of leads into some impact on our revenues in the first quarter. So it's not that we're seen a draw or a shift in our demand downwards its mainly.
While we could actually produce in the quarter and delivered to customers. So that that was a little bit light, but as Eric said, our order book is still very very strong.
And we also had.
When we spoke.
Early on in the year, we were saying we were gonna see more of our growth will come in the back half of the year versus the first.
And that's still what we're seeing.
So there's really no change.
Great. Thanks for clarifying that.
I didn't get that have you I've got a couple of clients asking can you just sort of.
Confirm that you are looking for greater than 100 basis points of overall operating margin expansion this year.
Yeah, and again that that's implied in the in the guidance. So it will be greater than 100 basis points.
And J J just back to the point I made earlier, if you look at the fundamentals of the business.
If you take that take or pay that we had in Q1 2021, if you back that out and then look at the comp on that basis.
<unk> margin would expand us about 130 basis points.
So from a comp point of view you had that level of.
Challenge here in the first quarter. So when I look at that gives me confidence to be able to say, yes, we are going to continue to expand that operating margin.
Do you think the production constraints are wisely alleviated now.
Yes.
Comment I would say just based on the last couple of months of performance. So I would say, yes, I mean, there's always challenges in this environment today.
The the couple of plants that burn is referring to we were hit hard on the omicron.
And that did impact absorption it also impacts on productivity.
But over the last couple of months looking at the productivity.
Productivity levels the output.
We do believe we have a very good control around this.
And we were able to you know bill.
Bill Flex to make sure that we're able to deliver going forward, but it was it was a short term hit.
Yes.
We did see improvement as we move through the quarter.
And we're forecasting that to continue based on what's in place now.
Great.
I've got.
Some people asking.
On.
Your China exposure and just sort of any commentary in that region has that been a headwind to the business at all.
Yes, so our.
<unk>.
It does impact in a sense that.
Our <unk> manufacturing facility isn't within the <unk>.
The regional Shanghai atmosphere offices too. So we did have a site closure or a short period of time and we're working through that now as materiality for west.
<unk> very low percentage, a poor west coming out of that facility for the local market.
But we're keeping an eye on it make sure that we can pivot and potentially import.
Necessary versus having.
Having materials coming out of that specific site, we do expect to see a recovery.
This quarter.
With the demand, but we need to stay tuned because that's kind of a dynamic environment right now.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Dave Windley of Jefferies.
Hi, Good morning, Thanks for taking my questions I wanted to follow up on.
Derek and several of the other questions line of questioning around the capacity.
I'm wondering if you're here.
Europe's your absorption commentary.
Productivity issues affected your ability to deliver to clients like should we think about revenue would have been higher in the quarter. If you had been able to produce as much as you expected in those facilities and like.
Did the lag times to clients changed at all.
Okay.
Yeah, it impacted it slightly but it didn't really impact lead times overall.
We were able to kind of get that product out to customers.
In the early part of this quarter. So there was we tried to minimize any customer impact as we said it happened Eric earlier in the quarter.
But there is no.
Kind of long term impact to that it was the way it was a once off and it was something we have been able to deal with and we've been able to continue supplying to our customers.
It did it could impact revenues.
Slightly but not <unk>.
Not overly material I will put it that way, but there was some impact around that.
Okay on the it seems as people have already highlighted the gross margin impact and somewhat offset by.
By SG&A being a little lower should we think about that that SG&A level as durable is that a result of kind of some some permanent productivity step ups.
Yes.
It is <unk> it's.
It's productivity and again until it is looking at what what is the appropriate level for SG&A of our business.
And that's something that we manage very very tightly.
Okay, and then just somewhat longer term question around capacity.
Apologize I'm, probably not great at keeping up with all of this but you've you've pulled forward quite a bit of capex not just now but over the COVID-19 period.
And have a number of initiatives in place to bring more capacity online could you just.
Help us understand in broad strokes.
When those capacity expansions are supposed to hit.
And and I think it's mostly Florida checking Nova peer as you've highlighted Eric.
And then also confirm that the confirm what you said in the past that you basically expect that capacity to be.
Taken up by by order demand right away in other words no.
Dilution to productivity.
Absorption et cetera, as you're bringing on slugs of new capacity. Thanks.
The last part first and say that we don't anticipate any impact.
If theres very very variability around the COVID-19 piece.
If we look again look at our the demand that we're getting with non COVID-19 related, particularly in the biologics space, which is which of the overlaps are 100% with the.
The investments that we are putting in the.
The growth is actually.
It's a little bit higher than we anticipated.
So.
Therefore, we're in a position we can absorb that but to your first point. The initial launch that we communicated back in early on in the pandemic. Since this is call. It 2000 22020.
That investment is now finalized and in place and now through is producing commercial product.
This year and it was kind of weaved in throughout 2021, So that's 100% installed the second phase that we communicated really towards the early part of 2021, we're seeing that being layered in as we speak.
And might leak some parts of it not all a portion small portion might go into 2023.
But the focus of the remaining needs VP is exactly what you stated it's really focus around Nova here in Florida had capacity and it is across multiple plants within our network.
And again it lines up very nicely with the growth in biologics.
Also those support pharma and generics, but most of the biologics and then growth in biologics and our order book is.
Extremely strong as we speak today, so I'm pretty confident now we need to get that equipment installed validated and we've been doing a great job across the globe. We also need to add some resources to be able to.
To run the those are the new equipment.
That is ongoing as we speak.
So we're seeing.
Very good uptick on attracting new additional talent to our organization, but also doing a good job of keeping the pace of the capital expansion.
Excellent I appreciate those answers thank you.
You.
Thank you I would now like to turn the conference back to Quintin Lai for further remarks.
Thanks Debbie.
Thank you for joining us on today's conference call.
Online archive of the broadcast will be available on our website. It was for him to dot com in the investors section.
Additionally, you may access a replay through Thursday may the tiv 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.
This concludes today's conference call. Thank you for participating and you may now disconnect.
Alright.
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Yes.
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