Q1 2023 West Pharmaceutical Services Inc Earnings Call

Speaker 1: We issued our financial results this morning and the release has been posted in the investor section on the company's website located at westparma.com.

Speaker 1: This morning, Eric Green and Bernard Brackett will review our financial results, provide an update on our business and present an update on our financial outlook for the full year 2023. The next morning, Eric Green and Bernard Brackett will review our financial outlook for the

Speaker 1: There's a slide presentation that accompanies today's call and a company that presentation is available on the investor section of our website.

Speaker 1: On slide four, our State Harbor Statement, statements made by the 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.

Speaker 1: 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 statements made here.

Speaker 1: Please refer to today's press release as well as any other disclosures made by the company regarding the risk to which it is subject, including our 10-K, 10-Q, and 8-K reports.

Speaker 1: During today's call, management will make reference to non-GAAP financial measures, including …

Speaker 1: for carrying sales growth, 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 are provided in this morning's earnings release.

Speaker 1: I now turn the call over to our CEO Eric Green. Great. Thank you Quentin and good morning everyone. Thanks for joining us today. We will start on slide 5. On April 14th, West turned 100 years old. This is a major milestone that we're very proud of. Over the course of our 100 year history, we have been working to make this happen.

Speaker 1: The West name has come to mean so much to so many people. I would like to recognize our founder, Herman O. West, and the past generations of leadership that have built West to who we are today. In addition, I want to especially thank our 10,000-plus team members who are motivated by our purpose.

Speaker 1: improving patient lives and making a difference in the communities in which

Speaker 1: Moving to slide six.

Speaker 1: I am pleased to report that we delivered a solid first quarter. This was driven by overall organic sales growth of over 2%. Excluding COVID-19, our base organic sales grew high teens. Our end markets remain stable.

Speaker 1: even in this uncertain macroeconomic environment. As expected, we saw a drop in COVID-19-related sales compared to last year. That said, our Biologics Market Unit, excluding COVID, again grew double digits. And we expect this trend to continue for the rest of the year.

Speaker 1: With a focus on reprioritization of longer lead time components, our generics and farmer market units delivered an especially strong quarter of double-digit organic growth.

Speaker 1: our team members across the globe as they remain focused on our strategic initiative of Execute, Innovate, and Grow. The resiliency of the business continues to be a reflection of our team members and I want to acknowledge these efforts to say thank you.

Speaker 1: Turning to slide 7.

Speaker 1: In addition to our financial performance,

Speaker 1: There were several other significant accomplishments in our quarter.

Speaker 1: I would like to highlight a few. In February , we opened our new R&D lab in Radnor, Pennsylvania.

Speaker 1: This investment supports our capability enhancements while meeting the growing needs of customers in the changing regulatory environment across the globe.

Speaker 1: The lab's applied research will include containment and systems for advanced therapies and biomaterials along with advanced design and engineering for drug delivery. In addition, the lab will also test and develop elasmir glass systems and the work done here will

Speaker 1: for new containment and packaging solutions.

Speaker 1: Our product innovations have been recognized with several notable awards, including the Best Technologies Award at Intereffects for a WES Ready Pack with Corning's Valor Ready-to-Use vials.

Speaker 1: as we continue to make tremendous stride in ESG, we have announced a stability partnership with the Philadelphia Eagles who are recognized as environmental stewards across all areas of their business. We look forward to sharing more detail on our ESG efforts in our corporate responsibility

Speaker 1: Shifting to slide 8, a robust capital investments through expansions and optimizing productivity across our global operations remain on track. We continue to drive forward the expansion of additional HVP capacity with the

Speaker 1: our customers' biologic portfolios and

Speaker 1: This includes the installation and validation of new manufacturing equipment for HVP plungers and finishing capabilities, which will continue to come online throughout 2023 and into 2024.

Speaker 1: Moving to slide nine.

Speaker 1: We are reiterating our full year 2023 organic sales growth outlook of 3 to 4 percent and are raising our 2023 financial outlook for overall net sales and adjusted diluted EPS.

Speaker 1: While Bernard will go over more details in his remarks, I want to make a few

Speaker 1: we continue to see a decline in overall COVID-19 sales and now expect $60 million for the full year 2023 instead of $85 million. Even with this change, we are reaffirming full year 2023 overall organic sales guidance.

Speaker 1: We continue to expect mid-teens' proprietary products base organic sales growth for the year.

Speaker 1: Contract manufacturing is now expected to be double digit growth compared to prior high single digit outlook, as we expect to see continued demand for certain injection devices as seen in Q1. Now, I'll turn the call over to Bernard. Bernard?

Speaker 1: Thank you, Eric, and good morning. We'll first look at Q1's 2023 revenues and profits, where we saw low single-digit organic sales growth and a decline in operating profit and diluted EPS, compared to the first quarter of 2022.

Speaker 1: I will take you through the drivers impacting sales and margin in the quarter as well as some balance sheet takeaways.

Speaker 1: And finally, we will provide an update to our 2023 guidance.

Speaker 1: First up, Q1. Our financial results are summarized on slide 10 and the reconciliation of non-US GAAP measures are described in slide 17-20.

Speaker 1: We recorded net sales of $716.6 million, representing organic sales growth of 2.3%.

Speaker 1: COVID-related net revenues are estimated to have been approximately $23 million in the quarter.

Speaker 1: an approximate $88 million reduction compared to the prior year.

Speaker 1: These net revenues in 2022 included our assessment of components associated with vaccines, treatment, and diagnosis of COVID-19 patients, offset by lower sales to customers affected by lower volumes due to the pandemic.

Speaker 1: High-value products which made up more than 70% of proprietary product sales in the quarter declined by low single digits due to the reduction in COVID-related net revenues.

Speaker 1: Looking at the performance of the market units, the generics market units delivered high double-digit growth led by sales of Westar components, while the pharma market unit experienced low double-digit growth led by Envision and Westar components as well as admin systems.

Speaker 1: And the Biologics market unit saw a double-digit decline due to a reduction in sales related to COVID-19 vaccine. Our contract manufacturing segments experienced double-digit net sales growth in the first quarter.

Speaker 1: primarily driven by an increase in sales of components related to injection related devices.

Speaker 1: Our adjusted operating profit margin of 23% was a 340 basis point decrease from the same period last year.

Speaker 1: Finally, adjusted diluted EPS declined 13.9% for Q1.

Speaker 1: excluding stock-based compensation tax benefits, EPS decreased by approximately 16.1%.

Speaker 2: Now let's review the drivers in both revenue and profit performance.

Speaker 2: On slide 12, we show the contributions to organic sales growth in the quarter. Sales price increases contribute to $38 million, or 5.3 percentage points of growth in the quarter.

Speaker 2: offsetting price was a negative mix impact of 21.3 million.

Speaker 2: primarily due to a reduction in COVID-19 related net demand and a foreign currency headwind of approximately $20.1 million.

Speaker 2: Looking at margin performance, slide 13 shows our consolidated gross profit margin of 37.9% for Q1 2023, down from 39.5% in Q1 2022.

Speaker 2: For proprietary products, first quarter gross profit margin of 42.5% was 90 basis points lower than the margin achieved in the first quarter of 2022.

Speaker 2: The key drivers for the decline in proprietary products' gross profit margin were unfavorable mix from a reduction in sales related to COVID-19 vaccines.

Speaker 2: continued inflationary pressures on our plant costs including labor, raw materials and overheads.

Speaker 2: These factors were partially offset by sales price increases and production efficiencies.

Speaker 2: Contract Manufacturing first quarter gross profit margin of 17.6% was 250 basis points below the margin achieved in the first quarter of 2022, primarily due to mix of products sold.

Speaker 2: Now let's look at our balance sheet and review how we've done in terms of generating more cash.

On slide 14, we have listed some key cash flow metrics. Operating cash flow was $138.1 million for the three months ended March 2023. A decrease of $13.1 million compared to the same period last year, a 8.7% decrease.

primarily due to a decline in operating results. Our first quarter of 2023 year-to-date capital spending was $82.1 million, $16.3 million higher than the same period last year.

We continue to leverage our capex to increase our high-value product manufacturing capacity within our existing facilities in the US, Germany, Ireland and Singapore.

2022. Our cash balance at March 31st of $886.3 million dollars was $8 million lower than our December 2022 balance.

The decrease in cash is primarily due to our share repurchase program and higher capex.

offset by operating cash flow for the first quarter.

Turning to guidance, slide 9 provides a high-level summary.

We are updating our full year 2023 net sales guidance and expect net sales to be in a range of $2.965 billion and $2.99 billion.

compared to a prior guidance range of $2.935 billion to $2.96 billion.

There is an estimated full year 2023 tailwind of $15 million based on current foreign exchange rates compared to prior guidance of the 2023 headwind of $30 million.

We expect organic sales growth to be approximately 3-4% unchanged from prior guidance.

We expect our full year 2023 adjusted diluted EPS guidance to be in a range of $7.50 to $7.65, compared to a prior range of $7.25 to $7.40.

Also, our CAP-X guidance is $350 million for the year, unchanged from prior guidance. There are some key elements I want to bring your attention to as you review our guidance.

We expect full year COVID-19 related sales to be approximately $60 million, compared to prior guidance of approximately $85 million.

Net sales guidance also includes a reduction of $8 million, resulting from an expected divestiture of a European facility that produced standard proprietary product components. Full year 2023 adjusted diluted EPS guidance range includes an estimated FX tailwind of approximately $0.02.

associated with first quarter 2023 tax benefits from stock-based compensation.

Our guidance does not include potential future tax benefits from stock-based compensation.

A solid financial performance and execution in Q1 continues to reaffirm we have a strong base business and are delivering unique value to our

While there may be instability in some small cash dependent biotechs, these customers are not a substantial portion of our business.

our end markets remain stable, and there continues to be a promising pipeline of new drugs that could have meaningful launches and or expansions over the next few years, which means more HVP sales opportunities for West.

Our global operations team is efficiently manufacturing and delivering products in this complex environment with a focus on service and quality. And we continue to progress capital spending across our operations.

to meet current and anticipated future growth. With great pride, we realize this criticality of our products for healthcare across the globe, which is why our purpose to improve patient lives propels us each and every day. Norma, thank you.

Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster.

Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question.

a quick question on the quarter and a little more high level, just, you know, the obviously a little bit of a step up in acceleration and sort of core growth. You mentioned mid-teens, high teams growth is quarter proprietary products. And I think your guidance kind of points to sort of mid to high teams growth for the year. Um, and obviously it's a little bit of a shift away from COVID for you guys.

the acceleration growth between COVID, perhaps a little bit waning COVID impacts and just more growth I guess in Novapure and other high value products. And I guess the third thing is just the overall growth in biologics. But I'm just trying to get a feel for how those three drivers sort of you know line up if you will. Yeah great thank you Larry and good morning.

We've seen, we're seeing that obviously as COVID demand decreases we've been able to through the reprioritization of the long lead time items, we're able to bring them back in line what we expect for the market and therefore you're seeing us with very strong growth in the market.

brought in. We did see a little bit better performance in our contract manufacturing and as we've been making investments and specifically in that area, very targeted investments, those are coming online. We're starting to see the benefit and that's the reason why we moved up the full year look. On the biologic side, I have to be, I'm very proud on how we continue to do very well and that...

And that's why we're trying to be more transparent about the core itself. So we're very pleased across the board on the execution. And overall, it's been very strong start of the year.

In terms of capital projects, capital expansion plans, obviously you've got I think you've more than probably doubled capacity over the last couple of years or the last three years. As you go out into 24, do you see, I suppose at some point we'll have a slow down or pause in the expansion.

Do you view this or how do you sort of view your warmer term plans out beyond sort of the next 12 months?

Yeah Larry, you're right. We had some significant capital investments over the last couple years. One was to fuel or be able to support the vaccines during the pandemic. And fortunately the team was very focused on helping our customers with these solutions around the higher end of high value products.

So this equipment is fungible. We're still leveraging that existing equipment for for base business growth, particularly on the biologics area, and we're continuing to layer in more capital. The capital that we're layering in right now is shifting a little bit away from what I would call the vile configuration to more prefilled syringes.

and i.e. our plunger manufacturing capabilities which are coming online this year and then in 2024. But that is based on demand that we have in our hands today and into the next couple years. So we will continue to layer in capital.

when the growth profile remains as we're seeing today, but you're right Larry if there's opportunities to to continue to leverage existing assets more effectively, that's the first thing we look at. How do we leverage what we currently have, great efficiencies, higher automation before we start investing more and that's the start.

daily framework as we think about capital investments. So the long story short would be if we continue to invest as we are, it's because the growth of business is greater than we anticipated.

Gotcha. And then just lastly, a quick question for Bernard. On proprietary products, gross margin down a little, I think 90 bits year over year, but I think it absorbed like a 90 million or so drop in COVID sales, right? So or something like that. I don't think you gave the actual quarter number, but somewhere around there. So, you know, which

So I'm just trying to going forward gross margin, it feels like most of the COVID benefit is out of there. So should we kind of expect proprietary products gross margin to be maybe a good number, a good starting point, and maybe we can grow a little bit off of this gross margin base?

Just on the COVID, you know, we did, you kind of said that we did 88 million, I think, in Q1 2022. And there was about 23 million in this quarter, so that, you know, the drop was pretty significant. But, you know, we have been...

space and as we were progressing through

2020, we're already lining up some changes. We're starting to see the impact there. Also, you know, the price that we've been able to get, which is above what we would normally see, that's also helping with that margin and to absorb some of the inflationary costs.

Live over them while Biden.

over the next five. Got it. Okay, great. Thanks. I appreciate the call, guys.

Thank you. One moment for our next question. Our next question comes from the line of Paul Knight with KeyBank Capital Markets. Please keep your lines now open.

revenue? Is it a one year? Is it a two year lag?

And then my last question would be, where do you benefit from this growth in GLP-1s? Thanks.

Yeah, thanks Paul. Good morning. So in the capital, fortunately we're in a good position over layering in the capital once we install and then validate. Revenues are coming up rather quickly.

So you mentioned about Grand Rapids, Michigan's one of our contract manufacturing sites. When the lines are ready to go, we're turning them on and to be able to meet the demand requirements. And that's very consistent across proprietary and also CM in today's environment. I would say if you look back historically, well, we made the right investments. Sometimes we would do greenfield.

those are the ones that take longer period to get the demand to fill those plants. But the investments we're making today are really about more near-term demand requirements. In some cases we're trying to catch up. On the GLP-1, it's an interesting dynamic that is occurring as you can imagine, West, as we did with the...

vaccines in the pandemic, you can imagine that our participation in the GLP1 with multiple customers, multiple components, both in the proprietary area, but also in the contract manufacturing from a technical device perspective. So we are obviously participating in that area. We're seeing the demand.

We don't call out specific drugs or customers, but we are investing particularly around plungers.

and also in the contract manufacturing area about injectors, auto injectors. So you've seen that in both camps as we speak today.

And then last question would be for Bernard. Bernard, what's your applied operating margin for the, or guide for the year? Approximately 23%.

Okay, thanks.

And just on Larry's question, I just want to clarify one thing. The differences on the COVID revenue between 2020 2023 and 2022 is 88 million. And just to clarify that the drop was 88 million.

Thank you. One moment for our next question, please.

This question comes from the line of Matt LaRue with William Blair. Your line is now open. Your line is now open.

Hi, good morning. For the space more broadly, de-stocking has been an issue and I'll see that further upstream and that's something that's...

really been effective for your business. But just on the subject of visibility, could you maybe speak to your visibility into customer demand right now, particularly around HVP and maybe how that compares to your historical visibility over the last three to five years or so?

Yeah, Matt, I think before COVID, we were continuously building the capabilities to have better visibility with our customers in the markets around demand. And we have been building that, I would say, during the COVID period, it's been a little more volatile, but now we're back into an environment, have better visibility, better as we do make to order our customers are giving us visibility.

and then when we think about our forecasts or guidance for the full year, there are certain areas I would say probably more in our...

non-HVP area that might have more volatility. On the high value product area, that is going back to our capital investments. We need to continue to fuel that to try to get ahead of the curve versus trying to maintain where we are right now. So the demand is greater than we have capacities.

as we speak. So it's an interesting blend right now, Matt, and we have better visibility, but it's not consistent across the whole portfolio, but I think we're responding appropriately. Okay, and then decommissioning a plant in Europe , making both products amidst

Specifically on, you mentioned on the GLP-1s, you participate on the plunger side. Are those Novapyr plungers, I think?

Well Matt, a couple points there. One is you're right, the decommissioning of the plant, that's a plant that is a single product, single customer, and we're very pleased on how that is now, that was a standard product, but it wasn't that in relation to high-value products. Right, it's a standard product. Basically we've had this...

this discussion for a long time. It doesn't fit our growth strategy, so therefore we've made the decision with our customer and also another party to make sure that they can continue on producing those products for our customers, but in someone else's hands. I think from an order book perspective, you think about where our growth strategy is.

Profile is really is run the biologics.

We obviously have high growth right now in generics and pharma. We'll continue to see that over the course of 2023, but really as you think about the future, longer term, it is around the biologics. It met multiple therapeutic categories, and it tend to be the higher end of our high-value products.

The plunger specifically, it's a range of different types of plungers within high-value products. So it ranges anywhere from FloraTEC all the way up to NovaPeer, depending on the customer's needs. So it is kind of a range. But the optics of our order book...

continues to be strong, but this portion of that tends to be more around the high value products and the higher end of that.

continues to be strong, but this portion of that tends to be more around the high value products and the higher end of that.

Thank you. One moment for our next question.

The next question comes from the line of Jacob Johnson with Stevens. Your line is now open. The next question comes from the line of Jacob Johnson with Stevens.

Hey, thanks. Good morning. Maybe 1st, just sticking on the topic and as it relates to contract manufacturing, I think that's a business that at times kind of the work you do with customers can vary year to year. Obviously, start starts the year, you're increasing expectations there. Is this something that is

Is kind of sustainable growth for you all, or is there something about 2023 that maybe we shouldn't, you know.

within our longer-term construct.

Last year we had declines in the contract manufacturing business, so now we're seeing a bit of a rebound. So if I'm looking at past 2023, it'll be more the mid-tempo high-tempo digital growth rate.

Okay, thanks for that. And then just a couple kind of clean up on some of the commentary around the outlet for this year. If I'm not mistaken. I think you said mid teens X, cobit growth and proprietary products. But I think that was high teens last on the last call.

And then also 23% off margins. I think that was 23 to 24 last quarter. Is this something to do with the stronger contract manufacturing growth for the EDR? Anything you can flush out in terms of that commentary?

Yeah, on the operating margin, a little bit of it is around contract manufacturing. And then, you know, they're having less of that COVID business coming through versus what we expected. So they're the primary drivers there.

On the revenue side, when we talk about the proprietary outlook, it's pretty consistent to the wealthy guidance in February without COVID. So the all three units will be very strong throughout the whole year.

and relatively consistent as far as performance in that area.

relatively consistent as far as performance in that area. Okay, got it. I'll leave it there. Thanks for taking questions.

Hi, good morning.

Hi, good morning. Morning, Derek.

Hey, a couple of questions. Is there a good rule of thumb to think about your CapEx in terms of revenue generation? You know, for every dollar you spend in CapEx, it can generate X amount of revenues. I'm just really trying to think about future opportunities and just thinking about all the spend and how this is built out.

So the investment in CapEx is driving both revenue improvement but also delivering on that operating margin improvement so it's encompassed in that.

So, going to the next shift next, because obviously that has accelerated recently. When you think about your forward model construct, does that margin sort of look more like 150 basis points, or are you still thinking about 100 basis points as where you should...

come out on the off margin expansion on an annual basis just given the mix. Yeah, Derek, I'm not going to give you a number, but we've said that we will achieve a hundred plus basis point margin expansion year-over-year for a number of years, but as an organization, as a team, we're really focused on how we can continue.

to beat that. Looking at it through automation, looking at the mix shift effect that's happening really when you think about the biologics.

just reviewing the participation of biologics more recently continues to remain extremely strong. I'm very proud of that and so we believe well we're going to commit to the author plus basis points and operating margin but we do believe there's opportunity to continue

and stay aggressive. Great. And just one more. So I'm thinking about some of the newer drug opportunities. I mean, obviously there's a lot of interest in discussion on GLPs, but you've had to build capacity for a number of, I mean, this isn't like COVID where it suddenly popped up.

the upside driver of that could be to your business, because there's clearly something already embedded in. It isn't like a virgin market where you are. So I'm just very curious on how you're thinking about that market as it expands. There's two areas. One area, specifically around our product portfolio. Unlike what we've seen in other types of configurations, like vial configuration, we get multiple doses of vial.

this particular area is single dose, right? And so as the prefilled syringes continue to grow, we're going to need to continue to invest in plungers and that's what we're seeing and that's where our areas of investments are going. And we'll continue.

contract manufacturing, just any thoughts on how that revenue growth could look like beyond 2023? Yeah, I think the same focus on a long-term construct, the EO says 7.9% organic sales growth. I know we're excited that obviously we do have a

a role to play with the GLP-1 as that evolves. I'm excited because as an organization, we can support our customers in multiple fronts, i.e., multiple different components and proprietary. That, to me, has a higher economic profile for us.

and then the contract manufacturing while we play in both higher dependency on the proprietary side. But I would say that our growth, when we say the 7 to 9 percent organic growth outlook is not solely reliant on that category.

We have numerous customers with different types of launches that are occurring and an uptake of current drugs in the market that we need to keep fueling. So it is it's a mixture of multiple drugs, multiple customers and multiple therapy classes. Yes, we participate in GLP-1.

But I want to make sure that the growth of this business is very diversified. Great. Appreciate the call. Thanks for taking the questions.

Yeah, thank you, John . Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Quentin Lai for closing remarks.

Thank you, NOLA, and thank you all of us for joining us on today's conference call. An online archive of the broadcast will be available on our website at westfarmer.com in the investor section. Additionally, you may access a replay for 30 days following this presentation by using the...

instructions at the end of today's earnings release and an acknowledgement of our sustainability partnership with the Philadelphia Eagles. It gives me a unique opportunity to conclude the call with Fly Eagles Fly.

Have a nice day. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.