Q3 2023 West Pharmaceutical Services Inc Earnings Call
Yeah.
Good day, and thank you for standing by and welcome to the third quarter 2000, and twenty-three West Pharmaceutical services earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session. Please press star one on your telephone you will then hear an automated message advising you that your hand, just raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand the conference.
Your speaker today, Quintin Lai VP of Investor Relations. Please go ahead.
Thank you Michele good morning, and welcome to West third quarter 2023 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, we will review our financial results provide an update on our business and presented an update on our financial outlook for the full year 2023.
There is a slide presentation that accompanies today's call.
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.
Shipments are based on our beliefs and assumptions current expectations estimates and forecasts.
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.
Please refer to today's press release.
As well as any other disclosures made by the company regarding the risks to Wuxi this subject.
Our 10-K, 10-Q and 8-K reports.
Yeah.
During today's call management or macro.
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.
In conformity to GAAP are provided in this morning's earnings release.
And now I turn over the call.
So our CEO, Eric Green Street.
Good morning, everyone. Thanks for joining us today.
Due to the unexpected family emergency back in Ireland burner cannot participate today I appreciate your understanding.
Quintin will step in for Bernard.
I'd like to begin by addressing the ongoing situation Israel.
Our top priority and focus remains on the safety and wellbeing of our team members and their families that live and work in the region.
Yes.
Now, let's turn to slide five and the Q3 performance I.
I am pleased to report that our team delivered a solid third quarter. Our ongoing success can be attributed to a well established market like girls strategy, which allows us to take full advantage of a solid base of customer demand and recent capacity expansions.
And it is the strength of our one west team, who I'd like to think that makes us a meeting make a meaningful difference to ensuring our customers have a reliable supply of components.
Necessary to deliver drugs to patients.
In the third quarter, we had solid organic net sales growth of five 7%.
What's an approximate $78 million year over year decrease in COVID-19 related sales.
Our base organic sales growth exceeded 20% for both the enterprise and our proprietary products segment.
Shifting to slide six.
Proprietary products, we had strong base demand of H B P components and devices.
We continue to see certain customers experiencing strong uptake other drugs as they accelerate and increase the replenishment orders with us.
The greater than 20% growth.
Our base business was again led by our biologics market unit, which had very strong double digit growth in the quarter, excluding the impact of COVID-19 related sales.
And as we have seen through much of the year. We also had accelerated growth from restocking long lead time H P. P components that we've been able to produce through our capacity expansions. This fueled growth in our generics and pharma market units.
During September and October we have started to see an increase in inventory management trends by certain large pharma and generic customers, especially for our standard products as they manage their safety stocks for the remainder of the year.
These issues.
Let us to temper, our fourth quarter organic sales growth at 2% to 3% excluding COVID-19 related sales, we expect double digit overall organic sales growth and double digit proprietary product sales growth for the quarter.
And we continue to monitor the situation in Israel and currently do not expect any impact on our ability to manufacture and ship out of the country.
As in prior years, we will provide our formal 2020 for guidance on our upcoming February Q4 call.
And a bit of a preview despite the inventory management, we are seen by some of our large customers. We continue to expect to deliver our financial construct of 7% to 9% organic sales growth and 100 basis points of operating margin expansion.
In addition, we anticipate that our pandemic related sales are at a point, where we will no longer have to separate out base performance in 2024.
Lastly, a key aspect of our growth strategy and market leadership is west team of scientific thought leaders and technical experts.
They continue to advance the care for patients with our customers through valuable insights to address the changing needs of more complex molecules and combination products. For example at the recent PDA Conference and C. P. H a worldwide conference several of our west experts deliberate insight full presence.
Patients about the revised regulatory standards and emphasis on the development of sustainable products now I'll turn the Colorado Clinton, who will go into more detail from the quarter Quintin.
Thank you Eric and good morning, Let's review the numbers in more detail.
First look at Q3, 2022 revenues and profits, where we saw a mid single digit increase in organic net sales growth and increase in diluted EPS and a decline in operating profit compared to the third quarter of 2022.
I will also take you through the drivers impacting sales and margin in the quarter as well as some balance sheet takeaways and finally, we'll provide an update to our 2023 guidance first of Q3.
Our financial results are summarized on slide seven.
A reconciliation of non U S. GAAP measures are described in slide 16% to 20.
We recorded net sales of $747 $4 million.
Representing organic sales growth of five 7%.
Covid related net revenues are estimated to have been approximately $18 million in the quarter, a decline of $78 million compared to the same period last year.
Looking at slide eight.
Few through proprietary products organic net sales increased three 2%.
High value products, which made up approximately 76% of proprietary product segment sales.
<unk> grew by mid single digits led by customer demand for HCP components and devices.
Taking a look at the performance of the market units, including the negative impact from a reduction of COVID-19 related sales.
<unk> market unit delivered high single digit growth in the pharma market unit experienced low single digit growth, both led by western components and advent systems.
The biologics market unit also saw low single digit growth driven by sales of Florida components and self injection delivery devices.
Our contract manufacturing segment experienced double digit net sales organic sales growth led by an increase in components sales of components related to injection related devices and health care diagnostic devices.
Our adjusted operating profit margin of 24, 2% was a 290 basis point decrease from the same period last year.
Finally, adjusted diluted EPS increased six 4% for Q3.
Excluding stock based compensation tax benefit adjusted diluted EPS increased by 1% compared to last year.
Now, let's review the drivers of both our revenue and profit performance on slide nine we show the contribution to organic sales growth in the quarter.
Sales price increases contributed $46 2 million.
Or six eight percentage points of growth in the quarter.
Foreign currency tailwind was approximately $25 1 million or three seven percentage points of growth.
Overall mix and volume negatively impacted sales by $7 3 million.
This includes an approximate $78 million reduction in COVID-19 related net demand, partially offset by positive volume and mix contribution from our non COVID-19 based business.
Looking at margin performance Slide 10 shows our consolidated gross profit margin of 38, 6% for Q3.
Down from 39.0% in the same period last year.
Proprietary products third quarter gross profit margin of 43, 4% was 20 basis points lower than margin achieved in the same period last year.
The key driver for the decline in proprietary products gross profit margin with an unfavorable mix from a reduction in sales related to COVID-19 vaccines offset by sales price increases that offset inflationary cost pressures in our plants.
Contract manufacturing third quarter gross profit margin of 18, 6% was 130 basis points higher than the margin achieved in the third quarter of last year.
Due to a favorable mix of products sold and increased sales prices offset by inflationary pressures on our plant labor costs.
Now, let's look at our balance sheet and review, how we've done in terms of generating.
Cash for the business on Slide 11, we have listed some key cash flow metrics.
Operating cash flow was $537 $4 million for the first nine months of 2023, an increase of $44 2 million compared to the same period last year.
9% increase primarily due to improvement in working capital.
Our third quarter 2023 year to date capital spending was $253 $3 million.
$63 $6 million higher than the same period last year, we continue to leverage our capex to increase our high value product manufacturing capacity.
Working capital of approximately $1 $44 billion.
At September 32023 increased by $38 3 million from December 31, 2023.
MLR is due to growth in our current assets offset by an increase in our current portion of long term debt.
Our cash balance at September 32023.
$898 6 million and was $4 $3 million higher than our December 2022 balance.
The small increase in cash is primarily driven by positive operating results offset by increased repurchases under our share repurchase program and higher capex.
Turning to guidance Slide 12 provides a high level summary.
Updating our full year 2023, net sales guidance and expect net sales to be in a range of $2 95 to $2 96 billion compared to our prior guidance range of $2 97 billion to $2 99 5 billion.
There is an estimated full year 2023 tailwind of $20 million based on current FX rates unchanged from prior guidance.
We expect organic sales to be approximately 2% to 3% for the full year compared to the prior guidance range of 3% to 4%.
We are raising our full year 2023, adjusted diluted EPS guidance to be in a range of $7 95.
To $8 compared to a prior range of $7 65.
To $7 80.
Also our Capex guidance is $350 million for the year unchanged from prior guidance.
There are some key elements I want to bring to your attention.
We have lowered our revenue guidance to reflect our recent trend with certain pharma and generic customers slowing their restocking of inventory and increased inventory management as we head into the end of the year.
We expect full year, COVID-19 related sales to be approximately $68 million compared to prior guide of $60 million.
Net sales guidance also includes a reduction of $8 million, resulting from a divestiture of a European facility that produce standard proprietary products and this is unchanged from prior guidance.
Full year 2023, adjusted diluted EPS range includes an FX tailwind of approximately seven.
Based on current FX exchange rates.
Compared to prior guidance of a tailwind of five cents.
The updated guidance also includes EPS of <unk> 41 associated with year to date 2023 tax benefits from stock based comp.
Our guidance excludes future tax benefits from stock based compensation.
I would like to highlight that over the last five years, our base business growth, excluding COVID-19.
Has been within or above our construct of annual organic.
Organic revenue growth of 7% to 9% and over this same time period, we've averaged.
Annual operating margin expansion of over 100 basis points.
As Eric mentioned earlier, we are providing a preliminary look to 2024 based on current trends and demand, we anticipate that west will again be within our long range financial construct of organic sales growth and our operating profit margin expansion as usual, we will provide more detailed guidance on <unk>.
24 in our February call.
I'd like to turn the call back over to Eric Thank.
Thank you.
To summarize on slide 13, we had a solid Q3 performance and are on track for double digit base organic sales growth in Q4, our base business remained strong which is a testament to the durability of the foundation, we have built over time.
We are proud to serve as a valuable trusted partner for customers to support patient health and look forward to continue to play a critical role in delivering health care well into the future.
Michelle we're ready to take questions. Thank you.
Thank you and as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Draw. Your question. Please press Star one again, we ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile our Q&A roster.
Our first question is going to come from the line of Paul Knight with Keybanc capital markets. Your line is open. Please go ahead.
Hi, Eric Hi, Quintin, you mentioned as a stocking.
Issue was kind of in the standard products category, which leads to the question of.
In the.
High value product category.
Are you, obviously, we know you're supplying <unk> products, but are you capacity constrained on that side of the business.
If you could talk to that issue and how big is <unk>. One if you can or will and then lastly, these capex numbers what facilities open next year. Thanks.
Great. Thank you for the question Paul and good morning.
Let's start with the <unk> question, if you look at <unk>.
Serve that space.
Both areas of our business proprietary products with her elastomer components.
Pacifically in that space Youll see <unk> lenders and then in the in the contract manufacturing space we support.
That the our customers in the <unk>.
Auto injectors.
So I would say today from our perspective.
We're not capacity constrained, we're able to re leverage some of the assets that we had.
That we put in place for Covid.
A lot of that technology, and we also leverage our global network and so we'll see we'll be able to continue to ramp.
Particularly around the last Mers space.
HCP plunger's to build to support our customers as new drug molecules are approved and launched across the globe.
Cm side, we have.
We have we are currently producing.
Auto injectors into the market and we've been asked to expand capacity, which we've actually put.
<unk> expansion is in place and their ongoing it will take several quarters to get completed.
Validated.
Throat, let's call it throughout 2024, and particularly those sites. So we're referring to Paul is a double and also Grand Rapids, Michigan.
So significant.
Investments in those two areas.
On the and from a market size perspective in <unk>. We don't we haven't commented we still will not.
We would say that from a volume perspective.
Would focus from our customers and how they communicate their expectations, but I can assure you that we're working with them to ensure that we are.
Or not and will not be the bottleneck as we continued to grow in that space for a number of years to come and.
In regards to the restock and Youre absolutely correct its not.
As much in the AWP area tends to be it is really around our standard products.
And categories around disposable medical devices.
This tends to be the standard elastomer components.
And we're being asked to divert some of those orders into 2024. So that's the cadence inside of lots of share and we continue to have a very healthy win ratio a new approved molecules, particularly in biologics.
And so our position from a market position hasn't changed.
But it is just the timing of inventory manager with a few select customers.
Okay.
Thank you and we'll move on to our next question one moment. Please.
Our next question is going to come from the line of Larry Solow with Jay with CJS Securities. Your line is open. Please go ahead.
Good morning, guys. Thanks for taking the questions and not with shell Laclede Bernard.
I guess first question Eric.
Little bit of a slowdown in proprietary products, just seasonally and I know you guys were increasing capacity. So I'm just curious I thought we were going to kind of trend.
Is there just a little bit more of a return to some seasonality youre seeing I know Q3 historically pre.
Pre COVID-19, what kind of a little bit slower.
The last few years I've, obviously been kind of I think thats been thrown out the window, but.
We're kind of getting back to some of that and maybe that kind of goes in hand, with the inventory management to where now supply chains are maybe somewhat normalized for some of your larger customers already have the ability to manage our inventory better as well.
Yes, Larry Thanks for the question first of all I'll pass on your remarks to Bernard go a bit later.
And in regards to the inventory management and what we're seeing.
It's not really seasonality.
Seasonality.
Around timing of orders. So if we think about the investments, we're making and I know Paul earlier asked about specific capital investments in different plants and most of our investments about two thirds is call. It two thirds of our Capex is around growth orientation right now there's a hedge.
Emphasis around <unk>.
Particularly around <unk> and also in the <unk> side, that's been a little bit larger than typical because of the supporting some of the new drug launches coming down the road.
But we're seeing we're seeing some of the and so those investments are going to be at our major HCP sites.
Already commented on which sites for RCM in regards to.
Timing of the orders.
That seasonality and also the timing of customer actions schedules. So what I would look at it is Q3 with a 20% base.
Base organic growth.
Comments that biologics give the number but it was led that so it's obviously above.
That is relatively new molecules in the market and success of those existing components, sorry molecules in the market already and so the demand continues to be layered on top we play in Kinston site as an example.
We installed new.
Capacity for Novo peer cleansers, we've been ramping that up through Q3, and we also do that through Q4, and we should be able to relieve the bottle of the back order situation by the end of this year and we'll be in a very good position to build service our customers effectively throughout 2024 and the fastest area.
Of growth.
So hopefully that gives you some context Larry.
What we're seeing.
Their own product.
Standard products in the market.
Gotcha great.
Shifting gears just want to follow up just on the hardware solutions.
And that could lead into that.
Obviously that continues to be that.
The driver and it sounds like there hasn't been much slowdown any of that.
Just.
In terms of just I think you said it was greater than 75% in the quarter for revenue can you remind us approximately what it was last year and more importantly.
It's a lot lower on volume can you give me some kind of a guesstimate of where it is on a volume basis.
I imagine youre still remain a minority piece of that and that sounds like that.
Contrary to the fastest growing piece going forward any color there would be great. Thanks.
Yes, Larry.
I can't recall.
I'll have to get back to you on what it was as a percent of sales last year somewhere around 70 or plus or minus.
We have seen growth year on year, and it's a combination of volume mix and price.
And then have driven the year on year growth.
And.
If you think about it when when some of the new drugs that Eric has mentioned that incremental volume of those.
<unk>.
Drug successes typically come at our higher end of HCP like Novo pure.
And so therefore, it has a bigger impact so it may not have as big a volume as much as <unk>.
One additional comment.
Algorithm Larry of you think about the growth of <unk> in the double digits that requires about 100 basis points.
Increase year over year of volume.
For <unk>. So we're still we're still in the $23 24% corridor.
From a volume perspective.
But because of the way that quintin articulate the ASP and margins, it's actually quite significant impact on the overall portfolio.
Got it great I appreciate the color. Thanks.
Thanks, Larry.
Thank you and one moment as we move on to our next question.
And our next question is going to come from the line of Jacob Johnson with Stephens. Your line is open. Please go ahead.
Hey, Thanks, Good morning, and my best to Bernardo as well I guess I'll stick with the popular subject in the morning, maybe just first going back to the the restocking dynamic you did call it out as a slowdown in restocking trends I'm just curious about what surprised you about that is that a lack of restocking in cars.
It's not going to as higher safety stock that you would have expected or is it some destocking not to get too caught up in the vernacular here and then the other piece of that is Eric you mentioned growing next year, despite that inventory management, how should we how long should we think about this dynamic persisting.
He will cover the first part sure so.
Yes, Jacob I'll give you an example.
We.
At the start of the year, we had customers putting orders in for Q4 that based on where we were in our capacity and our ability to deliver we said.
We're going to have to get it to you in next year.
That's the lead time issue that we had and we had those types of discussions.
As our team have done a fantastic job of getting getting added and increasing the capacity we got over the issues that we had last year in terms of some of the issues of installing that some of the HBV processing capacity in one of our sites we built on.
New facilities I can kinston in other areas.
We were able to start.
Some of that backlog and then we were able tend to go to those customers and said hey, we're going to be able to now deliver like you said originally for the end of the year.
And what they came back to us and said that now we're good where we are already reset our R.
Our manufacturing schedules.
We're going to just take it here in 2020 forward instead.
And so.
We thought we're going to be able to do and handle it because now we've got that additional capacity and helps restock them now.
As a matter of timing. So that just gives you. An example of some of the things that we've seen as the year's progressed.
Absolute.
I think the last aspect around this is that if you think about the dynamics is long term.
What we're what we're speaking with customers on it is really as the rescheduling of their production lines and the need of the product. So that's why we are we have given.
Indication.
And we're not giving full.
The full guidance today, but were given indication at 79% corridor of the topline growth has been led by HCP.
And it's been led by biologics.
And we are putting COVID-19 into the into the number. So it gives you kind of the dynamics that we're seeing right now so we should this is.
Temporary situations.
Okay.
And then <unk>.
Eric you were just talking about that Ken Zhang capacity ramping in <unk> and <unk> and you kind of mentioned that that you would catch up on maybe some back orders or something like that if I heard you correctly I'm just curious as it relates to that market do you think containment solutions have been a bottleneck.
For the ramp of some of these drugs and this is something that as you can.
Get caught up on we.
We should expect to ramp pretty well in <unk> and maybe into early next year.
Yes, I would say no we're not the bottleneck and be clear.
And some of these drug launches.
We would we would state that we have been able to navigate and manage through.
And I was just before this call. We were just kind of do another review of the customers that are coming out of that incident.
<unk> for particular, Nova peer.
Plunger's.
Quite a few customers. So it's not one molecule that one customer.
Multiple in there and there is ramping up toward 2024 campaigns. So we're excited about where we are but I would say right now we're not a bottleneck is just goes back to what we spoke about earlier is that where we would like to they would like to see better stronger safety stocks.
At their own in their own pipeline, but we do know that there's some other issues.
That we'll see but that's not for us to discuss.
Some of these launches.
I would say we're not the bottleneck we got the investments put in place is validated customers are very satisfied with the quality of the product from our Kinston facility and we have capacity to continue to grow and support frankly, the biologic launches and these are these are the areas around oncology autoimmune allergy I mean, these are exciting areas for us.
And I think we're well positioned for the future, particularly out of that plant.
Got it thanks for taking the questions.
Thank you.
Thank you and one moment, while we move to our next question.
And our next question is going to come from the line of John Bair with UBS. Your line is open. Please go ahead.
Good morning, and best of Bernard.
I guess, just starting off on on <unk>, just any additional color or even maybe broader biologics, but how do you see this market evolving maybe.
Between auto injectors, and multi dose pens and maybe do you have tier ones more specifically just any thoughts on potential transition to more oral project products there.
Yes.
I don't want to be put in.
And on behalf of my customers are going to be careful here. So what we're what we're prepared to do for them is we will continue to be the primary key manufacturer of Alaska Air components.
That go into several of these auto injectors and other modalities and so from a last part position, we're very encouraged with our HCP plunger portfolio.
And we're able to support them on the demand.
And then actually stay ahead of the demand with our manufacturing capabilities, we mentioned a little bit earlier today that some of the assets, we put in for Covid or actually fungible for this.
Not just for <unk>, but for <unk> in general.
I think in regards to multi use pens again, I would referred to our customers in that discussion, but from our point of view.
We participated at all.
And we are the market leader injectable medicines now we don't participate in oral.
And that is the uptake of oral the effectiveness or all that those are all discussions that would.
Really encouraged due to speak with our customer xylem directly but as the injectable space continues to grow and <unk>. One is new molecules are approved and launched.
And the investments, we're making both on the proprietary and cm side, we have a good visibility of cadence of what we're being asked to build support.
Through our global network to support the demand.
I'll just be clear one other aspect is on the proprietary side, we always enjoy a very high.
Depreciation rate on the <unk> side, we've been very clear that our customers.
We are looking at multiple suppliers to support them and we're one of them.
We're positioned very well on both sides of the business hopefully it gives you some context of what we're seeing.
Yes. Thanks, I appreciate the color there and also.
Just looking through the high level framing around around next year, you've had pretty strong pricing. This year I think in the 5% to 6% range just any color on what you think pricing could shake.
So you got two for 2024.
Yes, I won't give exact at this point because we are still working through our detailed so we have been in discussions with customers I think one thing to think about you're right. This year we were.
Communication between 5% to 6% net price realization.
We are clearly in that corridor on the upper end.
And in which is which is positive when you think about the inflationary pressures that all of us around the world are faced with.
Able to offset.
Majority of that.
Sure.
We are taking consideration of additional inflation, if what that would look like next year. So just to give you a little context of how we look at this.
And that will help us.
Form our decision about exactly what quarter or we're going to be in but I would say.
I can say here that the in store, Kentucky years ago. When we were at sub one or between 1% to 2% I believe thats behind us.
We do think we're in a very in a.
Better positioned to capture more price going forward.
Thanks, Eric and then last one just on <unk> it sounds like Youre no longer going to break that out next year and there was an increase in the guidance for this year any way just to think about what is the endemic level there on Kobe going forward yes.
Yes, I think just based on the guidance Quintin has articulated.
Bernard and <unk> been clear on is about we're looking at about $68 million for this year.
The base because if you do do the Delta is about $8 million in the fourth quarter.
And that means compare that to $388 million prior year, and we are a little bit more than the previous year to that.
It's hard to predict.
And but where we've been the last two quarters, we've been basically between 10 and $20 million a quarter.
And so the way we look at it as yes that could potentially be a headwind there's less doses that are <unk>.
Ministered or it could be a tailwind if theres more doses, depending on how this pandemic evolves, but we're just we're going to we right now our thinking is to put it into the base and run the business as a whole.
Because at this point, it's becoming.
A very small portion of overall west so yes, we will be clear for the balance of this year, but we'll give.
Better clarity in February if we think if we do need is still call it alpha, but our thinking right now is to eliminate that.
Thanks for taking the questions.
Thank you.
Thank you and one moment as we move on to our next question.
Our next question is going to come from the line of Matt <unk> with William Blair. Your line is open. Please go ahead.
Good morning.
Obviously, the focus in terms of the contract manufacturing auto injector investments right now are around jumpy ones.
Growing interest.
More broadly.
Every modalities and obviously other smartphone platform.
Just curious if you could maybe update us on either the interest on our pipeline are more generally.
Discussions with customers are like and more of the device category investments.
Matt. Thank you for the question excellent question.
Yes, so Matt.
Let me clarify so when we think about injection delivery platforms.
We at West can participate in two ways one if the customer has the IP.
Then we can manufacture on behalf of that customer and Thats, where our contract manufacturing as well.
We're really good at it.
Not the only one that will be there as.
As we've said in the past.
The customers with the IP will typically outsource to two to three and if it is a very big project it could be up to five to six.
Different players.
So thats, how we participate and very often.
Those customers also happened to be key proprietary product Alaska customers.
And then on the spot side.
There that is proprietary to us that as our design and thats when customers come to us and work with us to spec in that device with their drug to make a drug device combination therapy and there we're seeing really active uptake we are up to four.
Now drug approvals using our spark dose platform and we have a very active pipeline of customers.
That are evaluating the platform. Thanks.
Excellent.
Thank you okay.
Thanks, Ken.
And then next on the capacity obviously.
Kingston is ramping to full capacity I think you'd referenced.
Maybe adding to the Waterford site in 24, So I guess, just as we think about where capital is moving next.
On investment perspective.
Waterford are there other sites or a particular category.
<unk>.
And as you're doing that and ill referenced building additional automation to nowhere builds.
Are those things that can help speed time to to ramp or a modest benefit at steady state.
Yes, so the two points.
About the first one in regards to their network and where we're investing our invest.
Capital figure on the HCP.
It's heavily concentrated between kinston, a little bit in Jersey shore up in Pennsylvania.
In Europe it's.
Waterford and S Weiler.
And we're also looking at additional expansion in Singapore to build support.
The Asia market, but the priority has been really around the U S and Europe.
And it will continue to invest in it.
It's interesting the growth that we're experiencing with AWP to build support that.
It is it is really around when you think about the pharma washing sterilization envision.
That is helping us to drive the HCP conversion. So I'm excited about where we are but also the investments are in flight with that will give us and also give us the ability to do uplift.
On the additional demand that we expect the automation is is ongoing and Alex I'm pleased with some of the recent progress we've made on new technology for West.
It allows us to be more efficient improve.
Quality.
In my mind are always looking at ways to improve safety.
It also allows us to scale up.
Foster when we start thinking about to support various areas, whether it's biologics with as I mentioned earlier about oncology immunology or immune but it's also thinking about how do we support this scale up on <unk>, one and so this automation that we're working on with a couple of our external partners.
I need to get over to Europe recently to see some new investments that we put in place.
For what the engineering team has been doing and it's going to give us.
Ability to scale faster, but more importantly, I think the automation that provide a better product that continues to differentiate west in the marketplace. That's why I'm really excited about yes, we will gain efficiencies, yes, we'll get more.
Throughput.
But reality is main focus as a higher quality product that differentiates us in the market.
Okay. Thank you.
Thank you.
Thank you and one moment as we move to our next question.
And our next question is going to come from the line of David Windley with Jefferies. Your line is open. Please go ahead.
Hi, good morning, Thanks for taking my questions and best of.
So Bert and his family.
I wanted to start on on stocking and just to understand some moving parts a little bit better.
I'm not understanding I think well that youre talking today that debt within elastomers are components.
The Destocking is mostly standard I think early in the year, we had understood that.
You had some areas that.
Post pandemic maybe.
Maybe west Star for example, post pandemic had not gotten the capital allocation growth allocation and were under stocked and catching up.
And so I guess I wanted to try to understand better if there.
Those two factors were both that play an offsetting in the quarter or maybe the the westar was already done and therefore the standard Destocking now is what we're feeling.
It feels like there have been through the year moving parts in both directions and I just wanted to understand those and the cadence of them. Thanks.
It's a good question, David Hey, Dave So.
Maybe it's just.
A definition.
Just maybe.
When you say destocking.
We think of it more as customers that are having a demand issue.
I can't COVID-19, and what Theyre doing is theyre, not reordering and theyre, taking down their safety stock and consuming their safety stock and that's certainly happening in COVID-19, which we've seen year over year declines.
The other impact is the fact that we have been.
Behind in terms of delivering because of our capacity constraints and then as we've been able to restock.
The base growth that you've seen in generics and pharma is well above the financial construct so well.
There has been going on for.
The first part of this year, what we're seeing now is that that base growth.
Yes is going to temper, it's not declining it's just not going to be as high as we thought it was going to be in Q4, that's why we're calling it.
A slowing of a restock is not necessarily a destock situation.
And again.
A lot of it happens is the fact that we have done a really good job of clearing the backlog.
We've gone to our customers, we said hey, we have that capacity to deliver product and they said no given where we are in the year, given where our manufacturing schedules are we would rather be delivered next year instead of Q4.
Okay.
Well thank you.
And thinking about your initial comments on 'twenty four.
And admittedly the I appreciate your answers too.
Paul's question to start on <unk> and I.
I think we all know that the attention theres, probably overwrought, but but.
In.
In so much as there is a lot of enthusiasm for that particular class.
I think your.
Folks that are paying attention to west believed that that can be a very strong driver for you.
Perhaps in excess of your your long term construct.
Would you.
Tell us that that is.
That that our assessment of that is too enthusiastic or is it that.
The pace at which that comes on is perhaps not as quick as we think.
Or is it that other parts of the business are offsetting and those things net you into that 7% to 9%.
Range. Thanks.
So.
Again.
Understanding your question Here's here's.
Here's our philosophy.
We need to be ready for whatever the customers need from us.
And so we have thats why our teams have such great communication with the customers. We have cited that we have customers that are doing really well and are increasing their reorders.
In the event.
Those things change to the positive.
That's where our global network is ready.
So so we're in position for that we've got the global network to do that and so now what happens to that class a drug that's really better addressed by our customers. All we can say is that we will be ready and.
Yes.
And continuing to be ready and that's why we've got so much capital projects going on right now.
In addition to that puts US right. If you think about the growth or we're really confident with the growth of biologics.
When we speak about biologics, we're not really.
<unk> conversations is that a mix.
And so the.
Growth, we're talking about 7% to 9% construct.
Led by led.
Led by biologics.
That really has been part of the Jetblue on premises.
As <unk>.
Demand comes in for <unk> drugs are approved and as for the launches.
The whole supply chain is working effectively and efficiently will.
We will be in a very good position to build support that scale up.
That timing exact cadence so that aspect I would probably for more of our customers on that but we're positioned well to absorb.
<unk> side and also the investments, we're making will take some time to get the buildings and validate.
In addition, while we have already that will be a.
There's a little bit longer term, but we are ready to adjust that.
I appreciate that answer if I could just clarify Eric on what you just said when you say youre, not bringing <unk> and <unk>.
That statement does that mean that <unk> are categorized say in pharma not biologics or are you just saying that you are enthusiastic about the biologics pipeline notwithstanding whatever <unk> due to that pipeline.
Yes, really it's ladder.
I tend to focus on what's what's approved or about to get approved in the market.
And that's around the biologics space, we have a diverse portfolio of customers versus poor portfolio.
Proved drugs in the market and bought to be approved.
And.
Yes, we as an organization are going to fully support <unk>.
Ready and available to support the <unk> launches that are beyond what we see today and we're excited to be part of that participation and we will lead in the front like we have.
And there's no reason why we can't deliver like we did around Covid the same model frankly.
When you think about really the number of Skus number of <unk>.
Assets that are that were.
Leveraging their existing operations, we're very confident we can deliver but I would say I just wanted to be clear I'm very excited about biologics without.
Saying that.
This growth can be driven by <unk>.
Understood. Thanks for the clarification. Thank you.
Thanks.
Thank you and one moment as we move on to our next question.
And our next question is going to come from the line of Justin Bowers with Deutsche Bank. Your line is open. Please go ahead.
Hey, good morning, everyone, just a two parter on.
On the outlook for 2024, which I think we all appreciate.
One wanted to clarify that.
To 9% organic does include.
Okay.
$68 million.
It's on top of that compared to $68 million Covid and then.
For Q.
<unk>.
Sort of can you help us understand the visibility that you have now and to that growth is there.
Is there a level of commitment from customers.
You're already talking about sort of like project planning in the pipeline.
For next year just any.
Investors in the space have been very skittish.
Around disabilities shiny any claim that there would be helpful.
Yes, no great question. So first one is pretty clear yes.
When we talk about 7% to 9% top line of 100 basis point margin expansion that is inclusive of the COVID-19.
$68 million that we guided for 2023 and that number so.
And if there is a drastic change between now and February we'll communicate that but based on what we're seeing.
The answer is yes, as part of that equation.
The second part about visibility just.
It's interesting our business is make to order for the most part so our customers are coming to us and giving us campaigns, whether it's three quarters six quarters five quarters.
And we're able to support them on whether its new drug launches are existing drug launches and theres always going to be some variability on each and every molecule and so but on the aggregate we have pretty good loans, what type of volume we need.
Four skus and what investments we need to make on the CMS side it tends to be very long contracts with specific.
Assets Capex installed that will take a little time to ramp but once we're operating we pretty much know what the capacity and the output will be.
Day over day, the on the Alaska side, that's losing more volatility more variability.
And again it depends on how successful the drugs are in the marketplace and so therefore, we're able to move a little bit up and down quarter to quarter. So we do have visibility is at a 100% no. But this business has tremendous amount of I'll call. It annuity life.
Repeat year over year.
100%, but it's very high.
And that gives us confidence.
And how we can plan existing.
Growth, but also future future launches working with our customers.
There's a little bit of both in there in that in that answer.
Got it and then just a quick follow up on.
Sort of the margins this year.
Or this quarter or is that is that sort of a good go forward.
Great just given given sort of the commentary on the.
The long the longer visibility in that business.
Yes.
This quarter, we did have some benefit from some pricing that we did take.
Through through some of our contracts.
We think longer term, we're looking at 16% to 17%.
Okay. That's all for me thank you.
Yes. Thank you.
Thank you and one moment as we move on to our next question.
And our next question is going to come from the line of Derik de Bruin with Bank of America. Your line is open. Please go ahead.
Hey, Thanks for taking my question so.
The the margin guide that's implied for the fourth quarter.
To get to your EPS number that it's basically and sort of using your.
Premier guides and everything you put in there to get to that EPS number for the year.
Even if we don't assume you're going to get any of that stock based compensation. It looks like youre going to take a pretty big step down sequentially Q3 to Q4.
I'm just sort of curious what's going on is it validation of lines.
Why is there such why is this sort of implied margin step down so a bit between the quarters.
Hey, Derik.
Thanks for the question really is just utilization and absorption.
Given that we're probably going to have.
Lower volumes through our facilities in the fourth quarter were just we just wanted to make sure that we have a reasonable swag at gross margin.
But so so that's where the margin impact is really going to be reflected especially in proprietary products margin.
For the quarter got it.
So gross margin on proprietary products, you expect to be down sequentially just given the.
That's correct and then to get back down to kind of that 16 16, 5% range.
Got it okay and so how.
How long does that sort of like I mean, how long does that sort of white drag on proprietary products. We can start thinking about building out our quarterly models.
Our quarterly estimates for next year.
No.
Okay.
The process of.
Normalizing kind of the plans for 2024, but as we look at it.
Each year with the topline growth that we get led by HCP youre going to see gross margins improve year on year.
Got it okay, that's great and.
Just going back I mean, I know we've talked about.
I know we've talked about the guide questions have been asked but I mean I've covered the stock for a while and you are right. I mean, you historically are doing better than your 79% construct.
Why wouldn't you do at least the high end of that range next year, I mean, given that you've got pricing you've got.
You've got demand you've got you've got some orders that got pushed from this year to next year I mean, why wouldn't a colgate is normalizing why wouldn't that be just like.
Why wouldn't that be a reasonable 9% or better.
Well Derik.
We're we're sitting here in October we're putting our plans together, we're trying to give you kind of.
Preview of next year and we're also doing is cognizant of the fact that we're hearing other life science tools companies upstream of us talk about softness and tougher times.
We don't have some of the high exposure that they have in certain areas like.
Emerging bio and pre commercial companies and things like that but still we just want to be.
Again, we want to be.
We acknowledge that there are uncertainties out there so.
As we sit there and put all that in and.
That's how we come up with that preliminary guide.
Yes.
We will provide a lot more detail in February because we will have a lot more information then and we're happy to come back and talk to you then and I think we've been consistent in the message that says to us we want to continuously.
Hit or exceed so that's where we sit right now with the visibility we have.
Great. Thanks, a lot I appreciate it.
Thanks, Beth good targeting Derik.
Thank you and I would like to hand, the conference back over to Quintin Lai for any further remarks.
Michelle Thank you for joining us on today's conference call an online archive of the broadcast will be available on our website at west pharma Dot com in the investors section. Additionally, you may access a replay for 30 days. Following this presentation by using the dial in numbers and conference I'd provided at the end of today's earnings release.
That concludes the call have a nice day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Thanks, Patrick.
Okay.
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