Q1 2024 West Pharmaceutical Services Inc Earnings Call
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Operator: Good day, and thank you for standing by. Welcome to West Pharmaceutical Services' first quarter 2024 earnings conference call.
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Speaker Change: Good day, and thank you for standing by and welcome to the West Pharmaceutical services first quarter 'twenty 'twenty four 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 the session you will need the best one one on your telephone.
Operator: 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 the session, you will need to press star 11 on your telephone. You will then hear an automatic message advising that your hand is raised. Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Sir Quintin Lai, Vice President of Investor Relations. Please go ahead, sir.
Speaker Change: Here in automatic message advising yohan this race.
Speaker Change: Please note that today's conference maybe recorded.
Speaker Change: I'll now hand, the conference I'll, let you speak of house sequentially, Vice President of Investor Relations. Please go ahead Sir.
Quintin Lai: Thank you, Livia. Good morning, and welcome to West's first quarter 2024 conference call. We issued our financial results this morning, and the release has been posted in the investor section of the company's website, located at westpharma.com. This morning, we will review our financial results, provide an update on our business, and present an updated financial outlook for the full year 2024. There's a slide presentation that accompanies today's call, and a copy of that presentation is available in the investor section of our website. Slide four is our safe harbor state.
Speaker Change: Yeah.
Speaker Change: Thank you Olivia good morning, and welcome to <unk> first quarter 2024 conference call.
Speaker Change: 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.
Speaker Change: This morning, we will review our financial results.
Speaker Change: Provided an update on our business and present, an updated financial outlook for the full year 2024.
Speaker Change: There's a slide presentation that accompanies today's call.
Speaker Change: A copy of that presentation is available on the investors section of our website.
Speaker Change: On slide four is our safe Harbor statement.
Quintin Lai: 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. The company's future results are influenced by many factors beyond the control of the company. Consequently, 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.
Speaker Change: 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.
Speaker Change: These statements are based on our beliefs and assumptions current expectations estimates and forecasts.
Speaker Change: The company's future results are influenced by many factors beyond the control of the company.
Speaker Change: Actual results could differ materially from past results as well as those expressed or implied in any forward looking statements made here.
Speaker Change: 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.
Speaker Change: <unk>, our 10-K 10-Q and 8-K reports.
Quintin Lai: 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. 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. I now turn the call over to our CEO, Eric Green.
Speaker Change: During today's call management will make reference to non-GAAP financial measures, including organic sales growth.
Speaker Change: Adjusted operating profit adjusted operating profit margin and adjusted diluted EPS.
Speaker Change: Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results.
Speaker Change: Parity in conformity to GAAP are provided in this morning's earnings release.
Speaker Change: And now I'll turn the call over to our CEO Eric Green.
Eric M. Green: Your question.
Eric M. Green: Morning, everyone. Thanks for joining us today.
Eric M. Green: He will start on slide five where I would like to cover a few topics first we will review Q1 performance second we will provide an update on the markets that we serve as well as updates on our growth initiatives and third we will provide an update to our full year 2024 financial outlook.
Eric M. Green: Thank you, Quintin. Good morning, everyone.
Eric M. Green: Thanks for joining us today. We will start on slide 5, where I'd like to cover a few topics. First, we will review Q1 performance. Second, we will provide an update on the markets that we serve, as well as updates on our growth initiatives. And third, we will provide an update to our full year 2024 financial outlook. Now, turning to the financial results, we delivered a solid start to the year.
Eric M. Green: Now turning to the financial results, we delivered a solid start to the year during the quarter. We again saw growth in our top tier H B P component no up here at our HB P devices, such as smart dose.
Eric M. Green: We also continued to see inventory management or destocking by our larger mature customers. They are working down their inventory closer to pre pandemic levels.
Eric M. Green: With that said Q1 had a solid start due to favorable order timing of customer deliveries fulfilled in the quarter.
Eric M. Green: I want to address a question that many of you are asking are we have seen an inflection and destocking.
Eric M. Green: During the quarter, we again saw growth in our top-tier HVP component, Novapyr, and our HVP devices, such as SmartDose. We also continue to see inventory management or de-stocking by our larger, mature customers that are working down their inventory closer to pre-pandemic levels. With that said, Q1 had a solid start due to favorable order timing of customer deliveries fulfilled in the quarter. Now, I want to address the question that many of you are asking. Are we seeing an inflection point in these stocks? The short answer is, not quite yet.
Eric M. Green: The short answer is not quite yet.
Eric M. Green: Several customers are still working through their safety stock levels, and we still expect Q2 to have an impact from customer destocking.
Eric M. Green: And customer order trends continue to indicate a stronger second half of 'twenty 'twenty four with returned to more typical order patterns in Q4.
Eric M. Green: Therefore, after a solid quarter, we maintained our full year net sales guidance.
Eric M. Green: Turning to slide six we continue to have an active year of capital expansion projects that are increasing capacity to meet growing demand for both our proprietary products and contract manufacturing segments.
Eric M. Green: In our proprietary products segment, we have expansion projects in several of our HCP components manufacturing sites, such as Jersey shore Kinston, Waterford and S. Wyler. These projects will provide a combination of increased manufacturing capacity, especially <unk>.
Eric M. Green: Several customers are still working through their safety stock levels, and we still expect Q2 to have an impact from customer to stock, and Customer Order Trends continue to indicate a stronger second half of 2024 with a return to more typical order patterns in Q4. Therefore, after a solid quarter, we maintain our full-year net sales guidance. Turning to slide six.
Eric M. Green: Processing of washing sterilization and envision as well as bring a higher level of global standardization throughout our network. We believe that this favorably positions west to address anticipated growing demand for H B P components.
Eric M. Green: Volume growth of legacy drugs from recently launched or to be launched drugs.
Eric M. Green: And potential conversions from legacy customers to higher levels of quality and response to the global regulatory changes.
Eric M. Green: We continue to have an active year of capital expansion projects that are increasing capacity to meet growing demand for both our proprietary products and contract manufacturing segments. In our proprietary product segment, we have expansion projects at several of our HVP components manufacturing sites, such as Jersey Shore, Kinston, Waterford, and Eschweiler. These projects will provide a combination of increased manufacturing capacity, especially HVP processing, washing, sterilization, and InVision, as well as bring a higher level of global standardization throughout our network.
Eric M. Green: Last quarter, we mentioned one such regulatory change was the European Union GMP annex one we continue to emphasize that.
Eric M. Green: That adoption, both timing and level of HCP will vary from customer to customer and from drug to drug.
Eric M. Green: What we are seeing in Q1 as an acceleration of interest from customers as annex one calls for higher quality lower particulate.
Eric M. Green: Stabilized solutions.
Eric M. Green: Earlier this month at the <unk> Conference in New York Amex, One was a key topic of discussion with customers as we highlighted our innovative approach and leading products, a westar select and over here.
Eric M. Green: Also in the proprietary products segment, we're making progress with capacity expansion of our <unk> devices, including smart dose self dose and admin systems for.
Eric M. Green: For the near term, we're working to layering in capacity through productivity optimization programs.
Eric M. Green: We believe that this favorably positions West to address anticipated growing demand for HVP components from Volume Growth of Legacy Drugs, from recently launched, or to be launched, drugs, and potential conversions from legacy customers to higher levels of quality in response to global regulatory changes. Last quarter, we mentioned one such regulatory change was the European Union GMP Annex I. We continue to emphasize that adoption. Both timing and level of HVP will vary from customer to customer and from drug to drug.
Eric M. Green: And for the longer term, we are adding capacity that incorporates automation to complement our manual processes.
Eric M. Green: With our contract manufacturing, we continue to build out capacity at our Grand Rapids site and significant expansion at our Dublin facility, which are both in support of our customers' injection device platform.
Eric M. Green: These expansions are critical to the overall volume growth that we continue to experience with growing demand for certain components associated with drugs for diabetes and obesity.
Eric M. Green: Shifting shifting to slide seven we're maintaining our full year 2020 for organic sales growth outlook of 2% to 3%.
Eric M. Green: Our teams are actively engaged in working through our customers inventory management.
Eric M. Green: We expect improved growth along with stronger gross and operating margins in the second half of the year with Q4 are projected to be the strongest quarter.
Eric M. Green: What we are seeing in Q1 is an acceleration of interest from customers as Annex I calls for higher quality, lower particulate, and more stabilized solutions. Earlier this month at the Interfects Conference in New York, Annex I was a key topic of discussion with customers as we highlighted our innovative approach and leading products, Westar Select and Novapyr. Also, in the proprietary product segment, we're making progress with capacity expansion of our HVP devices, including smart dose, self-dose, and admin systems.
Eric M. Green: For the full year, we are maintaining general core cost discipline, while reinvesting into new growth and its initiatives as I just outlined.
Speaker Change: Now I'd like to turn the call over to burner burner. Thank you Eric and good morning, Let's review the numbers in more detail. We'll first look at Q1 2024, our revenues and profits.
Speaker Change: As expected we saw a low single digit decrease in organic sales the decline in operating profit and diluted EPS compared to the first quarter 2023, given the current market dynamics.
Burner: I will take you through the drivers impacting sales and margin in the quarter as.
Burner: As well as some balance sheet takeaways.
Burner: And finally, we will provide an update to our 2024 our guidance.
Burner: First up Q1.
Burner: Our financial results.
Burner: Excuse me our financial results are summarized on slide eight and the reconciliation of non U S. GAAP measures are described in slides 15 to 18.
Eric M. Green: For the near term, we're working to layer in capacity through productivity optimization programs. And for the longer term, we are adding capacity that incorporates automation to complement our manual process. With our contract manufacturing, we continue to build out capacity at our Grand Rapids site and significant expansion at our Dublin facility, both in support of a customer's injection device platform. These expansions are critical to the overall volume growth that we continue to experience with growing demand for certain components associated with drugs for diabetes and obesity. Shifting to slide seven.
Burner: We recorded net sales of $695 $4 million, representing an organic sales decline of 3%.
Burner: Looking at slide nine.
Burner: <unk> products organic net sales decreased 4% in the quarter.
Burner: High value product, which made up 72% of proprietary product sales in the quarter declined by low single digit.
Burner: Primarily due to decreased sales from our flora tech product and westar components.
Burner: Looking at the performance of the market unit.
Burner: <unk> market unit delivered low single digit growth led primarily by sales of Novocure.
Burner: Our pharma market unit saw a high single digit decline, primarily due to a reduction in sales of ambition and standard components, while the generics market unit declined double digits, primarily due to decreased sales from our westar Flora Tech components.
Burner: Our contract manufacturing segment experienced low single digit net sales growth in the first quarter, primarily driven by an increase in sales of components associated with diagnostic devices.
Eric M. Green: We're maintaining our full year 2024 organic sales growth outlook of 2 to 3%. Our teams are actively engaged in working through our customers' inventory management. We expect improved growth along with stronger growth and operating margins in the second half of the year, with Q4 projected to be the strongest quarter. For the full year, we are maintaining general core cost discipline while reinvesting in new growth initiatives, as I just outlined. Now I'd like to turn the call over to Bernard. Okay Bernard?
Burner: Our adjusted operating profit margin 17, 7% was a 530 basis point decrease from the same period last year.
Burner: Finally, adjusted diluted EPS declined 21, 2% for Q1 <unk>.
Burner: Excluding stock based compensation tax benefit EPS decreased by approximately 23%.
Speaker Change: Now, let's review the drivers in both our revenue and profit performance.
Burner: On slide 10, we show the contributions to organic sales decline in the quarter.
Burner: Sales price increases contributed $24 1 million at.
Burner: At three four percentage points of growth in the quarter as did a foreign currency tailwind of approximately $3 4 million.
Burner: More than offsetting price was a negative volume and mix impact already $45 5 million.
Burner: Primarily due to lower sales volume caused by customer inventory management decisions in the period.
Bernard J. Birkett: Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q1 2024 Revenues and Profits. Whereas expected, we saw a low single-digit decrease in organic sales and a decline in operating profit and diluted EPS compared to the first quarter of 2023, given the current market dynamics. I will take you through the drivers impacting sales and margin in the quarter, as well as some balance sheet takeaways. Finally, we will provide an update to our 2024 guidance.
Burner: Looking at margin performance.
Burner: 11 shows our consolidated gross profit margin of 33, 1% Q1 2024.
Burner: Down from 37, 9% in Q1 2023.
Burner: Proprietary products first quarter gross profit margin of 37% was 550 basis points lower than the margin achieved in the first quarter of 2023.
Burner: The key drivers for the decline in proprietary products gross profit margin on lower sales volume and an unfavorable mix of products sold partially offset by increased sales prices.
Burner: Contract manufacturing first quarter gross profit margin of 17% was 60 basis points below the margin achieved in the first quarter of 2023.
Burner: Primarily due to inflationary labor costs, and an unfavorable mix of products sold.
Bernard J. Birkett: First up, Q1, or Financial Results. Our financial results are summarized on slide 8, and the reconciliation of non-U.S. GAAP measures is described on slides 15 to 18. We recorded net sales of $695.4 million, representing an organic sales decline of 3%. Looking at slide 9, proprietary products organic net sales decreased 4% in the quarter; high-value products, which made up 72% of proprietary product sales in the quarter, declined by low single digits, primarily due to decreased sales from Oflorotec products and Westar components.
Burner: Actually offset by increased sales prices.
Speaker Change: Now, let's look at our balance sheet and review, how we've done in terms of generating cash for the business.
Speaker Change: On slide 12, we have listed some key cash flow metrics.
Speaker Change: Operating cash flow was $118 2 million.
Speaker Change: For the three months ended March 2024.
Speaker Change: A decrease of $19 9 million compared to the same period last year, a 14, 4% decrease primarily.
Speaker Change: Primarily due to a decline in operating results.
Speaker Change: Our first quarter 2024 year to date capital spending was 96 million.
Speaker Change: $8 5 million higher than the same period last year.
Speaker Change: We continue to leverage our capex to increase both our high value product and our contract manufacturing capacity.
Speaker Change: Working capital of approximately 1.0 or $1 billion.
Speaker Change: March 31, 2024 decreased by $220 1 million from December 31, 2023, primarily due to a reduction in our cash balance.
Bernard J. Birkett: Looking at the performance of the market units, the Biologics market unit delivered low single-digit growth, led primarily by sales of Novacure. Pharma market units saw a high single-digit decline, primarily due to a reduction in sales of Envision and Standard Components, while the generics market unit declined double digits, primarily due to decreased sales from a Westar and Floratech component.
Speaker Change: Our cash balance at March 31, 2024 of $601 8 million.
Speaker Change: It was $252 1 million lower than our December 2023 balance.
Speaker Change: The decrease in cash is primarily due to $267 million of share repurchases and our capital expenditures offset by cash from operations.
Speaker Change: Turning to guidance slide seven provides a high level summary.
Speaker Change: We are reaffirming our full year 2024, net sales guidance in a range of $3 to $3 <unk> 5 billion.
Speaker Change: There is an estimated full year 2024 headwind of approximately $8 million.
Bernard J. Birkett: Our contract manufacturing segment experienced low single-digit net sales growth in the first quarter, primarily driven by an increase in sales of components associated with diagnostic devices. However, our adjusted operating profit margin, 17.7%, was a 530 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 21.2 percent for Q1. Excluding stock-based compensation tax benefits, EPS decreased by approximately 23 percent. Now let's review the drivers in both the revenue and profit performance. On slide 10, we show the contributions to organic sales decline in the quarter.
Speaker Change: Based on current foreign exchange rate.
Speaker Change: We expect organic sales growth to be approximately 2% to 3% unchanged from prior guidance.
Speaker Change: We are raising our full year 2024, adjusted diluted EPS guidance to be in a range of $7 $63 $7 88.
Speaker Change: Compared to our prior range of $7 $50 to $7 75.
Speaker Change: Also our capex guidance of $350 million for the year unchanged from prior guidance.
Speaker Change: There are some key elements I want to bring your attention to as you review our guidance.
Speaker Change: Full year 2024, adjusted diluted EPS guidance range includes an X and estimated FX headwind of approximately <unk>.
Speaker Change: Based on current foreign currency exchange rate, which is an increase from the prior guidance.
Speaker Change: The updated guidance also includes EPS of <unk> 15.
Speaker Change: The Adas with first quarter 2020 for tax benefits from stock based compensation.
Speaker Change: Our guidance excludes future tax benefits from stock based compensation.
Speaker Change: I would now like to turn the call back over to Eric.
Eric M. Green: Thank you Bernard to summarize on slide 13, the solid financial performance and execution in Q1 continues to reaffirm our proven growth strategy strong base business and the unique value of our high quality product offerings for customers. We look forward to building on this momentum as we move through the.
Bernard J. Birkett: Sales price increase contributed $24.1 million, or 3.4 percentage points of growth in the quarter, as did a foreign currency tailwind of approximately $3.4 million. More than offsetting price was a negative volume and mixed impact of $45.5 million, primarily due to lower sales volume caused by customer inventory management decisions in the period.
Speaker Change: A year and our team is steadfast in meeting the anticipated growth expectations as we make a positive impact on health care across the globe Livia, we're ready to take questions. Thank you.
Speaker Change: Ladies and gentlemen to ask a question you will need to press star one on your telephone and wait.
Speaker Change: Aimed to be announce to withdraw your question simply press Star one again, please standby, while we compile the Q&A roster.
Bernard J. Birkett: Looking at margin performance, slide 11 shows our consolidated gross profit margin of 33.1% for Q1 2024, down from 37.9% in Q1 2023. Proprietary Products' first quarter gross profit margin of 37% was 550 basis points lower than the margin achieved in the first quarter of 2023. The key drivers for the decline in proprietary products' gross profit margin were lower sales volume and an unfavorable mix of products sold, partially offset by increased sales prices.
Speaker Change: Okay.
Speaker Change: And now first question coming from the line of Matt Larew with William Blair. Your line is open.
Matthew Richard Larew: Hi, good morning.
Matthew Richard Larew: To ask about you referenced the pick up in the back half of the year, but more about the second quarter.
Speaker Change: Last call you.
Matthew Richard Larew: You discussed sort of a flipped to positive growth in the second quarter and Eric in your comments it sounds like there hasn't been an inflection at least.
Matthew Richard Larew: Stocking. So just wondering if we should still be thinking about positive organic growth in the second quarter or if things are now more weighted to the back half of the year.
Eric M. Green: Yes, good morning, Matt. Thanks for the question, what we're seeing is that.
Eric M. Green: Q2 will be sequentially stronger than Q1, but we also see that as we go into Q3 and Q4 throughout the year.
Eric M. Green: We did see some some demand in the first half of this year that we were able to build fulfilled through our manufacturing sites in Q1.
Eric M. Green: I would consider as timing in the first half of this year, but the buildup will be sequential quarter over quarter over the next four quarters or if you want to add anymore.
Speaker Change: Yes, just.
Speaker Change: As Erik said, Matt sequentially, it'll be up there is an element of timing between Q1 and Q2 so.
Speaker Change: Some of those orders that we shipped out in Q1, originally we would've earmarked in Q2. So we're seeing we're seeing that and we're also seeing and the Destocking continue into Q2.
Bernard J. Birkett: Contract manufacturing had a first-quarter gross profit margin of 17%, 60 basis points below the margin achieved in the first quarter of 2023, primarily due to inflationary labor costs and an unfavorable mix of products sold, partially offset by increased sales prices. Now let's look at our balance sheet and review how we did in terms of generating cash for the business. On slide 12, we have listed some key cash flow metrics. Operating cash flow was $118.2 million for the three-month end of March 2024, a decrease of $19.9 million compared to the same period last year, a 14.4% decrease, primarily due to a decline in operating results.
Speaker Change: Okay, and then maybe let me go from there.
Speaker Change: Very near term to a higher level, which is that some peers have described.
Speaker Change: Apply chain disruptions.
Speaker Change: Lager lead times during the pandemic created an opportunity for them, perhaps to get into west customers, where they didn't have access to before.
Speaker Change: So just curious what your assessment is of your competitive positioning and perhaps more generally.
Speaker Change: The industry's bias towards sole source or multi source arrangements moving forward.
Speaker Change: Can I ask that in light of all the high value capacity you're adding.
Speaker Change: Yes, Matt over the pandemic, we actually worked with our customers to make sure that we're able to continue to supply that there wasn't any.
Speaker Change: Stock out with any particular customer. So we were successful through the pandemic period of time, and we've been working on reducing the backlog and increasing their safety stock levels.
Speaker Change: Really in 2000, and backend of 2022 and 2023.
Speaker Change: The way that we.
Speaker Change: You'll see it is that we continue to be on the molecules that are in the marketplace.
Bernard J. Birkett: Our first quarter 2024 year-to-date capital spending was $19.6 million, $8.5 million higher than the same period last year. We continue to leverage our CapEx to increase both our high-value products and our contract manufacturing capacity. Working capital of approximately $1.04 billion at March 31, 2024 decreased by $220.1 million from December 31, 2023, primarily due to a reduction in our cash balance. Our cash balance of March 31, 2024 was $601.8 million, $252.1 million lower than our December 2023 balance. The decrease in cash is primarily due to $267 million of share repurchases and or capital expenditures offset by cash from operations.
Speaker Change: We are working with them as they adjust their schedules for future shipments will continue to supply those products in the market.
Speaker Change: And it is based on.
Speaker Change: Number of scripts that are being.
Speaker Change: Jackson's being administered but also more importantly is if we look at our current.
Speaker Change: Win rates higher participation rate last year and going into this year. It is as strong as it's ever been so our interaction with our customers.
Speaker Change: Remain very strong we have a very strong.
Speaker Change: Position in the marketplace.
Speaker Change: And the issue around potential sole source is that what customers have.
Speaker Change: Gain confidence in is that we have multiple sites that can build support their product in the marketplace. So they are not dependent on a particular site.
Speaker Change: In that sense, we're able to provide them with a single product multiple sites to build support for global <unk>.
Speaker Change: Supply chain.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks Pat.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of Jacob Johnson with Stephens. Your line is now open.
Jacob K. Johnson: Hey, Thanks, good morning.
Jacob K. Johnson: Just on the quarter, if I look at revenue and EBIT kind of sequentially. They were down a similar amount.
Bernard J. Birkett: Turning to guidance, slide 7 provides a high-level summary. We are reaffirming a full year 2024 net sales guidance in a range of 3 to 3.025 billion dollars. There is an estimated full-year 2024 headwind of approximately $8 million based on current foreign exchange rates. We expect organic sales growth to be approximately 2-3%, unchanged from prior guidance. We are raising our full year 2024 adjusted diluted EPS guidance to be in a range of $7.63 to $7.88 compared to a prior range of $7.50 to $7.75.
Jacob K. Johnson: So kind of the decremental margins are maybe a little bit greater here I know, there's probably a few moving pieces as it relates to capacity additions and mix, but can you just talk about.
Jacob K. Johnson: Why we didn't see maybe a little bit more leverage on the margin side of things given given the revenue outperformance in the quarter.
Speaker Change: Yes, it was primarily around gross margin and thats impacted by mix and then the overall absorption.
Speaker Change: And some of our plants impacted the margin.
Speaker Change: That we saw in Q1, but it was actually ahead of where we have predicted it to be which so it was a solid performance for us in the quarter.
Speaker Change: Got it thanks for that Bernard and then maybe a longer term question.
Speaker Change: A couple of years ago.
Speaker Change: <unk> updated your al RFP to seven to nine since then <unk> lines in the next one.
Speaker Change: Emerged or come to the forefront I'm just curious if you. Thank you.
Speaker Change: If either or both of those trends kind of changed your thinking about your long term.
Speaker Change: Our medium term outlook.
Speaker Change: Hey, Jacob Good morning, this is Eric.
Eric M. Green: I would say at this point, we do not want to adjust our long term outlook. However, we are excited about working with our customers in both areas.
Bernard J. Birkett: Also, our CAPEX guidance of $350 million for the year is unchanged from prior guidance. There are some key elements I want to bring your attention to as you review our guidance. The full-year 2024 Adjusted Diluted EPS Guidance Range includes an estimated FX headwind of approximately 4 cents, based on the current foreign currency exchange rate, which is an increase from the prior guidance of 2 cents. The updated guidance also includes EPS of $0.15 associated with first quarter 2024 tax benefits from stock-based compensation. Our guidance excludes future tax benefits from stock-based compensation.
Speaker Change: Described one is in the <unk> sector, which we would feel.
Speaker Change: To support our customers both in the elastomers side, but also in the in our contract manufacturing.
Speaker Change: Spilled sort them other delivery devices.
Speaker Change: And on the annex one.
Speaker Change: We feel really good about where we are and the discussions that are ongoing right now with our customers and the trends that we're seeing our.
Speaker Change: Aligns well with how we positioned our portfolio away from if you think about the components specifications all the way to the manufacturing design container closure integrity. They think about documentation services the whole suite of requirements.
Speaker Change: To make our customers successful as they transition and be ready for the annex one so well.
Speaker Change: We're very well positioned in both situate areas.
Speaker Change: Is about timing and change can take time and adoption could take time. So we are we would say that the long term.
Speaker Change: Outlook construct as a range.
Speaker Change: But as an organization, we don't have a ceiling.
Speaker Change: So I'll leave it leave it like that.
Speaker Change: Got it thanks for that Eric and thanks for taking the question.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Thank you and our next question coming from the line of Paul Knight with Keybanc. Your line is open.
Paul Richard Knight: Hi, Eric.
Paul Richard Knight: I look at the numbers would it be fair to say that within contract manufacturing and proprietary proprietary delivery systems, you you need to build capacity and there seems to be a.
Eric M. Green: I would now like to turn the call back over to Eric.
Eric M. Green: Thank you Bernard. To summarize slide 13, the solid financial performance and execution in Q1 continue to reaffirm our proven growth strategy, strong base business, and the unique value of our high quality product offerings for customers. We look forward to building on this momentum as we move through the year, and our team is steadfast in meeting the anticipated growth expectations as we make a positive impact on health care across the globe. Livia, we're ready to take questions. Thank you. Ladies and gentlemen,
Paul Richard Knight: Ceiling right there for you right now.
Eric M. Green: Yes, Paul.
Paul Richard Knight: Yes, I would characterize as such is probably more pronounced in contract manufacturing.
Eric M. Green: Do have significant investments going on right now.
Eric M. Green: Bolton Grand Rapids in Dublin that will be.
Paul Richard Knight: Validation will occur later this year, but most commercial revenues will be observed in 2025 going forward.
Paul Richard Knight: And then in the high value product proprietary devices.
Paul Richard Knight: There are some constraints that we have due to capacity, but that's being layered in as we speak so is the timing throughout the year, you'll see even stronger.
Paul Richard Knight: Throughput later on this year.
Paul Richard Knight: Which leaves I guess standard packaging the the weakest.
Speaker Change: Is that a fair assumption.
Speaker Change: As standard whats in standard packaging to make that the weakest if it is.
Speaker Change: Well.
Speaker Change: Let me rephrase that I think the HCP components.
Operator: Ladies and gentlemen, to ask a question, you will need to press Star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press Star 1-1 again.
Paul Richard Knight: For us most of the Destocking that we've experienced earlier this year.
Paul Richard Knight: Is around that category. However.
Paul Richard Knight: That particular part of the portfolio will ramp up.
Paul Richard Knight: Quite.
Paul Richard Knight: Nicely sequentially throughout the year.
Operator: Please stand by while we compile the canine roster. And our first question comes from the line of Matt Larew with William Blair. Your line is open.
Paul Richard Knight: So it is most of that most of the if you look at the Q1.
Paul Richard Knight: Proprietary Alaska side. It really is due to destocking at this point in time, but very very strong outlook towards the end of the year and very strong obviously.
Matthew Richard Larew: Hi, good morning. I wanted to ask you about the pickup in the back half of the year, but more about the second quarter. On the last call, you discussed sort of a flip to positive growth in the second quarter, and Eric, in your comments, it sounds like there hasn't been an inflection on the de-stocking. So I was wondering if we should still be thinking about positive organic growth in the second quarter, or if things are now more weighted to the back half of the year.
Paul Richard Knight: Beyond that.
Paul Richard Knight: I think Paul on that it's important to note that we don't.
Paul Richard Knight: And anticipate any major mix shift.
Paul Richard Knight: They are still.
Paul Richard Knight: The growth opportunities around <unk> and in the biologic space and even in Q1 that continued to grow and you could see the growth driven there by the growth in Novocure. So from a mix perspective, I think when you look at it in the whole of the areas.
Paul Richard Knight: <unk> are growing and our goal.
Paul Richard Knight: As we look out past 'twenty four.
Paul Richard Knight: Round standard components and packaging and HCP. The trajectory is the same that they are the growth drivers.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Next question coming from the line of Michael <unk> with Bank of America. Your line is open.
Eric M. Green: Good morning, Matt. Thanks for the question. What we're seeing is that... Q2 will be sequentially stronger than Q1, but we also see that as we go into Q3 and Q4 throughout the year. We did see some demand in the first half of this year that we were able to fulfill through our manufacturing sites in Q1 that I would consider as timing in the first half of this year, but the buildup will be sequential quarter over quarter over the next four quarters. Bernard, do you want to add anything more?
Speaker Change: Okay.
Michael: Thanks for taking the question.
Michael: I just have a couple of quick follow ups, one I mean, you talked about.
Michael: The cadence and the progression of revenues through the year I want to focus a little bit more on the margin side of things I think we've previously for a little bit more of a jump from <unk> to <unk> on the gross margin on proprietary products.
Michael: And on operating margins as well.
Michael: Is it fair to say that given your comments on.
Michael: Timing of revenues in Q1 Q2 Q.
Michael: Second quarter margins will be a little bit more subdued as well and it will be closer to the first quarter and then I've got a follow up.
Michael: We expect margin improvement sequentially as we move through the year and that Hasnt changed since we spoke about in February. So we would see gross and operating margin step up quarter over quarter.
Speaker Change: Okay, Alright, and then on the on the contribution of price versus volume mix in the quarter.
Michael: Sure.
Michael: Price was weaker than we had expected is that just a component of mix and some of the Destocking you had talked about or.
Michael: Should we expect price to be.
Michael: They're contributing as you go through the year.
Speaker Change: Or is that going to have level about alright. Thanks.
Speaker Change: Yes, no. It's a great question I mean last year was a unique situation due to inflationary pressures this year like we discussed before.
Speaker Change: But we're targeting between the 3% to 4% corridor.
Speaker Change: Net price contribution.
Speaker Change: Absent of any <unk> mix shift and.
Speaker Change: And so we started the year off in line with what we.
Speaker Change: But we expect 3% to 4%.
Bernard J. Birkett: Yeah, just as Eric said, Matt, there is an element of timing between Q1 and Q2, so, you know, some of those orders that we shipped out in Q1, you know, originally we would have earmarked for Q2, so we're seeing that, and we're also seeing the de-stocking continue into Q3.
Speaker Change: Alright, Thank you great.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Alright.
Speaker Change: Comes from the line of <unk>.
Deutsche Bank: <unk> with Deutsche Bank. Your line is now open.
Deutsche Bank: Hi, good morning, Eric.
Deutsche Bank: Eric earlier, you talked about some of your customers returning to pre pandemic safety stock levels.
Deutsche Bank: Do you have a sense on when that normalizes this year.
Speaker Change: And what it means in terms of.
Speaker Change: The typical pattern.
Eric M. Green: So we're seeing some of that return in Q2 as we speak.
Matthew Richard Larew: Okay, then maybe let me go from very near term to higher level, which is that some peers have described that the supply chain disruptions and longer lead times during the pandemic created an opportunity for them, perhaps, to get into West customers where they didn't have access before. And so, just curious what your assessment is of your competitive positioning and, perhaps more generally, the industry's bias towards sole source or multi-source arrangements moving forward, and I just kind of ask that in light of all the high-value capacity you're adding. Thanks. Yeah, Matt, during the pandemic, we actually
Eric M. Green: But as I mentioned in the prepared remarks that we're seeing we're still seeing some destocking occurring.
Eric M. Green: <unk> Q2, and as we look at the order patterns in the second half of the year and we and obviously we are as you know were made to order. So we get we have purview of.
Eric M. Green: If you look out multiple quarters ahead of us it is but it is stronger than it has been in a number of years. If you normalize for Covid. So we feel good about the.
Eric M. Green: When we talk about <unk>.
Eric M. Green: <unk>.
Eric M. Green: Growth on the revenue for the next several quarters, we feel very good based on the on the on the order patterns were currently seeing today.
Eric M. Green: Contract manufacturing side last last quarter, you talked about some operational improvements.
Eric M. Green: <unk>.
Eric M. Green: Is that.
Eric M. Green: Is that somewhat of a gating factor until you implement.
Eric M. Green: Those and get the throughput through or can you maintain the same productivity levels, while you're making those changes.
Eric M. Green: Yeah, Matt, during the pandemic, we actually worked with our customers to make sure that we were able to continue to supply and that there wasn't any stock out with any particular customer. So we were successful through the pandemic period of time. And we've been working on reducing the backlog and increasing their safety stock levels in really in 2022 and 2023. The way, the way we see it is that we continue to be on the molecules that are in the marketplace.
Eric M. Green: Yes.
Eric M. Green: This will be within our high value product devices portfolios.
Eric M. Green: Portfolio is a smaller piece of our overall business.
Eric M. Green: There are some as we make these improvements there are some.
Eric M. Green: I guess constraints.
Eric M. Green: Continuing to manufacture, but most of those have been are being resolved as we speak and I think the productivity improvements and that we're actually working on right now don't impact our current levels of production and we would we would again we would see.
Eric M. Green: Sequential improvement in the throughput.
Eric M. Green: Around that business. So we're not looking at a step back there.
Speaker Change: Appreciate the questions and sorry about the background noise I've got some guys on the road.
Speaker Change: Yeah.
Speaker Change: I appreciate it. Thank you for the question no problem.
Speaker Change: Okay.
Speaker Change: Thank you one moment our next question.
Eric M. Green: We are working with them as they adjust their schedules for future shipments. They'll continue to supply those products in the market. And It is based on a number of scripts that are being, injections being administered.
Speaker Change: And our next question coming from the line of David Windley with Jefferies. Your line is now open.
David Howard Windley: Thanks for taking my questions I was going to say, Justin let us know if you need us to come rescue.
Speaker Change: Yes.
Speaker Change: Right.
Speaker Change: Right.
David Howard Windley: Thanks for taking the question I was going to come.
Speaker Change: Come back to the mix.
Eric M. Green: But also, more importantly, if we look at our current WinRate or participation rate last year and going into this year, it is as strong as it's ever been. So our interactions with our customers remain very strong. We have a very strong position in the marketplace, and the issue around potential sole source is that what customers have gained confidence in is that we have multiple sites that can be able to support their product in the marketplace. So they're not dependent on a particular site. In that sense, we're able to provide them with a single product across multiple sites to be able to support their global supply chain.
David Howard Windley: I hope I don't confuse the situation further, but but just trying to understand.
David Howard Windley: On the original question I guess Jacob's question about the decremental margin and the moving parts. There I understand revenue was lower overall and so you have absorption.
Speaker Change: Impacts from that.
Speaker Change: But no the pure you call out are strong and we've identified that the margin the <unk>.
Speaker Change: Margin contribution from that ought to be really really high and then it sounds like you have some other reasonably high margin contributors there being destock and so I guess I wanted to make a plea for may.
Speaker Change: And maybe a little bit more granularity. So we can understand the moving parts there.
Speaker Change: And and then how that progresses as you see the sequential improvement through the balance of the year, possibly thank you.
Operator: And our next question, coming from the line of Jacob Johnson with Stevens: your line is open.
Speaker Change: Yes, David So it was really.
David Howard Windley: The other areas of high value products, where we saw some step back.
David Howard Windley: In Q1, but what we do expect to see as we progress through the year.
Jacob K. Johnson: Hey, thanks. Good morning.
David Howard Windley: The volumes around that business to increase again sequentially.
Jacob K. Johnson: Maybe just for the quarter, if I look at revenue and EBIT kind of sequentially, they were down a similar amount. And so the decremental margins were maybe a little bit greater here. I know there's probably a few moving pieces as it relates to capacity additions and mix, but can you just talk about why we didn't see maybe a little bit more leverage on the margin side of things, given the revenue outperformance in the quarter?
David Howard Windley: And that's when we talked about the Destocking earlier on in the year, we were saying it was across all different parts of our business. So we would expect that the <unk> growth too.
David Howard Windley: It accelerated as we moved through the year and then the margin in that to be reflected in our margins and also we'll get the pickup of incremental or increased throughput as we move through the year. I think Q1 was our lowest level of throughput and where a high volume business.
David Howard Windley: Absorption does get impacted.
Speaker Change: As a follow up.
Bernard J. Birkett: Yeah, it was primarily around gross margin, and that's impacted by mix, and then the overall absorption in some of our plants impacted the margin that we saw in Q1, but it was actually ahead of where we had predicted it to be, which was a solid performance for us in the quarter.
Speaker Change: In these areas of of higher demand.
Speaker Change: GOP, one being one of the previous call outs that you responded to.
Speaker Change: If its.
Speaker Change: It's increasingly apparent that.
Speaker Change: The.
Speaker Change: Efforts of the sponsors to get those products ultimately the market are.
Jacob K. Johnson: Got it. Thanks for that, Bernard.
Speaker Change: Very multifactorial.
Jacob K. Johnson: And maybe a longer-term question, you know, a couple of years ago, you all updated your LRP to 7 to 9. Since then, GLP-1s and Annex-1 have emerged or come to the forefront. I'm just curious if either or both of those trends kind of change your thinking about your long-term or medium-term outlook.
Speaker Change: With so many different elements of the supply chain.
Speaker Change: Investing aggressively.
Speaker Change: To bring up capacity you all being an example of at least two different areas, where you're investing.
Speaker Change: To what degree.
Speaker Change: Do you have dialogue with those clients or visibility to understand.
Speaker Change: You invest and you add in over pure capacity and you add injection device capacity, but fill finish capacity is a challenge for example.
Eric M. Green: Jacob, good morning. This is Eric. I would say at this point we do not want to adjust our long-term outlook. However, we are excited about working with our customers in both areas that you describe. One is in the GLP-1 sector, where we would be able to support our customers both on the elastomer side but also in our contract manufacturing, to be able to support them on their delivery devices. And on Annex 1, we feel really good about where we are and the discussions that are ongoing right now with our customers, and the trends that we're seeing align well with how we've positioned our portfolio, all the way from, you think about the component specifications, all the way to the manufacturing design, container closure integrity, then you think about documentation services, the whole suite of requirements to make our customers successful as they transition and be ready for Annex 1.
Speaker Change: And that could be a rate limiting step that you also need to anticipate relative to the order patterns like.
Speaker Change: How are you able to do calculus around that thanks.
Speaker Change: Yes, David.
Speaker Change: Good observation is that not just upstream or downstream we have to be aware of we do have very strong <unk>.
Speaker Change: Long term relationships with customers that are in this space. So those relations are.
Speaker Change: Well established.
Speaker Change: We do interact with them about their.
Speaker Change: The demand profiles.
Speaker Change: Max type of conversation with various drugs.
Speaker Change: And so we're sensitive towards that obviously, we don't speak to any of those volumes are.
Speaker Change: A customer, but the way to look at it is.
Speaker Change: So to your question if there is bottleneck somewhere else in the.
Speaker Change: Value chain of.
Speaker Change: To get these products since the market.
Speaker Change: We have to be aware and we tried to work with our customers.
Speaker Change: With that understanding.
Speaker Change: Our role is to make sure that we arent the bottleneck and so as you think about the last one side of the business a lot of those assets are fungible. So these lines are not exclusive.
Speaker Change: So if we have to make.
Speaker Change: If we have to make a high value product.
Speaker Change: Plunger.
Speaker Change: We're able to do that in multiple high value product facilities and our customers.
Speaker Change: Improved more than one site.
Speaker Change: When it comes to contract manufacturers, a little different that's installed capacity and there is a theoretical maximum to it.
Speaker Change: That is one of many.
Speaker Change: Suppliers in that space.
Eric M. Green: So while we're very well positioned in both areas, it is about timing, and change can take time, and adoption can take time. So we would say that the long-term outlook construct is a range, but as an organization, we don't have a ceiling. So I'll leave it like that. Okay.
Speaker Change: So that is different that is a very tailored.
Speaker Change: <unk> business model for a customer or multiple customers. So thats, how we are tackling this dave so we as we look at the investments.
Speaker Change: On the Alaska side, we feel really good about where we are with our capacity we have been expanding capacity. So we're in a very good position.
Speaker Change: Tract manufacturing site, we will if and when awarded additional.
Jacob K. Johnson: Got it. Thanks for that, Eric, and thanks for taking the question.
Speaker Change: Contracts, we will we will build out expand and ramp up.
Speaker Change: Production to peak volumes within within.
Operator: Thank you. And our next question comes from the line of Paul Knight with KeyBank. Your line is open.
Speaker Change: One or two years, so that's pretty typical of the model that we have today.
Speaker Change: Very helpful. If I could just sneak a last one in on on the destock is it possible to size or quantify or comment too.
Paul Richard Knight: Hi Eric. As I look at the numbers, would it be fair to say that within contract manufacturing and proprietary delivery systems,
Speaker Change: The impact of of customer.
Speaker Change: Our inventory management.
Speaker Change: In <unk>, the peak and you expect that to wane.
Eric M. Green: Both in Grand Rapids and Dublin, that will be, validation will occur later this year, but most commercial revenues will be observed in 2025 going forward. And then, in the high-value product proprietary devices, there are some constraints that we have due to capacity, but that's being layered in as we speak.
Speaker Change: Still continue into <unk>, but Wayne as you continue through the year can you comment on that.
Speaker Change: Well I will say it will wane, yes, it is going to weigh in as he talked about throughout the year.
Speaker Change: Okay, and Thats supported by Air.
Speaker Change: Ah confirm orders as we think through through the balance of 2020 or and also the discussion we had about <unk>.
Speaker Change: Sequential growth quarter.
Speaker Change: Quarter over quarter for the next four quarters got it. Thank you.
Speaker Change: Thank you.
Speaker Change: Next question coming from the line of.
Paul Richard Knight: Well, let me rephrase that. I think the HVP components...
Speaker Change: Larry Solow with CJS Securities. Your line is now open.
Bernard J. Birkett: I think, Paul, on that, it's important to note that we don't... anticipate any major makeshift, you know; there's still growth opportunities around HVP and in the biologic space, and even in Q1, that continued to grow, and you could see, you know, the growth driven there by the growth in Novacure. So from a mixed perspective, I think when you look at it in the whole area, you know, we're growing, and our growth potential as we look out past 24 around standard components and packaging and HVP, you know, the trajectory is the same, that they are the growth driver.
Lawrence Scott Solow: Great. Thanks, guys, just a few follow ups I guess.
Lawrence Scott Solow: Just on the.
Lawrence Scott Solow: Update I know you mentioned, Alex one and whatnot, just any qualitative thoughts on that.
Lawrence Scott Solow: That you can speak to just conversations with customers on <unk>.
Lawrence Scott Solow: In terms of conversion the legacy products going forward anything that you could speak to there.
Alex: Good morning, Larry Thanks for the question.
Lawrence Scott Solow: Have you been having a lot of active discussions and as I mentioned at the recent.
Lawrence Scott Solow: Conference that we attended in New York that was that was clearly the number one discussion point.
Speaker Change: And it's interesting is that we're very well positioned to build support our customers as we kind of think about how do our customers get ready for.
Bernard J. Birkett: We expect margin improvements sequentially as we move through the year, and you know that hasn't changed since we spoke about it in February, so we would see gross and operating margins step up quarter over quarter.
Lawrence Scott Solow: To be able to build support.
Lawrence Scott Solow: Byproduct with with the regulations of annex one now the one comment I would make is that one of the.
Bernard J. Birkett: Yeah, no, it's a great question. I mean, last year was a unique situation due to inflationary pressures. This year, I think we discussed in February that we're targeting between the 3% to 4% corridor on net price contribution, absent any HPP makeshift. And so we started the year off in line with what we expect, 3% to 4%.
Lawrence Scott Solow: One of the <unk>.
Lawrence Scott Solow: Clear indicators that the most interest is coming from the multinationals I think originally there.
Lawrence Scott Solow: Thinking around just the European.
Lawrence Scott Solow: Firms, but this clearly is a discussion.
Lawrence Scott Solow: Multinational level, it's really simplify their own supply chains.
Speaker Change: So that's encouraging.
Speaker Change: And again, it's not just for new drugs, that's really a heavy emphasis on the legacy.
Speaker Change: Portfolio. So that's about as much like probably can give you without going too detailed but but these are active dialogue discussions that they will take time.
Eric M. Green: And so we're seeing some of that return in Q2 as we speak, but as I mentioned in the prepared remarks, we're still seeing some destocking occurring in Q2, and as we look at the order patterns in the second half of the year, and obviously, as you know, we're made to order, so we have a lot of control.
Speaker Change: On the customer depending on the drug that they would like to transfer.
Speaker Change: But we're well positioned to have those discussions and then act on them.
Speaker Change: Alright, and I appreciate that color and just a question on R&D I think R&D increase last year, I think 16% 17%.
Speaker Change: What's sort of the outlook. This year I know Q1 looks like it was only up a little bit year over year, but I know the quarters can jump around a little bit.
Eric M. Green: And around that,
Paul Richard Knight: No problem. I really appreciate it. Thank you for the question.
Bernard J. Birkett: So, we would expect, you know, that HVP growth to accelerate as we move through the year, and then the margin, and that to be reflected in our margins. And also, you know, we'll get the pickup of incremental or increased throughput as we move through the year. I think, you know, Q1 was our lowest level of throughput, and we're a high-volume business, so absorption does get impacted.
Speaker Change: Thoughts on R&D.
Speaker Change: Sure.
Speaker Change: Whereas the lion's share of that increase going into that I know a lot of investment into Corning, but isn't.
Speaker Change: Is it going into a lot of different areas right.
Speaker Change: Yes, Larry as a percentage of revenues, we expect R&D to be pretty constant as we go through the year.
Speaker Change: Where is that money going.
Speaker Change: A lot of that increase is around integrated systems and how we are building that out and again it is a partnership with Corning and supporting that and developing that market.
Lawrence Scott Solow: Okay, and just lastly on price I think you had little over 3% increase you mentioned this quarter is that about.
Bernard J. Birkett: GLP-1s being, you know, one of the previous call-outs that you responded to.
Speaker Change: And that also could probably move around a little bit but is that probably a good.
Paul Richard Knight: Customer Inventory Management
Speaker Change: Run rate you think for.
Eric M. Green: Yes, Larry, that's correct. That's a good position to be in for us.
Speaker Change: For the full year.
Speaker Change: Plus remind larry.
Speaker Change: Yes.
Lawrence Scott Solow: That's correct.
Lawrence Scott Solow: That's a good position to be in for us right.
Speaker Change: Great excellent thanks, guys I appreciate it.
Speaker Change: Thanks, Larry.
Lawrence Scott Solow: Thank you.
Lawrence Scott Solow: And I see no further questions in the queue at this time I'll turn the call back now over to Vincent <unk> for any closing remarks.
Vincent: Thanks Olivia.
Vincent: Thank you for joining us on today's conference call an online archive of the broadcast will be available on our website. It was from a dot com in the investors section.
Vincent: Additionally, you may access the 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.
Speaker Change: That concludes the call have a nice day.
Speaker Change: Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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