Q2 2024 West Pharmaceutical Services Inc Earnings Call

Speaker Change: Good morning, and welcome to West's second quarter 2024 conference call.

John Newton Sourbeer: Our way of introduction, this is John Sweeney, the new head of investor relations at West. I'm delighted to be here and I look forward to working with all of you.

John Newton Sourbeer: We issued our financial results earlier this morning, and the release has been posted to the investors section on the company's website, located at westpharma.com. On the call today, we'll 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 the presentation is available in the investors section of our website. Slide four is our safe harbor.

Speaker Change: We issued our financial results earlier this morning and the release has been posted to the investors section on the company's website located at westpharma.com

Speaker Change: On the call today, we'll review our financial results, provide an update in 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 the presentation is available on the investors section of our website.

John Newton Sourbeer: Statements made by management on this call and the accompanying presentation contain forward-looking statements within the meaning of the 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.

On slide four is our Safe Harbor Statement.

John Newton Sourbeer: Statements made by management on this call and the accompanying presentation contain forward-looking statements within the meaning of the U.S. Federal Securities Law.

John Newton Sourbeer: These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts.

John Newton Sourbeer: Actual results could differ materially from past results; please refer to today's press release, as well as any other disclosures made by the company regarding the risk, subject, including our 10K, 10Q, and 8K reports. During today's call, management will make reference to our non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS.

John Newton Sourbeer: The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results, as well as those expressed or implied in any forward-looking statements made here.

John Newton Sourbeer: Please refer to today's press release, as well as any other disclosures made by the company regarding the risks of this subject, including our 10-K, 10-Q, and 8-K reports.

Speaker Change: During today's call, management will make reference to our non-GAAP financial measures including Organic Sales Growth, Adjusted Operating Profit, Adjusted Operating Profit Margin and Adjusted Diluted EPS.

John Newton Sourbeer: Reconciliations and limitations of the non-GAAP financial measures to the comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release.

John Newton Sourbeer: Reconciliations and limitations of the non-GAAP financial measures to the comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I'll now turn the call over to our CEO, Eric Green. Thank you, John, and welcome to West. And I would like to thank Quintin Lai for his partnership over the past eight years and for his many contributions at West. Thank you for joining us today.

Eric M. Green: I'll now turn the call over to our CEO , Eric Green. Thank you, John , and welcome to West. And I would like to thank Quintin Lai for his partnership over the past eight years and for his many contributions at West.

Eric M. Green: We will start on slide five, where I will cover three main topics. First, examine the drivers of Q2 performance. Second, discuss a revised outlook for the remainder of 2024. And third, provide insight on our long-term financial outlook and why we remain confident in our growth strategy. Let's begin with Q2 performance. We had a lower-than-expected second quarter impacted by continued customer defection.

[inaudible]

Speaker Change: Thank you for joining us today.

Speaker Change: We will start on slide 5, where I will cover three main topics.

Speaker Change: First, examine the drivers of Q2 performance. Second, discuss a revised outlook for the remainder of 2024. And third, provide insight on our long-term financial outlook and why we remain confident in our growth strategy.

Speaker Change: Let's begin with Q2 performance.

Speaker Change: We had a lower-than-expected second quarter impacted by continued customer distraction.

Eric M. Green: That being said, we are seeing promising signs from our customers that give us confidence of a turning point in this trend. Looking ahead, we expect the second half of the year to be stronger than the first half, with a return to year-over-year organic growth in the fourth quarter, led by our proprietary product segment, specifically Biological. We have adjusted our full year 2024 guidance to reflect a more gradual recovery as compared to our previous expectations.

Speaker Change: That being said, we are seeing promising signs from our customers that give us confidence of a turning point in this trend.

Speaker Change: Looking ahead, we expect the second half of the year to be stronger than the first half with a return to year-over-year organic growth in the fourth quarter, led by our proprietary product segment, specifically Biologics.

Speaker Change: We have adjusted our full year 2024 guidance to reflect a more gradual recovery as compared to our previous expectations.

Eric M. Green: While I'm disappointed that we're lowering our guidance, I want to reiterate my confidence in West's proven market-led strategy and attractive long-term growth potential. Turning to slide six, we are the market leader in the containment and delivery of injectable medicine, which is one of the fastest growing areas of health. We have an even stronger position in biologics, which is the fastest growing segment of injectables. Our products are addressing the most critical therapeutic areas, including immunology, oncology, rare diseases, and obesity.

Speaker Change: While I'm disappointed that we're lowering our guidance, I want to reiterate my confidence in West's proven market-led strategy and attractive long-term growth potential.

Speaker Change: Turning to slide six.

Speaker Change: We are the market leader in containment and delivery of injectable medicines, which is one of the fastest-growing areas of health care.

Speaker Change: We have an even stronger position in biologics, which is the fastest-growing segment with injectables. Our products are addressing the most critical therapeutic areas, including immunology, oncology, rare diseases, and obesity.

Eric M. Green: And for the past five years, West has achieved a CAGR of double-digit organic revenue growth, demonstrating that we have been able to deliver a long-term financial construct of 7-9%. Moving to slide seven, our confidence in our medium to long-term trajectory is underscored by our ongoing capital expansion project. The investments we have made to address COVID are now being repurposed to drive increased capacity to address new opportunities. In addition, we have expansion plans focused on HVP products that provide a combination of increased manufacturing capacity and a higher level of global standardization through our network.

Speaker Change: And for the past five years, West has achieved a CAGR of double-digit organic revenue growth, demonstrating that we have been able to deliver a long-term financial construct of 7-9%.

Speaker Change: Moving to slide seven. Our confidence in our medium to long-term trajectory is underscored by our ongoing capital expansion projects.

Speaker Change: The investments we have made to address COVID are now being repurposed to drive increased capacity to address new opportunities.

Speaker Change: In addition, we have expansion plans focused on HVP products that provide a combination of increased manufacturing capacity and higher level of global standardization through our network.

Eric M. Green: By looking at biologics, GLP-1s, and changing global regulatory requirements, we are seeing increased customer interest for higher quality, lower particulate, and more standardized solutions. This favorably positions West's innovations and leading products such as Westar Select and Novartis. Another focus for our capital allocation is our HPP devices, which include our self-injection devices.

Speaker Change: This favorably positions West's innovations and leading products such as Westar Select and Novapur.

Speaker Change: Another focus for our capital allocation is our HPP devices, which includes our self-injection devices. Our platforms are an integral part of our customers drug device combination products that are making a difference to patients.

Eric M. Green: Our platforms are an integral part of our customers' drug-device combination products that are making a difference to patients. These expansion projects remain on target for the back half of the year and 2020. And lastly, for contract manufacturing, we have an exciting growth contribution from our new capacity at our Grand Rapids site. A few weeks ago, I had the opportunity to join our team as we opened this new portion of the state-of-the-art facility in support of our customer's injection device platform and produced product in Q4. And we have the ongoing expansion in Dublin, which is already dedicated to contract manufacturing and demand for components associated with drugs for diabetes and obesity.

Speaker Change: And we have the ongoing expansion in Dublin, which is already dedicated to contract and demand for components associated with drugs for diabetes and obesity. We expect it to be completed by the end of Q3.

Eric M. Green: We expect it to be completed by the end of Q3. Our promising growth drivers are in a position to drive significant value for our customers, patients, and shareholders as we move forward. Shifting to slide eight.

Eric M. Green: At the end of June, we published our 2023 sustainability report on the company website. Proudly, we received several accolades, including being named as one of America's most responsible companies by news. Now I'll turn the call over to Bernard Birkett. Thank you, Eric, and good morning.

Speaker Change: At the end of June , we published our 2023 Sustainability Report on the company website. Proudly, we received several accolades, including being named as one of the America's Most Responsible Companies by Newsweek.

Bernard J. Birkett: Let's review the numbers in more detail. We first look at Q2 2024 Revenues and Profits, where we saw a mid-single-digit decline in organic sales as well as declines in operating profit and diluted EPS compared to the second 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. And finally, we will provide an update for 2024 guidance.

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

Bernard J. Birkett: First up, Q2. Our financial results are summarized on slide 9, and the reconciliation of non-U.S. GAAP measures is described on slides 17 to 22. We recorded net sales of $702.1 million, representing an organic sales decline of 5.9%.

Speaker Change: And finally, we will provide an update to our 2024 guidance.

Speaker Change: First up, Q2. Our financial results are summarized on slide 9, and the reconciliation of non-U.S. GAAP measures are described in slides 17 to 22.

Speaker Change: We recorded net sales of 702.1 million dollars, representing an organic sales decline of 5.9%.

Bernard J. Birkett: Looking at slide 10, proprietary products organic net sales decreased 8.4% in the quarter as customers' destocking continued at a higher rate than anticipated. I value products, which made up approximately 71% of proprietary product sales in the quarter, declined by double digits, primarily due to decreased sales of our Westar, Dicrystal, Zenith, and Floratech products. Looking at the performance of the market units, the biologics market experienced a mid-single-digit decline, primarily driven by lower volumes of dikyl-crystal-xenate and Westar products.

Speaker Change: Looking at slide 10, proprietary products organic net sales decreased 8.4% in the quarter as customers de-stocking continued at a higher rate than anticipated.

Speaker Change: I value products which made up approximately 71% of proprietary product sales in the quarter, declined by double digits, primarily due to decreased sales of our Westar, Dicuocrystal, Zenith and Fluratech products.

Speaker Change: Looking at the performance of the market units, the biologics market experienced a mid-single digit decline, primarily driven by lower volumes of Dikyo Crystals units and Westar products.

Bernard J. Birkett: The pharma market unit saw a low single-digit decline, primarily due to a reduction in sales of admin systems and Westar products, while the generics market unit declined double digits, primarily due to lower volumes of Floratech and Westar products. Despite these revenue declines in the quarter, we do expect revenues in the second half of 2024 to be greater than the first. Our contract manufacturing segment experienced mid-single-digit net sales growth in the second quarter, led by growth and sales of components associated with injection-related devices. However, our adjusted operating profit margin of 18% was a 650 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 28% for Q2. However, excluding stock-based compensation tax benefits, EPS decreased by 28.4%.

Speaker Change: The pharma market unit saw a low single-digit decline primarily due to a reduction in sales of admin systems and Westar products, while the generics market unit declined double-digits primarily due to lower volumes of our Floratech and Westar products.

Speaker Change: Despite these revenue declines in the quarter, we do expect revenues in the second half of 2024 to be greater than the first half.

Speaker Change: Our contract manufacturing segment experienced mid-single-digit net sales growth in the second quarter, led by growth and sales of components associated with injection-related devices.

Speaker Change: Our adjusted operating profit margin of 18% was a 650 basis point decrease from the same period last year.

Speaker Change: Finally, adjusted diluted EPS declined 28% for Q2.

Speaker Change: Excluding stock-based compensation tax benefits, EPS decreased by 28.4%.

Bernard J. Birkett: Now let's review the drivers in both the revenue and profit performance. On slide 11, we show the contributions to organic sales decline in the quarter. Sales price increases contributed $21 million, or 2.8 percentage points of growth in the quarter.

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

Speaker Change: On slide 11, we show the contributions to organic sales decline in the quarter.

Speaker Change: Sales price increases contributed 21 million dollars or 2.8 percentage points of growth in the quarter.

Bernard J. Birkett: More than offsetting price with a negative volume and impact mix of $65.5 million, primarily due to lower sales volume caused by customer inventory management decisions in the period and a foreign currency headwind of approximately $6.1 million. Looking at Margin Performance. Slide 12 shows our consolidated gross profit margin of 32.8% for Q2 2024, down from 38.7% in Q2 2023. Proprietary product, second quarter gross profit margin 37%, 690 basis points lower than the margin achieved in the second quarter of 2023.

Speaker Change: More Than Offsetting Price was a negative volume and impact mix of $65.5 million.

Speaker Change: primarily due to lower sales volume caused by customer inventory management decisions in the period and a foreign currency headwind of approximately $6.1 million dollars.

Speaker Change: Looking at Margin Performance

Speaker Change: Slide 12 shows our consolidated gross profit margin of 32.8% for Q2 2024, down from 38.7% in Q2 2023.

Speaker Change: Proprietary products second quarter gross profit margin 37% with 690 basis points lower than the margin achieved in the second quarter of 2023.

Bernard J. Birkett: Key drivers for the decline in the proprietary product's gross profit margin were lower production volume due to reduced customer demand in the period and an unfavourable mix of products sold, partially offset by an increased sales price.

Speaker Change: The key drivers for the decline in the proprietary product's gross profit margin were lower production volume due to the reduced customer demand in the period and an unfavourable mix of products sold, partially offset by increased sales prices.

Bernard J. Birkett: Contract Manufacturing had a second quarter gross profit margin of 16.2%, 80 basis points greater than the margin achieved in the second quarter of 2023, primarily due to increased sales price. Now let's look at our balance sheet and review how we've done in terms of generating cash for the business. Flight 13.

Speaker Change: Contract manufacturing second quarter gross profit margin of 16.2% was 80 basis points greater than the margin achieved in the second quarter of 2023, primarily due to 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.

Bernard J. Birkett: Lin-Manuel Miranda, Operating cash flow was $283.2 million for the six months into June 2024, a decrease of $24.1 million compared to the same period last year, or a 7.8% decrease, primarily due to a decline in operating results offset by favorable working capital management. Our second quarter 2024 year-to-date capital spending. $190.8 million, $33.3 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 $849.3 million at June 30th, 2024 decreased by $415.3 million from December 31, 2023, primarily due to a reduction in our cash balance. Our cash balance at June 30, 2024 of $446.2 million was $407.7 million lower than our December 2023 balance.

Speaker Change: On slide 13, we'll introduce asymmetrics.

Speaker Change: Operating cash flow was $283.2 million for the six months ended June 2024.

Speaker Change: A decrease of $24.1 million compared to the same period last year, or a 7.8% decrease primarily due to a decline in operating results offset by favorable working capital management.

Speaker Change: Our second quarter 2024 year-to-date capital spending was $190.8 million, $33.3 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 $849.3 million at June 30, 2024 decreased by $415.3 million from December 31, 2023, primarily due to a reduction in our cash balance.

Speaker Change: Our cash balance at June 30, 2024 of $446.2 million was $407.7 million lower than our December 2023 balance.

Speaker Change: The decrease in cash is primarily due to $454.1 million of share repurchases and our capital expenditures offset by cash from operations.

Bernard J. Birkett: The decrease in cash is primarily due to $454.1 million of share repurchase and our capital expenditures offset by cash from operations. Turning to guidance, slide 14 provides a high-level summary. We are updating our full year 2024 net sales guidance to a range of $2.87 billion to $2.9 billion from a prior range of $3 billion to $3.025 billion. There is an estimated full year 2024 headwind of approximately $5 million based on current foreign exchange rates. We expect organic sales to decline approximately 1-2% compared to our prior guidance of 2-3% growth.

Speaker Change: Turning to guidance, slide 14 provides a high-level summary.

Bernard J. Birkett: We are updating our full-year 2024 adjusted diluted EPS guidance to be in a range of $6.35 to $6.65, compared to a prior range of $7.63 to $7.88. Also, our CAPEX guidance is expected to be $375 million for the year, which is an increase from the previous guidance of $350 million. The increase in CapEx is driven by additional investments and growth initiatives and the timing of spend on one of our major

Speaker Change: We are updating our full year 2024 adjusted diluted EPS guidance to be in a range of $6.35 to $6.65 compared to a prior range of $7.63 to $7.88.

Speaker Change: Also, our CAPEX guidance is expected to be $375 million for the year, which is an increase from the previous guidance of $350 million.

Speaker Change: The increase in CapEx is driven by additional investment in growth initiatives and the timing of spend on one of our major projects.

Bernard J. Birkett: There are some key elements I want to bring your attention to as you review our guide, full year 2024 adjusted diluted EPS. The guidance range includes an estimated FX headwind of approximately 3 cents, based on current foreign currency exchange rates, which is a decrease from the prior guidance of Forrester. The updated guidance also includes EPS of 22 cents associated with first half 2024 tax benefits from stock-based compensation. However, our guidance excludes future tax benefits from stock-based compensation.

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 estimated FX headwind of approximately 3 cents based on current foreign currency exchange rates which is a decrease from the prior guidance of 4 cents.

Speaker Change: The updated guidance also includes EPS of 22 cents associated with first half 2024 tax benefits from stock-based compensation.

Eric M. Green: I would now like to turn the call back over to Eric. Thank you, Bernard. To summarize on slide 15, we are the market leader in injectables with an even stronger position in biologics. We are seeing promising signs from our customers at the stockings that attorney. We are investing significant capital in higher growth areas with expanded margins and cash flow. And I'm confident that we'll achieve our long-term financial targets with our proven market-led strategy and future growth drivers.

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 Erik.

Erik: Thank you Bernard. To summarize on slide 15, we are the market leader in injectables with an even stronger position in biologics.

Erik: We are seeing promising signs from our customers.

Speaker Change: at these Stockings at a Turning Point.

Erik: We are investing significant capital in higher growth areas with expanded margins and cash flow. And I'm confident that we'll achieve our long-term financial construct with a proven market-led strategy and future growth drivers. With great pride, we will continue to live by our purpose.

Eric M. Green: With great pride, we will continue to live by our purpose and make a positive impact on patient lives. Shannon, we're ready to take questions. Thank you. Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced.

Speaker Change: and make a positive impact on patient lives.

Speaker Change: Shannon, we're ready to take questions. Thank you.

Shannon: Thank you. If you have a question, please press star 1-1 on your telephone and wait for your name to be announced.

Operator: To withdraw your question, please press star 1 once again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Paul Knight with KeyBank Capital Markets. Your line is now open. Hi Erik.

Speaker Change: To withdraw your question, please press star 1 1 again.

Speaker Change: Please stand by while we compile the Q&A roster.

Speaker Change: Our first question comes from the line of Paul Knight with KeyBank Capital Markets. Your line is now open.

Paul Richard Knight: I've got two questions. Number one, in this destocking environment, are they things related to COVID? Or is it, you know, broader than that, like injectable drugs, etc., if you could kind of give some color on that?

Paul Richard Knight: Hi, Erik. I've got two questions. Number one, in this de-stocking environment, is it things related to COVID, or is it...

Eric M. Green: And then lastly, these new expansions specifically cited in Kinston and Grand Rapids, do they contribute to revenue here in 2024, and therefore you're improved to a, Yeah, thank you, Paul. The de-stocking activity that we are seeing is actually a combination of both. Obviously, we were still seeing a little bit of de-stocking of COVID vaccines, but also, during the pandemic, several of our customers, when we were having discussions with them, were increasing their safety stock levels significantly from several months to because our lead times got a little bit longer.

Paul Richard Knight: You know, broader than that, like injectable drugs, et cetera, if you could kind of give color on that. And then lastly, these new expansions, specifically cited in Kinston and Grand Rapids, do they contribute?

Speaker Change: to revenue here in 2024, and therefore you're improved to age.

Paul: Yeah, thank you, Paul.

Speaker Change: Digit Stocking

Speaker Change: The activity that we are seeing is actually a combination of both. Obviously, we're still seeing a little bit of de-stocking in the COVID vaccines.

Speaker Change: But also, during the pandemic, there was several of our customers, when we are having discussions with them, were increasing their safety stock levels significantly from several months because our lead times got a little bit longer.

Eric M. Green: Now that we've installed the capacity, our service levels are at an all-time high for our customers, and we're able to respond quickly, they are now taking down those safety stock levels. So, it is a combination of both, but it is also allowing our customers to normalize their safety stock for our products in the market. In our belief, and speaking with our customers, the inpatient demand for the molecules still remains in line with what we expected.

Speaker Change: Now that we've installed the capacity, our service levels are at the all-time high for our customers and we're able to respond quickly, they are now taking down those safety stock levels.

Speaker Change: So, it is a combination of both, but it is also allowing our customers to normalize their safety stock for our products in the market. Our belief, and speaking with our customers, the inpatient demand on the molecules still remains in line as what we expected.

Eric M. Green: The market shift is not occurring as consistently as we've been speaking for the last several years, and our win rate for new molecule approvals continues to be as good, if not, in some cases, better than what we had in the past. So, I feel really good about where we are moving forward. In regards to our investments, two particular areas in contract manufacturing will be online in the second half of this year. That's in Grand Rapids, Michigan, and also in Dublin, Ireland.

Speaker Change: The market shift is not occurring.

Speaker Change: It's consistent, as we've been speaking for the last several years.

Speaker Change: And our win rate in new molecule approvals continues to be as good, if not in some cases better, than what we had in the past. So I feel really good where we are moving forward. In regards to our investments...

Speaker Change: Two particular areas in contract manufacturing will be online in the second half of this year. That's in Grand Rapids, Michigan, and also in Dublin, Ireland.

Eric M. Green: And then, in regards to proprietary, yes, we have additional benefits coming from Kinston and other expansions in our HVP plants towards the end of this year. Thank you.

Speaker Change: And then in regards to proprietary, yes, we have additional benefits coming from Kinston and other expansions in our HVP plans towards the end of this year.

Lawrence Scott Solow: Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Your line is now open.

Speaker Change: Have a great day.

Bob: Thank you. Thanks, Bob.

Speaker Change: Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Your line is now open.

Eric M. Green: Great. Thank you, and good morning, and welcome, John, to the company. I guess, Eric, just a couple of questions. It sounds like the demand environment or mid- to long-term environment hasn't changed at all. I'm just curious, on the de-stocking and inventory levels, how's your visibility with that? Are levels back to where they were pre-COVID, or maybe even lower?

Lawrence Scott Solow: Great. Thank you and good morning and welcome, John , to the company. I guess, Eric, just a couple questions. It sounds like the demand environment or mid- to long-term environment hasn't changed at all. I'm just curious on the de-stocking and inventory levels.

Speaker Change: How's your visibility?

Speaker Change: With that, are levels like back to where they were pre-COVID, or are we?

Eric M. Green: What gives you confidence that customers aren't... Maybe this goes even a little bit longer than expected. We keep moving that to the right a little bit. You sound pretty confident that you have a good hold on it, but what gives you that? Yeah, Larry, this is twofold.

Speaker Change: or maybe even lower, you know.

Speaker Change: What gives you kind of confidence that...

Speaker Change: Customers aren't, you know, maybe this goes even a little bit longer.

Speaker Change: then thought, you know, we keep kind of moving that to the right a little bit. You sound pretty confident that, you know, you have a good hold on it, but what kind of gives you that confidence?

Eric M. Green: One is, at the beginning of the year, after having discussions with our customers, we had an indication that the return would be a little bit sooner than we anticipated. What I mean by that is a little more pronounced, back to normalized demand curves in the second half of this year. As we progressed through Q2, we started seeing intra-quarter demand slightly less than we anticipated, and we see that persisting a little bit into Q3.

Speaker Change: Yeah, there is a two-fold there. One is in the beginning of the year, after having discussions with our customers, we had an indication that the return would be a little bit sooner than we anticipate. What I mean by that is a little more pronounced

Eric M. Green: So, we do see sequential improvements over the next couple of quarters and, as I mentioned, returning to growth in Q4, and that is really our customers are gradually going back to where they were pre-COVID. So, we don't see any variations below or any variations slightly above. It's pretty much consistent when a customer tells us what they're targeting, i.e., 12 months or 9 months or 16 months.

Speaker Change: back to normalized demand curves in the second half of this year. As we progress through Q2, we started seeing the intra-quarter.

Speaker Change: Demand slightly less than we anticipated, and we see that persisting a little bit into Q3.

Speaker Change: So we do see sequential improvements over the next couple quarters, and as I mentioned, returning back to growth.

Speaker Change: and Q4, and that is really our customers.

Eric M. Green: I will tell you, though, every customer that we're speaking to has a different algorithm that they manage. So, it's not universal from one customer to the next. As we go through the different segments, whether it's generics, biologics, or small molecule pharma, they're also in different stages of the new stock. Okay.

Speaker Change: are...

Speaker Change: gradually going back to where they were pre-COVID, so we don't see any variations.

Speaker Change: below or any variations slightly above. It's pretty much consistent when a customer tells us what they're targeting, i.e. 12 months or 9 months or 16 months. I will tell you though, every customer that we're speaking to

Speaker Change: has a different algorithm that they manage to, so it's not universal from one customer to the next.

Speaker Change: And as we go through the different segments, whether it's generics, biologics, or small molecule pharma, they're also in different stages of this, of the, of these documents.

Eric M. Green: And in terms of the CapEx, obviously, a little bit of an increase, I guess, to me, certainly signals your confidence, although you mentioned a little bit of timing there, but as we look out over the next few years, do you expect to still kind of spend this, you know, $350 to $400 million investment? You know, is that something that you still have a several-year runway to continue? Let me start, and I'll turn it over to Barnard, because that's important. It's a good question, Larry.

Speaker Change: Okay and in terms of the CapEx obviously that a little bit of an increase I guess you know to me it certainly signals your confidence although you mentioned a little bit of timing there but as we look out over the next few years if you expect to still kind of spend this

Speaker Change: 3.5 million to $400 million investment, is that something that you still have a several year runway to continue?

Eric M. Green: You know, our investments. More recently, they have been, I mean, obviously, during the COVID pandemic, it was focused on HVP, particularly around stoppers and finishing of those HVP products to be able to support the vaccine growth. We're able to pivot those assets as we speak right now to continue to produce other HVP products for our customers. These additional investments we've been layering in really are to really support, I would say, three specific areas. The continuation of biological growth and our participation in that area is extremely high.

Barnard: Let me start and I'll turn it over to Barnard because that's important. It's a good question, Larry. You know, our investments...

Speaker Change: More recently have been, I mean, obviously during the COVID pandemic, it was focused on HPP.

Barnard: particularly around stoppers.

Barnard: in the finishing of those HVP products to be able to support the vaccine growth. We're able to pivot those assets as we speak right now to continue to produce other HVP products for our customers.

Speaker Change: [inaudible]

Eric M. Green: So we want to be ahead of the curve. So these investments we've been making are really more of the finishing process. When you go into Kinston, Jersey Shore, Eschweiler, Waterford, that's what you'll see.

Speaker Change: is really more on the finishing process when you go into Kinston, Jersey Shore, Eshwether, Waterford, that's what you'll see. Secondly is we are a significant player in the GLP.

Eric M. Green: Secondly, we are a significant player in the GLP from two angles, one on the proprietary Elastomer site, where we've always had a very strong foothold, and we continue to do so on all commercial drugs. And frankly, there are several that are in the pipeline or being developed by several customers, and we're participating in that arena also. But also in contract manufacturing, we are producing and will produce even more auto injectors and pens and, in some cases, doing some of the billing at the end of the process for our customers. So that's the second area around the GLP ones.

Speaker Change: and from two angles, one on the proprietary Elasper site

Speaker Change: which we've always had a very strong foothold and we continue to do so on all commercial drugs and frankly

Speaker Change: There are several that are in the pipeline or being in development by several customers and we're participating in that arena also. But also in contract manufacturing, we are producing and will produce even more auto injectors and pens.

Speaker Change: that in some cases doing some of the filling.

Eric M. Green: And the third area, which really kind of ties to the biologics also, is that there's more demand in the future. By talking to our customers about some of these regulatory changes that we're working through with them, I'm moving bulk standard material more up the HBP curve. So those are the three areas that we really focused our capital on. Now the long-term, I wanted to touch on that because that's a good question. How long will this persist?

Speaker Change: at the end of the process.

Speaker Change: for our customers. So that's the second area is around the GLP ones. And the third area, which really kind of ties to the biologics also, is that there's more demand in the future talking to our customers about some of these regulatory changes that we're working through with them.

Speaker Change: I'm moving bulk standard material more up the HBP curve.

Speaker Change: So those are the three areas that we really focus our capital.

Eric M. Green: Yeah, Larry, just two things on that. One on the increase in CapEx for this year, really the... The major driver behind that is business that we've been awarded from customers for our Dublin facility, where they actually want us to put the capacity in place, https://www.quintinlaye.com.au. And, you know, but that, again, if that's based on the demand that we're seeing today and how we're going to meet it, if that demand increases or goes beyond that, and particularly around finishing capacity, I got it.

Lawrence Scott Solow: Now, the long-term, I wanted to touch on that, because that's a good question, how long will this persist? Yeah, Larry, just two things on that. One on the increase in CapEx for this year.

Lawrence Scott Solow: The major driver behind that is business that we've been awarded from customers for our Dublin facility, where they actually want us to put the capacity in place.

Speaker Change: Sooner than originally anticipated. So we've pulled some of that CAPEX that we had earmarked for 25 into 24 to

Speaker Change: and meet those requirements.

Speaker Change: When we look at the longer term, we're really targeting about 6-8% of revenue, so getting back to pre-COVID levels of CapEx for our business.

Speaker Change: and you know but that again if and that's based on the demand that we're seeing today and how we're going to meet us. If that demand increases or goes beyond that and particularly around finishing capacity

Speaker Change: is the areas where we see that could potentially happen, then we would deploy more capital, but it would be very growth-focused if that was the case, and always around, or predominantly around HVP.

Lawrence Scott Solow: And the 68% Bernard CapEx of revenue, does that kind of support your sort of 7-9% targeted growth outlook, not this year, maybe, I don't know if it begins next year, but certainly multi-year, so 7-9%. Has that changed at all? That 7-9%, I should say, let's rephrase that. No, the 6-8% would support that level of growth.

Speaker Change: Got it. And the 68%, Bernard, CapEx of revenue, does that kind of support your...

Bernard: Sort of seven to nine percent, you know targeted growth outlook Not this year, you know, maybe I don't know if it begins next year, but it's certainly You know multi-year sort of seven to five has that changed at all that seven to nine? I should say, you know, let's rephrase No The six to eight percent would support that level of growth

Eric M. Green: And as we say, if we go beyond that, and it depends on what areas and where the growth comes from, we always have the ability to go and adjust that. But again, the CapEx remains very growth focused. And I think we're getting to like 60% to 70% of our CapEx budget is really growth focused at this point, and predominantly around HVP. And then some, as Eric said, in contract manufacturing, but that's for very specific customers and very specific businesses. I got it.

Speaker Change: And, as we say, if we go beyond that, and then it depends on what areas and where the growth comes from, we always have the ability to go and adjust that. But again, the CapEx remains very growth focused.

Bernard: and I think we're getting to like 60 to 70 percent of our CapEx budget is really gross focused at this point and predominantly around HVP and then some as Eric said in contract manufacturing but that's for very specific customers and very specific business.

Eric M. Green: And sitting here today, I know it's a, you know, there's no guarantees, it's hard, but do you feel comfortable that you can return to sort of that, you know, 7 to 9% growth in 25? I won't be able to pinpoint exactly which quarter over the next few quarters, but we will get back to a 7% to 9% construct. Like I said earlier, our position in the marketplace, and the areas of growth that we're focused on are biologics.

Speaker Change: Got it. And sitting here today, I know it's a, you know, there's no guarantees it's hard, but do you feel comfortable that you can return to sort of that, you know, seven to nine percent growth in 25?

Speaker Change: I won't be able to pinpoint exactly which quarter over the next few quarters, but we will get back to that seven to nine percent construct. Like I said earlier, our position in the marketplace...

Eric M. Green: It costs the entire portfolio, but what's outsized that growth is biologics, GLP-1s, and some of the work we're doing with our customers about moving up the HVP curve. So, yes, we feel confident we will be back to a 7% to 9% construct. Yeah, and if you think about it, you've got to remember, within the construct, Larry, there are three drivers in there. One is volume.

Speaker Change: The areas of growth that we're focused on is biologics.

Speaker Change: and some across the entire portfolio, but what's outsized that growth is Biologics, GLP-1s.

Speaker Change: and some of the work we're doing with our customers about moving up the HVP curve. So, yes, we feel confident we will be back to the 7% to 9% construct. Yeah, and if you think, you've got to remember, within the construct, Larry, there's three drivers in there. One is volume.

Lawrence Scott Solow: The other is product, and then you've got makeshift. So you've got three drivers.

Eric M. Green: The other is product, and then you've got makeshift, so you've got three drivers, you know, supporting that construct over the long term. And if you look back over... Kager between 2019 and as to where we're guiding today, you know, that that's about 10% growth, right? That construct is underpinned by those three drivers. And then if you look at the areas that Eric just called out that support that thesis, particularly around the mixed shift, looking at the changing regulatory landscape, GLP, or the high level of participation around biologics, and then demand normalization, plus we have the infrastructure and capacity in place now to be able to respond in the required lead times by customer risk to be able to support that growth over the next number of years. Got it. Great. I appreciate the call.

Lawrence Scott Solow: you know, supporting that construct over the long term. And if you look back over the CAGR between 2019 and as to where we're guiding today, you know, that's about 10%.

Lawrence Scott Solow: growth. So that construct is underpinned by those three drivers and then if you look at the areas that Eric just called out that support that thesis particularly around the mixed shift

Eric: You're looking at the change in regulatory land, GLP, or high level of participation around biologics.

Eric: and then to demand normalization. Plus we have the infrastructure and capacity in place now to be able to respond in the required lead times by customers to be able to support that growth over the next number of years.

Unknown Executive: I appreciate to call her. Thank you, thank you. Thank you.

Justin D. Bowers: Thank you, guys. Thank you. Our next question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open. Hi, good morning.

Unknown Executive: Our next question comes from the line of Justin Bowers with Deutsche Bank; your line is open.

Speaker Change: Got it, great. I appreciate the call. Thank you guys.

Speaker Change: Thank you. Our next question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open.

Justin Bowers: Hi, Justin. Hi, good morning, and thank you. So, just a couple of questions. How is the coverage ratio shaping up and how has that changed throughout the, you know, throughout the year?

Justin D. Bowers: And thank you. So just, um, just a couple of questions. How is the coverage ratio shaping up, and how has that changed throughout the year? And Ben.

Justin: I'm Justin.

Justin D. Bowers: Hi. Good morning and thank you. So, just a couple of questions. How is the coverage ratio?

Justin D. Bowers: And then the other question would be just in terms of the be stalking. I think earlier in the year, you mentioned that it was viewing heavier towards standard components versus like HVP's, and just curious if that's still what you're seeing.

Justin D. Bowers: shaping up and how has that changed throughout the you know throughout the year and then

Eric M. Green: The other question would be, just in terms of the destocking, I think earlier in the year, you mentioned that it was skewing heavier towards standard components versus HVPs. And just curious if that's still what you're seeing. I'll take the second part, and then I'll come to you. Oh, yeah, I'll take the coverage, please. Eric will take the coverage.

Speaker Change: The other question would be, just in terms of the destocking, I think earlier in the year you mentioned that it was skewing heavier towards standard components versus like HVPs.

Unknown Executive: I'll take the second part, and then I'll take the coverage.

Speaker Change: I'm just curious if that's still what you're seeing. I'll take the second part and then I'll have a look.

Unknown Executive: Yeah, absolutely, so Justin is. It's so things really questions. The coverage ratio is getting stronger. So there's two aspects we look at: is firm confirmed orders scheduled out, and we're seeing that increased nicely, not just on a percent racial perspective, but on absolute dollar for both two four of this year and also going into the early part of 2025. That's that's one aspect and therefore as I can increase the intra quarter demand profile is actually is is less of a factor in the growth of the of the business and so we're seeing that come back.

Eric M. Green: Yeah, absolutely. So, Justin, thanks for the questions. The coverage ratio is getting stronger. So there's two aspects we look at, namely firm confirmed orders scheduled out. And we're seeing that increase nicely, not just on a percent racial perspective but an absolute dollar for both Q4 of this year and also going into the early part of 2025. That's one aspect.

Speaker Change: Oh yeah, I'll take the coverage. Eric will take the coverage. Yeah, absolutely. So, Justin, thanks for the questions.

Eric: The coverage ratio is getting stronger, so there's two aspects we look at is firm confirmed orders scheduled out and we're seeing that

Eric: increased nicely not just on the percent racial perspective but an absolute dollar for both Q4 of this year and also going into the early part of 2025.

Eric M. Green: And therefore, as that kind of increases, the intra-quarter demand profile is actually less of a factor in the growth of the business. And so we're seeing that come back a little bit slower than we originally anticipated in the middle part of this year, as we were articulating back in February. And so that's why, hence why we changed the guidance. But when we look out to Q4 and to 2025, we're seeing very strong indications with confirmed orders and our discussions where customers are lining up exactly to that conclusion when we look at their de-stocking programs and when they feel they'll be at a level that they feel is acceptable. So it's lining up nice.

Eric: That's one aspect, and therefore, as that kind of increases, the intra-quarter demand profile is actually less of a factor.

Unknown Executive: A little bit slower than we originally anticipated in the middle part of this year, as we were articulating back in February, I believe.

Eric: in the growth of the of the business. And so we're seeing that come back a little bit slower than we originally anticipated in the middle part of this year as we were articulating back in February , I believe. And so that's why hence why we changed the guidance.

Unknown Executive: And so that's why it has stopped; why we changed the guidance. But we look out to Q for and into 2025 where we're seeing very strong indication with confirmed orders and our discussions where customers are lining up exactly to that conclusion. And when we look at through these stocking programs and when they feel they'll be at a level that it feels acceptable. So it's lining up nice.

Eric: But when we look out to Q4 and to 2025, we're seeing very...

Eric: Strong indication with confirmed orders and our discussions where customers are lining up exactly

Eric: to that conclusion when we look at their de-stocking programs and when they feel they'll be at a level that they feel is acceptable. So it's lining up nice. I'm going to touch on de-stocking. Yes, on the de-stocking, Justin, when we look at that,

Bernard J. Birkett: Would you like to touch on de-stocking? Yeah, so on the de-stocking, Justin, when we look at that, You know, we have been seeing that in our biologics segment and in generics. That's where we saw the biggest impact here in the second quarter, and you know that as we were going through COVID, that's where we saw the most pressure also around lead times where customers really had to manage their supply chains, and you know that's where we believe the safety stock built over time, so that's why we are seeing de-stocking in those areas right now, to a larger extent versus comparing this to our other market units

Unknown Executive: You know, it's such an easy.

Unknown Executive: Yeah, so on the default stocking, Justin, when we look at that. We, you know, we have been seeing that in, you know, biologics segment and in generics, that's where we sell the biggest impact here in the second quarter. And, you know, that's really where, as we were going through COVID, that's where we saw the most pressure also around lead times, where customers really had to manage their supply chains. And, you know, that's where we believe the safety stock built over time. So that's why we are seeing these stocking in those areas right now. And, you know, to a larger extent versus comparing to two or other market units.

Speaker Change: You know, we have been seeing that in our biologics segment and in generics, that's where we saw the biggest impact here in the second quarter.

Speaker Change: And, you know, that's really where, as we were going through COVID, that's where we saw the most pressure also around lead times, where customers really had to manage their supply chains.

Eric: and you know that's where we we believe the safety stock built over time so that's why we are seeing

Eric: de-stocking in those areas right now, you know, to a larger extent versus comparing this to our other market units.

Bernard J. Birkett: And you can see that play out then in the impact on gross margin and operating margin is that that's impacting our mix. So we're having one volume impact because of that. We're also having a mixed impact.

Unknown Executive: And you can see that play through then on the impact on our gross margin and operating margin is that that's impacting our mix or having won a volume impact because of that, but we're also having a mix impact. And I think what we sell in COVID and what we would see when we return to normalized growth rates and seeing that gross margin out, operating margin expand in line with or long term construct and, you know, potentially beyond that so that. I think that's where we, when we look at it, we're looking at it from a revenue perspective but also looking at an impact on margin and saying how do we get back to the margins that we're used to delivering on. And when we see those biologics in generic market starts in normal life.

Eric: And you can see that play through then on the impact on or...

Eric: [inaudible]

Bernard J. Birkett: I think what we saw in COVID and what we would see when we return to normalize growth rates and see that gross margin and operating margin expand in line with our long-term construct and potentially beyond that. I think that's where we're looking at it from a revenue perspective, but also looking at an impact on margin. And saying, "How do we get back to the margins that we're used to delivering on? And when we see those biologics and generic markets start to normalize."

Eric: And I think what we saw in COVID and what we would see when we return to normalized growth rates and seeing that gross margin and operating margin expand in line with our long-term constructs and potentially beyond that.

Eric: I think that's where we, when we look at it, we're looking at it from a revenue perspective but also looking at an impact on margin.

Eric: saying how do we get back to the margins that we're used to delivering on and when we see those biologics and generic markets start to normalize we'll see the revenue rebound and also from a margin perspective we'd see that also.

Eric M. Green: We'll see the revenue rebound, and also from a margin perspective, we'd see that also, understood, and then maybe, Just one quick follow-up, in terms of your improved throughput, do you have a sense from your conversation with customers, are they now trying to manage inventory levels in line with your lead times? Or, I'm just trying to get a sense of..., change in ordering patterns and where that might normalize. Yeah, Justin, exactly.

Unknown Executive: We'll see the revenue rebound, and also from a margin perspective, we see that also.

Unknown Executive: Understood, and then maybe just one quick follow-up in terms of your improved throughput. Do you have a sense from your or conversation with customers, are they? Are they now trying to manage inventory levels in line with your lead times or just trying to get a sense of. Change memory patterns and where that might normalize?

Speaker Change: Understood. And then maybe...

Speaker Change: Just one quick follow-up, in terms of your improved throughput, do you have a sense from your conversation with customers, are they now trying to manage inventory levels in line with your lead times?

Eric: or

Speaker Change: I'm just trying to get a sense of...

Eric M. Green: That's the point where, unfortunately, during the pandemic due to the demand that was put on, our business, our lead times did go up to, you know, we're between 30 to 50 weeks. And with the consistency now in the last several quarters, call it 8-12 weeks, sometimes earlier, sometimes a little bit longer, depending on the process. Our customers are realigning their reordering patterns based on those leads, and we're seeing that clearly.

Unknown Executive: Yeah, just an exactly that's the point where we're unfortunately during the pandemic due to the demand that was put on. Our business early times did go up to, you know, between 30 to 50 weeks. And with the consistency now in the last several quarters of call at eight to 12 weeks, sometimes earlier, sometimes a little bit long depending on the processing. Our customers are re aligning their re ordering patterns based on those lead times, and we're seeing that clearly. So as they built inventory is during the longer lead time period and during the supply chain constraints during the pandemic and across the whole industry.

Speaker Change: change in ordering patterns and where that might normalize.

Speaker Change: Yeah, Justin, exactly. That's the point. We're, unfortunately, during the pandemic, due to the demand that was put on

Speaker Change: Our lead times did go up to between 30 to 50 weeks, and with the consistency now in the last several quarters of the year, we've been able to do that.

Speaker Change: call at 8 to 12 weeks, sometimes earlier, sometimes a little bit longer, depending on the processing.

Speaker Change: Our customers are realigning.

Eric M. Green: So as they've built inventories during the longer lead time periods and during the supply chain constraints during the pandemic and across the whole industry, we're seeing that also coming down, but also realigning. So what you'll see, a pattern of more frequency, instead of one large bolus, it's more paced throughout the next three or four quarters, which, by the way, is also very effective for our operations. So it aligns really well with where we want to be long-term. Got it. I appreciate the questions.

Speaker Change: They're reordering patterns based on those lead times.

Speaker Change: and we're seeing that clearly.

Speaker Change: So, as they built inventories.

Speaker Change: during the longer lead time periods and during the supply chain constraints during the pandemic and across the whole industry.

Unknown Executive: We're seeing that. Scouts are coming down, but also the re aligning. So what you'll see a pattern of more frequency.

Speaker Change: We're seeing that also coming down, but also the realigning. So what you'll see a pattern of...

Unknown Executive: It's one large bowless; is more pace throughout the next three or four quarters, which by the way is also very effective for our operations, so it aligns real well with where we want to be a long term.

Speaker Change: More frequency. Instead of one large bolus, it's more paced throughout the next three or four quarters, which, by the way, is also very effective for our operations. So it aligns real well with where we want to be long term.

Unknown Executive: Got it. Appreciate the questions. Thank you.

Justin D. Bowers: Thank you. Thank you. Our next question comes from the line of Avantika Debaria with Bank of America. Your line is now open. Hey, this is Mike Riskin from B of A.

Unknown Executive: Our next question comes from the line of Eventica de Baria with Bank of America. You'll notice now open.

Speaker Change: Got it. Appreciate the questions. Thank you.

Speaker Change: Thank you. Our next question comes from the line of Avantika Debaria with Bank of America. Your line is now open.

Mike Rinskin: Hey, this is, this is Mike Rinskin from Bavay. Just want to go back and just touch on the D stock one more time because that's where we're getting the most debate. I mean, appreciate all your comments about coverage ratio and conversations with your customers, but you know, you also had the more comments after four cue and one cue earlier this year. So it just seems like this situation does evolve, and the conversations with customers do evolve. You know, as well as to the guide for three cue and four cue, you know you've seen it. There's a little bit of a step up and five and three cue, and a pretty sizable step up and four cue just to get to the fiscal year number.

Mike Riskin: Just want to go back and touch on D-stock one more time because that's where we're getting the most debate. I appreciate all your comments about the coverage ratio and conversations with your customers, but you also had similar comments after 4Q and 1Q earlier this year, so it just seems like the situation does evolve, and the conversations with customers do evolve. As well as to the guide for 3Q and 4Q, it seems like there's a little bit of a step, a pretty sizable step up in 4Q just to get to the fiscal year numbers. So why not take an even more conservative approach?

Speaker Change: Hey, this is Mike Riskin from B of A. Just want to go back and...

Mike Riskin: Just touch on the D-stock one more time because that's where we're getting the most debate.

Speaker Change: I appreciate all your comments about coverage ratio and conversations with your customers,

Speaker Change: You know, you also had similar comments after 4Q and 1Q earlier this year, so it just seems like the situation does evolve and the conversations with customers do evolve, as well as to the guide for 3Q and 4Q, you know, it seems like there's a little bit of a step-up in 5Q and 3Q.

Speaker Change: Pretty sizable step up in 4Q just to get to the fiscal year numbers.

Mike Rinskin: So why not take an even more conservative guide at this point in the cycle? I mean, it just seems like there's still some risk that the D stock could evolve one more time. So just what do I think is your thought on that as you progress through the year.

Mike Riskin: at this point in the cycle. I mean, it just seems like there's still some risk that D-stock could go up one more time. So just would love to get your thoughts on that as you progress through the year. And then, tied to that, I'll throw in my second question right away. Has to do with the margins and the EPS outlook. Are there any incremental cost cuts that are assumed in 4Q, 3Q, or 4Q to get to the EPS number? Obviously, volume deleverage has a big impact on gross margins, but I was just wondering what's implied there as you go through the year. Thanks.

Speaker Change: Why not take an even more conservative guide?

Speaker Change: at this point in the cycle. I mean, it just seems like there's still some risk that the D-stock could evolve one more time. So just would love to get your thoughts on that as you progress through the year. And then tied to that, I'll throw in my second question right away. Has to do with the margins and the EPS outlook.

Unknown Executive: And then ties that up around my second question right away has to be with a margin and the EPS outlook. Is there any incremental cost cuts that are soon in, in four cue? Regure for you to get to the EPS number. You know, obviously, volume the leverage has a big impact on cross margins, but just wondering what's implied there as you go through the year. If you want to get to the EPS number, you need to get to the EPS number. You know, that is essentially the main driver, and what we, when we had looked at it originally, our coverage race for Q3 and Q4 was pretty much in line with a little bit ahead of pre-COVID levels. But what hasn't happened then is filling in between the actual orders confirmed and the forecast that we had; that hasn't accelerated in the way that we would have anticipated that that would take place.

Speaker Change: Is there any incremental cost cuts that are assumed in 4Q, 3Q or 4Q, to get to the EPS number? You know, obviously volume deleverage has a big impact on gross margins, but just wondering what's implied there as you go through the year. Thanks.

Bernard J. Birkett: Yeah, so what we are seeing is that, you know, for Q3, we don't see any major step up continuing the way we're, you know, we've been going. Some sequential improvement, as Eric mentioned, and then a step up into Q4. And that step up in Q4 is really driven by the customer segments within biologics and a reasonable improvement in generics. But the main driver is the biologics market, and that's what we're seeing, and that's the information we're getting from our customers. And that forms the basis of our guide at this point.

Speaker Change: Yeah, so what we are seeing is that, you know, for Q3 we don't see

Speaker Change: any major step of continuing the way we're, you know, we've been going.

Speaker Change: Some sequential improvement as Eric mentioned and then a step up into Q4 and that step up in Q4 is really driven by

Speaker Change: The customer segments within biologics and a, you know, a reasonable improvement in generics. But the main driver is around the biologics market, and that's what we're seeing. And that's the information we're getting from our customers.

Bernard J. Birkett: And as Eric said, then there are metrics around that which are giving us, you know, confidence that that will actually materialize. And then on the EPS, we have been managing our cost base pretty tightly, as you know, we're very operationally focused, and we've been managing the variable costs across our plants as we have been going through and 2024. One thing that we have to be cognizant of with cost management is that when we're expecting to get back to growth, we need to make sure that we have the right resources and capabilities in place to be able to support that growth so we don't derail it.

Speaker Change: And that informs the basis of our guide at this point. And as Eric said, then there are metrics around that, which are giving us, you know, confidence that that will actually materialize.

Eric: And then on the EPS, we have been managing our cost base pretty tightly, as you know, we're very operationally focused and we've been managing.

Eric: the variable costs across our plants as we have been going through.

Speaker Change: 2024, one thing that we have to be cognizant of with cost management is

Eric: that when we're expecting to get back to growth, we need to make sure that we have the right resources and capabilities in place to be able to support that growth so we don't derail it. So we're managing that pretty tightly. Other than that, we're not making any significant cost cuts, but we are

Bernard J. Birkett: So we're managing that pretty tightly. Other than that, we're not making any significant cost cuts, but we are, I would think, I would say we are using appropriate cost management to manage through the de-stocking period, although it is a little bit longer than we originally anticipated. But also, we have to be prepared for returning to growth to make sure that we're able to support our customers. Hopefully, that helped.

Speaker Change: I would think, I would say we're using appropriate cost management.

Speaker Change: to manage through the de-stocking period, although it is extending a little bit longer than we originally anticipated.

Speaker Change: But also we have to be prepared for returning to growth to make sure that we're able to support our customers with that.

Speaker Change: Hopefully that helps.

Matthew Richard Larew: Thank you. Our next question comes from the line of Matt Larew with William Blair and Company. Your line is now open, morning.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Matt Larew with William Blair and Company. Your line is now open.

Matthew Richard Larew: I just want to go back again to what exactly happened in your quarter from a de-stocking perspective, if I go back to... the initial outlook from the Q4 call where you had incorporated about 203 databases points of the cut from the Q3 call last fall from the stock. But, you know, mentioned that 75% of the stock in which six customers were interested. Obviously, the first quarter results themselves actually were positive relative to the outlook you'd provided, and you maintained the guide for the year.

Matthew Richard Larew: Hi, good morning. I just want to go back again to what exactly happened in your quarter from a destocking perspective. You know, if I go back to...

Speaker Change: The initial outlook from the Q4 call, where you had incorporated about 203 antibasis points

Speaker Change: of the cut from the Q3 call last fall from de-stocking. But, you know, mentioned that 75% of de-stocking was from six customers.

Matthew Richard Larew: So, you know, now having 400, 500 basis points come out of the organic guide with, you know, about four months left, four or five months left in the year. The magnitude is pretty large. So, just was it going back to, you know, conversations specifically with that group of big customers? Was it something that, you know, historically, you use the term broadened and worsened?

Speaker Change: Obviously, the first quarter results themselves actually were positive relative to the outlook you'd provided, and you maintained the guide.

Speaker Change: So, you know, now having 400, 500 basis points come out of the organic guide with the new

Speaker Change: you know about four months left four or five months left in the year is the magnitude is pretty large so just was it going back to you know conversation specifically with that that group of big customers was it something that you know historically you've used the term broadened and worsened did things broaden and worsen further was there one or two

Bernard J. Birkett: Did things broaden and worsen further? Was there one or two pockets of customers or product categories? Just trying to understand what happened from, you know, mid-April to the end of June in terms of the big change. Yeah, Matt, I'll start off, and then if Eric, if you want to add,

Speaker Change: markets as customers or product categories, just trying to understand what happened from, you know, mid-April to the end of June in terms of the big change here.

Bernard J. Birkett: Yeah, what we did see as we were progressing through Q2 and the level of intra-quarter orders that we would have anticipated to, you know, materialize in that period of time, you know, it wasn't at the rate that we would have expected it to be. So and then there was some timing with customers moving some orders out late in the quarter, which would have, you know, impacted us, and then as we've looked at the balance of the year and as we've rolled through the end of June and practically through July, what we're seeing in Q3 is that orders that we would have anticipated materializing for the period and even some for Q4, they just weren't coming through.

Speaker Change: Yeah, Matt, I'll start off and then Eric, if you want to add.

Speaker Change: Yeah, what we did see as we were progressing through Q2 and the level of intra-quarter orders that we would have anticipated to

Speaker Change: Bernard Birkett, Eric Green

Speaker Change: then it's as we've looked at the balance of the year and as we've rolled through the end of June and practically through July

Speaker Change: What we're seeing in Q3 is that orders that we would have anticipated

Bernard J. Birkett: And when we assessed what was happening there, it's still really related to levels of destocking. So it's gone longer than we would have originally anticipated, you know that that is essentially the main driver and what we when we had looked at it originally our coverage rate for Q3 and Q4 was pretty much in line with or a little bit ahead of you know pre-COVID levels, but what hasn't happened then is filling in between the actual orders confirmed and the forecast that we had, that that hasn't accelerated in the way that we would have anticipated that that would take place.

Speaker Change: materializing for the period and even some for Q4, they just weren't coming through and you know when we assessed what was happening there it's still really related to levels of de-stocking so it's gone longer than we would have originally anticipated.

Unknown Executive: And so, you know, when we did the assessments, we felt that, you know, we have to be transparent and do the right thing and take the guide down and, you know, do it with the right level where we don't want to be in the position where we're cutting and cutting and cutting. So, hence the reason why the drop in the guide is, you know, is pretty significant. It's not something we want to do, but it's, it's reality that we're dealing with today. I think the good thing and the positive for is is that it's actually returning to growth and, you know, in Q4, so it's really pushed it out a quarter. And, again, Q4 isn't as strong as we would originally anticipate it would, so we've taken that down as well.

Bernard J. Birkett: And so, you know, when we did the assessment, we felt that, you know, we have to be transparent and do the right thing and take the guy down and, you know, you know, do it at the right level where we don't want to be in the position where we're cutting and cutting and cutting. Hence the reason why.

Eric M. Green: The drop in the guide is pretty significant. It's not something we want to do, but it's the reality that we're dealing with today. I think the good thing and the positive for us is that, based on the customer conversations, it's still a similar group of customers across multiple segments. Yes, there are some of the larger ones we highlighted earlier in the year that they're actually going through the process and then getting closer to the end of that process.

Speaker Change: So, hence the reason why the drop in the guide is, you know, is pretty significant. It's not something we want to do, but it's reality that we're dealing with today. I think the good thing and the positive for us is that it's actually...

Unknown Executive: And I was just adding to this thanks for, and it became more of a gradual recovery, I believe, and what we're seeing versus a more pronounced Q3 recovery. And that's, that's actually one of the drivers of why. And that customer conversations is that's a similar group of customers across multiple segments. Yes, there's some of the larger ones we highlighted earlier the year that they're actually going through the process and then getting to court culture to the end of that process. But as we look through with these discussions, we look at where they are in their process, where we are with their.

Speaker Change: And I'll just add to this, thanks Bernard.

Speaker Change: It became more of a gradual recovery, I believe, in what we're seeing versus more pronounced Q3 recovery and that's that's actually one of the drivers of why

Bernard: based on the customer conversations. It's still a similar group of customers across multiple segments. Yes, there's some of the larger ones we highlighted earlier in the year that they're actually going through the process and then getting closer to the end of that process.

Eric M. Green: But as we look through these discussions, we look at where they are in their process, where we are with our ability to produce products in a very short period of lead times. We are confident moving back to the long term. And that will, it's going to take a little more time than we anticipated, but as indicated in the guidance that we gave, we're getting closer to that in Q4, and we believe that will carry on going forward.

Bernard: But as we look through with these discussions, we look at where they are in their process, where we are with our able to produce products in a very short period of lead times.

Unknown Executive: They're able to produce products in the very short period of lead times. We are confident moving back to long term construct and that will, it's going to take a little more time than we anticipate it, but as it indicated in the guidance of we gave, we're getting closer to that and Q4. And we believe that will carry on going forward.

Bernard: We are confident moving back to a long-term construct.

Bernard: And that will...

Bernard: It's going to take a little more time than we anticipated, but...

Bernard: As indicated in the guidance that we gave, we're getting closer to that in Q4, and we believe that will carry on going forward.

Eric M. Green: So yes, Matt, that's a very clear statement we made earlier this year about it being more acute, but it's taking a little bit longer to work out than we anticipated in the, Okay, understood, and I think having observed this in the bioprocessing industry over the last 18 months, you know, fully appreciate that it's challenging to understand customers' pace of inventory work down, and at times, maybe there's competing incentives in terms of them wanting So in light of that, you referenced now understanding that customers are managing to, you know, you're now more normalized, and you have reduced lead times.

Unknown Executive: So yes, Matt, that's very clear clear. Steve, we made earlier this year about to be more acute, but it's taking a little bit longer to work out than we anticipated in the industry. Okay, understood. And I think having observed this in the by a process in the industry of last 18 months, you know, fully appreciate that it's challenging to understand customer's pace of inventory work down. And the times maybe there's competing incentives in terms of them wanting to have capacity available for demand that you know, they may or may not give you in the next quarter to.

Speaker Change: Yes, Matt, that's a very clear statement we made earlier this year about being more acute, but it's taking a little bit longer to work out than we anticipated in the industry.

Matthew Richard Larew: Okay, understood and I think having observed this

Speaker Change: In the bioprocessing industry over the last 18 months, we fully appreciate that it's challenging to understand customers' pace of inventory work down, and at times maybe there's competing incentives in terms of them wanting you to have...

Unknown Executive: So, in light of that, you referenced, you know, now understanding that customers are managing to, you know, you're now more normalized reduced lead times. As part of those conversations, you usually give a better understanding of how much inventory is sitting out there. And when you kind of combine those, you know, two observations, does that give you, you know, conviction specifically not in the back after year, but specifically in the third quarter. And how do you incorporate, perhaps, you know, a better understanding of our customers are at into the way you're just thinking about this back after.

Speaker Change: [inaudible]

Eric M. Green: As part of those conversations, do you feel like you have a better understanding of how much inventory is sitting out there? And when you kind of combine those two observations, does that give you, you know, conviction specifically, not in the back half of the year but specifically in the third quarter?

Speaker Change: As part of those conversations, you feel like you have a better understanding of how much inventory is sitting out there, and when you kind of combine those two observations.

Speaker Change: Does that give you conviction specifically, not in the back half of the year, but specifically in the third quarter, and how do you incorporate perhaps a better understanding of where customers are at into the way you're thinking about this back half guide?

Unknown Executive: Yeah, Matt, the clarity of more recent conversations than the beginning of the year gives us that conviction of where we're going in the near term and moving up to, you know, when I was talking about the mid and long term, getting back to that, that growth algorithm, we've been accustomed to and we expect based on our market position and what we see ahead of us. But yes, we're the clarity of where they want to land with the safety stock and the confidence they have in our ability to deliver and meet those service levels that we expect and our customers expect. And we're able to do that today with your past and we have online.

Matthew Richard Larew: And how do you incorporate, perhaps, you know, a better understanding of where customers are into the way you're thinking about this back half of the year? Yeah, Matt, the clarity of more recent conversations than the beginning of the year gives us that conviction of where we're going in the near term, and moving up to, you know, when I talk about the mid and long term, getting back to that, that growth continues to occur in 2025 and beyond, we're well positioned versus getting behind the curve, which would happen during a pandemic. So, we have much more visibility today and better clarity, and we're firm on making sure that we are going to be delivering what we said we would deliver. Thank you. Thank you, Matt.

Speaker Change: Yeah, Matt, the clarity of more recent conversations than the beginning of the year gives us that conviction of where we're going in the near term and moving up to, you know, when I talk about the mid and long term, getting back to that.

Speaker Change: that growth algorithm we've been accustomed to and we expect based on our market position.

Speaker Change: and what we see ahead of us. But yes, we're, the clarity of.

Speaker Change: where they want to land.

Speaker Change: with the safety stock and the confidence they have in our ability to deliver and meet those service levels that we expect and our customers expect, and we're able to do that today with the capacity we have online.

Unknown Executive: And and and that's reason why we can keep fuel the capital so that as the growth continues to occur in 2025 and beyond is that we're well-positioned versus getting, getting behind the curve, which we would happen through the pandemic. So we have, we have much more visibility today and better clarity, and we're firm on make sure that we are going to be delivering what we said we're in deliver. Okay, understood.

Speaker Change: And that's the reason why we continue to fuel the capital so that as the growth continues to occur in 2025 and beyond is that we're well positioned versus getting behind the curve, which would happen during the pandemic.

Speaker Change: We have much more visibility today and better clarity, and we're...

Speaker Change: We're firm on making sure that we are going to be delivering what we said we were going to deliver.

Unknown Executive: Thank you.

Unknown Executive: Thank you, Matt. Thank you.

Jacob K. Johnson: Thank you. Our next question comes from the line of Jacob Johnson with Stevens. Your line is now open. Hey, thanks. Good morning.

Jacob Johnson: Our next question talks from the line of Jacob Johnson with Steven. She'll let us help.

Speaker Change: Okay, understood. Thank you.

Matthew Richard Larew: Thank you, Matt.

Speaker Change: Thank you. Our next question comes from the line of Jacob Johnson with Stevens. Your line is now open.

Jacob Johnson: Hey, thanks. Good morning.

Jacob Johnson: Maybe just to go back to the EPS guidance, you know, you're pointing to kind of down one to two organic growths this year and I think it's, it would seem to apply probably like three to four hundred bits of operating margin contraction, which is kind of greater decremental margins than the long-term algorithm would suggest. Can you just flush that out a bit more, is some of that capacity additions, et cetera. And then I think I heard heard mentioned earlier, perhaps as revenues are covered, maybe we could see something better than, than underbip some margin expansion.

Jacob K. Johnson: Hey, thanks. Good morning. Maybe just to go back to the EPS guidance.

Jacob K. Johnson: Maybe just to go back to the EPS guidance. You know, you're pointing to kind of down one to two organic growth this year, and I think it would seem to apply probably like three to 400 bits of operating margin contraction, which is kind of greater decremental margins than the long-term ALGA would suggest. Can you just flush that out a bit more, some of the capacity additions, etc.?

Jacob K. Johnson: You know, you're pointing to kind of down one to two organic growth this year, and I think it would seem to apply probably like three to four hundred bits of operating margin contraction, which is kind of greater decremental margins than the long-term ALGA would suggest. Can you just flesh that out a bit more, some of that capacity additions?

Bernard J. Birkett: And then, as Bernard mentioned earlier, perhaps, as revenues recover, maybe we could see something better than 100 bits of margin expansion. Can you just talk about the incremental margins as we return to growth in 4Q and beyond? Yeah.

Jacob K. Johnson: etc. And then I think I heard Bernard's...

Bernard: Mentioned earlier, perhaps, as revenues recover, maybe we could see something better than 100 bps of margin expansion. Can you just talk about the incremental margins as we return to growth in 4Q and beyond?

Unknown Executive: Can you talk about the incremental margins as we return the growth and beyond. Yeah. So the major impacts on margin that we've seen here, you know, in Q2, is really driven by volume and then mix, and you know, for high volume manufacturing operation, any decrease in volume like that is going to have a significant impact. And what we're seeing at Jacob is really in HVP, so they, the, the, the drop is in biologics and genetics. And so we're, we're getting this kind of outsized impact on margin where if you look back at, take the COVID years when we were getting a large amount of expansion and HVP and growth in that area, we were getting outsized margin expansion, you know, well beyond our hundred basis points.

Bernard J. Birkett: So yeah, the major impacts on margin that we've seen here, you know, in Q2, are really driven by volume and then mix. And, you know, for a high volume manufacturing operation, any decrease in volume like that is going to have a significant impact. And where we're seeing it, Jacob, is really in HVP.

Speaker Change: Yeah, so the major impacts on margin that we've seen here, you know, in Q2, is really driven by volume and then mix.

Speaker Change: And, you know, for a high volume manufacturing operation, any decrease in volume like that is going to have a significant impact.

Bernard J. Birkett: So the drop is in biologics and generics. And so we're getting this kind of outsized impact on margin, where if you look back at the COVID years when we were getting a large amount of expansion and HVP and growth in that area, we were getting outsized margin expansion, you know, well beyond our 100 basis points. So essentially, what we're seeing now is the reverse of that. So when things normalize, we start to see growth again, and getting back into our long-term construct, that volume growth will be driven within HVP.

Speaker Change: And what, where we're seeing it, Jacob, is really in HVP, so they, they,

Jacob K. Johnson: The drop is in biologics and generics, and so we're getting this kind of outsized impact on margin.

Speaker Change: where if you look back at, take the COVID years, when we were getting a large amount of expansion in HVP and growth in that area, we were getting outsized margin expansion.

Unknown Executive: So essentially, what we're seeing now is the reverse of that. So when things normalize, we start to see growth again and getting back into our long-term construct. That volume growth will be driven within HVP and then also that aligns with the mixed shift as well, improving where, you know, our HVP was in the kind of mid 70s as a percentage of proprietary revenues. And today we're, we're saying it's about 71% and that that's the type of impact it has on our business.

Speaker Change: you know, well beyond our 100 basis points.

Speaker Change: So essentially what we're seeing now is the reverse of that.

Speaker Change: So, when things normalize and we start to see growth again and getting back into our long-term construct.

Bernard J. Birkett: And then also that aligns with the mixed shift as well, improving where, you know, our HVP was in the kind of mid-70s as a percent of proprietary revenues. And today we're saying it's about 71%, and that's the type of impact it has on our business. When we were, you know, when we were returning to growth, we would expect to see that margin recover pretty much, you know, pretty quickly and in line with that growth, particularly around biologics and the generic space. Thanks for that, Bernard.

Speaker Change: that volume growth will be driven within HVP and then also that aligns with the mixed shift as well improving where you know our HVP was in the kind of mid 70s as a percent of proprietary revenues and today we're saying it's about 71% and that's the type of impact it has.

Unknown Executive: So looking beyond, as we said earlier on the call, we would expect our CAPEX over the next year or two to get back to more normal life levels of 68% of revenues. That's what we will be targeting, and that supports the long-term construct growth of 79% on the top, and be more focused, again, on creating that mixed shift and supporting that HPP growth. So hopefully that kind of gives you some color.

Speaker Change: on our business so when we were you know when we're returning to growth we would expect to see that margin recover pretty much you know pretty quickly and in line with that growth particularly around biologics and the generic space.

Speaker Change: It's all in gross margin, the off-ex is pretty tight.

Jacob K. Johnson: Got it. It makes sense. And then maybe just on the stopper vial side of things, you guys referenced the capacity you brought on during COVID and repositioning that now for non-COVID applications. Can you, one, talk about the timeline for kind of transitioning that capacity to non-COVID demand? And I guess, two, the other concern I think a peer of yours referenced the other day is that, you know, you weren't the only one who brought on capacity during COVID, and lead times are shorter, and they suggested that customers are going below pre-pandemic inventory levels. And I think investors may be worried that this could be structural for some time. Can you just talk about that dynamic a little bit as well? Thanks. Jacob, I'll take that.

Speaker Change: So.

Speaker Change #100: Got it. Makes sense. And then maybe just on the...

Speaker Change: Bernard Birkett, Eric Green

Speaker Change: Can you, one, talk about the timeline for kind of transitioning that capacity to non-COVID demand? And I guess, two, the other concern, I think,

Speaker Change: A peer of yours referenced the other day is that, you know, you weren't the only one who brought on capacity during COVID, and lead times are shorter, and they suggested that customers are going below pre-pandemic inventory levels, and I think investors may be worried that this could be structural for some time. Can you just talk about that dynamic as well? Thanks.

Eric M. Green: So, first of all, on repurposing the assets, that's done. So, we're able to leverage not just for, like, Novapur stoppers but also use the processing for plungers, as an example, or other types of SKUs in the HVP portfolio. So, the team has done a great job getting those assets ready to go, and they're ready to go. And so, as demand comes in, we're ready to respond accordingly. In regards to what our customers are telling us, in regards to where they want to stay with the safety stock, because of where we are in the supply chain, and if you think about the economics of our product as a percentage of the drug molecule, we don't see that going any further below the pre-pandemic level.

Jacob K. Johnson: Jacob, I'll take that.

Speaker Change: So, first of all, on repurposing the assets, that's done. So, we're able to leverage not just for, like, Novapur stoppers, but also use the processing for plungers, as an example, or other types of SKUs in the HVP portfolio.

Speaker Change: So the team has done a great job to get those assets ready to go, and they're ready to go. And so as demand comes in, we're ready to respond accordingly.

Speaker Change: in regards to what our customers are telling us in regards to where they want to stay with the safety stock.

Eric M. Green: Because of where we are in the supply chain, and if you think about the economics of our product as a percentage of the drug molecule, we don't see that going any further down below pre-pandemic levels.

Eric M. Green: So we believe it's going to, for us, I can't speak for others, but for us, with our customers, for the types of products we provide, the lead times that we can provide, and the number of SKUs we provide our customers, we believe it's on the conversations we have back to pre-pandemic levels. Got it. Thanks for that, Eric. I'll leave it there.

Speaker Change #101: Thank you.

Eric M. Green: So we believe it's going to normalize. For us, I can't speak for others, but for us...

Speaker Change: with our customers.

Speaker Change: for the types of products we provide, the lead times that we can provide.

Speaker Change: and it's the number of SKUs we provide our customers, we believe.

Speaker Change: and the conversation will be back to pre-pandemic levels.

Dan Leonard: Thank you. Thank you. Our next question comes from the line of Dan Leonard with UBS. Your line is now open. Thank you. I have another question on visibility.

Dan Leonard: Got it. Thanks for that, Eric. I'll leave it there. Thank you.

Speaker Change #104: Thank you. Our next question comes from the line of Dan Leonard with UBS. Your line is now open.

Eric M. Green: Can you discuss the breadth of your visibility? And I ask because I'm wondering if we're in a situation where you have close contact and visibility with those large customers, but rather it's the long tail of smaller customers that are driving the downside surprise. Actually, Dan, thanks for the question.

Dan Leonard: Thank you.

Dan Leonard: I have another question on visibility.

Dan Leonard: Can you discuss the breadth of your visibility? And I ask because I'm wondering if we're in a situation where you have close contact and visibility with those large customers, but rather it's the long tail of smaller customers that are driving the downside surprise.

Dan Leonard: But the more variability has been with the larger customers and the smaller customers, although obviously we're very focused on that because that's really the pipeline we think about new and David Williams. The volumes there are less, and the frequency of orders is probably a little bit higher. The predictability of which quarter to lantern is lower, but the order of magnitude on the stocking impact is less. So I'm not sure if that helps, but, you know, obviously, a very important part of our portfolio are the smaller biotech pharma companies when you think about their innovation pipeline and how that feeds into the whole ecosystem of the injectable medicine space, but the impact that it has on our fluctuations in revenues is not as great. I don't know if that helps, but that's great.

Speaker Change #103: Actually the, so Dan thanks for the question, but the more variability has been with the larger customers.

Bernard J. Birkett: and the smaller customers, although obviously we're very focused on that because that's really being the pipeline when you think about new developments.

Dan Leonard: The volumes there are less.

Dan Leonard: and the frequency of orders are probably a bit higher. The predictability of which quarter it lands in is lower, but the order of magnitude on the stocking impact is less.

Dan Leonard: So I'm not sure if that helps, but, you know, obviously a very important part of our portfolio are the smaller biotech pharma companies, when you think about their innovation pipeline and how that feeds into the whole ecosystem of the injectable medicine space.

Dan Leonard: but the the impact that has on our

Eric M. Green: Thanks for that clarification, Eric. And a quick follow-up: you mentioned that the new capacity in Dublin opens in the third quarter. How important is Dublin to the fourth-quarter revenue ramp? Not really.

Dan Leonard: fluctuation on the revenues is not as great. I don't know if that helps, Dan. That's great. Thanks for that clarification, Eric. And a quick follow-up, you mentioned that the new capacity in Dublin opens in the third quarter. How important is Dublin to the fourth quarter revenue ramp?

Dan Leonard: I mean, the team is going to work really hard to get that capacity up and running and, you know, full utilization, but the reality is it takes us a few quarters to ramp any new site of that magnitude up to full capacity. So I would suggest that's not a major driver of why we're giving the guidance the way we are for Qpool. Got it. Thanks a bunch.

Speaker Change #102: Not really. I mean, the team is going to work really hard to get that capacity up and running and, you know, full utilization. But the reality is, it takes us a few quarters to ramp any new site of that magnitude up to full capacity.

Dan Leonard: So I would suggest that it's not a major driver to why we're calling, giving the guidance the way we are for Q4.

David Howard Windley: Yeah, thank you. Thank you. Our next question comes from the line of David Windley with Jeffries. Your line is now open. Hi, good morning.

David Howard Windley: Got it. Thanks a bunch. Yeah, thank you. Thanks, Quintin.

Speaker Change: Thank you. Our next question comes from the line of David Windley with Jeffries. Your line is now open.

David Howard Windley: Thanks for taking my questions. I'm going to try to ask a few in a different way. Eric, in June, when we were together, you talked about 50% or maybe a little less of your revenue coming from large customers where your visibility is higher, I think you said, because of the high volume that you do with them, the connectivity that you have with them, and then the smaller customers are much more volatile.

David Howard Windley: Hi, good morning. Thanks for taking my questions. I'm going to try to ask a few in a different way. Eric, in June , when we were together, you talked about...

David Howard Windley: And you kind of commented on that. I thought you said that your visibility or your forecasting accuracy around those large customers was really accurate over time. But you also then just said that those are actually the source of the destock, and so I wanted to make sure. I understood kind of the, you know, the historical accuracy and tie-in with those large customers, but there seems to be a disconnect on that right now. Is that the right way to think about it?

Speaker Change: 50% or maybe a little less of your revenue comes from large customers where your visibility is higher, I thought you said, because of the high volume that you do with them, the connectivity that you have with them, and then the smaller customers are much more volatile, and you kind of, to Dan's question there,

Eric Green: commented on that.

David Howard Windley: I thought you said that your...

David Howard Windley: You know, your visibility or your forecasting accuracy around those large customers was really accurate over time. But you also then just said that those are actually the source of the destock. And so I wanted to make sure.

David Howard Windley: I understood kind of the you know the historical accuracy and tie in with those large customers but but seemingly a disconnect on that right now is that is that the right way to think about it?

Eric M. Green: but I would say that the larger customers have larger variability. When they do, we'll have a discussion about a forecast, and then they will, when we get to the point of actually firming up as a firm order, there is some movement that is occurring. And since it doesn't take many of them to have a meaningful impact compared to the smaller account. It is true on a smaller account, and maybe I should have been clearer.

Eric M. Green: No, what I would say is that, and so David, thanks for the question, but I would say is that the larger customers have a larger variability. When they do, we'll have a discussion about a forecast.

Eric M. Green: and then they would, when we get to the point of...

Eric M. Green: Actually firming up as a firm order, there is some movement that is occurring.

Eric M. Green: And since it doesn't take many of them to have a meaningful impact compared to the smaller account.

Eric M. Green: When we look at the degree of accuracy, we're looking at quarter versus quarter prior year. And therefore, in the smaller accounts, that's less predictable on which exact month or quarter it will land. We have a high repeat business model. And we mentioned this before, that the majority of our revenues are almost annuity-like. Every year, there's a repeat, and then the variable would be drug demand, up or down, and then that's the throttle. But in this particular case, when we talk about the degree of accuracy, the smaller counts from a quarter versus the prior quarter are a little harder to predict, but from an impact on revenue. The larger accounts are the ones that have a more meaningful impact on the dollar value perspective for one quarter.

Eric M. Green: It is true in a smaller account, and maybe I should have been clearer, when we look at degree of accuracy, we're looking at quarter versus quarter prior year. And therefore, in the smaller accounts, that's less predictable on which exactly month, quarter it will land.

Eric M. Green: We have a high repeat business model.

Eric M. Green: And we mentioned this before, that majority of our revenues, it's almost annuity-like. Every year, there's a repeat, and then the variable would be drug demand up or down, and then that's the throttle.

Eric M. Green: But in this particular case, when we talk about the degree of accuracy, the smaller counts from a quarter versus prior quarter is a little more harder to predict, but from a impact to the revenues

Eric M. Green: The larger accounts are the ones that have a more meaningful impact on the dollar value perspective from one quarter to the next.

David Howard Windley: Got it. Okay. And then, in terms of the improving confidence... I guess I'd like to key on Bernard's answer about, you know, the cuts to this year and the order patterns. You know, earlier in the year, your coverage was encouraging relative to pre-COVID levels, but then the fill-in on top of that was not coming as you expected. Can you give us some sense of what is a normal level of coverage versus the amount of coverage we can get?

David Howard Windley: Got it. Okay. And then in terms of the improving confidence, I guess I'd like the key on on Bernard's answer about, you know, kind of the cuts to this year and older patterns.

Speaker Change: Can you give us some sense of what is the normal level of coverage versus the amount of go-get? Like how much go-get do you have?

Bernard J. Birkett: Like how much go get do you have for the second half of the year, you know, in absolute or relative terms that give you the confidence that you can get to the levels that you're now setting? Yeah, the exact number we're not going to give out for... [inaudible] conversations with customers, understanding their order patterns and changing order patterns and factoring all of that in, and then understanding what their forecasts are. So, That's, you know, that's what's given us the confidence.

Bernard J. Birkett: for the second half of the year in absolute or relative that gives you the confidence that you can get to the levels that you're now setting.

Bernard J. Birkett: Yeah, the exact number we're not going to give out for...

Speaker Change: like pretty obvious reasons, but it's our coverage race.

Bernard J. Birkett: and the go-get that we would have to do now on this new guidance is I would say we're more confident around that and delivering it and being able to get it and that it's that go-get is based on

Bernard J. Birkett: conversations with customers understanding their order patterns and changing order patterns and factoring all of that in and then understanding what their forecasts are so

Bernard J. Birkett: So the size of what we have to go get isn't as large from a dollar perspective, and you know, as I said when we talked about it earlier in the year, we had a level of confidence around it and anticipated a certain conversion rate. Obviously, you know, that hasn't materialized in the way we would have anticipated. So we've had to, and we have adjusted our guidance to reflect that and give us confidence about being able to deliver on the numbers now that we're guiding to. Got it. And Bernard, to your point.

Bernard J. Birkett: That's, you know, that's what's given us the confidence. So the size of what we have to go get isn't as large from a dollar perspective.

Bernard J. Birkett: And, you know, as I said, when we talked about it earlier in the year, we had a level of confidence around it and anticipate a certain conversion rate.

Bernard J. Birkett: Obviously, you know, that hasn't materialized in the way we would have anticipated, so we've had to, so we have adjusted our guidance to reflect that and give us confidence about being able to deliver on the numbers now that we're guiding to.

David Howard Windley: You did, management did say similar things about, you know, when those six customers kind of arose and kind of shockingly were not going to be ordering as much earlier in the year, and the guidance was two to three instead of, you know, the seven to nine construct. So you had those conversations earlier in the year, and, you know, we're talking about having them again here in the middle of the year. I guess I'd also invoke, you mentioned that, you know, you go back to pre-COVID levels and look at the growth rate. We've done the same. You said 10. It looks like it's even a little above 10.

David Howard Windley: Got it. And Bernard, to your point...

Speaker Change: You did say, management did say similar things about...

David Howard Windley: you know, win those six customers.

David Howard Windley: kind of arose and kind of shockingly we're not going to be ordering as much in earlier in the year and the guidance was two to three instead of you know the the seven to nine construct.

David Howard Windley: So you had those conversations earlier in the year and, you know, we're talking about having them again here in the middle of the year. I guess I'd also invoke, you mentioned that...

Speaker Change: that, you know, you go back to pre-COVID levels and look at the growth rate, we've done the same, you said 10, it looks like it's even a little above 10. I guess using that construct, if we were to use the midpoint of the LRP, the 8% of your long-range targets,

Eric M. Green: I guess using that construct, if we were to use the midpoint of the LRP, the 8% of your long-range target, that would imply a revenue level that's still a couple hundred million dollars below where you're guiding today, or said differently, that next year would be a flat year to grow into an 8% growth rate from 2019. How do we get confidence that there are factors that... You know, that bias to the upside, what that growth should be, or conversely, that there's not still a couple hundred million dollars of overbuying in your customers' inventory levels that they still need to work through before you get to that, you know, that multi-year growth support level? David, I'll start with this one.

Eric M. Green: You know, that would imply a revenue level that's still a couple hundred million dollars below where you're guiding today, or said differently, that next year would be a flat year to grow into an 8% growth rate from 2019.

David: How do we get confidence that there are factors that...

Eric M. Green: You know, that bias to the upside, what that growth should be, or conversely, that there's not still a couple hundred million dollars of overbuying in your customers' inventory levels that they still need to work through before you get to that, you know, that multi-year growth support level.

Eric M. Green: One of the biggest drivers in the last five years, Kager, taking out COVID, has been the biologic growth. If you recall back five, six years ago, our participation rate was high, but the percentage of sales of biologics was sub 20%. And I don't have the exact number for you, but it's about 20% of our overall business, if I recall. And as the years progressed over those five years, the number of approvals, and the number of biologics really accelerated the market.

David: David, I'll start with this one here. One of the biggest drivers in the last five years, CAGR, taking out COVID.

Eric M. Green: was the biologic growth.

Eric M. Green: If you recall back five, six years ago, our participation rate was high, but the percentage of sales of Biologics was sub-20 percent.

Eric M. Green: And I don't have the exact number in front of me, but it's about 20% of our overall business, if I recall. And as the years progressed over those five years, the number of approvals, the number of biologics that really accelerated in the market, and there's a few that we still see continue to outpace the demands.

Eric M. Green: And there are a few that we still see continue to outpace the demand that we forecasted with our customers, which is positive. Now the base of that business is much larger, so I believe we were well on around 40%.

Eric M. Green: So 2x it as a percentage of the whole company, and the whole company has grown or doubled in size. So as we kind of think forward a little bit, you know, the seven to nine is why we say the financial construct going forward, seven to nine is we feel that taking that in consideration as a bigger base we're operating on, continuing to lead with the HPP in the biologics area will give us that type of growth off of a close to $3 billion business. I got it.

Eric M. Green: that we forecasted with our customers, which is a positive.

Eric M. Green: Now, the base of that business is much larger.

Eric M. Green: I believe it's we were well for around 40% so 2x it as a percentage of the whole company and the whole company has grown Or doubled in size. So as we kind of think forward a little bit, you know, the seven to nine

Eric M. Green: is why we say the financial construct going forward, seven to nine, is we take that in consideration as a bigger base we're operating off of.

Eric M. Green: continue with a leading with the HPP in the biologics area will give us that type of growth off of a close to a three billion dollar business

David Howard Windley: Okay. I'll leave it at that. I was going to ask one more, but I've probably beaten it up enough.

Speaker Change: Got it. Okay. I'll leave it at that. I was going to ask one more, but I've probably beaten it up enough. Thank you. Thank you. Thank you. Our next question comes from the line of Tom DeBorsey with Nephron Research. Your line is now open.

David Howard Windley: Thank you. Thank you. Thank you. Our next question comes from the line of Tom Deborsey with Nephron Research.

Tom Deborsey: Your line is now open. Hi, good morning. Good morning.

Bernard J. Birkett: I just had a quick question, I guess, on CapEx. And, you know, so the current level of CapEx is 12 to 30 percent of revenue. And so I just wanted to get a sense of how you're, and then just as you look to 2025, I think consensus has maybe the number going down to 300 million for CapEx. And just, I'm not asking you to endorse that number, but just would you expect CapEx to be down year-over-year in 2025?

Speaker Change: Hi, good morning.

Bernard J. Birkett: Good morning. Good morning. I just had a quick question, I guess, on CapEx, and, you know, so the current level of CapEx, you know, 12 to 13 percent of revenue, and so I just wanted to get a sense of how you're

Speaker Change: I guess metering the demand, you know, or...

Bernard J. Birkett: [inaudible]

Bernard J. Birkett: I'm not asking you to endorse that number, but just would you expect CapEx to be downed year over year in 2025?

Bernard J. Birkett: Well, I'm not going to guide 2025 at this point, but what I would say is that the investments we're making and the higher level of CAPEX that we're experiencing right now, compared to pre-COVID levels, are really targeted at growth in a number of different areas. And for us to layer in that capacity, you're looking at 12, 24, like 36 months in some cases, depending on the lead times of the equipment and the technology that we're installing.

Bernard J. Birkett: Well, I'm not going to guide 2025 at this point, but what I would say is that the investments we're making and the higher level of CapEx that we're experiencing right now, compared to pre-COVID levels.

Bernard J. Birkett: is really targeted at growth in a number of different areas.

Bernard J. Birkett: and for us to layer in that capacity you're looking at 12, 24, like 36 months in some cases depending on the lead times.

Bernard J. Birkett: And so when we're when we're doing that, we're looking at, you know, what markets are growing. We're looking at the regulatory landscape, what changes are needed there, and what finishing capacity we need. We're looking at GLP from both a proprietary and a contract manufacturing perspective, and then we're also looking at our participation across biologics. And again, what sort of capacity we need there. So we've got three pretty powerful drivers for growth coming on over the next couple of years.

Bernard J. Birkett: of the equipment and the technology that we're installing.

Bernard J. Birkett: And so, when we're doing that, we're looking at, you know, what markets are growing, we're looking at the regulatory landscape, what changes are requiring there, and what finishing capacity we need.

Bernard J. Birkett: We're looking at GLP from both a proprietary and a contract manufacturing perspective, and then we're also looking at our participation across biologics.

Bernard J. Birkett: again, what sort of capacity we need there. So we've got three pretty powerful drivers.

Bernard J. Birkett: And we, for us, need to have that capacity installed to meet that demand when it actually materializes so we can respond. So we don't get into the position where our lead times get pushed out like they were during the COVID timeframe. Looking beyond, as we said earlier in the call, we would expect our CapEx over the next year or two to get back to more normalized levels of 68% of revenues.

Bernard J. Birkett: for growth coming on over the next couple of years and we, for us, we need to have that capacity installed to meet that demand when it actually materializes so we can respond.

Bernard J. Birkett: So we don't get into the position where our lead times get pushed out like they had during the COVID time frame.

Bernard J. Birkett: Looking beyond, as we said earlier on the call, we would expect our CapEx over the next, you know, year or two to get back to more normalized levels of 68% of revenues.

Bernard J. Birkett: You know, that's what we would target, and that supports the long-term construct growth of seven to nine percent on the top, and be more focused again on creating that mixed shift and supporting that HVP growth. So hopefully, that kind of gives you some color.

Bernard J. Birkett: You know, that's what we would target it will be targeting and that supports the long-term construct growth of seven to nine percent at the top and Be more focused again on creating that mixed shift and supporting that HVP growth

Unknown Executive: Thank you. This includes the question and answer session.

John Newton Sourbeer: Thank you. This concludes the question and answer session. I would now like to hand the call back over to John Sweeney for closing remarks. Thank you all for joining us today on the conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you can access a replay for 30 days following the presentation by using the dial-in numbers and conference ID provided at the end of the day's earnings release. That concludes the call. Thank you very much, and have a nice day. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Unknown Executive: I would now like to hand the call back over to John Swinney for closing remarks. Thank you all for joining us today on the conference call. An online archive of the broadcast will be available on our website at westparma.com and the investors section. Additionally, you can access a replay for 30 days following the presentation by using the dial-in numbers and conference ID provided at the end of the day's earnings release.

Unknown Executive: That concludes the call. Thank you very much, and have a nice day.

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