Q3 2025 West Pharmaceutical Services Inc Earnings Call
Speaker #2: Good day and welcome to West Pharmaceutical Services Inc.'s Q3 2025 Earnings Conference Call. At this time, all participants are in listen-only mode.
Speaker #2: After the speaker's presentation , there will be a question and answer session . To ask a question , please press star one . One .
Speaker #2: To remove yourself from the queue , press star one one again . We ask that you please limit yourself to one question . As a reminder , this call may be recorded .
Speaker #2: I would like to turn the call over to John , Vice President , Investor Relations . Please go ahead .
Speaker #3: Good morning and welcome to West's Third quarter 2020 earnings conference call , which has been webcast live . With me today on the call are West CEO Eric Green and CFO Bob McMahon .
Speaker #3: Earlier today , we issued our third quarter financial results . A copy of the press release , along with today's slide presentation containing supplement information for your reference , has been posted in the investor section of the company's website , located at investor .
Speaker #3: Come later today, a replay of the webcast will also be available in the investor section of our website. On the call, we will review our financial results and provide an update on our business and outlook for FY 25.
Speaker #3: Statements made by management on the call and the accompanying presentation contain forward looking statements within the meaning of US Federal securities law . These statements are based on our beliefs and assumptions .
Speaker #3: Current expectations , estimates and forecasts . The company's future results are influenced by many factors beyond the control of the company . Actual results could differ materially from past results , as well as those expressed or implied in any forward looking statements made here .
Speaker #3: Please refer to today's press release, as well as other disclosures made by the company regarding the risks to which it is subject, including our 10-K and 10-Q.
Speaker #3: During the call , management will make reference to non-GAAP financial measures , including organic sales growth , adjusted operating profit , adjusted operating profit margin , free cash flow and adjusted diluted EPs .
Speaker #3: Limitations on reconciliations of non-GAAP financial measures to the most comparable financial results prepared in conformity with GAAP are provided in this morning's earnings release.
Speaker #3: I'll now turn the call over to our CEO , Eric Reed . Eric . Thank you , John , and .
Speaker #4: Good morning , everyone . Thanks for joining us today . I'm pleased to report we delivered solid third quarter results with revenues , margins and adjusted EPs coming in above our expectations .
Speaker #4: Revenues of $805 million were up 5% on an organic basis. The adjusted operating margins were 21.1%, and adjusted EPS of $1.96 was up 6% compared to the prior year.
Speaker #4: As you will hear today , our business momentum is steadily improving and we expect this trend to continue as a result of the strong performance we are increasing our guidance for 2025 .
Speaker #4: I want to . Especially thank our West team members for their efforts and continued focus in achieving these results . Before getting into the details of our Q3 performance , I want to highlight two notable appointments which further strengthened our executive leadership team .
Speaker #4: In August , a new CFO , Bob McMahon , joined West . Many of you know Bob , and he has done an exceptional job transitioning into his role , already visiting several of our West sites and meeting with many of you .
Speaker #4: I'm excited to have Bob on board and partner together to lead the next phase of growth. I'm also extremely pleased to welcome Devesh Mathur, our new Chief Technology Officer, who also joined West in August and is tasked with accelerating our innovation and new product introductions.
Speaker #4: Our team looks forward to benefiting from his industry experience and expertise . Now back to the Q3 financial results . Let's begin with the review of the proprietary product segment .
Speaker #4: Revenues of $648 million were up 5.1% on an organic basis . These results were driven by HBP components . Our largest and most profitable business .
Speaker #4: We have a strong market position because of our trusted reputation for high-quality scale and reliability. This business has continued to strengthen each quarter, and revenues increased 13% organically in Q3.
Speaker #4: Several factors drove the strength of HBP components . First , elastomers for GLP one had strong growth and now account for 9% of total company sales .
Speaker #4: We benefit from our long standing relationships as we partner with our customers in this market , supporting them as they expand their GLP one franchises .
Speaker #4: We're also collaborating closely with customers who are launching a pipeline of new GLP one molecules and generics , and expect this market to continue to evolve as there are a number of new early stage trials seeking to expand the range of indications and treatments using GLP one .
Speaker #4: Second is biologics . We're encouraged for their underlying market demand as ordering trends are returning to normal . Levels . Participation rate for biologics we biosimilars is trending above our historical levels .
Speaker #4: Year to date of greater than 90% , the third driver is HBP upgrades , including annex one . Given our strong market position with our elastomers portfolio , we are well positioned to benefit from what we believe is a long term opportunity .
Speaker #4: We are tracking ahead of our expectations and we currently have 375 ongoing annex one upgrade projects with the robust pipeline of new projects and our ability to partner with customers to convert current projects into commercial production .
Speaker #4: We anticipate annex one and related HBP upgrades to deliver 200 basis points of growth this year , up from our previous expectation of 150 basis points .
Speaker #4: We expect Annex One to drive continuing demand for higher quality products, as European regulators now require pharmaceuticals and their culture of continuous manufacturing improvement.
Speaker #4: West is well positioned to support our customers with HBP components and technical documentation to meet those requirements . We continue to work through our constraint at our HBP manufacturing site in Germany .
Speaker #4: During the quarter , we made good progress hiring and training employees and installing new equipment to expand capacity . These efforts , in addition to product tech transfers , will allow us to further leverage our investments made in our global HBP components , infrastructure and balanced production across the network , enabling us to drive future growth .
Speaker #4: Moving to the HBP delivery device business , revenues declined compared to prior year as expected , driven mainly by the $19 million incentive payment we received last year .
Speaker #4: With respect to SmartDose 3.5, less than 4% of total company revenues were improving profitability every quarter by driving down costs and remain on track to go live with automation.
Speaker #4: In early 2026 . Even as we continue to evaluate options to maximize the value of this business . Lastly , our standard products business increased 3.6% on an organic basis this quarter , converting standard products to HBP components over time serves as an important funnel for our business by generating revenue and expanding margins .
Speaker #4: Turning to contract manufacturing segment . This business performed well in the quarter , delivering revenues of $157 million , growing by 4.9% organically moving forward , we are now utilizing our Arizona CGM footprint to consolidate operations from less efficient locations .
Speaker #4: We continue to expect the second CGM contract to conclude at the end of Q2 2026 . The future available space is an attractive location with strong operating team that is resulting in a number of promising discussions with multiple customers .
Speaker #4: Turning to our Dublin site , we continue to ramp production of delivery devices for the obesity market . We are currently validating and testing the equipment installed for the commercialization of our drug handling business , in early 2026 .
Speaker #4: GLP one is in the contract manufacturing segment accounts for 8% of total company sales . Overall , I'm very pleased with the performance of both the proprietary products and contract manufacturing segments , along with the trends that we are seeing in our business and in the markets .
Speaker #4: Now, I'll turn the call over to Bob. Bob, thanks.
Speaker #3: Eric , and good morning .
Speaker #4: Everyone .
Speaker #3: It's great .
Speaker #4: To be here and I'm pleased to be part of the West team . West Injectable Solutions and Services business is second to none .
Speaker #4: And I'm excited about the long term growth potential of the company . Now , before getting into the details , I wanted to highlight that we have revamped our quarterly presentation to provide some supplemental segment information , which you may find useful .
Speaker #4: Going forward . Now on to the quarterly results . In my remarks this morning , I'll provide some additional details on revenue as well as take you through the income statement and some other key financial metrics .
Speaker #4: I'll then cover our updated full year and fourth quarter guidance . As Eric mentioned , third quarter revenue was $805 million above the top end of our revenue guidance , beating our expectations on a reported basis .
Speaker #4: Total revenues increased 7.7% . Currency had a positive impact of 2.7 percentage points , resulting in organic growth of 5.0% . Of note , the incentive fee reduced organic growth by 280 basis points .
Speaker #4: So a solid result overall . I'll now go through each of our businesses in more detail . Within the proprietary segment , HBP components , our largest business accounting for 48% of total company sales , was the standout revenues of $390 million , increased 13.3% organically .
Speaker #4: This was driven by robust growth in GLP one , Hvp upgrades , including annex one , improving performance in biologics , and a normalizing demand environment .
Speaker #4: We are very pleased with the continued momentum in this business this year and our HBP delivery devices business , which accounted for 12% of the company's net sales in the quarter .
Speaker #4: Revenues were $99 million . This was down 16.7% year on year organically , but roughly flat sequentially as we expected in standard products revenues of $158 million increased 3.6% on an organic basis , even as we saw annex one accelerate standard products accounted for 20% of total company net sales this quarter .
Speaker #4: Now , looking across our end markets for proprietary biologics , revenue was $329 million and up 8.3% on an organic basis . Growth in products using our laminated technology and strength in West Star and Envision offset the headwind from the incentive fee in the prior year .
Speaker #4: Pharma revenue rose 1.4% on an organic basis to $183 million , with growth in Rou seals , stoppers , and plungers and Generics revenue increased 2.6% organically to $136 million .
Speaker #4: Also driven by growth in seals and stoppers. Now finishing up revenues. Our contract manufacturing segment delivered $157 million, growing 4.9% on an organic basis.
Speaker #4: Segment performance in the quarter was driven by an increase in sales of Self-injected devices for obesity and diabetes , partially offset by a decrease in sales of healthcare diagnostic devices .
Speaker #4: Contract manufacturing accounted for 20% of total company net sales in the quarter . Pricing was a positive 1.7% , and we are tracking at roughly 2.4% for the first nine months of the year , right in line with our 2 to 3 percentage point expectation .
Speaker #4: Now , let's take a closer look at the rest of the PNL gross margin was 36.6% in the quarter , up 120 basis points as compared to the prior year .
Speaker #4: This strong result is due to the positive mix of HBB components, as well as good execution in our supply network. Adjusted operating margins of 21.1%, while down 40 basis points compared to the prior year, were ahead of our expectations and below the line.
Speaker #4: Our net interest income was $4.5 million . The tax rate came in at 19.8% , slightly better than expected , and we had 72.6 million diluted shares outstanding in the quarter .
Speaker #4: Now , putting it all together , Q3 adjusted earnings per share were $1 . $0.96 , up 6% versus last year , and $0.26 above top end of guidance .
Speaker #4: Moving on to a few cash flow metrics year to date , operating cash flow is $504 million , up 9% , while free cash flow of $294 million is 54% higher than last year as capital expenditures are down 23% .
Speaker #4: To date , we have invested $210 million in capital expenditures and remain on track for 275 million for the year . In summary , we had a very solid third quarter operationally that exceeded our expectations and as a result , we're increasing our full year guidance on both revenue and earnings per share for the full year .
Speaker #4: We are now anticipating our reported revenue to be in the range of 3.06 to $3.07 billion . This represents reported growth of 5.8 to 6.1% and organic growth of 3.75 to 4% for the full year .
Speaker #4: The foreign exchange environment has remained relatively stable since our last guide , and so currency is still expected to be a $59 million tailwind for the year .
Speaker #4: We are also increasing our full year adjusted EPs range to $7.06 to $7.11 , representing year on year growth of 4.6 to 5.3% .
Speaker #4: A few more items to help you modeling . This assumes flat other income and expense . A 21% tax rate in the fourth quarter and 72.6 million diluted shares outstanding .
Speaker #4: In addition , we continue to anticipate 15 to $20 million in tariff related costs this year . And now expect to mitigate more than half of those costs in 2025 .
Speaker #4: For 2026 , we expect to fully mitigate the impact based on the current tariff landscape . Our updated full year guidance translates to fourth quarter revenue of 792 $800 million .
Speaker #4: This is a reported increase of 5.5 to 6.8% , and an organic increase of 1 to 2.3% . As a reminder , we also had a $25 million incentive fee in Q4 of last year , which we do not expect to repeat this year .
Speaker #4: And is reducing our expected Q4 organic growth by roughly 360 basis points and fourth quarter adjusted earnings per share are expected to be between $1.81 and $1.86 .
Speaker #4: Before turning the call back over to Eric , and while we're still going through our planning process , I did want to share a few thoughts on 2026 .
Speaker #4: We are exiting 2025 in a good place. We believe destocking is largely behind us, and demand will continue to improve for our key growth drivers.
Speaker #4: That said , our end markets remain dynamic and we could see a range of outcomes . So we will be prudent with our planning , our components , business will lead the way given the multiyear growth drivers of GLP one and HBP upgrades driving our biologics and market , we are anticipating the remaining CGM contract will continue to run at full capacity until exiting in mid 2026 .
Speaker #4: This is roughly a $40 million headwind for the second half of 2026. We are actively working on refilling that space with higher-margin business, with the expectation of the pacing and ramp of pipeline coming in view by the end of the year.
Speaker #4: Lastly, we're building out drug handling in our Dublin facility, and this is expected to add roughly $20 million in revenue for next year, which will help offset the CGM contract.
Speaker #4: And we will get back to expanding margins . So while early , I believe 2026 is coming into better focus and I look forward to giving specific guidance on the next earnings call .
Speaker #4: Now , I'd like to turn the call over to Eric for closing comments . Eric . Great . Thanks , Bob . To summarize , we had a solid quarter resulting in an upward adjustment to our guidance .
Speaker #4: We believe the positive trends in our business are sustainable due to strong execution , improving market conditions , and our ability to respond to the evolving needs of our customers .
Speaker #4: Our reputation for high quality and service is paramount . West has key competitive advantages that allow us to protect our business model long term , especially in our highest margin .
Speaker #4: HCP components franchise, and we continue to make progress in improving our margins. This is why I'm confident that we are well positioned for Q4 and into 2026.
Speaker #4: Operator we're ready to take questions . Thank you .
Speaker #2: Thank you . As a reminder , if you'd like to ask a question , please press star one . One . If your question has been answered and you'd like to remove yourself from the queue , please press star one .
Speaker #2: One. Again, we ask that you please limit yourself to one question. Our first question comes from Paul Knight with KeyBanc Capital Markets.
Speaker #2: Your line is open .
Speaker #5: Hi , Eric . Hi . Bob and John . Congrats on the quarter . As you think about your long term construct of 7 to 9% growth , are we heading there in 2026 ?
Speaker #5: In your opinion ? In terms of , you know , the momentum you're citing here in three ? Q . .
Speaker #4: Yeah , thanks for that , Paul . And I'll start and then maybe ask Bob to join us in the conversation . But as we think about the key drivers to be able to deliver the long range plan or long term construct it , really the thesis is really around the HBP components and driving into double digit growth consistently year over year .
Speaker #4: And as you know , the key drivers of that for us are biologics and biosimilars . It's also the driver on annex one and also GLP one .
Speaker #4: So we feel good that we have the foundation laid that allows us to drive in the right direction to get to that LRP long term .
Speaker #4: Bob , do you want to give more color ? Yeah . Hey , hey Paul . Good morning and thanks for the call .
Speaker #4: The question as Eric said , you know , the biggest growth driver we're seeing really nice momentum . As I mentioned on the call or in earlier , we've got some puts and takes here in in 2026 .
Speaker #4: But we feel good about the long term growth of the business . We have to work through the puts and takes of , you know , some of the contracts that are coming in and out .
Speaker #4: And right now , I would say , you know , the streets in a good place .
Speaker #2: Thank you . Our next question comes from Michael Ryskin with Bank of America . Your line is open .
Speaker #6: Hey , thanks for taking the question , guys . Maybe just a follow up on that . The HBP components , as you said , big part of the story .
Speaker #6: Really good growth in Tokyo continued that in the third quarter . Obviously , you know , GLP one is one part of that .
Speaker #6: But could you talk about the sustainability of that being over doubled , being double digits ? You know , you talked about hitting that in the fourth quarter as well .
Speaker #6: But then going beyond just confidence in that trajectory . And then if I could throw on just a quick second parter on the margin comment you made , Bob , about expanding margins next year , could you talk about the moving pieces of that between gross margin , volume , leverage or any cost actions ?
Speaker #6: Thanks .
Speaker #4: Excellent . Thanks , Michael . And you're absolutely correct on the HPT components . I mean , the growth is is starting to sequentially get stronger from the beginning of this year as we as we were looking at how the order patterns are becoming more normalized .
Speaker #4: So we're seeing the markets become more in line with what we would expect long term . We're seeing that with the order trends through our discussions with our customers and other precursor for us , we keep a close eye on is the bioprocessing space .
Speaker #4: As you know , that that's a key indicator of what we should see and expect more near to mid-term . We also are so we're confident in our position in biologics and biosimilars , particularly of the products in market , but also new approvals that are in pipeline .
Speaker #4: And then annex one is another key driver that has multi-year growth algorithm of conversion from from standard to high value products , which is a it's a good opportunity for long term growth to get us to that that growth algorithm .
Speaker #4: We talked about double digits for high value product components . And Bob , you want to yeah . Hey , Mike , thanks for the question .
Speaker #4: Maybe to add on the first question about HBP components , certainly we're feeling good about the momentum here . We're actually building to our Q4 guidance is low to mid teens .
Speaker #4: So that momentum we're expecting to to continue , obviously as we get into next year , there's some more more challenging comps in the back half of the year .
Speaker #4: But that being said , you know , the long term growth drivers of GLP one and annex one and the HPV upgrades are there that actually leads to your second question around the margin expansion .
Speaker #4: One of the things that I think we we saw here in the quarter was just the beauty of that business being upgraded . The power of being able to to drive more efficiency through the through the factories , with the investments that we've made over time here , as well as being able to provide more value added products to our customers , I would expect that to continue next year .
Speaker #4: So when we think about opportunities , I do expect gross margin to be an area of opportunity for us to expand margins , but we're also looking at how do we ensure that we're also driving efficiencies kind of below the gross margin level as well ?
Speaker #4: So I would say it's both , but certainly as HBP drives the growth , that's a we generate a mixed benefit as well .
Speaker #4: So very nice from that standpoint.
Speaker #2: Thank you . Our next question comes from Patrick Donnelly with city . Your line is open .
Speaker #7: Hey guys . Thanks for taking the questions . Maybe one quick one on the CDM contract . Sounds like kind of the exit in mid 26 .
Speaker #7: Appreciate the commentary there Bob . On the $40 million headwind . I guess in terms of the visibility into filling that with high margin business , it sounds like what are the conversations there ?
Speaker #7: What would the timing look like in terms of the backfill ? How big of a gap would there be ? And then maybe secondarily , just following up on Mike's question there , Bob , you know , I know you spent a lot of time thinking about the margin opportunity here where there's opportunities , whether it's footprint you hire , utilization .
Speaker #7: When you dug into the company here and looked at the margin opportunity , can you just talk about some of that long term stuff that you see and what opportunity you see on the margin , not only the mix to high value , but also just more efficient , efficient operations ?
Speaker #7: Thank you guys .
Speaker #4: Yeah , that's a great question . And good morning , Patrick . Yeah . Let me I'll cover the first . And then address your second question .
Speaker #4: But in regards to contract management manufacturing specifically the CGM manufacturing we have in Dublin , we have a number of customers that are engaged with today that late stage discussions to identify what would be appropriate business to replace the CGM business .
Speaker #4: That would be exiting or finishing the current agreement until the end of June of 2026 . So we feel good about the prospects .
Speaker #4: We do know that the economics of the future business , the expectations , is to be stronger than what we currently have in that facility and secondarily , there will be a transition .
Speaker #4: Transition period in the second half of 2026 , but usually what you'll find is , as we extract the the equipment for our previous customer and install new equipment , there's engineering fees that we incorporate into our revenue for contract manufacturing .
Speaker #4: So there will be revenues to replace the gap . And I won't say it's going to be 1 to 1 , but it's healthy .
Speaker #4: Revenues and margin . And we expect to have commercial operations up towards the end of 2026 . If it is a pretty straightforward process .
Speaker #4: So I'm feeling good about the prospects . I know the conversations have been ongoing and very , very attractive . Business that we can put into that location .
Speaker #4: Yeah . Patrick , on your second element of the question around our supply network , I think one of the things that I would say , first off is as we look at the the footprint , our ability to be local for local is a big opportunity .
Speaker #4: And advantage for us , for our customers . That being said , I think there's an opportunity in the medium and longer term to really optimize our footprint and we're actually going through that analysis right now of , given the investments that we've made to kind of not only level load and fill those factories with tech transfers across , but also the ability to actually drive more efficiency within the existing footprint .
Speaker #4: And I think that there probably is more opportunity to consolidate certain areas to drive even more efficiency as we go forward . That's not a 2026 element time frame .
Speaker #4: That's more of a longer term , which actually makes me feel good that there's not only some some near-term opportunities to drive cost efficiencies , but also longer term opportunities .
Speaker #2: Thank you . Our next question comes from Daniel Markowitz with Evercore ISI . Your line is open .
Speaker #8: Guys , congrats on the print and welcome , Bob .
Speaker #4: Thanks . Good to be here .
Speaker #8: Awesome . So Eric and Bob , I had a two parter for you . First , I'm curious on high level headwinds and tailwinds to high value components in 2026 .
Speaker #8: As you see it today , as I think about it , I see a few tailwinds . One is that your coughing the destock , especially in the first half , second , you have GLP one growing off of a larger base .
Speaker #8: Third , annex one is accelerating following the uptick in project growth through 2025 . And then lastly you have this unique one off customer situation that I think was about 150 basis points headwind to 25 , but should benefit 26 .
Speaker #8: So wrapping up on this first one , is there anything else I should be thinking about as a headwind on the other side or anything ?
Speaker #8: I'm missing ? And then the second question , zooming in on one of those on Glp1 elastomer growth , it was mid-single digit percent of sales in 2024 .
Speaker #8: And now it's been climbing pretty steadily to now about 9% of total revs . That implies pretty healthy growth for GLP 1 in 2025 .
Speaker #8: Is it right to think it's more than like 50% growth ? And if so , what's causing that ? Should we expect sustained over 20% growth over the next few years ?
Speaker #8: Thank you . And sorry for for being long winded .
Speaker #4: Yeah , I'll I'll verify your math . Dan it we've been very pleased with the growth in GLP one and I'll , I'll turn it over to Eric to actually give some of the color commentary on , on what's been driving that .
Speaker #4: But I think it's important to understand that , you know , we expect that GLP one , while they may not be growing at that level , given the law of large numbers coming into next year , we are expecting very healthy growth in GLP one next year , given the kind of underlying market dynamics there .
Speaker #4: Eric . Yeah , that's excellent question . So as we think about the key drivers for product components , you're absolutely correct that GLP one will continue to grow .
Speaker #4: We're seeing even as you think of a long term with the potential introduction of orals into the equation . We do think the market itself will be a healthy blend of injectables and orals with injectables continue to be the larger portion .
Speaker #4: But the overall market continues to grow quite nicely based on what we are hearing from our customers , but also other sources . So we're very well positioned with GLP one .
Speaker #4: As you remember , this is this is leveraging our high value product manufacturing plants . And we have five across the globe . And so we do have scale .
Speaker #4: We do have the portfolio that supports our customers in that area . You commented about the timing of potential headwinds . I think the one area I would say is on annex one , while have really good momentum in our contamination control strategy , working with our customers is really resonating .
Speaker #4: And as you know , this is really converting our standard that are on drug molecules in commercial today to high value products . And the economics for us is very attractive .
Speaker #4: As you know , our averages for standard products are are , you margins in the 20 to 30% range , while the HBP is 60 plus percent .
Speaker #4: And so it's a but the timing on how these projects roll off into commercial revenues do vary from client to client , and so that that I won't say it's a headwind .
Speaker #4: It's more of a timing . From quarter to quarter . And but we're really optimistic and confident in the in the pipeline that we're currently working on , but also know that we're only touching a fraction of the 6 billion components we believe is the market opportunity here .
Speaker #4: I think the other area is just, again, timing of new drug molecules approved in the market. If you kind of look from last year to this year at the number of approvals by the FDA, it might be a little bit lower for various reasons.
Speaker #4: But as we are planning with our customers of future launches , the timing might be a little bit , you know , uncertain on certain launches .
Speaker #4: Now , saying that the growth levers that you mentioned earlier about biologics , biosimilars , GLP one and NX one are very favorable .
Speaker #4: And those are those are the tailwinds that we're moving . So the balance this year and into next year , Daniel , just maybe one other thing to follow up on your initial question around GLP one .
Speaker #4: You know , obviously we watch that very closely and feel that our growth is largely in line with the growth that the end market is seeing as well .
Speaker #2: Thank you. Our next question comes from Dan Leonard with UBS. Your line is open.
Speaker #9: Thank you very much . And Bob , you might have addressed my question right there , but I have a follow up on GLP one .
Speaker #9: It does seem like from the script data for Novo and Lilly that you're growing a lot faster than the market is growing . I wonder if there's a way to reconcile that .
Speaker #9: Could there be a compound or element here ? Is it the clinical trial participation ? You alluded to ? Any thoughts would be appreciated .
Speaker #9: Thank you .
Speaker #4: Yeah . Dan , this is Eric , you're touching on exactly the areas we think about . We're starting to see an increase in vials .
Speaker #4: So therefore our stoppers and seals are necessary . So that's a factor when you think about our volumes . And also the pipeline of new new molecules being looked at and going through clinical .
Speaker #4: So there's other factors that we're working with . Several customers . And also there's there's a couple of geographies . There's an element around generics that we're also able to support .
Speaker #4: So overall it's I would say it's a little bit broader than just the scripts data of our two of our two customers .
Speaker #2: Thank you . Our next question comes from Justin Bowers with Deutsche Bank . Your line is open .
Speaker #10: Hi . Good morning everyone . And first appreciate the the increased detail and transparency on some of the disclosures this quarter . So a two parter for me .
Speaker #10: One , I just wanted to follow up on annex one . There was some updates earlier this year , and just curious how that's impacting customer decision making in some of the conversions .
Speaker #10: And if that's been a catalyst for some of the acceleration we're seeing . And then part two , earlier in the prepared remarks , you talked about liquid handling and Dublin being about a 20 million opportunity plus or minus .
Speaker #10: Is that is that sort of the peak opportunity or is there room for growth there in that facility beyond 2026 ?
Speaker #4: Yeah , Justin , thank you for that . First , I'll touch on the Dublin real quick on the on the 20 million that we communicated as we ramp up a new site .
Speaker #4: It does take time to get to full utilization . So I would consider this as early stages . And as we move into 2027 and a little bit beyond , that's when we get into our peak volumes and revenues .
Speaker #4: So the 20 million is , is is really just kind of the ramp up stage and then move through efficiencies through through a few quarters .
Speaker #4: You'll start seeing the utilization significantly go up . So I would not look at 20 million as the peak revenues of that of that site .
Speaker #4: For for the drug handling on the annex one , it's there are different factors . We do know that there are more conversations with the EU .
Speaker #4: Regulators , with our customers as they are auditing and discussing about the regulations and therefore there is a interest to continue these projects on an accelerated pace .
Speaker #4: But again , as I mentioned earlier , there's there's a tremendous amount of opportunity of drug molecule that goes into Europe that we believe this is just really early stages .
Speaker #4: Out of the 6 billion components . It's a small fraction that we are currently converted to commercial at this time .
Speaker #2: Thank you. Our next question comes from Larry Solow with CGS Securities. Your line is open.
Speaker #11: Great . Thanks . Good morning . I echo the appreciation on the transparency . And I also welcome Bob . I guess just want to just follow up on that .
Speaker #11: Just on the gross margin . Really strong this quarter . Just just curious if you guys are actually seeing and I think this has been part of the theme to just a , an improvement in mix within HPE and getting more towards the , you know , up and to the right until the Nova Pure and higher margin HBP components .
Speaker #11: Are you seeing that dynamic continue as well ?
Speaker #4: Yeah . Hey Larry , I appreciate the the feedback . And to your question on gross margin , yeah , that's certainly is an element of it .
Speaker #4: When you look at our gross margin, despite the incentive fee, we were actually up year on year, 120 basis points.
Speaker #4: That was up almost 300 basis points . If you take that out kind of on a like for like basis . And really the proprietary business or HPE component business drove that .
Speaker #4: So what we're seeing is not only the investments that we made over the last couple of years , being able to be filled in that capacity , driving .
Speaker #4: And you can imagine with the fixed installed base , the incremental margins are quite nice from that standpoint . As it goes through the factory .
Speaker #4: But then as you're having these higher value products , there , you're driving , you know , higher ASP products through those , through the facilities .
Speaker #4: And I think , you know , you see that that's a very positive mix standpoint . The team is also done a very good job of driving down costs and driving up efficiencies .
Speaker #4: You know , if I think about scrap and our yields , the those are also areas of focus that the teams are really driving .
Speaker #4: And I think as we as we talked about earlier , I think that we've got a multiyear opportunity from that standpoint . And then also , you know , one of the areas is around also being much more focused on on some of the raw material input costs .
Speaker #4: We're building out capabilities in our sourcing organization , working closely with our supply chain as well as , you know , streamlining some of the production , traveling of our some of our products before they get to customers .
Speaker #4: So there's a number of elements , I think , that are in the next several years that I feel that we have an opportunity to continue to drive that that gross margin opportunity .
Speaker #2: Thank you . Our next question comes from Doug Schenkel with Wolfe Research . Your line is open .
Speaker #12: Good morning , and thank you for taking the questions . Two , two quick topics I want to touch on . One is just a question on Q4 guidance .
Speaker #12: And then one is on really visibility heading into next year . So on on the fourth quarter , I want to confirm that you essentially bumped up guidance by the magnitude of the revenue beat , and if so , were there any timing dynamics in the third quarter that held you back from bumping up guidance more , or was this just trying to be conservative in a period of continued uncertainty ?
Speaker #12: So that's that's the first topic . The second is risk and visibility . As a topic . So part of the attraction for a long time of West for investors has , has been that this has been a great sleep at night story .
Speaker #12: A steady compounder . You know , last year , you know with that in mind , I think the company and certainly the investment community were surprised by the roll off of the incentive payments and drug delivery and also the changes in contract manufacturing .
Speaker #12: How would you characterize anything resembling that category of risk heading into year end ? I would I would guess you feel pretty good about it , but I just want to give you an opportunity to , you know , kind of tell us , you know , where we should all feel better about this .
Speaker #12: Getting back to being the old West again .
Speaker #4: Yeah . I'll start . Doug and it on the Q4 guidance . Don't read anything into that . We don't believe that there was any material pull forward when we look at it .
Speaker #4: Actually , if you look at it on a two year stack basis , Q4 is actually an acceleration . But there's also an element of prudence that , given the market dynamics outside that , we want to make sure that we feel good about that , and we do .
Speaker #4: And so we've got some good momentum there . And I'll just leave it at that . Maybe I'll start with the the second piece and then turn it over to Eric as well .
Speaker #4: You know , I think this is an area that , you know , I'm focused on intently . And I don't want to declare victory just yet .
Speaker #4: In terms of that . And we but we do feel good about some of the trends . I would say we have , you know , in our we're committed to improving , you know , improving and providing more transparency , which we'll continue to do over time .
Speaker #4: But the market is still dynamic . I think we are improving our visibility , but , you know , the market still has some variables that we're working through .
Speaker #4: Our business planning process right now . And that's why we wanted to provide some some puts and takes to what we know today for next year .
Speaker #4: And , you know , I think the long term trends are positive . It's the pace of when we get back there and I'll turn it over to Eric to maybe add anything .
Speaker #4: Yeah . No thanks . Bob and Doug , it's a great question because that is critical for historically , West has been consistently from a demand profile perspective , pretty consistent of the market .
Speaker #4: The injectable market space , we believe based on the work that we have been doing , and Bob did touch on this , is that going deeper into different segments with clear accountability and ownership ?
Speaker #4: Has given us better line of sight of our markets . Obviously , engage with our customers , getting closer to them , which we observed during the pandemic period .
Speaker #4: We needed to do more of . And I'm confident we're making good headway in traction in that direction . The airline market conditions continue to to improve considering where we were a while back , but your point is , we are laser focused on making sure we are reducing those risks and increase visibility .
Speaker #4: And also providing more of that lens as we as we engage in these conversations .
Speaker #2: Thank you. Our next question comes from Mack Eatock with Stephens Inc. Your line is open.
Speaker #13: Hey , good morning . I appreciate you taking the questions . Maybe just one on delivery devices , you know , relatively flat year over year , excluding the incentive fee .
Speaker #13: And I think you highlighted some improving economics ahead of the automated line coming on in 2026 . So could you just highlight some of the various aspects driving performance during the quarter and the variables that you're seeing on the top , top line and margins as well ?
Speaker #13: Thank you .
Speaker #4: Yeah . No , absolutely . Thanks for the question . When we look at the the drug delivery device business , the area look at it holistically , the entire portfolio , we have administration systems in that category we have Crystal zenith and and obviously injectable devices like Smartdose .
Speaker #4: And I'm really pleased with the progress we're going to have throughout the year for our Crystal zenith . And also our admin systems .
Speaker #4: The area of focus has been on smart , smartdose to to drive two , two levers with urgency . One is to drive down costs and improve efficiencies .
Speaker #4: And that the progress the team has made is on track with our expectations for this year . And we're seeing improved margin performance or profitability quarter over quarter .
Speaker #4: There's more to come with the the automation that we are going to be commercializing in early 2026 . We're just going through the validation process as we speak , and we're confident that we'll be able to drive even more cost out of the out of the product itself .
Speaker #4: The second area is , is the continue to look at alternative options to create even more value with that product . And we will communicate once we can .
Speaker #4: But of the final decision . But we're making progress in both areas . Yeah . And I would just add on that , you know , if you look at it on a quarterly basis sequentially , it hit where we expected it to .
Speaker #4: So feel good about that . And that that work that Eric just talked about . You know , we're looking at both of those paths with urgency and focus .
Speaker #4: And so I feel good that , you know , each quarter the economics have improved in delivery devices , as we said in our prepared remarks .
Speaker #4: And there's more room to go . But we're also making sure that we're looking at this for the long term . And evaluating what's the best value for shareholders .
Speaker #2: Thank you . Our next question comes from Matt Leroux with William Blair . Your line is open .
Speaker #14: Hi . Good morning . Kind of a two part question around your manufacturing network . So , you know , after a couple of years of pressure on free cash flow and obviously an elevated CapEx spend for you , you've had a significant improvement in free cash this year as as CapEx is normalized down to around 9% .
Speaker #14: So , Bob , you referenced a couple of times the opportunity for network optimization , but there's then the balance of obviously customers thinking about , you know , regionalization of manufacturing and some of the policy dynamics .
Speaker #14: And obviously still significant investment in HPE . So just as you think about maybe that balance of network optimization versus making sure you have capacity available for customers , how are you thinking about the levels of CapEx needed to support growth ?
Speaker #14: That'd be the first part . The second part is there's been a number of recent headlines around pharma tariffs and MFN . And and I realize your business is tied to commercial volumes , not necessarily early stage R&D , but how tuned in are your customers to those headlines in terms of influencing investment decisions versus , sort of the train has left the station in terms of , you know , regionalization of their manufacturing .
Speaker #14: Thanks to the question .
Speaker #4: Yeah , Matt , thanks for the question . Let me let me start with the the capital , the CapEx that we are we have spent .
Speaker #4: But you're absolutely correct . Our focus really is on the high value product components with our five center of excellence that we have .
Speaker #4: Obviously , in Asia , Europe and the US . Fortunately , over time , we have built the capacity and the capabilities to build support our global customers from multiple sites .
Speaker #4: So as you think about being more regionalized , will support our customers in all markets , we're very well positioned from an infrastructure perspective .
Speaker #4: You're correct . As volumes increase , we will need to layer in additional capital . But we do feel comfortable that we're going to be back to the 6 to 8% of sales corridor for CapEx , but heavily weighted towards the high value product components .
Speaker #4: Part of our business . And again , the the the concept of the Center of Excellence given us that network capability , but also a more of a campus site perspective versus doing more greenfield .
Speaker #4: I'll talk a little briefly on the on the the second question you posed , and I'll turn it over to Bob to add any comments .
Speaker #4: But you're right that conversation is active with our customers in the sense of what can we do to support our customers , to drive down costs , to support them .
Speaker #4: One is continue to leverage our global network . So there are a few cases where we could do tech transfers to move from one location to another .
Speaker #4: Geography to be more cocoa co-located with their end market . That's one opportunity that we are working with . But those do take around 12 to 18 months to complete and then to commercialize .
Speaker #4: But I also just want to comment the the the products that we provide , the elastomer components that we provide are critical to the drug molecule , and they are less than 1% of the cogs of the drug .
Speaker #4: And so therefore , our focus is how can we help our customers drive better yields in efficiencies of their finished process by providing more of the HBP services .
Speaker #4: So in essence , we are we are working with our customers to provide additional services to improve the yield output from our for our customers .
Speaker #4: So, it’s an active dialogue, but for us, we’re seeing less discussion about price and more about making sure we’re balanced from a global manufacturing perspective.
Speaker #4: Bob . Yeah , I just add a couple of things . You know , obviously that's one of the areas that's pretty dynamic .
Speaker #4: When we talk about kind of the FM , MFN here in the US just recently , we haven't seen any change in our customer buying behavior .
Speaker #4: That's something that will continue to to watch . But on and on the other side , I actually think that that's a potential lift of an overhang .
Speaker #4: So that they can now , you know , move forward . And then the investments here that we're seeing in the US , we are seeing that we believe that's real .
Speaker #4: That's a multiyear kind of investment . But as we think about where we're talking about kind of level loading , we've made a lot of investment in the US for for the Covid capabilities and capacity .
Speaker #4: A couple of years ago . And so we're working very closely with those , you know , as , as those customers are building out additional capacity in the US about this tech transfer that Eric was just talking about .
Speaker #4: So I think we've got good relationships with those customers . And I think we're well placed to be able to continue to invest .
Speaker #4: And I'll just want to reiterate what what Eric said , you know , we do think that we'll we're going to continue to drive down our capital spend as a percent of revenue .
Speaker #4: But disproportionately invest behind our highest growth opportunities , which is in Hvp .
Speaker #2: Thank you . Our next question comes from Tucker Reimers with Jefferies . Your line is open .
Speaker #15: Good morning . Thanks for taking my question . I had another question on annex one . So you talk about 2% contribution this year from Nx1 projects .
Speaker #15: Can you break down how that splits between those projects that are in a development or validation phase versus switches that have already been put in place and sort of hitting what I would call a commercial production ?
Speaker #15: Thank you .
Speaker #4: Yeah , no . Great question . I would say if we look at the entire at the end of Q3 , the number of open projects that we're currently working on and the number of projects that converted to revenues are less than 40% .
Speaker #4: We're have been converted since the duration of this project or this this move towards annex one . So that kind of gives you a feel of , you know , as we ramp more new projects in there , rolling off .
Speaker #4: And we did mention earlier that some projects could be 3 to 4 quarters and a few others could be 6 to 8 quarters .
Speaker #4: So it does depend on the scale of the project and the speed of our customers. We want to convert.
Speaker #2: Thank you . And our next question comes from Luke Sergott with Barclays . Your line is open .
Speaker #16: Great . Thanks , guys . Just wanted to ask here about the capital allocation . You know , the first one to hat tip to the transparency on the on the deck is beautiful .
Speaker #16: So given that you guys have like a pristine balance sheet right now producing a lot of cash margins going the right way , free cash flow seems to be picking back up .
Speaker #16: So, update us on your capital allocation priorities, favoritism towards maybe a repo versus a more bolt-on M&A.
Speaker #4: Hey Luke , I appreciate the feedback . And Bob , and you're hitting on one of the key priorities that I've got . In talking with Eric and the rest of the team .
Speaker #4: And actually just spoke with our board about this . I think there's an opportunity for us to better define and establish a capital policy .
Speaker #4: And and to your point , with the being blessed with such a strong balance sheet and our cash flows to be more active in using those cash flows to really drive the drive , the business .
Speaker #4: And so what I would say is stay tuned . But it is high on the list of opportunities that will help continue to grow .
Speaker #4: Grow the business over .
Speaker #2: Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to John Sweeney for any further remarks.
Speaker #3: Thank you all very much for joining us today on the call. An online archive is available at our website at West Pharmaceutical Services Inc.
Speaker #3: In the Investor Relations section . That concludes the call . Thank you very much , everybody , and have a great day .
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