Q2 2019 Earnings Call
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Results to differ from our expectations.
Please refer to todays press release as well as any further disclosures the company makes regarding the risks to would be the subject in the company's 10-K, 10-Q and 8-K reports.
In addition during today's call.
Management will make reference to non-GAAP financial measures, including organic sales growth adjusted operating profit adjusted operating profit margin and adjusted diluted EPS.
Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release.
I'd now turn the call over to Wes CEO and President Eric Green.
Thank you Quintin and good morning, everyone. Thank you for joining us today.
As you saw in our press release, we delivered another quarter of strong growth on both the top and bottom lines from strong sales gains across the organization.
And as a result of efficiency initiatives put in place by our global operations team.
Our performance in Q2 has shown once again, our customers positive reaction to our market led growth strategy.
With two good quarters behind us and given our confidence in the underlying strength in future.
Growth of the business, we are increasing our sales and EPS guidance for the full year.
Bernard will take you through the details of our updated guidance later in the call.
Let's start with the specifics of this our sales performance on slide four.
Proprietary product sales grew by 7.5% in the quarter.
Key to the growth strategy in this segment is customer adoption of our high value products. These products offer higher levels of quality and productivity to our customers.
Seeking to meet the increasing regulations of the biopharmaceutical industry to improve their own manufacturing performance and to meet the demands of new molecules and therapies.
Hi Valley products make up more than 60% of our proprietary product sales.
And in Q2 organic sales of these products grew double digits.
Now, let's take a look at the organic sales growth of our market units.
Sales within our biologics market unit grew strong double digits in Q2, we experienced an impressive uptake of our Nova appear and west start components. We continue to see growing interest from biologic customers for these types of product solutions.
And this demand is coming from volume growth of existing drugs and from newly commercialized drug products.
We also saw good uptake of Crystal Zenith containment solutions, and our Smartdose technology platform.
CZ growth is coming from both commercially available drugs as well as from pre commercial molecules.
We continue to experience high levels of customer activity across our smartdose device platform for drugs and all stages of development.
Looking ahead, we anticipate full year double digit growth for the biologics market unit.
The generics market unit had a solid quarter with high single digit growth high value products also performed well in this market unit growing by double digits.
This was led by an increase uptake of Westar Rs and Ru products.
We are pleased with the continued interest and adoption of our elastomer components, including the Axalta product line.
In addition, we're also seeing demand for our delivery and safety device platforms for use with generics medicines.
We expect high single digit growth in this market unit for the full year.
Our pharma market unit experienced a small decline in the quarter due to the previously announced bile to bag product recall.
If we exclude this impact we saw mid single digit growth for pharma led by Flotek and Invision product sales.
We expect the pharma market units to deliver full year performance of low single digit growth.
A quick word about buyouts of a.
As we noted on our last call we remain committed to bringing this product back to the market.
We are working to redesign certain aspects of the device with the goal of returning to the market with enhanced product for hospitals and the patients they are treating.
Let's now turn to contract manufacturing.
This segment of our business once again posted strong sales of 10% over the prior year's quarter.
The majority of the growth continues to be in the diabetes market led by sales of medical and drug delivery devices and services.
For the balance of the year, we expect that quarterly sales will be in line with the performance of this segment in Q1 and Q to Q2 of this year.
But that growth will moderate as this business runs up against more difficult year over year comparisons.
We anticipate full year growth of high single digits and contract manufacturing.
I'd like to now review some business highlights from the quarter on slide five.
We discussed at our last quarterly earnings update the importance of expanding our companies reach to help us grow in the important Asia Pacific region.
We have established a direct presence in the very attractive South Korean market through the acquisition of our distributor.
Another example comes from our Asia, China team, who recently hosted more than 200 customers from 70 companies for our west sponsor an educational event reinforcing that technical expertise, we can bring to our customers in this market.
Our scientific and technical team continues to be the at the forefront of the industry presenting at numerous conferences publishing their work in partnering with our customers to shape best practice in our field.
We're also pleased to announce that our Nova Guard safety system recently won two India packaging awards for excellence.
This product is designed to help prevent accidental needlestick injuries.
Which is a serious concern for health care practitioners and their patients.
Customers recognize the value of this product and as a result, we are seeing increased uptake.
As our commercial team works with customers to provide solutions for their most demanding injectable containment and delivery needs. Our operations team is working to help our business work more efficiently.
They are driving for improved safety higher quality better service and increase profitability.
We have implemented a number of lean initiatives across the organization through our one west management system.
That are really starting to pay off.
I recently visited our plants in Europe and saw first hand, the improvements that team has made.
To streamline internal processes improve quality standards and address customer feedback more effectively.
Customers are no soon too and have provided us with very positive feedback at the conclusion of several recent audits.
We're also working to consolidate and optimize our global manufacturing network.
By the end of the year, we will have 25 plants, a total reduction of four sites over the past two years.
This broad restructuring program announced in Q1 of 2018 is on track to be completed by year end and will provide significant savings for our business in the future.
As a result of these efforts and the growth of our high value product portfolio, we achieved more than 180 basis points of consolidated gross profit margin expansion in the quarter.
Thanks to margin improvements in both our proprietary and contract manufacturing segments.
At this time I'd like to turn the call over to our CFO Bernard Birkett to go into more detail around our financial performance Bernard.
Thank you, Eric and good morning, everybody.
Now, let's review the numbers in more detail.
I will first look at Q2, 2019 revenues and profits, where we saw continued solid growth led by strong proprietary product performance, especially in our biologics market units.
I will take you through the margin growth, we saw in the quarter and how we see it continuing to improve in 2019.
In addition to some quarter end balance sheet takeaways.
And finally, we will review the guidance for 2019.
First felt Q2, our financial results are summarized on slide six and the reconciliation of non US GAAP measures are described in slides 11 to 15.
We recorded net sales of $469.7 million, representing organic sales growth of 8.1%.
And 20 basis points of inorganic growth related to a recent acquisition.
We also saw growth in two of our proprietary product market units and in contract manufacturing.
With double digit organic sales growth in our biologics market the unit.
We are pleased to see continued improvement in gross profit.
We recorded $157.9 million and gross profit.
$15.7 million or 11% above Q2 of last year.
And our gross profit margin of 33.6% was a 180 basis point expansion from the same period last year.
We also saw improvement in adjusted operating profit with $81.9 million recorded this quarter compared to $62.5 million in the same period last year for a 31% increase.
And our adjusted adjusted operating profit margin of 17.4%.
Was a 340 basis point expansion from the same period last year.
Finally, adjusted diluted EPS grew 27%.
So what's driving the growth in both revenue and profits.
On slide seven we show the contributions to sales growth in the quarter.
Volume and mix contribution at $33.9 million or 7.6 percentage points of growth.
Sales price increases contribution to $3.4 million, our 0.7 percentage points of the growth.
And changes in foreign currency exchange rates reduced sales by $15.1 million or a reduction of 3.4 percentage points.
Looking at margin performance slide eight shows our consolidated gross profit margin of 33.6%.
For Q2, 2019 up from 31.8% in Q2 2018.
Proprietary products second quarter gross profit margin of 39.5%.
<unk> was 230 basis points above the margin achieved in the second quarter of 2018.
The key drivers for the continued improvement in proprietary products gross profit margin were favorable mix of products sold.
Focusing on high value products.
Sales price increases and increasing plant efficiency and utilization.
Partially offset by increased labor costs and the impact of the voluntary recall of vial to bag products.
Our high value products represented 62% of Q2 proprietary product sales and generated double digit organic sales growth.
Contract manufacturing second quarter gross profit margin of 14.3% increased by 120 basis points compared to the prior year quarter.
The year over year increase in margin is primarily due to improved production efficiencies.
Adjuster adjusted operating profit margin grew by 340 basis points over Q2 2018, as we continue to expand gross profit margins and closely manage our operating expenses as we execute on our 2019 goals.
Now, let's look at our balance sheet and review, how we've done in terms of generating more cash for the business.
On slide nine we have listed some key cash flow metrics.
Operating cash flow was $152.7 million for the year to date 2019, an increase of $25.7 million compared to the same period in 2018 at 20% increase.
Our year to date capital spending was $57.1 million.
$8.9 million higher than a year ago.
Working capital of $631.1 million at June Thirtyth 2019.
Was $20.4 million higher than at December 30, Onest 2018.
Primarily due to the increase in our accounts receivable at inventory balances.
Our cash balance at June Thirtyth of $326.7 million was $10.7 million less than our December 2018 balance.
Primarily due to an increase in the cost for purchases of our common stock in 2019, and the acquisition of our distributor in South Korea.
Turning to guidance.
Slide 10 provides a high level summary.
First despite increasing FX headwinds, we are raising our expectation of 2019 full year net sales to be in a range of between $1.81 billion and $1.825 billion compared to the prior guidance range of between $1.79 billion and $1.82 billion.
We expect organic sales growth to be at the higher end of the previously communicated range of 6% to 8%.
Over 2018 reported net sales.
Which assumes a headwind of $42 million for the full year 2019 sales based on current foreign currency exchange rates.
Compared to the prior guidance of full year negative impact of between $34 million to $37 million.
Second we are raising both bottom and top end of our adjusted EPS guidance range by 20 cents.
Our new range for full year 2019, adjusted diluted EPS will be $3 and $3.10 compared to the prior guidance of between $2 80, and $2 90.
There are some key elements I want to bring your attention to as we as you review our guidance.
At this point guidance does not include any revenues per vial to bag in 2019.
And for Cup passed at cost of remediation are included in our EPS guidance.
Estimated FX headwind has an impact of approximately 10 cents on adjusted diluted EPS.
Based on foreign currency exchange rates.
Compared to the prior guidance of eight cents.
To summarize the key takeaways for the quarter.
Strong topline growth in both proprietary and contract manufacturing.
Gross profit margin improvement.
Growth in operating profit margin.
Growth in adjusted diluted EPS over Q2 18.
And growth year to date, and operating and free cash flow.
Our re sales and EPS projections for 2019 and performance to date are in line with our long term construct of 6% to 8% organic sales growth.
Operating profit margin improvement of greater than 100 basis points and EPS expansion.
I'd now like to turn the call back over to Eric.
Thank you Bernard.
To summarize our Q2 performance together with the results. We saw in Q1 have contributed to a very strong start to the year.
As we look to the remainder of 2019, we know that our market led growth strategy will continue to drive value for our stakeholders.
We have the top experts in our field working at west and that technical and scientific expertise is an asset to our customers.
Across all market units customers are driving demand for our high value products and we are delivering those products and solutions with a more efficient and cost effective manufacturing initiatives.
This is translating into better margins and increased return on invested capital.
We feel confident in the continued strength of our business and look forward to a successful remainder of 2018, Chris we're ready to take questions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star in the one key on your Touchtone telephone.
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To prevent any background noise messaging. Please patient autonomy. What's your question has been stated.
And our first question comes from the line of John Kreger with William Blair. Your line is now.
Hi, Thanks, very much can you just give us a little bit more info on the acquisition and should we be thinking about acquisitions, perhaps is a little bit more active part of your capital deployment strategy going forward.
John Good morning.
When we look at the acquisition in South Korea, So really the entry strategy to have a direct presence and what I would call a very attractive biopharma.
Marketplace that we historically worked with the dealer and one of the west strengths is to have that direct interaction with our clients across the globe.
So we believe there is an opportunity to step indirectly in actually reinforce our focus in the Asia Pacific market.
Looking forward to.
Other types of M&A transactions, we feel that we will continue to look at.
Bolt on technologies that will enhance our current portfolio, but also look at ways to look at adjacent spaces to really continue to support our existing customer base.
Great. Thanks, and then also just to clarify I think a comment you made earlier on the call today and you think pharma growth will be low single digits for the year I assume that is burdened with the vial to bag recall.
Yes, John Thats correct. It does that low single digit does include the.
Bile debate recall that occurred last year.
Great Great and then.
Lastly.
Any sense of when you think you can re launch of that product is that something that can be feasible for next year.
Well, we have guided.
This year's revenues without any vials of big revenues and again, we are working towards a resolution and we will be working with the regulatory authorities to get it back as soon as possible. So until we have.
Affirmation from the regulatory bodies, we can't comment on exactly when this be returning.
Okay. Thank you.
Thanks Jay.
Thank you and our next question comes from the line of Paul Knight with Janney Montgomery Scott. Your line is now open.
And if your phone is on mute Paul Please UN mute it.
Hi, Eric Congratulations on the quarter, great. Thank you Paul and good morning.
Can you talk to a demand isn't.
Coming from the record number of approvals last year or is it a and then on the second question is in the cell and gene therapy. There's obviously a lot of things in the pipeline is that a significant part of your business. The youre containment systems on the sell in jeans side and I guess the first question. Though is are you seeing this approved therapy in total from last year is that part of what were seeing in this growth rate.
Yes, Paul if when you think about the growth rate as it were.
We have today and looking at the quarter committed order book that we have the near term.
That really is due to the robust pipeline that's coming through in addition to that its uptake of molecules have been introduced in the market a couple of years ago. So it's a combination of.
Existing molecules, but also new launches over the last 12 18 months.
On these cell and gene therapy area, it's too early to comment a lot of that is in early phase as you know.
We obviously have a role to play in the containment of the very important therapies.
But the volumes will be small and.
But it's too early to tell its not that is not impacting our numbers as of today.
And then secondly, Ah Bernard I noticed obviously operating cash flow up 20% and free cash up 21%.
I guess, you're still in the early days of.
Your.
Youre improvement of our capital and management of capital facility consolidation I mean is this a couple year process ahead of us where we'll see better.
Utilization turnover on cash and facility utilization could you talk to us about that overall program that you've embarked upon and where how long it goes.
Yes, it's a multiyear process and we will be continuously looking for improvements am.
And operating and free cash flow generation and it's it is a big focus for the organization across a number of different areas. So it's not just on capex, it's across all aspects of our business.
As we believe it.
It is very important for us obviously to focus on that so.
Again, we have a lot of people looking at it in different areas and where.
Very focused on cash flow generation and disciplined in our approach.
And then debt.
What do you think your maintenance capital expenditure is.
It's probably between $40 million to $50 million a year.
Okay. Thank you.
Thank you Paul.
Thank you and our next question comes from the line of David Windley with Jefferies. Your line is now open.
Thanks.
A quick follow up on that last question Bernard has the as the maintenance number is that something you've been able to compress or has that been fairly stable and it's been the growth capital that youve compressed.
It's been we havent compressed.
A lot of growth capital and I think if you look back at the way we were spending before we were investing a lot in facilities and that expanded the capex and so the focus is on utilizing in improving the utilization of what we have the infrastructure that we have in place.
We believe we have a lot of capacity.
The maintenance Capex has been pretty stable over the last number of years.
But just to be clear, we are not impacting growth we are investing in growth and.
On a continuous basis, and Thats, where we invest and a lot of our capital and thats with the allocation goals. So it's a very very measured approach with the difference being that we do not have to invest in large building projects at this current time.
Yeah, great. Good clarification on my question wasn't intended to imply that you were sacrificing growth at all but just.
I don't know exactly where the decline in the budget was coming from.
Thanks, similar theme as you are seeing some on some nice operating margin and gross margin and operating margin improvement in the quarter.
Our is is that in any way.
Driven by.
The facility rationalization that you are doing is that showing up already or are those facilities not yet offline and so thats actually still in front of us yes.
That that's still in front of US again, it's it will be over the next number of years beginning in 2020 , we'll start to see the benefits of the rationalizations coming through.
So the the drivers right now is we've seen a lot of hate VP growth, which is a key strategy for us and we expect to see that continuing and thats been supplemented by the improvements in overall utilization and productivity gains that we've been seeing coming through our plants with increased with the implementation of lean initiatives and globalization of operations and the important aspect that we saw in this quarter was the improvement in margins in contract manufacturing and that's that's also been a plus and now that's back on track. So there are a number of drivers for overall operating margin expansion.
And on your your comment on contract manufacturing.
Did improve year over year I think the second quarter of last year was kind of the low point.
Is that now on a fairly steep improving trajectory or I think the highest for that business are still several hundred basis points above the twoq levels that you just achieved how could you might describe the just the trajectory to those.
Those prior levels.
That's correct. So we would expect to see the continuous improvements for the remainder of the year and improvement into 2020, as we get back to.
2016, 2017 levels of gross margin within that business. So I don't believe it's going to happen overnight.
But we have made some changes within our contract manufacturing business, we're taking a lot of the learnings that weve had within our proprietary business from an operational point of view and applying those within our contract manufacturing division and we're starting to see the improvements come through there, but it's not an overnight fix and move it will take a little bit of time. So you will see it phased in but there will be continuous and sustained improvement.
Great. Thanks, and last question Eric This one may be able to bring you in on this one.
The your generic clients are.
Buying up into high value products, that's been I think one of the the kind of pleasant surprises of of your kind of segmentation of the end market from when you joined as CEO .
Some of those clients are under some.
What seems to be a little bit of financial distress at this point so stocks trading at so were really really low prices is there a way do you think that impacts.
Demand for your products at all and is there a way for you to.
To protect yourself or diversify yourself in the event that maybe one of these.
Presuming, it's not all of them, but what one might.
You know might be.
More negatively financially impacted.
Yes. Good question in to your point is that we are diversifying within the generic space. So we continue to work with the broader array of the generic players today I would say we're in early stages as we move our generic customers from standard packaging components to the high value products by leveraging the recently launched accelerator program.
We think about the adoption rates with our clients it takes.
One to two years to get the adoption and to have them retool their operations, which frankly at the end of the day is taking cost out of their system.
Even though they are moving up the high value products, the ASP slightly higher so we're supporting them by bringing better product to the market driving better yield of their manufacturing and final fill finish.
And given assurance that this total cost of ownership cost continues to to drive down the overall cost.
I would say Sunrise, though we are we do diversify and if there is a issue with one client we typically see that particular drug molecule will be picked up by another and Thats why were it's a good situation with or a diversity.
Okay, great. Thank you.
Thanks.
Thank you and our next question comes from the line of Derik de Bruin with Bank of America. Your line is now open.
Hi.
Just one other than that no further Eric congratulations on the quarter guys.
Okay. Thank you want.
Yes, My first question is.
Can you give us your thoughts on the four plus seven generic program in China.
Have you evaluated the situation and if any potential impact.
From this fully embedded in the revised 2019 guidance also if you could tell us what your revenue exposure is through the Chinese generics market.
Well one when you look at our revised guidance. This is not being driven by China, So either way.
We have a.
Our business in Asia Pacific is roughly last year was about 8% of total last.
In China is is a portion of that.
Obviously are larger.
Localities, our China, India.
In Japan also in southeast Asia, but the four plus seven.
He referred to the Chinese market in the market does not impact our current business.
And we don't have a lot of exposure to the local generics.
Our growth in that market and where we're seeing the growth and we're investing is really the multinationals are pulling us into the market for them to be able to manufacture into either use local consumption or export.
The two areas that we see more most of the growth in is in the farm and biologic.
Very less so in the generic space out of China.
Okay. Good.
Thanks, and then.
My second question is for the full year 2009 can you still expect.
Pharma business to post low single digit organic growth.
I think that in order to achieve this.
I estimate the pharma growth would need to be at least in the high single digits in Fourq.
Given that in the next quarter prior year comp is difficult and so what gives you confidence confidence into a strong rebound in the pharma business in the fourth quarter, what is the downside risk to this.
So if you look at that from a comp perspective, we had a large credit in the fourth quarter of 2018 regarding the vial to bag recall.
So that.
That adjustment in Q in Q4 18 was in the pharma sector. So when you comp it from a growth perspective that that's how we're going to see the high single digit growth within this year within Q4 within pharma within pharma.
Okay.
And then my last question, if I may one of the phrases and the press release that.
My interest towards that one of the reasons why youre raising guidance for the full year. In 2019 was that you were encouraged by the growing backlog of committed orders.
News to provide this number on a quarterly basis before but over the last year or you have only provide annually.
I was wondering if you could tell us what that backlog is.
The absolute dollar value of if it's less than half a billion what was that.
What was your today as of the second quarter.
Well it instead of calling out that the exact number what we're seeing is a a large growth in the <unk> and our order book compared to the same time last year. So we're seeing the order book strengthen as and Thats been happening as we've been going through the year. So it hasnt just all happen at once and that gives us confidence and to be able to.
Use that as support for raising the guidance. So that we are seeing strong phone demand fundamental growth in the market.
Okay that was it thank you.
Thank you want.
Thank you and our last question comes from the line of Larry Solow CJS Securities. Your line is now.
Great. Thanks, guys and congratulations really good quarter and a very impressive on the on the margin side Im just a few.
Summary questions. Most of mine have been answered, but on the on sort of I guess related to that backlog I know you guys. Obviously improved your throughput significantly in the last few years I'm not that it skewed backlog as lead times came down a lot.
Part of our thesis was that you know as as supply really start to improve and you know.
Overall, you know eventually you would start seeing some some legacy products start transitioning to some of your higher value products and Eric I think you mentioned in your prepared remarks. There that you are seeing some part of the growth. This quarter was sort of on existing products not only on our new and improved products are you seeing sort of.
Maybe not inflection point, but.
Holder pharmaceutical and older products sort into transmission or at least move up the chain in the high value products area.
Yes, Larry the when we look at our the order book. They are committed orders that we have on hand today as Bernard mentioned, a little bit earlier is that we're seeing a very healthy uptake and the driver of that I would say two or three years ago. We were spent a lot of time talking about lead times from our operations today that increase in demand is not due to lead times and our operations.
I'm very convinced the we globalize the operations and the focus that we have and the lean initiatives that are inter operations is really driving quality is driving in delivery and service to our customers. So if you spoke to our customers you'll you'll hear quickly that there hasn't been any really change.
Of the really improved performance, we have seen over the last one or two years the demand that we're seeing at this point really is accommodate mostly a combination of a volume of existing drugs in the marketplace and new product launches that are have been planned and will be plan.
In the near future.
I'm very encouraged by this because.
Is this is not just in one of the segments. This is across all segments and is showing just the underlying health of the different markets. We serve obviously biologics has a heck a healthier market growth rate than the small molecules and pharma.
But when I see the growth that we're seeing eye to me. It shows that we're maintaining share if not capturing new share with new products going into the pipeline.
Right and it seems like you're also not only as your mix of high value products rising, but within that mix because I know like Nova pure is.
Sounds like it's starting to really pick up some steam but I.
Venture a guess it still represents a pretty small fraction of overall.
In terms of penetration of that relative to other high value products is that fair to say right. If we if we look at.
Two areas that youve to one of them you spoke of as Nova Pier.
We've talked about that in the past, but the adoption is now get into commercial drug molecules in the marketplace.
We're seeing the same thing with the Crystal Zenith and so now it's becoming more meaningful these numbers and the growth is quite significant.
So while we don't give out specific numbers of each product line. Those two areas alone are contributing to a good portion of the growth in particularly in the biologics area and also a little bit in the CZ sales to help sell with.
With the pharma side dose or lead into my next question could you without quantifying maybe give us a little more color on the on the CD side, maybe you know how many new products you have commercial is today or something you know something changed from last couple of years or.
Any more color there have a great.
Yes, what you've seen on the seed side is that were and commercial.
A number of products is above three are being launched in 2019, So that's incremental.
And particularly around the one ml insert needle that we are manufacturing.
Out in our Scottsdale, Arizona facility.
This is obviously great work done by both our partner Daikyo and also our internal engineers, Phil get into a scale out as our customers I won't mention specifically where customers are increasing their demand and for these launches is also causing us as Bernard talked earlier about where are we investing our capital.
Thats a specific area, we're investing additional capital not facilities, but.
Actual lines cell lines to build produce more crystal zenith, one ml insert needle.
And also frankly in the Nova pure line too. So it's we're seeing that uptick Larry we're seeing it.
And now in sort of really pre commercial and development. These these are starting to take off.
We're encouraged by it.
Excellent and then just last question just miscellaneous one for Bernard on the there was a two and a half million dollar credit I guess in in the operating income line.
So what was that related to.
FX.
Oh that was NSX, okay, great. Thank you.
Great Thats particular, thank thank you great. Thank you Larry.
Thank you and that does conclude todays question and answer session I would now like to turn the call back to Quintin Lai Vice President of Investor Relations for any further remarks.
Thanks, Chris.
And thank you everyone for joining us on todays conference call an online archive of the broadcast will be available on our website at west pharma Dot com in the investors section. Additionally, you can get a replay through Thursday August eight by dialing the numbers and conference I'd provided at the end of today's earnings release.
That concludes the call and have a nice day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may all disconnect everyone have a great day.