John Sweeney:

Good morning, and welcome to West's Second Quarter 2024 Conference Call. By 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. 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 will review our financial results, provide an update on our business, and present an updated financial outlook for the full-year 2024. There is a slide presentation that accompanies today's call and a copy of the presentation is available on the Investors' section of our website. On Slide 4 is our Safe-Harbor statements. Statements made by management on this call and the accompanying presentation contain forward-looking statements within the meaning of the U.S. Federal Securities Laws. 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. Actual results could differ materially from past results as well as those expressed or implied in any forward-looking statements made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risks to which it is subject, including our 10-K, 10-Q and 8-K reports. 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. 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.

Bernard Birkett:

Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll 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 to our 2024 guidance. 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. We recorded net sales of $702.1 million, representing an organic sales decline of 5.9%. 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. High 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, Daikyo Crystal Zenith and FluroTec products. Looking at the performance of the market units, the Biologics market experienced a mid-single-digit decline, primarily driven by lower volumes of Daikyo Crystal Zenith and Westar products. The pharma market units 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 FluroTec 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 half. Our Contract Manufacturing segment experienced mid-single-digit net sales growth in the second quarter, led by growth in sales of components associated with injection-related devices. 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. Excluding stock-based compensation tax benefit, EPS decreased by 28.4%. Now, let's review the drivers in both our revenue and profit performance. On Slide 11, we show the contributions to organic sales decline in the quarter. Sales price increase has contributed $21 million or 2.8 percentage points of growth in the quarter. More than offsetting price was 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 products' second quarter gross profit margin of 37% was 690 basis points lower than the margin achieved in the second quarter of 2023. The key drivers for the decline in the proprietary products' gross profit margin were lower production volume due to the reduced customer demand in the period and an unfavorable mix of products sold, partially offset by increased sales prices. 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. Now, let's look at our balance sheet and review how we've done in terms of generating cash for the business. On Slide 13, operating cash flow was $283.2 million for the six months ended 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 was $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 product and our contract manufacturing capacity. 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. Our cash balance at June 30, 2024 of $446.2 million was $407.7 million lower than our December 2023 balance. The decrease in cash is primarily due to $454.1 million of share repurchases 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 $3.0 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% to 2% compared to our prior guidance of 2% to 3% growth. 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 in growth initiatives and the timing of spend on one of our major projects. There are some key elements I want to bring your attention to as you review our guidance. Full-year 2024 adjusted diluted EPS guidance range includes an estimated FX headwind of approximately $0.03 based on current foreign currency exchange rates, which is a decrease from the prior guidance of $0.04. The updated guidance also includes EPS of $0.22 associated with first half 2024 tax benefits from stock-based compensation. Our guidance excludes future tax benefits from stock-based compensation. I would now like to turn the call back over to Eric.

Operator:

[Operator Instructions] Our first question comes from the line of Paul Knight with KeyBanc Capital Markets. Your line is now open.

Eric Green:

Yes. Thank you, Paul. The destocking -- the activity that we are seeing is actually a combination of both. Obviously, we're still seeing a little bit of destocking in the COVID vaccines. 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 to from several months to because our lead times got a little bit longer. Now that we've installed the capacity, we are -- 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. Our belief, and speaking with our customers, the end patient demand on the molecules still remains in-line as what we expected. Our -- the market shift is not occurring, is consistent, as we've been speaking for the last several years. And our win rates 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, two particular areas in Contract Manufacturing will be online in second half of this year. That's in Grand Rapids, Michigan and also in Dublin, Ireland. 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.

Eric Green:

Thanks, Paul.

Larry Solow:

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 destocking and inventory levels, how is your visibility on with that. Are levels like back to where they were pre-COVID or maybe even lower? What gives you kind of confidence that customers aren't maybe this goes even a little bit longer than thought. We keep kind of moving that to the right a little bit. You sound pretty confident that you have a good hold on it, what kind of gives you that confidence?

Larry Solow:

Okay. And in terms of the CapEx, obviously, a little bit of an increase I guess, to me, it certainly signals your confidence, although you mentioned a little bit of timing there. But as we -- if we look out over the next few years, do you expect to still kind of spend this $350 million to $400 million in investment? Is that something that you still have a several year runway to continue?

Bernard Birkett:

Yes, Larry, just two things on that. One on the increase in CapEx for this year, really the major driver behind that is a business that we've been awarded from customers for our Dublin facility, and where they actually want us to put the capacity in place sooner than originally anticipated. So, we pulled some of that CapEx that we had earmarked for '25 into '24 to meet those requirements. When we look at the longer-term, we're really targeting about 6% to 8% of revenue. So getting back to pre-COVID levels of CapEx for our business. 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 it. If that demand increases or goes beyond that, and particularly around finishing capacity is the areas where we see that could potentially happen, then we would deploy more capital, but it will be very growth-focused if that was the case, and always around or predominantly around HVP.

Bernard Birkett:

No, the 6% to 8% would support that level of growth. 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. And, 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.

Eric Green:

I won't be able to pinpoint exactly which quarter over the next few quarters, but we will get back to that 7% to 9% construct. Like I said earlier, our position in the marketplace, the areas of growth that we're focused on is Biologics and some -- and across the entire portfolio, what's outsized that growth is biologics, GLP-1s and some of the work we're doing for our customers whilst moving up the HVP curve. So yes, we feel confident we will be back to that 7% to 9% construct.

Larry Solow:

Got it. Great. I appreciate the color. Thank you guys.

Operator:

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

Justin Bowers:

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 year? And then, 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. I'm just curious if that's still what you're seeing.

Eric Green:

I'll take the coverage ratio.

Eric Green:

Yes, absolutely. So Justin, so, thanks for the 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 increase nicely, not just on a percent ratio perspective, but on absolute dollar for both Q4 of this year and also going into the early part of 2025. So that's one aspect. And therefore, as that kind of increases the intra-quarter demand profile is actually is 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, I believe. And so, that's why hence why we changed the guidance. But when we look out to Q4 and into 2025, we're seeing very strong indication with confirmed orders, and our discussions where customers are lining up exactly to that conclusion when we look at their destocking programs and when they feel they'll be at a level that they feel is acceptable. So, it's lining up nice. You want to touch on the destocking?

Justin Bowers:

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 now trying to manage inventory levels in line with your lead times or -- just trying to get a sense of change in ordering patterns and where that might normalize?

Justin Bowers:

Got it. Appreciate the questions.

Operator:

Thank you. Our next question comes from the line of Avantika Dhabaria with Bank of America. Your line is now open.

Bernard Birkett:

Yes. So, what we are seeing is that, for Q3, we don't see any major step up continue in the way we're -- we've been going. Some sequential improvement, as Eric mentioned, and the -- 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 around the biologics market, and that's what we're seeing, and that's the information we're getting from our customers. 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 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 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. So we're managing that pretty tightly. Other than that, there are -- we're not making any significant cost cuts, but we are -- I would think -- I would say we're using appropriate cost management to manage through the de-stocking period, although it has extended 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 with that. Hopefully that helps.

Matt Larew:

Hi, good morning. 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 200 basis points to 300 basis points of the cut from the Q3 call last fall from de-stocking, but mentioned that 75% of de-stocking was from six customers. Obviously, the first quarter results themselves actually were positive relative to the outlook you'd provided and you maintained the guide for the year. So, now having 400 basis points, 500 basis points come out of the organic guide with about four months left -- four months, five months left in the year is -- the magnitude is pretty large. So just -- was it -- going back to conversations specifically with that group of big customers, was it something that historically if you use the term broadened and worsened, did things broaden and worsen further? Was there one or two pockets of customers or product categories? Just trying to understand what happened from mid-April to the end of June in terms of the big change here.

Eric Green:

And I'll just add to this. Thanks Bernard. And -- so it became more of a gradual recovery, I believe, in what we're seeing versus a more pronounced Q3 recovery. And that's actually one of the drivers of why, based on the customer conversations, it's a still 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. 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, we are confident moving back to a long-term construct. And that will, it's going to take a little more time than we anticipated, but as it indicated in the guidance that we gave, we're getting closer to that in Q4. And we believe that will carry on going forward. So 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.

Eric Green:

Yes, 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, when I talk about the mid to long term, getting back to 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 the capacity we have online. 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. 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're going to deliver.

Eric Green:

Thank you, Matt.

Jacob Johnson:

Hi, thanks. Good morning. Maybe just to go back to the EPS guidance, you're pointing to kind of down 1% to 2% organic growth this year. And I think it would seem to apply probably like 300 bps to 400 bps of operating margin contraction, which is kind of greater decremental margins than the long-term algo would suggest. Can you just flesh that out a bit more, some of that capacity additions, et cetera? And then I think I heard Bernard mention 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?

Jacob Johnson:

Thanks for that, Bernard. Sorry.

Jacob Johnson:

Got 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 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.

Jacob Johnson:

Got it. Thanks for that, Eric. I'll leave it there.

Operator:

Thank you. Our next question comes from the line of Dan Leonard with UBS. Your line is now open.

Eric Green:

Actually, the -- So, Dan, thanks for the question, 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 being the pipeline when you think about new developments, and the volumes there are less, and the frequency of orders are probably a bit higher. The predictability of which quarter lands in is lower, but the order of magnitude on the stocking impact is less. So, I'm not sure if that helps, but obviously a very important part of our portfolio are the small, 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 has on our fluctuation on the revenues is not as great. I don't know if that helps, Dan.

Eric Green:

Not really. I mean, the team is going to work really hard to have -- to get that capacity up and running in 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 to why we're calling -- giving the guidance the way we are for Q4.

Eric Green:

Yes. Thank you. Thanks, Dan.

David 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 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, 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 historical accuracy and tie in with those large customers, but seemingly a disconnect on that right now. Is that the right way to think about it?

David Windley:

Got it. Okay. And then in terms of the improving confidence, I guess I'd like to key on, on Bernard's answer about kind of the cuts to this year and 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 not coming as you expected. 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 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?

David Windley:

Got it. And Bernard, to your point, you did say -- management did say similar things about, 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 2% to 3% instead of, the 7% to 9% construct. So, you had those conversations earlier in the year and, we're talking about having them again here in the middle of the year. I guess I'd also invoke, you mentioned that, 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, that would imply a revenue level that's still a couple of 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 of hundred million dollars of overbuying in your customers' inventory levels that they still need to work through before you get to that multi-year growth support level?

David Windley:

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.

Bernard Birkett:

Thanks David.

Tom DeBourcy:

Hi, good morning.

Tom DeBourcy:

Good morning. Just had a quick question, I guess on CapEx. And, you know, so the current level of CapEx, 12% to 13% of revenue, and I just wanted to get a sense of how you're, I guess, metering the demand, or long-term capacity expansion versus maybe short-term weaker demand due to de-stocking. And then just as you look to 2025, I think consensus has maybe the number going down to $300 million of 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?

Operator:

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.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Good day, and thank you for standing by. Welcome to West Pharmaceutical Services First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that today's conference may be recorded.

Quintin Lai:

Thank you, Olivia. Good morning, and welcome to West's First Quarter 2024 Conference Call. We issued our financial results this morning and the release has been posted in the Investors section on the company's website located at westpharma.com.

Eric Green:

Thank you, Quintin, and good morning, everyone. Thanks for joining us today.

Bernard Birkett:

Thank you, Eric, and good morning. Let's review the numbers in more detail.

Matthew Larew:

I wanted to ask about -- you referenced the pickup in the back half of the year, but more about the second quarter. Last call, you discussed sort of a flip to positive growth in the second quarter. And Eric, in your comments, it sounds like there hasn't been an inflection on the destocking. So just wondering if we should still be thinking about positive organic growth in the second quarter or if things are now more weighted to the back half of the year?

Matthew Larew:

Okay. Then maybe let me go from very near term to a higher level, which is that some peers have described that the supply chain disruptions and longer lead times during the pandemic created an opportunity for them perhaps to get into West's customers where they didn't have access to before. And so just curious what your assessment is of your competitive positioning and perhaps more generally, the industry's bias towards sole source or multisource arrangements moving forward and just kind of ask that in light of all the high-value capacity you're adding.

Operator:

And our next question coming from the line of Jacob Johnson with Stephens.

Bernard Birkett:

Yes. It was -- it's primarily around gross margin, and that's impacted by mix and then the overall absorption in some of our plants impacted the margin that we saw in Q1, but it was actually ahead of where we had predicted it to be, which -- so it was a solid performance for us in the quarter.

Eric Green:

Jacob, this is Eric. I would say, at this point, we do not want to adjust our long-term outlook. However, we are excited about working with our customers in both areas that you described. One is in the GLP-1 sector, which we would be able to support our customers both in the elastomer side, but also in the -- in our Contract Manufacturing to be able to support them on their delivery devices.

Paul Knight:

Eric, as I look at the numbers, would it be fair to say that within Contract Manufacturing and proprietary delivery systems, you need to build capacity and there seems to be a ceiling right there for you right now?

Eric Green:

Well, if I -- let me rephrase that. I think the HVP components for us, most of the destocking that we've experienced earlier this year is around that category. However, that particular part of the portfolio will ramp up quite -- very nicely sequentially throughout the year. So it is -- most of the -- if you look at the Q1, the proprietary elastomer side, it really is due to destocking at this point in time but very strong outlook towards the end of the year and very strong obviously beyond that.

Operator:

And our next question coming from the line of Michael Ryskin with Bank of America.

Bernard Birkett:

We expect margin improvement sequentially as we move through the year, and that hasn't changed since we spoke about it in February. We would see growth in operating margins step up quarter-over-quarter.

Eric Green:

Yes. No, it's a great question. I mean last year was a unique situation due to inflationary pressures. This year, I think we discussed in February that we're targeting between the 3% to 4% corridor on net price contribution, absent of any HVP mix shift. And so we started the year off in line with what we expect 3% to 4%.

Justin Bowers:

Eric, earlier you talked about some of your customers returning to pre-pandemic safety stock levels. Do you have a sense on when that normalizes this year? And what it means in terms of typical ordering patterns?

Justin Bowers:

Contract Manufacturing side, last quarter, you talked about some operational improvements, I think, maybe in Arizona. But is that somewhat of a gating factor until you implement those and get the throughput through? Or can you maintain the same productivity levels while you're making those changes?

Bernard Birkett:

Yes. And I think the productivity improvements that we're actually working on right now don't impact our current levels of production. And we would -- again, we would see a sequential improvement in the throughput around that business. So we're not looking at a step back there.

Justin Bowers:

Appreciate the questions and sorry the background noise. I've got some guys on my roof.

Justin Bowers:

Totally appreciate it.

Operator:

And our next question coming from the line of David Windley with Jefferies.

Bernard Birkett:

Yes, David. So it was really in some of the other areas of high-value products where we saw some step back in Q1. But what we do expect to see as we progress through the year, the volumes around that business to increase again sequentially. And that's when we talked about the destocking earlier on in the year where we're seeing it was across all different parts of our business. So we would expect that HVP growth to accelerate as we move through the year and then the margin -- and that to be reflected in our margins. And also, we'll get the pickup of incremental or increased throughput as we move through the year. I think Q1 was our lowest level of throughput, and we're a high-volume business. So absorption does get impacted.

Eric Green:

Yes, David, that's a good observation is that not just upstream, but downstream, we have to be aware of. We do have very strong, very long-term relationships with customers that are in this space. So those relations are very -- are well established, where we do interact with them about their demand profiles, min to max type of conversation for the various drugs and so we're sensitive towards that.

Eric Green:

Well, I will say, it will wane. Yes, it is going to wane throughout -- as you talked about, throughout the year. And that's supported by our confirmed orders as we think through the balance of 2024 and also the discussion we had about sequential growth quarter-over-quarter for the next 4 quarters.

Lawrence Solow:

Just a few follow-ups. I guess just on the -- any update? I know you mentioned Annex 1 and whatnot. Just any qualitative thoughts on -- that you can speak to, just conversations with customers on potential conversions of legacy products going forward? Anything that you could speak to there?

Bernard Birkett:

Yes, Larry, as a percentage of revenue, we expect R&D to be pretty constant as we go through the year. And where is that money going? A lot of that increase is around integrated systems and how we're building that out. And again, it is our partnership with Corning and supporting that and developing that market.

Eric Green:

Yes, that's correct. That's a good position to be in for us.

Quintin Lai:

Thanks, Olivia. Thank you for joining us on today's conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you may access the replay for 30 days following this presentation by using the dial-in numbers and conference ID provided at the end of today's earnings release.

Operator:

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

Operator:

Thank you for standing by, and welcome to West Pharmaceutical Services Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Vice President, Strategy and Investor Relations, Quintin Lai. Please go ahead.

Eric Green:

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We'll start on Slide 5. Last year, we celebrated West's 100th anniversary of groundbreaking health care innovation, which is one of many proud highlights shown on this recap slide. I also want to thank our team members who are connected by our strong responsibility and shared values that continue to help us succeed each day. Now turning to Slide 6, where I'll cover 3 main topics. First, we will examine the drivers of 2023. Second, we will discuss the challenges ahead in 2024. And third, we will talk about the drivers of growth that we'll return West to long-term financial construct of sales and margin expansion in 2025. Let's begin with our financial results. I am pleased with the strong base growth in 2023, which more than offset a decline of COVID-19-related sales of approximately $320 million. Excluding pandemic-related sales, we had strong base overall organic sales growth in the mid-teens. Driving this base growth is the expanding customer demand for our high-value product offerings, both components and devices, and for our contract manufacturing services. During the year, we made great strides with our capital expansion plans across our global network. For example, in Kinston, we expanded our footprint with new NovaPure capacity, and we're in the process of a significant expansion in our HVP processing capacity. At our Grand Rapids contract manufacturing site, we brought online new capacity for a customer's injection device in late 2022, which contributed to growth in 2023. We also have been able to successfully address our backlog of long lead times for certain products. This has been a challenge since the start of the pandemic, and thanks to the hard work of our teams through both optimization and capacity expansion, we have exited the year with normalized lead times. Moving to Slide 7. As we turn our attention to 2024, we are facing several challenges to our growth model as indicated in our preliminary outlook from October. With greater visibility of a changing market landscape, we expect 2% to 3% organic sales growth for the full year or about 5 to 6 percentage points lower than our preliminary outlook. This difference comes from 4 main factors. First, we had expected flat COVID-related sales this year, instead, demand continues to decline, which resulted in about 1% point decrease in organic sales. Second, timing of HVP device manufacturing capacity coming online to satisfy customer demand has been pushed out, causing a percentage point of headwind. Third, timing of a customer's upgrade to a higher HVP tier has caused a percentage point of headwind. And finally, fourth, a more widespread destocking is causing approximately 2 to 3 percentage points of headwind. Towards the end of the year and into January, the industry inventory management trend and other life science tools companies have been experiencing has now reached our segment of the injectable drug value chain. While we thought we might see some impact in 2024, we were surprised with the breadth, latitude and speed at which customers change their forecast. In several of these cases, customers express to us the same sentiment at the amount of forecast changes that were being handed to them. As we look to overall quarterly pacing for 2024, we expect that Q1 will have the largest negative impact due to destocking as well as timing of new HVP device capacity and customer-led HVP upgrade. We expect in Q1 that proprietary products will be down by high single decline. We expect some effect, but to a lesser degree in Q2 with positive proprietary products and consolidated organic growth. And we expect the second half of the year to have better growth with Q4 in line with our long-term financial construct. As we set our 2024 guidance and quarterly cadence, we see several areas that support our expectations. First, our February order book for the second half of the year has a higher coverage ratio than prior pre-pandemic levels. Second, we have some customers that are expected to be able to produce more drugs as the year progresses. Third, we expect HVP device capacity to improve in the second half of the year as we implement process modifications that were designed to improve manufacturing throughput. I am disappointed that we will not achieve our usual full year organic sales and margin expansion in 2024. As I've outlined, outside of further COVID demand reduction, some of the impact is time-related to new capacity and timing of customer upgrades. As for destocking, this is an industry-wide situation, not a change in market share or patient demand for drug volumes. Looking beyond 2024, we continue to be bullish on our growth construct and our teams will have another active year of capital investments in 2024. Moving to Slide 8. We will be expanding our industry-leading capacity with major HVP expansion projects in Jersey Shore and Eschweiler as well as other projects across the global network. Another driver of growth with a bright future comes from our HVP devices, which includes our injection delivery device platforms, Crystal Zenith containment solutions in the admin systems. HVP devices had very strong double-digit organic sales growth in 2023 and now represent 10% of overall sales. Less platforms are an integral part of our customers' drug device combination products that are making a difference to patients. And this year, we have had multiple capital expansion projects that will increase capacity for SmartDose, SelfDose and admin systems, with some expected to come online in the second half of 2024 and fully online in 2025. As mentioned at the outset, contract manufacturing had growth contribution from new capacity at our Grand Rapids site to support our customer's injection device platform. Looking ahead, we're excited to have started a significant expansion at our Dublin facility, which is already dedicated to contracted demand for future injection device manufacturing. We expect to be completed and validated in 2024, which places us in a great position for 2025 growth. I also want to take some time to talk about the dynamics of future demand related to our growth drivers for HVP components. As you know, we have been building HVP capacity for several years and expect it to continue to do so in 2024. We see a robust runway of volume growth over the next few years. As a foundation, we expect volume growth of existing drugs with increasing ageing patient populations, expanding geographical reach and evolving treatment guidelines and market conditions. In addition to overall volume growth, we continue to experience and see certain drugs have breakthrough growth. For example, we are experiencing a similar surge in demand for components associated with drugs treating diabetes and obesity. Our responsibility as the industry leader in primary packaging is to be prepared for incremental jumps in demand. And lastly, the area with the most potential for our future growth is our HVP capacity to support and mix shift. For mix shift, we see a combination of volume from new drugs that enter the market and from legacy drugs that upgrade from either a standard component or lower to a higher HVP category. The mix shift of legacy to HVP has historically been a smaller contributor for us compared to contribution from newly approved drugs. However, with the industry landscape changing, regulators are introducing new regulations for higher quality, lower particulate, and more standardized solutions. And therefore, customers are looking to upgrade their standard primary components. When we look at that over the next few years, we estimate that several billions of our primary containment components in standard form could benefit from a mix shift to our modern formulation and HVP processes. We recognize this mix shift will take time, but we anticipate as new regulation changes are enforced. This adoption will accelerate. By considering our combination of growth drivers from volume, price and HVP mix shift, we can confidently assert that we will be well equipped to navigate the challenges and continue to fuel our long-range financial construct of 7% to 9% annual organic sales growth and at least 100 basis points of operating margin expansion per year. Now I'll turn the call over to Bernard. Bernard?

Eric Green:

Thank you, Bernard. To summarize on Slide 14, our proven growth strategy continues to deliver unique value, the breadth of our high-quality product offerings. This is evidenced by a robust committed order book. Despite the headwinds and challenges in the sector, our team is committed to overcome these obstacles to meet the anticipated growth expectations. I'm confident and excited about the future for West as we continue to make a difference to patient health across the globe. Latif, we're ready to take questions. Thank you.

David Windley:

I'm going to start with an easier one and then a higher level one. So Eric, I appreciate the comments that you gave us around the cadence of recovery or reacceleration in '24. So if I understood you correctly, you said negative double digits in proprietary products. Because one of you talked to where you think overall growth, like where will organic sales growth be in 1Q all in? And then how does that ramp through to the fourth quarter? It sounds like it gets to what you would call normal in the fourth quarter. Just want to understand that more precisely. Thank you.

Bernard Birkett:

Yes. On a consolidated basis, we would see the growth between 6% to 7% or negative 6% to 7% decline in Q1. And then as we said, we would expect to see growth ramping as we move through the year and getting back to construct in Q4.

Eric Green:

Yes, David. So first of all, when we have our conversations with customers, it's a combination of two factors. One is, as they look at their inventory levels, they see an opportunity to leverage a little more working capital management. In addition to that, you add on the factor that in the beginning of 2023 and in all of 2022, our lead times, we were significantly higher, probably 3x to 4x. And what we've been able to do successfully due to both optimization and capital deployment that now is online and keeping up with the demand. We were able to bring those lead times to well before pre-pandemic levels. And so therefore, if you add those two factors together, it gave them confidence to be able to be more aggressive on inventory management. From a destocking, look at our portfolio, you're right. One of the areas that was more pronounced was on the standard in bulk areas, but we're also seeing it in some cases in parts of our HVP portfolio. So it is -- I would say, it's a cross, a broader set, but I would say the primary area has been the bulk and of the standard area.

Paul Knight:

Hi, Eric. On the $250 million of CapEx this year, and then I think it was a little higher last year. When does this, like, for example, last year's CapEx, when does this translate into revenue? Is it what you're alluding to earlier, is it second half '24?

Paul Knight:

I guess my follow-up and last question would be, you've guided to a long-term growth rate of 7% to 9%, yet in the same period of the last couple of years or so, GLP-1s have emerged as a significant class of therapeutic. Does that square up with your historical guidance of 7% to 9% with this GLP-1 demand out there?

Operator:

Our next question comes from the line of Jacob Johnson of Stephens.

Eric Green:

Yes. Bernard, would you like to take that one, please?

Jacob Johnson:

Got it. And then just on the destocking and kind of visibility to this subsiding as we maybe get into the back half of the year. I know your portfolio is a bit different than the bioprocessing peers, but it took a while before we kind of found the bottom of destocking before really kind of numbers bottomed and kind of accelerated last year maybe there's some unique dynamics around that. And I think investors and some of us have [indiscernible] from this. Can you just talk about your visibility into that destocking concluding and maybe kind of the order book, how firm the order book is the back half of this year?

Operator:

Our next question comes from the line of Derik De Bruin of Bank of America.

Bernard Birkett:

Yes. Derik, that's what we would expect to see. Q1, obviously, is going to be pressured from a margin point of view based on what we're seeing from a revenue perspective, if we see a high correlation there. But again, we do see it trending back to more normal rates of operating margin as we progress through the year and it will be a gradual shift, I think, quarter-over-quarter.

Eric Green:

Yes, Derik. I mean, I know last year, we were between 5% to 6% as we guided the year before. I think we're between 3% and 4%. Before that, as you know, the history of this company, we're probably 1% or 2%. We're not returning back to the history levels. So we're probably more near the 3-plus mark from a net price contribution. And just to be clear, any mix shift that occurs, we do not classify that as price. So this is pure price net price contribution.

Eric Green:

Yes. It's absolutely a continued focus for us, Derik, absolutely. I mean, we're not pleased with the impact it's had on us. We pride ourselves we have pretty much access to a large part of the market. And however, based on the conversations and the data we've been looking at with our customers, there will be some still in Q2 that has some destocking, but not as pronounced in Q1. So it's really, most of it that we're seeing is really a Q1 phenomenon.

Matt Larew:

Asking about the order book here. I think one thing we saw on the bioprocessing side is at some point during that saga, company started referencing green shoots or early indicators of ordering demand and then just took longer for some of those orders to convert or for sort of the green shoots to turn into a dollar signs. So just understanding that the order book is outpacing pre-pandemic levels, good coverage. What sort of the level of confidence, whether that's written contractually or something else that sort of order activity today will convert to revenue dollars in the P&L as you see them coming in.

Matt Larew:

Okay. And then another piece of this was, I think you said 1% from HVP manufacturing capacity. And I think if we dial back to Kinston and bringing some of that capacity online, obviously, you end up catching up a little quicker than you initially thought. What sort of the scope of this capacity expansion and sort of the past year to get it back to where you want to be?

Operator:

Our next question comes from the line of John Sourbeer of UBS.

Bernard Birkett:

John, it's relatively the same percentage plus or minus because the destocking is kind of across broad categories. And when we look at growth in our business, particularly in the proprietary, it is led by the high-value products in the component side. That is leading to growth. As you know that we are in a very attractive injectable market and one of the best the fastest-growing subsegment within the injectable space is biologics. Our participation rate remains very high, continues to be so. And that's where a lot of the HVP growth is occurring which is causing a mix shift on the margin. So we anticipate that to be still robust percentage of our overall portfolio.

Eric Green:

Yes. That's good questions. You're absolutely spot on. But when we look at the destocking effect that's happened for us in the first half of this year, it is across multiple market segments. So it's both, it's not just the generics and pharma, but also in some cases, in the biologics. So I would say that for us and where we are in the value chain, is pretty much across all 3 sectors, we talk about biologics, pharma and generics.

Bernard Birkett:

Very similar of all three, very similar staging coming back.

Justin Bowers:

So I have a 2-parter here. But first, I wanted to clarify the cadence in the prepared remarks. I thought I heard products would be positive in 2Q and overall would be positive. So I just wanted to clarify that. And then sort of the step-up from 2Q to 3Q on growth? And then, the follow-up question would be just on the order book. You said it has a higher coverage ratio than pre-pandemic levels. Can you just help, is that sort of like a forward 12-month or forward 6 months, or just how do you guys look at it internally and across which businesses? Help us understand what that.

Justin Bowers:

Okay. Thank you. That's helpful. And then just to clarify on the margins, too. I'm getting to, it looks like if I sort of back into the EPS guide, with a normalized tax rate, I'm still getting to roughly 90 to 100 basis points of margin expansion on the low end. Is that the right math, or is there some other dynamics in play there that I'm missing here?

Justin Bowers:

Yes.

Operator:

Our next comes from the line of David Windley of Jefferies.

Eric Green:

Yes. When we say participation rate is that when we are our customers when they file their regulatory filings, it is pointing towards the West product. that's in their filings. And therefore, we tend to have a pretty, let's say, share, it's usually a very large percentage of that, if not all. Do customers in the market look at a secondary source and/or test for that secondary source, yes. But when we look at our participation rate, it tends to be a pretty large share of the volume of the doses basically. So that's what we mean by participation. It's a win rate for us, Dave. And it's pretty consistent historically, and we've been tracking that. For both ourselves, and our partners, Daikyo at the molecule level, absolutely.

Eric Green:

Yes. No, our participation rate in GLP-1 is very strong. And there might be other components that are used in the final packaging configuration that are provided by someone else in the market that's been historically true. But the way we are positioned with our customers in that particular space is very strong on proprietary components but also on the contract manufacturing side. So I would say that in all cases, when you look at a final primary packaging containment, there's multiple elements that go into it. Hence, the reason why we're driving towards more of an integrated system approach as we've been talking about building towards. We would like to have more components than just 1 or 2 items on that whole system. So yes, others will probably be participate with their own products, but I'm pretty -- I feel really comfortable where we are with our position.

Eric Green:

Dave, let me address the first part and then maybe I'll turn it over to Bernard on the second part. When I look at the capital that we have in front of us today for 2024, the $350 million. It is true that we would like to be able to get our capital as a percentage of sales back to the high single-digit range. However, while 70-plus percent of our capital is still around growth. These are commitments that our customers were working with, whether it's near term or more midterm, that we need to build support. So in the contract manufacturing side, it's very clear, it's very near term. These are contracts we have agreed upon for a number of years ahead of us that we need to get the installed capacity in place immediately so we can start producing product for them. On the proprietary side, we are anticipating future growth with new drug launches that are occurring and will occur and based on the volumes that we've been asked to be able to support, these are the types of investments we need to make. So, for example, HVP processing is not just a NovaPure play, but it's the ability to take our HVP portfolio and support the growth not just on the volume, but also new drug launches, any particular categories that are going to have outsized growth rates. And then also on this mix shift effect that is on us today due to regulatory changes requiring higher quality, lower particulates to meet these regulations that are going in place. So those are the drivers why we feel good, confident about the investments we're making because we know the return on these investments are very positive for us and obviously for our customers. And that's the lens that we currently have. Do you want to, Bernard, touch on the capital?

David Windley:

Share repurchase?

Quintin Lai:

We have time for just one more question.

Larry Solow:

There it is. Thank you. Long wait there, worth the wait. I guess just a couple, first of all, Eric, thank you for a really good description of sort of not a great subject, but the impact of the lower sales outlook, really appreciate that. I guess kind of just switching gears to a couple of topics. Can you just give us a little more follow-up on, a little more color just on the -- you mentioned an ongoing sort of regulatory shift. Has this accelerated in terms of requirements for low particulate. And is that something that's going to drive some of the legacy products to have to switch maybe over, or is that just driving more on new products coming to the market?

Larry Solow:

Absolutely.

Larry Solow:

It sounds like it's a layer in some extra growth on an annual basis if it comes to fruition over a multiple year period. But if I could squeak one more in, just on the devices and reaching 10% of proprietary high-value price sales. I think that's a nice significant milestone. Is that driven more by SmartDose, SelfDose, is that the combination of two, what's really driving that growth going forward?

Operator:

Thank you. I would now like to turn the conference back to Quintin Lai for closing remarks. Sir?

Operator:

Thank you for participating. You may now disconnect.

Operator:

Hello, and welcome to the Westrock Coffee Company's Third Quarter 2023 Earnings Conference call. My name is Tanya, and I'll be coordinating your call today. Following prepared remarks we will open your call to questions with instructions to be given at that time. I would now like to hand it over to Clay Crumbliss with ICR.

Scott Ford:

Thank you, Clay and good afternoon, everyone. Thank you for joining us today. I'll be the first to acknowledge that our third quarter this year looks like a bit of a mess as a variance from our targeted performance of roughly $20 million in adjusted EBITDA for the period and our reported results of $11.6 million appears quite large at first glance. That said, I think it's critically important to call out that virtually 100% of the miss comes from two distinct causes that were unique to the period. First, over $6 million of the miss happened in July and August alone in our traditional roast and ground coffee unit, where these customers ordered fewer pounds in this period than they did in the depths of COVID. As we work with them and our forecast analysts, we were repeatedly informed that the spike in gasoline prices, coupled with the spike in interest rates, combined with a measurably hot summer kept consumers out of restaurants and C-stores in the first two months of the quarter. Fortunately, September was largely back to normal versus prior years in roast and ground coffee volumes and October and early November are coming in at normal levels as well. So this appears to me to have been the same transient crunch that happened last year when gasoline prices spiked as oil went above $85 a barrel and demand came back for coffee as soon as oil prices retreated a bit. Secondly, as Chris will detail in a few moments, we incurred almost $2 million of expenses during this quarter that were associated offsets to prior periods, further compounding the stated performance GAAP. And I fully realize that GAAP does not allow us to go back and add these items back, if you will. But in terms of clearly laying out what is going on in our business, this $8 million of combined EBITDA pressure equates to 100% of our adjusted EBITDA miss for the quarter compared to the updated guidance we gave you after our second quarter. We will continue to head down to deliver all that we can in 2023, looking for ways to drive revenues up and costs down. Turning now to the Conway extract and RTD plan. I want to commend and thank the team that has tirelessly fought to convert that plant and distribution facility from rendering on the drawing board to the finest facilities of their type in the country in what has to be record time. It has been a joint effort of Westrock employees, professional service providers, equipment vendors, customer product development, QA and procurement leaders and the two primary general contractors involved, Nabholz Construction and Clark Construction Co. Each individual involved is dedicated to the successful completion, product commercialization, and operational launch of this new $300 million extract and ready-to-drink facility in Conway. Which is on schedule to successfully begin commercial production of finished product in the second quarter of 2024. This Conway facility is coming online just as we have essentially now finished selling out 100% of our extract manufacturing capacity in Concord North Caroline. So overall, while it is a bit of a difficult time for the core coffee market, where we continue to compete for customer volumes as they ebb and flow through the seasons and gasoline price generations, it is an absolutely glorious time to be in the extract and RTD space as our new customer and product extensions continue to expand and where we are about to open our third extracted ingredient factory, with the first two being sold out of capacity. For example, at this point, we have sold out almost 100% of our capacity on four of the initial six packaging lines, and we are over 50% sold out on the remaining two initial lines in the combined Richmond, California and Conway, Arkansas plans. And as Chris will describe in a few moments, we're working on some new ways to keep the investing public current on our progress inside the plants when we roll out our guidance for 2024 early next year. Now we do not expect most of this capacity in Conway to come online in commercial volumes, which is what produces EBITDA and until the very end of 2024 and early 2025. But we are confident that the four to five year forecasted EBITDA generation of Westrock, with these assets fully online remains right on track with our previous estimate at around $200 million of annual adjusted EBITDA. With that, I'll turn the call over to Chris for a review of our current operations and financial results.

Operator:

[Operator Instructions]. Our first question will come from Ben Bienvenu of Stephens Incorporated. Your line is open.

Scott Ford:

That's a good question. I appreciate where you're coming from on it. It's actually a very different economic being, if you will. It's a different set of contracts, it's a very different type of product flow, it's a very different product forecast flow because it's a consumer product good that goes to a shelf directly versus people driving through and people trying to guess what they're going to do whether they buy coffee or just as part of the value mill or just buy a biscuit, etcetera, etcetera. And when gas prices go up, they tend to soften up on that pretty quickly. You can see across the industry that RTD, like every other beverage had a soft third quarter across the industry, but nothing like hot coffee itself experiences in terms of seasonal fluctuation or fluctuations around gas prices. It is a much more stable business, and it is a much more contractually driven business than the core roast and ground coffee business.

Scott Ford:

Well, it hasn't changed. We feel -- we've got plenty of room and frankly, if you look at where we're running and what we expect to run, taking July and August hot coffee out and this is a little complicated. But in a quarter where we made $17 million last year, we were close to $20 million this year without the two items I took you through. So as you roll through where we're running apart from those two months, from a credit perspective, we think we've got plenty of room. But I know for certain that if we ran into any issue whatsoever finishing out Conway, we have multiple sources lined up wanting to be part of this capital structure, to be part of this adventure, if you will because the Conway numbers are frankly stunning in terms of what they're going to add to this business and bridging it or financing it in any way, shape, form or fashion that is needed to finish that off. We're highly confident we can get that done. And as we said on our last call, this is the last common equity you're going to see us raise which we raised this last summer to finish. And we didn't know exactly how July and August were going to come in, but even that performance doesn't change that answer.

Operator:

And one moment for our next question. And our next question will come from Todd Brooks of the Benchmark Company. Your line is open Todd.

Scott Ford:

It's a totally fair question. First of all, you look at the performance of the business overall over the last year, and you've got essentially two things going on. You have in the single-serve business and in the systems integration, the first part of the year where we were putting in a new accounting and information system in Concord, which is the roast and ground and extract business. You had $5 million to $10 million of cost this year related to those two things, which are, for the most part, now out of the run rate. So you look at single-serve where we were basically overrun with orders beyond the equipment. We had to get equipment in. It was late bringing it in. We paid penalties, we suffered the charges of that. We ran 24/7 over time. All of that was in the first part of the year. In the last five months of the year, that business is right on plan, clicking along just like we told you. So if you look at the extract business, flavors, extracts and ingredients and I'll heed your question and keep going, that, that business is up 70% over the quarter same period last year. So single serve is doing exactly what we told you it would do. Flavors extraction ingredients is doing exactly what we told you would do. The hot black coffee business is a very complicated business, where we had a very, very, very good year last year, and we've had a bit of a tough year this year, but you take out the demand forecast. Now these are the biggest companies in the world, biggest restaurant and C-store change. We follow their demand forecast. The gas price spike, the interest rate spike in the summer and the demand destruction that created at their restaurants and in their shelves surprised them as much as it surprised us. So I guess some points in time in hot black coffee, you're going to have periods of time like that. But if we hadn't had that happened to us, you'd be sitting here saying, well done, you're up 15% year-over-year. Tell me more about Conway. It's just like you just go through it. I've had quarters where we've been pleased and I'm no genius, and we've got quarters when we're disappointed, and we're not idiots. It's just part of a commodity processing business where you don't have contractual rights to make people buy product.

Chris Pledger:

Yes, I think at the end of the day, I think you're starting to see more normalization, both in roast and ground and you're starting to see more normalization in single-serve and growth and extract. But if you go from kind of where you started, you're starting at a lower base. And so we expect continued growth in those platforms throughout the fourth quarter. But your -- that growth will flow underneath our expectation whenever we updated our guidance over the -- at the end of the second quarter call.

Scott Ford:

Here's where we are, and let's be super candid. In terms of the things that we have to do, is the equipment in, are the systems in, is the plumbing in, are the products ready to go, are people ready to go? All of that is on or ahead of schedule. Now we come into the period of time when the customer chooses how much they want to commercialize, how many SKUs they want to commercialize and when they want to do it, and they have to do that and they get to do that over a year. So there are no penalties in the year of start-up, and they select when they come in. So if they all come in, in the second quarter, we will blow that away. We will run through the roof on our -- against that kind of guidance. But if they all delay until late in the year or first part of 2025, which they contractually can then that won't happen in 2024. Now you're asking me what are my customers going to do in the commercialization, start-up selection that they alone control. I don't know, but they have a year to turn it up, which -- so it's very easy for me to tell you what we've got signed up for 2025. It's very difficult for me to tell you how that will phase in, in 2024.

Operator:

And one moment for our next question. And our next question will come from Matt Smith of Stifel. Your line is open Matt.

Scott Ford:

Sure. I think let's take it into two parts. The first one is the variance in revenue and the impact on EBITDA. Well, that is in fact, in that part of our business where you really are a scaled core processing of commodity manufacturer, revenue ripple-through there is pronounced and direct as you would expect. When it comes to what we're going on with our customers, they were carrying inventory and the forecast they had for us caused us to build inventory. So at the end of the day, the whole system was full as we went into the summer and the summer was literally, we sold -- you may have to make an amended filing for this. But the whole miss was in hot coffee dollar for dollar from July and August. I mean it was stunning. And people said, as we've talked and getting ready for this quarter, I think a fair question is, well, why did you wait until the end of the quarter? Well, we're not Walmart. We don't report revenues on a monthly basis. But this quarter was in trouble in July. We didn't really realize how deeply we thought, well, that's some timing. But by the time August had closed when we were into September, we realized there is nothing you can do to save cost and get out of a commodity processing business quick enough when they just literally don't order anything.

Scott Ford:

This is 100% driven by the same set of customers doing less business year-over-year.

Scott Ford:

We said $125 million to $150 million on Conway. That's if you go back to last quarter and the previous, that was up from 100 when we went public. So we upped it from $100 million to $125 million to $150 million. Hard to know exactly how to fold in, but the number we're actually targeting is 200 plus or minus in 2027. And so those are the numbers, just go ahead and finish your question. I want to make sure we're on the same page there, though.

Scott Ford:

Yes, some of them do and some of them don't, but for the most part, the large ones, where if someone comes in as an anchor tenant, they do. They do have a form of take-or-pay.

Operator:

And one moment for our next question. Our next question will be coming from Joseph Feldman of Telsey Advisory Group. Your line is open.

Scott Ford:

Sure. Well, that's why we went on and gave you an update in our prepared remarks which we don't normally do, where we give you insight into the order book in October and November. So September, part of the third quarter, was back to 90% plus of the prior year. October was a write back at the prior year and November right now is running a little bit ahead. So we gave you that guidance so that you could see that as soon as gas prices came back down a little bit, people went back to their traditional buying patterns, and we lay over last year's results. We track it every day for the last several years, and we're laying right on top of previous years now. That could stop again if gasoline goes to $85 and Christmas spending comes on, there could be something like that, that we don't see right now. That's not coming through at the moment. What we're doing in terms of the coffee business is this, we changed out the accounting and, if you will, management information systems. It's taken us many months to do that. We've actually just now started being able to get to some of the reports where the machines themselves are wired up so that we have all of the waste and throughput data off each machine. These are the things that we did in the single-serve plant last summer, which is why we know basically very early on in the month, what we're likely to make because we've got the algorithms down now by machine, by operator. We're putting all of that in the old S&D roast and ground business over the next few months. I expect that we'll see material improvement in the operating metrics of that facility once that system is finished. So that's the answer to your question. What are you worried about? Well, I'm worried about things I don't know about as always. And then what are you working on? We're rehanging the information system in roast and ground, the same way we did single serve, in the same way we are setting Conway up from the very beginning, so that we have that level of detail to manage the business going forward.

Chris Pledger:

Well, we're not -- in terms of what we've seen so far in the fourth quarter, I think it's kind of a continuation of what we saw in September. So we're not seeing anything like that yet. I think you continue to have from an SS&T perspective, you're selling lower priced or you're selling coffee that comes in at a lower global commodity price. And so for SS&T, for example, you saw a significant decrease in the net sales of the business, but the EBITDA year-over-year is flat. And so you'll likely see significant decrease in net sales in SS&T coming into the fourth quarter, but you won't see -- but you'll continue to see EBITDA flat. You're not going to see EBITDA drop off because of that. But in our Beverage Solutions segment, I think you're going to continue to see the same kind of sales flow that you saw -- that we saw in September.

Scott Ford:

Thank you.

Scott Ford:

Well, thank you. I appreciate everybody hopping on this afternoon. I'd simply highlight what Chris and I had mentioned earlier, the third quarter was about a disappointing roast and ground coffee volume. Early in the quarter, we were pleased to see it come back. It continues to come back into the fourth quarter. That's as much visibility as we've got. So we're sharing it with you so that you can make your own assessment. We then look at the Conway facility coming online early next year. That is on time. I think it's important to remember this. We have filled out two extracted -- flavor, extract, and ingredient plant, one in Richmond, California that we bought a couple -- a year or so ago and the one in North Carolina they are full. We have more demand than we can make product for right now. Conway will not only package, but it will also manufacture extract to relieve that pressure. And the growth we've experienced there, which is up 70% year-over-year for the period, we're going to roll that same growth into Conway and the Conway facility alone, which is probably 70% contracted out right now, is capable of making twice the EBITDA of the entire enterprise on its own, and I expect it to do that. And we will be bringing you some metrics to follow along with us along the lines of percentage of completion, number of SKUs that are in commercialization, what kind of volumes that we've got, we'll try to give you some feel for that as we start the plant up so you can follow along and help do your own math, given really our lack of ability to forecast it because of the wide range of start-up window time that our customers have. And I'll just conclude by saying this, if they go to the end of their window, then we will make some more money next year than we made this year, and we will tough it out and rough it along. And if they come to the front of the window, it's very hard to get your mind around how fast the EBITDA of this business could explode to the upside. But nobody cares until we do it, we're on to that. We will get it done. Thank you for tuning in, and I look forward to talking to you next quarter.

Operator:

Good morning, ladies and gentlemen. Welcome to the DTE Energy Second Quarter 2023 Earnings Conference Call. [Operator Instructions] And now at this time, I would like to turn things over to Ms. Barbara Tuckfield, Director of Investor Relations. Please go ahead, ma'am.

Gerry Norcia:

Well, thanks, Barb, and good morning, everyone, and thanks for joining us. This morning, I will be discussing the achievements we've made so far this year and provide a general business update. I'll discuss the progress of our regulatory proceedings including the details of our IRP settlement. Dave will provide a financial update and wrap things up before we take your questions. Before we dive in, I want to take this opportunity to touch on some recent appointments to our regulatory commission here in Michigan. Governor Whitmer extended Chair Dan Scripps term an additional six years to 2029. The reappointment of Chair Scripps provides consistency and regulatory leadership and we appreciate the balance he has always brought to the commission. We congratulate Chair Scripps and look forward to continuing to work with them. Governor Whitmer also appointed Alessandra Carillon as a new commissioner to the MPSC, filling the vacant role left by Germain Phillips. We look forward to working with her as she comes to his position with a strong background in electrification. Moving on to Slide 4. We remain committed to supporting and delivering for all our stakeholders, including employees, customers, communities and shareholders. I always say that employee engagement drives our success, and our team continues to operate at top decile engagement levels as measured by the Gallup organization. I'm proud that our team's excellence in this area was recognized by earning the Gallup Exceptional Workplace Award for the 11th consecutive year. We also received great news that DTE was named one of Metro Detroit's best and brightest companies to work for. The best and brightest program recognizes companies that have a commitment to excellence in their human resource practices and employee enrichment based on categories, including work life balance, employee education and diversity. I'm happy to say that yesterday, the MPSC approved our IRP settlement agreement, which outlines our investment in Michigan's clean energy future, two weeks after we filed it. This demonstrates the supportive nature of our regulatory environment. We are proud that this plan puts our customers first by reducing the cost of our clean energy transformation, while reliably generating the cleaner, affordable energy that our customers will rely on for years to come. I'll provide more details on the settlement agreement in a few minutes. On the community front, DTE was honored to be named to the Civic 50 for the sixth consecutive year. This award presented by Points of Light recognized us as the most community-minded companies in the nation. I am proud that our team continues to put communities we serve at the forefront each and every day in our decision-making and earning this award year after year recognizes that. On the investor front, we are executing on our plan to achieve our 2023 guidance midpoint and our long-term financial growth. As you know, we have been facing headwinds with the weather and storms that we experienced earlier this year. Dave will go into more details on this, but the team has made excellent progress on the cost management work across the entire company, and we continue to find savings with our continuous improvement efforts. As well, we are seeing additional favorability across our portfolio of businesses. We are well positioned to continue to deliver the strong performance and premium growth that DTE is known for delivering on our 2023 midpoint guidance and also continue to deliver long-term EPS growth of 6% to 8%. Let's turn to Slide five and discuss the IRP settlement agreement. We want to thank our DTE employees and 21 organizations from across Michigan for their diligent work on this IRP settlement agreement. We completed a comprehensive analysis that reflected insights shared by our customers and other stakeholders to build the plan. The plan offers a balanced and diversified approach for the transition of our generation fleet, complementing our commitment to build a reliable and resilient grid while maintaining customer affordability. A key provision of the settlement agreement is ending DTE's use of coal in 2032. DTE will provide retraining for employees impacted by the plant retirements, and we'll continue to partner with the local communities on new economic development opportunities. We are continuing our plan to cease coal use at our Bell River power plant in 2026 and converted to a 1,300-megawatt natural gas peaking resource. We are retiring two coal units at Monroe in 2028 and accelerating the retirement of our two remaining units from 2035 to 2032, which is nearly 12 years earlier than originally planned. To determine the best replacement alternative for the capacity of Monroe, we will be studying a range of possible replacement technologies. Facilitated by these accelerations, our 85% carbon reduction goal moves from 2035 to 2032. To support these retirements, we are transforming how the company generates electricity over the next two decades. We will be developing more than 15,000 megawatts of renewables by 2042 to power homes, businesses and industrial facilities. Additionally, we will build more than 1,800 megawatts of energy storage to support the company's clean energy transformation. Through all of this, our focus remains in providing what our customers and communities need, clean, affordable, reliable energy. This IRP is also very positive for customer affordability as it provides over $2.5 billion in future cost savings, and we will be directing $110 million to support our most vulnerable customers, including $70 million to energy efficiency programs, $30 million in bill assistance and $8 million in home repairs facilitate cleaner energy for low-income customers. Through this IRP, we will be delivering long-term customer value by investing over $11 billion in the next 10 years in a clean energy transition, supporting more than 32,000 Michigan jobs. Let's move to Slide six to discuss how the IRP fits into our plan. This IRP supports our long-term capital plan as it solidifies a large portion of our planned investment in cleaner generation. As you recall, we will be investing $21.6 billion in our two utilities in the next five years and $45 billion over the next 10 years. all to build the grid of the future, transition to cleaner generation and modernize the gas transmission and distribution system. The significant additions of renewables and storage outlined in this plan in addition to the renewables investments we are doing through our voluntary renewable program provides surety to our cleaner generation investment plan. The IRP provides full recovery of the net book value of Bell River and Monroe. A portion of the assets are securitized to balance customer affordability with the increased investment in clean energy while supporting our financial plan. For Bell River, we will be depreciating the majority of the asset since it will remain in service earning the authorized ROE currently at 9.9%. A small portion of the net book value will be securitized after 2026. For Monroe, we received constructive regulatory asset treatment for the majority of the undepreciated coal unit investment balances with a 9% return on equity. The remaining portion of the assets will be securitized beginning in 2032. We will receive our full authorized ROE, which is 9.9% until 2032, at which point that portion will be securitized. So this plan is a really great outcome. Selling this case confirms the constructive nature of the regulatory environment in Michigan and DTE's ability to gain consensus with key stakeholders, including the MPSC staff, the attorney general, environmental, industrial and regulatory groups. It is consistent and supports our 5-year financial plan and our 6% to 8% EPS growth rate. It also provides visibility and surety and the long-term capital plan. And this settlement overall is good for customers and aligns with the state's goals to provide clean, affordable, reliable energy in Michigan. We will be updating our full 5-year financial plan at EEI. As with any of our plans, we continue to balance increases in investments in clean generation distribution infrastructure and base infrastructure with affordability for our customers. Now let's turn to our other accomplishments this quarter on Slide 7. Our team has accomplished a lot so far this year. At DTE Electric, we placed Michigan's largest wind park in service, the Meridian Wind Park, spanning three townships, the 225-megawatt wind park has 77 wind turbines and generates enough clean energy to power more than 78,000 homes. In addition to bringing even more clean energy to the grid and supporting Michigan's overall de-carbonization goals, these types of projects help strengthen our economy by creating jobs and by bringing additional tax revenue to our communities. Additionally, last month, Dakota, a native American and women-owned automotive supplier joined our voluntary renewables program. Dakota joins 15 automotive suppliers who are using my green power to make their operations more sustainable. This continues to demonstrate the success of our voluntary renewable program that currently has over 2,300 megawatts of commitments, including participation of over 90,000 residential customers, making us the largest voluntary renewable program in the state of Michigan and one of the largest in the country. We are continuing our focus on improved reliability of our electric grid. We trained more than 25,000 miles of trees over the last five years and will trim an additional 5,000 miles in 2023, of which we have completed 2,800 miles through the first half of this year. The electric rate case is progressing as we continue to pursue a constructive settlement with all stakeholders. At DTE Gas, our main renewal work marches steadily along. We've completed over 150 miles of renewal in the first half of 2023. Our natural gas balance program also continues to grow. We now have over 12,000 customers subscribed since program inception in 2021. In the second quarter, the city of East Grand Rapids was the first municipality in Michigan to join the program to help lower its carbon footprint, and we invite more municipalities to participate in this great program. Moving on to DTE Vantage. As we mentioned earlier this year, we have placed two projects in service so far in 2023. One RNG and one custom Energy Solutions project. We are on track to place two additional RNG projects in service by year-end and are in advanced discussions on an additional customer energy solutions project. We also continue to advance our development pipeline with strong opportunities in both RNG conversions and large custom energy solutions projects. With that, I'll turn it over to Dave to give you a financial update. Dave, over to you.

Operator:

[Operator Instructions] We'll go first this morning to Jeremy Tonet at JPMorgan.

Gerry Norcia:

Our target, Jeremy, to settled the rate case is mid-October, and before the PFD is issued. So we have started some conversations and those conversations, obviously, will become a lot more intense through the summer. But I believe we have the ingredients for settlement, and we'll continue to update you on that as we progress.

Dave Ruud:

Yes, Jeremy. So far, we're seeing things start out pretty close to what we had expected. And so as you know, though, August and September can be really big months for us or really big swing months. So continue to watch that closely as the weather plays out.

Dave Ruud:

Yes. We're looking across our portfolio for offsets. And with the ones we have within our steel portfolio, represent that. We have some byproducts that we sell as a process of what we're doing within our steel business and our cope making. And we just got some opportunistic pricing and some really good pricing for that through the year that we've been able to take advantage of this year. And I'll say, Jeremy, across our whole portfolio, we continue to look for these onetime cost reductions and some of these opportunities like this to ensure that we can deliver for the year.

Gerry Norcia:

So just to add to that, we're also seeing some lift in RNG pricing, which is also creating some favorability at Vantage.

Operator:

Thank you. We'll go next now to Shahr Pourreza at Guggenheim.

Dave Ruud:

Yes. As we play out the year, we're looking for the opportunities across the business, again, to ensure that we can offset the challenges that we've seen through storm and weather as we go through the year. And so we're doing that across our portfolio. We as an extended leadership team, we're meeting weekly to ensure that we're finding all the opportunities we can and extinguishing all the risks. And through the year, we've been able to find some additional opportunities that have been able to offset the challenges that we've seen through weather and through the storm we saw in the first quarter. So we'll continue to look for that flex throughout the year.

Shahriar Pourreza:

So I guess it would be fair to say kind of no big changes just executing on the plan from 1Q?

Shahriar Pourreza:

Excellent. And then maybe shifting to efficient financing. Just how are you thinking about supporting credit metrics on a tighter capital market environment, especially as we continue to see high levels of investment in rate base growth? And just any thoughts on internal versus external balance sheet support? As you mentioned the Vantage assets are potentially helping. But maybe how are those -- the value of those assets stacking up against any future equity needs?

Shahriar Pourreza :

Excellent. And maybe last one, housekeeping call out, following up on Jeremy's question on the rate case. There's been some data points on kind of higher ROEs that potentially the ranges that kind of have been recommended and that shows some recognition from stakeholders. Do you anticipate that, that will start to make an impact, whether in the '24 time frame or just in settlement negotiations?

Shahriar Pourreza :

Excellent. I appreciate it. Thanks for taking my questions.

Heidi Hauchon:

This is Heidi Hauchon for Julian. Thank you for taking my question.

Dave Ruud:

Hi, Heidi.

Gerry Norcia:

Sure. So there's been certainly a positive support from the staff for the IRM and we're getting all the right signals that this is something that will be really valuable to our customers. And can help secure the investments that's necessary to move towards a more resilient and reliable grid. That one feels encouraging. In terms of ring-fencing tree, we've essentially done that already through past proceedings where a good portion of it is ring fenced. And we're executing against that plan. And actually in good years when we've had surpluses, we've even put more against tree trimming because we see it as a significant labor in terms of reducing customer outages. So I feel that our positions are productive, positions that we've seen in the various parties, and we're going to work hard to get towards a settlement before the middle of October.

Dave Ruud:

Yes. Our sales have come in exactly as we expected on a weather-adjusted basis this year. If we look back to last year, residential sales are down about 3.5% to 4%. And that's really what we have predicted with people returning to work. Our commercial is down a little bit due to energy efficiency and some other things and our industrial is up as our plants in Michigan are experiencing a lot less downtime. So I think now we've seen that our sales are kind of at the right level or where they are with people return to work and kind of very consistent with what we have forecasted through the year.

Gerry Norcia:

So we did have some storm weather moved in last night. Approximately 92% to 93% of our customers have power at this moment. And we've mobilized about almost 3,000 of our team members to address the storm conditions. So we'll ramp most of it up in the next couple of days. These types of storms are pretty typical in July and August. So nothing out of the ordinary at this point in time. In terms of achieving guidance, as I mentioned and Dave has mentioned, we have seen about $200 million of headwinds, and we have a plan that addresses these headwinds. And those headwinds included some of the firestorm activity and cooler weather that we experienced and warmer weather in the winter. Many of the initiatives will be onetime in nature, but we're learning, as I mentioned, a lot more about our company and which is good for us and good for our customers. And the team is achieving the plan right on top of the plant. We've asked them for some significant delivery on initiatives and they're delivering on that plan. So I'm proud of their accomplishments, and that will land us at the midpoint of our guidance.

MichaelSullivan :

I just had a quick one on the IRP. I was just wondering if we could get a little more color on -- you mentioned like studying technology to replace Monroe and kind of what that could look like? I think originally, in the plan, you may have had a gas plant with carbon capture in there. Did that end up making it into the official plan? Or what sort of other solutions are on the table there?

Michael Sullivan :

Okay. Great. And then another one on the IRP. I think somewhere in there was mentioned potentially looking at IRA funding for the Belle River conversion. Can you talk a little bit about that and how that may help customers or your plan?

Dave Ruud:

Yes. What we mentioned there for the Belle River conversion with some of the DOE funds that are now available for replacing or repowering energy infrastructure that gets ceased and it kind of fits right into what this Belle River conversion is. So along with some other capital investment opportunity we have, we're going to look right at Belle River and see if there's some DOE funding that can come in and they can give lower interest rate that can really help with customer affordability as we're building out our infrastructure renewal and clear generation plan.

Dave Ruud:

As we get closer, we'll know it will be over the next few years, those funds are available for I forget the timing four or five years on that. So we have some time to get that. But it's just an opportunity to get some lower interest rates for our customers and lower overall expense.

Operator:

And we'll go now to David Arcaro at Morgan Stanley.

Dave Ruud:

We always look across the portfolio for opportunities. We've looked at convertible debt. We don't have much more corporate debt we need to do this year. And we'll look for other opportunities like that. But right now, we don't see a similar opportunity or what they brought up. And of course, anything we do, we want to make sure that we maximize the overall value for shareholders, too.

Gerry Norcia :

We will file that before the end of the year as required by the commission. And it will really address four major buckets. The continued surge of tree trim, which we expect to end in two years, but then we'll be more of a maintenance cycle. So that will be a key feature. What we call pull-top maintenance, which is replacement of press arms, insulators equipment that pulls themselves. That will be a big part of the plan on our aging system. Third is automation, trying to accomplish full automation of the grid in five years, that will be a major component of the plan. As we've seen more frequent storms and more sizable storms over the years, automation will be a big lever for us to restoration of outages. And then lastly, as I've mentioned before, 1/3 of our grid is quite old. It's a 4,800 volt system, and that was installed in the early 1900s through the '60s and we need to replace that, and that's about 16,000 miles. So that will be also a part of this updated plan to really accelerate our journey to try and get that done over the next 15 or 20 years. So those are the major components that you'll see. There'll be other things there, but those will be the four big hitters in the distribution grade plan.

Alex Mortimer:

With the new commissioners focused on electric vehicles, how do you think about the upside for low CapEx and rate base above what you might currently have included in your plan?

Alex Mortimer:

Okay. Understood. And then just given the additional headwinds present this quarter, should we essentially understand that all contingency has been exhausted at this point, and you now need normal weather for the balance of the year to achieve the stated goal midpoint of guidance?

Alex Mortimer:

Okay. And then other than weather in a more kind of "normal year" kind of what would get you to the high middle and low point of your guidance? And is the bias still towards the middle in a more normal year?

Operator:

Thank you. And it appears we have no further questions this morning. Mr. Norcia, I'd like to turn things back to you for any closing comments.

Operator:

Thank you, Mr. Norcia. Ladies and gentlemen, that will conclude the DTE Energy Second Quarter 2023 Earnings Conference Call. Again, I would like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.

Quintin Lai:

[Call Starts Abruptly] …conference call. We issued our financial results this morning, and the release has been posted in the Investors section on the company's website located at westpharma.com. This morning, Eric Green and Bernard Birkett will review our financial results, provide an update on our business and present an update on our financial outlook for the full year 2023. There's a slide presentation that accompanies today's call and a copy of that presentation is available on the Investors section of our website. On Slide 4, our safe harbor statement. Statements made by the management on this call and in the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results as well as those expressed or implied in any forward-looking statements made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risks to which it is subject, including our 10-K, 10-Q and 8-K reports. During today's call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin and adjusted diluted EPS. Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I now turn the call over to our CEO, Eric Green. Eric?

Bernard Birkett:

Thank you, Eric, and good morning. We'll first look at Q1 2023 revenues and profits, where we saw low single-digit organic sales growth and a decline in operating profit and diluted EPS compared to the first quarter of 2022. 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 to our 2023 guidance. First up, Q1. Our financial results are summarized on Slide 10, and the reconciliation of non-U.S. GAAP measures are described in Slides 17 to 20. We recorded net sales of $716.6 million, representing organic sales growth of 2.3%. COVID-related net revenues are estimated to have been approximately $23 million in the quarter, an approximate $88 million reduction compared to the prior year. These net revenues in 2022 include our assessment of components associated with vaccines, treatment and diagnosis of COVID-19 patients, offset by lower sales to customers affected by lower volumes due to the pandemic. Looking at Slide 11, Proprietary Products organic net sales remained flat in the quarter. High-value products, which made up more than 70% of Proprietary Product sales in the quarter, declined by low single digits due to the reduction in COVID-related net revenues. Looking at the performance of the market units, the Generics market unit delivered high double digits growth led by sales of Westar components, while the Pharma market unit experienced low double-digit growth led by Envision and Westar components as well as Admin Systems. And the Biologics market unit saw double-digit -- saw a double-digit decline due to a reduction in sales related to COVID-19 vaccine. Our Contract Manufacturing segment experienced double-digit net sales growth in the first quarter, primarily driven by an increase in sales of components related to injection-related devices. Our adjusted operating profit margin of 23% was a 340 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 13.9% for Q1. Excluding stock-based compensation tax benefits, EPS decreased by approximately 16.1%. Now let's review the drivers in both our revenue and profit performance. On Slide 12, we show the contributions to organic sales growth in the quarter. Sales price increases contributed $38 million or 5.3 percentage points of growth in the quarter. Offsetting price was a negative mix impact of $21.3 million, primarily due to a reduction in COVID-19-related net demand and a foreign currency headwind of approximately $20.1 million. Looking at margin performance, Slide 13 shows our consolidated gross profit margin of 37.9% for Q1 2023, down from 39.5% in Q1 2022. Proprietary Products first quarter gross profit margin of 42.5% was 90 basis points lower than the margin achieved in the first quarter of 2022. The key drivers for the decline in Proprietary Products gross profit margin were unfavorable mix from a reduction in sales related to COVID-19 vaccines and continued inflationary pressures on our planned costs, including labor, raw materials and overheads. These factors were partially offset by sales price increases and production efficiencies. Contract Manufacturing first quarter gross profit margin of 17.6% was 250 basis points below the margin achieved in the first quarter of 2022, primarily due to mix of products sold. Now let's look at our balance sheet and review how we've done in terms of generating more cash. On Slide 14, we have listed some key cash flow metrics. Operating cash flow was $138.1 million for the 3 months ended March 2023, a decrease of $13.1 million compared to the same period last year, an 8.7% decrease, primarily due to a decline in operating results. Our first quarter of 2023 year-to-date capital spending was $82.1 million, $16.3 million higher than the same period last year. We continue to leverage our CapEx to increase our high-value product manufacturing capacity within our existing facilities in the U.S., Germany, Ireland and Singapore. Working capital of approximately $1.4 billion at March 31, 2023, remained consistent from December 31, 2022. Our cash balance at March 31 of $886.3 million was $8 million lower than our December 2022 balance. The decrease in cash is primarily due to our share repurchase program and higher CapEx, offset by operating cash flow for the first quarter. Turning to guidance, Slide 9 provides a high-level summary. We are updating our full year 2023 net sales guidance and expect net sales to be in a range of $2.965 billion to $2.99 billion compared to our prior guidance range of $2.935 billion to $2.96 billion. There is an estimated full year 2023 tailwind of $15 million based on current foreign exchange rates compared to prior guidance of the 2023 headwind of $30 million. We expect organic sales growth to be approximately 3% to 4%, unchanged from prior guidance. We expect our full year 2023 adjusted diluted EPS guidance to be in a range of $7.50 to $7.65 compared to a prior range of $7.25 to $7.40. Also, our CapEx guidance is $350 million for the year, unchanged from prior guidance. There are some key elements I want to bring your attention to as you review our guidance. We expect full year COVID-19-related sales to be approximately $60 million compared to prior guidance of approximately $85 million. Net sales guidance also includes a reduction of $8 million, resulting from an expected divestiture of a European facility that produced standard Proprietary Product components. Full year 2023 adjusted diluted EPS guidance range includes an estimated FX tailwind of approximately $0.02 based on current foreign currency exchange rates compared to prior guidance of a headwind of $0.11. The updated guidance also includes EPS of $0.15 associated with first quarter 2023 tax benefits from stock-based compensation. Our guidance does not include potential future tax benefits from stock-based compensation. I would now like to turn the call back over to Eric.

Operator:

[Operator Instructions] Our first question comes from the line of Larry Solow with CJS Securities.

Eric Green:

Yes. Great. Thank you, Larry. We're seeing -- obviously, as COVID demand decreases, we've been able to -- through the reprioritization of the long lead items, we're able to bring them back in line what we expect for the market. And therefore, you're seeing us -- very strong growth in both the Pharma and the Generics market units, which is significantly higher than what you would see from a market volume-demand perspective. So that's where you see the benefit, specifically on Generics is really due to the long lead times that are being brought in. We did see a little bit better performance in our Contract Manufacturing. And as we've been making investments specifically in that area, very targeted investments, those are coming online, and we're starting to see the benefit, and that's the reason why we moved up the full year look. On the Biologics side, I have to be -- I'm very proud on how we continue to do very well in that area, not just on current drugs in the market, but also new drug launches and our participation rate is -- remains very high. And so we were excited to carry on that growth. But you're absolutely correct, the COVID reduction mutes that overall number. And that's why we're trying to be more transparent about the core itself. So we're very -- we're pleased across the board on the execution. And overall, it's a very strong start to the year.

Eric Green:

Yes, Larry, it's -- you're right, we had some significant capital investments over the last couple of years. One was to fuel or build to support the vaccines during the pandemic. And fortunately, the team was very focused on helping our customers with these solutions around the higher end of high-value products. So this equipment is fungible. We're still leveraging that existing equipment for base business growth, particularly on the Biologics area. And we're continuing to add -- layer in more capital. The capital we are layering in right now is shifting a little bit away from what I would call the vial configuration to more prefilled syringes and, i.e., our plunger manufacturing capabilities, which are coming online this year and then in 2024. But that is based on demand that we have in our hands today and into the next couple of years. So we will continue to layer in capital when the growth profile remains as we're seeing today. But you're right, Larry, if there's opportunities to continue to leverage existing assets more effectively. That's the first thing we look at. How do we leverage what we currently have, create the efficiencies, higher automation before we start investing more, and that's a daily framework as we think about capital investment. So the long story short would be if we continue to invest as we are, it's because the growth of the business is greater than we anticipated.

Bernard Birkett:

Just on the COVID, we did -- you kind of said that we did $88 million, I think, in Q1 2022, and that was about $23 million in this quarter. So the drop was pretty significant. But we have been really focused on increasing the level of efficiency through our plants, really understanding the cost base and as we were progressing through 2022, we're already lining up changes. We're starting to see the impact there. Also, the price that we've been able to get, which is above what we would normally see, more than 5%, that's also helping with that margin and to absorb some of the inflationary costs. So I would expect it to -- it is a good start for the year. There's obviously a lot of puts and takes, given what's going on within the macro environment, but we're confident to deliver within our guidance.

Paul Knight:

Eric, when -- on the CapEx side, is Michigan now online? And then when you do deploy this CapEx, when does that start to deliver revenue? Is it a 1-year? Is it a 2-year lag? And then my last question would be, where do you benefit from this growth in GLP-1s?

Paul Knight:

And then last question would be for Bernard. Bernard, what's your implied operating margin for the -- or guide for the year?

Operator:

Next question comes from the line of Matt Larew with William Blair.

Eric Green:

Yes, Matt, I think before COVID, we were continuously building the capabilities to have better visibility with our customers in the markets around demand. And we have been building that, I would say, during the COVID period. It's been a little more volatile. But now we're back into that environment, have better visibility, better -- as we do make to order, our customers are giving us visibility of their demands over the next several quarters. And then we plan accordingly in our global operations to be able to support them on existing drugs but also new launches. In regards to any movements of stocking or working capital, we do see some of that in certain parts of the business. And we take that in consideration when we think about our forecast or guidance for the full year. There are certain areas, I would say, probably more on our non-HVP area that might have more volatility. On the high-value product area, that is going back to our capital investments, we need to continue to fuel that to try to get ahead of the curve versus trying to maintain where we are right now. So the demand is greater than we have capacity in as we speak. So it's just seen blend right now, Matt, and we have better visibility. But it's not consistent across the whole portfolio, but I think we're responding appropriately.

Eric Green:

Well, Matt, a couple of points there. One is, you're right, the decommissioning of the plant, that's a plant that is a single product, single customer. And we're very pleased on how that is now -- that was a standard product. So it wasn't that in relation to high-value products. Right. It's a standard price is basically we've had this discussion for a long time. It doesn't fit our growth strategy. So therefore, we've made the decision with our customer and also another party to make sure that they can continue on producing those products for our customers but in someone else's hands. I think from an order book perspective, if you think about where our growth profile is really is around the Biologics, we obviously have high growth right now in Generics and Pharma. We'll continue to see that over the course of 2023. But really, as you think about the future longer term, it is around the biologics in multiple therapeutic categories, and it tends to be the higher end of our high-value products. The plunger, specifically, it's a range of different types of plungers within high-value products. So it ranges anywhere from FluroTec all the way up to NovaPure, depending on the customers' needs. So it is kind of a range. But our -- the optics of our order book continues to be strong, but this portion of that tends to be more around the high-value products and the higher end of that.

Jacob Johnson:

Maybe first, just sticking on the GLP-1 topic. And as it relates to contract manufacturing, I think that's a business that at times kind of the work you do with customers can vary year-to-year. Obviously, strong start to the year. You're increasing expectations there. Is this something that is kind of sustainable growth for you all? Or is there something about 2023 that maybe we shouldn't carry this forward into 2024 and beyond?

Jacob Johnson:

Okay. And then just a couple of kind of cleanups on some of the commentary around the outlook for this year. If I'm not mistaken, I think you said mid-teens ex COVID growth in proprietary products. But I think that was high teens last -- on the last call. And then off the 23% op margins, I think that was 23% to 24% last quarter. Is this something to do with kind of the stronger Contract Manufacturing growth in the -- for the year? Just anything you can kind of flesh out in terms of that commentary.

Eric Green:

On the revenue side, when we talk about the proprietary outlook, it's relatively -- it's pretty consistent to the COVID guidance in February without COVID. So the -- all 3 units will be very strong throughout the full year and relatively consistent as far as performance in that area.

Derik De Bruin:

A couple of questions. Is there a good rule of thumb to think about your CapEx in terms of revenue generation? For every dollar you spend in CapEx, it can generate X amount of revenues. I'm just trying to think about future opportunities and just sort of thinking about all the spend and how West will build it out.

Derik De Bruin:

So going down, so was going to the mix shift next because obviously, that has accelerated recently. When you think about your forward model construct, are -- does that margin sort of look more like 150 basis points? Or are you still thinking about 100 basis points is where you should come out on the op margin expansion on an annual basis, just given the mix?

Derik De Bruin:

Great. And just one more. So I'm thinking about some of the newer drug opportunities. I mean, obviously, there's a lot of interest in discussion on GLPs. But you've had to build capacity for a number of -- I mean this isn't like COVID where it suddenly popped up overnight. I mean you've been building capacity for a while. You've known there were trials coming. So I'm just sort of curious like what do we need to see in sort of some of the GLP trends in the market, prescription trends to sort of like think about what the upside driver of that could be to your business? Because there's clearly something already embedded in, it isn't like a virgin market where you are. So I'm just curious on how you're thinking about that market as it expands.

Operator:

Our next question comes from the line of John Sourbeer with UBS.

Eric Green:

Well, I would say it's just a mixture of multiple -- a few different customers in a few different products. GLP would be one area, but not the only area of growth. So the investments that we've been layering in, specifically in contract manufacturing, have been coming on board end of last year into this year. And we'll continue to layer that in, if and when necessary, with our customers. So yes, there's a portion of it is due to GLP-1.

Eric Green:

Yes. I think the same focus on the long-term construct to a [indiscernible] 7% to 9% organic sales growth. We're excited that, obviously, we do have a role to play with the GLP-1 as that evolves. I'm excited because as an organization, we can support our customers in multiple fronts, i.e., multiple different components in proprietary. That, to me, has a higher economic profile for us and then the Contract Manufacturing, while we play in both higher dependency on the proprietary side. But I would say that our growth, when we say the 7% to 9% organic growth outlook, it's not solely reliant on that category. We have numerous customers with different types of launches that are turning and uptake of current drugs in the market that we need to keep fueling. So it's a mixture of multiple drugs, multiple customers and multiple therapy classes. Yes, we participate in GLP-1, but I want to make sure that it's -- the growth of this business is very diversified.

Quintin Lai:

Thank you, Norma, and thank you all of us for joining us on today's conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you may access a replay for 30 days following this presentation by using the instructions at the end of today's earnings release. And an acknowledgment of our sustainability partnership with the Philadelphia Eagles, it gives me a unique opportunity to conclude the call with Fly Eagles Fly. Have a nice day.

Operator:

Good day, and thank you for standing by. Welcome to West Pharmaceutical Services Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Quintin Lai, Vice President, Investor Relations. Please go ahead.

Eric Green:

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on Slide 5. For over 100 years, the West name has come to mean so much to so many people. We have grown and expanded from manufacturing primary containment components to designing and manufacturing delivery systems. This remains the same today. As a global market leader who continues to define the evolution of our industry, our 10,000-plus team members are motivated by improving patient lives. The past few years have been a reminder that the world doesn't stand still and the needs of the health care industry are evolving and growing in complexity with shifting treatment options from the hospital to home setting. We remain committed to the pursuit of scientific innovation and partnerships to address the changing needs of today and into the future. Moving to Slide 6. Looking back at the year, I'm pleased to report that West delivered overall organic sales growth of approximately 8%. This growth was generated despite a rapidly shifting pandemic landscape. We started 2022 expecting COVID-19 volume growth, but instead decline in orders and demand from our customers actually resulted in a 15% decline in pandemic-related sales. Excluding COVID-19, we estimate that our base organic sales growth was low double digit, with mid-teens growth in proprietary products, and driving this base growth is demand for our high-value product offerings for both legacy as well as recently launched drugs, and we ended the year with a return to growth in Q4 in contract manufacturing. This performance is a result of the dedication and relentless focus of our team members across the globe. We are connected by a strong responsibility and shared values that continue to help us succeed each day. I want to acknowledge these efforts and say thank you. Looking ahead, we remain well positioned with the right growth strategy around execute, innovate and grow. Our solid order book of committed orders reinforces the criticality of West's components and devices to address our customers' growing injectable drug demand, and we continue to deploy capital investments to support the increase in demand driven by the attractive end markets. Turning to Slide 7. In addition to our financial momentum, there were several other notable accomplishments in 2022. We shipped close to 47 billion components touching billions of patient lives. As scientific and technical leaders in the industry, our customers expect us to help solve their problems. We continue to broaden insights with our expertise through our webinars, published articles and technical presentations. We partnered with Corning to build a next-generation leading elastomer-glass system. We launched Daikyo CZ 2.25 ml insert needle syringe to support the biologics market and secured 3 additional FDA-approved drugs using our SmartDose technology as we continue to bring additional value to our customers. Lastly, we donated $2.75 million, but more importantly, our team members continue to volunteer their time to help our local communities with the greatest needs. Our heartfelt thoughts are with all those impacted by the devastating earthquake in Turkey and Syria, where we have provided aid through UNICEF. Shifting to Slide 8. We continue to factor environmental considerations into every aspect of our business. Over the past 5 years, we have made tremendous strides across the 6 priority areas and newly defined performance indicators. I'm pleased that we're on target with 90% of our operational waste not being sent to landfills. Our pursuit of renewable energy alternatives has aided in a positive impact in the emission reduction. These efforts have been recognized with numerous ESG accolades in 2022. We look forward to sharing more detail in our corporate responsibility report to be published in the spring. Turning to Slide 9. We continue to address the growing market needs with today's complex and sensitive molecules. At the recent Pharma Pack meeting, we introduced several new products for large volume delivery and complete vial containment solutions. One available product is our West Ready Pack with Corning's Valor ready-to-use vials. This will be the first of many products from our Corning partnership. The combination of these products eliminates the risk of delamination and reduces glass particulate in bulk filling lines. It is drug delivery innovations like this that ensures best-in-class performance with a value proposition to meet the increased regulatory expectations with a complete vial containment solution. Moving to Slide 10. We are introducing full year 2023 financial guidance. This guidance is based on demand trends as well as our current capacity levels. It's also reinforced by our strong West and Daikyo participation rate in drug approvals, especially in biologics and biosimilars. We expect full year overall organic sales growth of approximately 3% to 4%, which includes a $303 million year-over-year decline in pandemic-related sales. Excluding this impact, we expect mid-teens overall base organic sales growth with proprietary products growth in the high teens and high single-digit growth in contract manufacturing. 2023 will represent a transition year for our margin profile as we see a headwind from COVID-19 HVPs. That said, our expected margins for this year are significantly above pre-pandemic 2019 levels. This underscores the strength of our financial construct with annual margin expansion of 100 basis points or more per year. In 2019, we posted operating margin of 16.1%. In 2023, we expect operating margin of 23% to 24%, which would represent an increase of approximately 800 basis points over a 4-year period. Also, today we announced that the Board of Directors has authorized a new share repurchase plan as our prior plan was completed last year. This program is authorized for up to $1 billion of share repurchase. We note that this new program does not have a specified end date. As comparison, in 2022, our 12-month program was completed at $203 million of buybacks. And in 2021, our 12-month program was completed at $137 million of buybacks. This new $1 billion program will provide for a continuation of our share count-neutral strategy, which is assumed in our 2023 full year financial guidance. We believe this program will also provide flexibility for incremental share repurchases depending on various factors such as economic and market conditions. Turning to Slide 11. As you can see from our guidance, we seek continued base momentum in 2023, and we're planning for a further additional growth as our customers are preparing for expanded success of their current biologics portfolio and drug launches. As such, we continue to drive forward to complete the installation of our capital expansion plans for additional HVP capacity. The picture shows the progression of our ongoing efforts. On my recent visit to Kinston, it was impressive to see the additional space added to accommodate the installation of new manufacturing equipment to address the growth of HVPs and plungers. Together with other site expansions, this will support future demand across our global manufacturing network. Now I'd like to turn the call over to Bernard.

Eric Green:

Great. Thank you, Bernard. To summarize on Slide 17, the solid financial performance shared today continues to reaffirm that our growth strategy is working. We have a durable base business proven by our market-led approach which is delivering unique value to our customers. Our global operations team is efficiently manufacturing and delivering products in this complex environment with a focus on service and quality. And we're continuing to progress capital spending across our operations to meet current and anticipated future growth. We realize that our products in pursuit of scientific innovations are critical to health care across the globe which is why we're so committed to support patient health today and well into the future. Shannon, we're ready to take questions. Thank you.

Lawrence Solow:

Congrats on a good quarter, better than obviously we expected. Eric, maybe could you just discuss sort of the long-range outlook. HVP, I know you mentioned 72% of volume in the -- revenue in the quarter. But could you speak to it more on a volume basis and particularly some of the faster growing and higher margin, NovaPure and as you kind of send up the HVP curve, if you will, I mean, the opportunities over the next several years?

Lawrence Solow:

Okay. And how about just -- yes, go ahead, I'm sorry.

Lawrence Solow:

And what about just generally in the industry, I know the trends have been biologics are obviously growing faster than overall drugs. Has that trend like accelerated over the last few years? Or what's the outlook there on a general macro level?

Lawrence Solow:

Got it. And then just lastly, can you just give us sort of a -- just a brief update on the call, not sure if you had talked a little bit about Corning at all, but just sort of where we stand there? I know I think last year, you had even called out how much you're spending on R&D. I'm sure it's a pretty incremental piece this year as well. But I don't know what you could speak to on the R&D side and the cost, but maybe just sort of where we stand qualitatively, the revenue outlook and how big this could be over the next few years?

Operator:

[Operator Instructions]. Our next question comes from Matt Larew with William Blair.

Eric Green:

Yes. Thank you for the question. So when I look at the order book versus pre-pandemic and then strip out the COVID piece, overall, it's a net increase where we were at that point in time. When you look at the composite of the growth of that order book, it is really driven by our high-value products, and particularly the higher end HVPs, we're seeing a healthy growth in plungers, not just in the NovaPure sector, but in the other categories of HVP. But -- so from an order -- committed order book perspective, that's the kind of the characteristics we're seeing right now. In regards to the adoption rate, it's actually quite high. So our participation rate, particularly in the biologics and biosimilars is very, very strong. And what we are doing is we're seeding with the NovaPure portfolio. And once that is locked in, in the development phase as they go through into commercialization, that's the end result. Better outcomes for our customers, obviously, better compatibility with the drug molecule. So we're very excited to see the continuation of that adoption of NovaPure and that's hence the reason why we're putting these investments in place, and we're seeing more of a transition from vials to prefilled syringes which will require our plungers. So that's where we are, but it's a very, very healthy growth profile of the higher end of HVPs.

Eric Green:

Yes. So those issues are resolved. The team did a really great job to resolve the issues and get our manufacturing facilities back up online. Fully validated, characterized and be able to support commercial production. That was done in, I'd say, mid part of Q4, a little bit later in that part of the quarter. So we're full out right now in Q1. And I'm excited that we have that at this point to allow us to get some of the backlog caught up in the early parts of this year.

Jacob Johnson:

Congrats on a nice quarter. Maybe kind of following up on that last question. Just Bernard, as we think about how the year plays out, anything you'd highlight in terms of seasonality or kind of margin progression, revenue progression throughout the year? And maybe along those same lines, can you just remind us when you have the toughest comps from COVID that you'll be lapping from 2022?

Jacob Johnson:

Got it. And then on contract manufacturing, nice to see a return to growth there, uptick in revenue in the quarter. I think gross margin was down sequentially. Can you just hit on what drove both? And maybe related, you're pointing to, I think, pretty robust growth in 2023. Were there some investments you're making for this year and kind of again along the same lines, what's driving the growth in that business in 2023?

Operator:

Our next question comes from the line of Paul Knight with KeyBanc.

Eric Green:

Yes. Paul, that's a good question. So the first part is that when we think about the COVID, it's -- we're looking about right now, approximately $85 million for 2023 is relatively kind of evenly spread. We can't get any more granular than that at this point. But as you know, we were much higher than that last year. So we do have the capabilities to manufacture accordingly. In regards to the prefilled syringe, when you think about our investments, particularly in the last couple of years and working with some of the launches in anticipation around plungers, which obviously supports the prefilled syringe space is actually -- we're anticipating higher growth in that area. And that is -- equipment is coming online as we speak. I mentioned a little bit in my prepared remarks about Kinston, a lot of the additional equipment in there is really geared around plungers. And so I'm excited to build support that part of the market as we see the prefilled syringe market continue to expand with high growth. So we're going to play in that, and we're prepared for it, and that's where investments are really focused on today.

Derik De Bruin:

So can you talk a little bit about sort of like pricing? You got about 4% in 4Q. How should we think about that in '23? Are you -- I know you were debating taking some higher pricing. You're looking at your pricing dynamics as things are going forward. And I guess, have you done that? And are you -- have you seen any pushback from your customers?

Bernard Birkett:

Yes. So our -- I think in the fourth quarter, we said we did about 3.8% of pricing. We're targeting 5% to 6% on price as we move through 2023. So it is a bit of a step up. And part of that is to take into account the inflationary cost pressures that we're also seeing. But as Eric said, you can see the trajectory and our price increases over the last number of years and how we're approaching that. That's also been on the increase.

Bernard Birkett:

We guide without it because it's very hard for us to estimate it. If you look at -- last year, it was about $0.22, I believe. So it's -- we guide without it for a reason because it is so hard for us to predict that's kind of outside of our control.

Eric Green:

Yes. So if you think about the prefilled syringe area and the plungers, we are -- it depends on if it's NovaPure, it's pretty comparable to -- we talk about the $0.88 to over $1 a unit. But if it's not the NovaPure, other types of HVPs you have a very large range between, let's call it, $0.40 per unit. So you can see the range that we're operating in. From a margin perspective, again, if it is HVP that could range anywhere between 55% to 80%. So I'm giving you a very broad range because not all molecules have the same requirements. But what's good around our investment thesis in our facilities, particularly on plungers is that the equipment and the processes are somewhat fungible. So we can leverage the existing assets we're putting into the current drug launches, but also the anticipated areas of potential growth. So we're positioned well.

John Sourbeer:

I guess maybe digging in a little bit more on the new capacity coming online in the CapEx. Any color just on pacing there for the year? And then just a follow-up on the equipment and the delays in 3Q. I think that was around the $30 million a month headwind. Can we assume now that this is up, that's contributing around $30 million a month as well?

John Sourbeer:

Got it. I appreciate it. And then I guess just maybe on COVID, it looks like you lowered the guidance there slightly. I guess just any thoughts on just where endemic levels go from here? How much more further drop do you think that you see coming down from COVID beyond 2023?

Operator:

Our next question comes from the line of David Windley with Jefferies.

Bernard Birkett:

Yes. So if you look at biologics as we go into 2023, the biggest drop -- or the biggest impact of COVID revenues being reducing is within the biologics segment. So we do see a reduction there. But if you back that out, we're actually seeing very strong double-digit growth within the biologics segment for our core business. And then as we progress through '23 on generics, again, we would be looking to see high single-digit, early double-digit growth, pharma, high single digits and then contract manufacturing, as we said earlier, mid-single-digit growth.

Bernard Birkett:

Yes. It's -- biologics was mid-40s. It's going to come back a slight bit. So you're probably 40% to 45%. And then -- pharma and contract was about 17% or 18%.

Eric Green:

Yes. No, absolutely. So specifically the equipment that we've discussed about Q3, that was ongoing operations, not specifically just NovaPure. So you have washers that wash -- pharmaceutical washing capability that supports really the high-value product portfolio. The vision that you -- the washing equipment that you were able to see that is for NovaPure. So some of the equipment is not fungible, but the core elements of the equipment is. But the growth that we're having, based off of that equipment you looked at was really around the heavy part about the NovaPure. There's some mix effect to it. And in the future investments we're making that you saw in Kinston, that is -- that's, again, it's a wide range of high-value products. FluroTec all the way up to NovaPure.

Bernard Birkett:

Yes. Dave, I'll take that. And just going back to your last question on the split, just to clear that up. So the -- as a percentage of proprietary sales, biologics is like mid-40s, generics, mid-20s and then pharma in a low 30% range, and that will get you to the split. With regard to your question on margin, it's not as simple as one product coming out and another product going in. So we're looking at it where there's a mix impact, obviously, with the COVID revenues falling off and they have been higher-margin products. And we've also got the impact of inflation on our cost base. So you've got those 2 headwinds. And then as we alluded to, we talked about earlier is the increase in price that we're seeing is above what we would normally see in our business. So that helps offset some of this margin pressure. And then we have a very specific cost initiatives within our business, both from an operations manufacturing perspective and then on SG&A and R&D, really looking at cost control and cost management. That is delivering a number of efficiencies for us. So it helps us to overcome some of the margin challenges, but not all of them. And then that goes back to the point earlier, we're not actually -- margin is not stepping back to pre-COVID levels. We're maintaining or holding on to a lot of the improvements that we made or the gains that we made.

Justin Bowers:

Just piggybacking on Dave's question. Can you help us understand and maybe it's a range of sort of what the margin profile is on the C-19 business? And then with respect to the new capacity that's coming online in 2023, can you help us understand how that phases in? Is it ratable? Or is it more second half loaded? Any color there would be helpful.

Justin Bowers:

Understood. And then just a quick one on China. Maybe a status update on the 2 plants over there? And any thoughts on how that impacts the progression of the year?

Operator:

I would now like to turn the conference back over to Quintin Lai for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day and thank you for standing by. Welcome to the Q3 2022 West Pharmaceutical Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Quintin Lai, Vice President of Investor Relations. Please go ahead.

Eric Green:

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We'll start on Slide 5. I'll begin by covering three main topics, first, examining the drivers of lower than expected Q3 results. Second, examining the impact to Q4, and third, providing color on our current view of market demand and projecting a preliminary sales outlook for 2023. Let's begin with Q3. As expected, we had a few drivers in the quarter that materialized. We had headwinds from FX. We had declining sales in contract manufacturing, and we had a decline in COVID-19-related sales of about $20 million from last year. If we exclude the headwinds from COVID, proprietary organic sales grew over 11%. However, this performance was below our expectations for the quarter. When we provided guidance on the Q2 earnings call, we projected that we would be able to shift resources, formerly dedicated to pandemic-related production to other HVP products that are experiencing increased demand. Specifically, we plan to successfully address this transitioned by accelerating customer orders for NovaPure plungers and fulfilling customer HVP orders originally requested for this year but pushed to 2023 because of longer lead times. These two factors were the underlying drivers to our guidance of strong double-digit base organic net sales in Q3 and Q4. Instead, as the quarter progressed, we underestimated the complexity of the transition and were impacted with a series of setbacks related to capacity constraints and mix shift productivity. Much of our vaccine stoppers were going to fewer customers with fewer SKUs. This enabled high productivity and throughput with our HVP network. When transitioning to NovaPure plungers, we now are addressing demand coming from numerous customers, addressing drugs across numerous diseases and more SKUs. The end result is lower throughput through our existing HVP manufacturing sites. And compounding this situation further, as the quarter progressed, we had a reduction in capacity in our HVP operating network through a combination of equipment downtime and project delays related to the installation of HVP processing equipment. We estimate that the total negative impact to Q3 was $30 million. While we see these issues as temporary and expect full resolution in 2023, they will continue to impact us in Q4. As we look at the capacity constraints, we project that additional HVP processing capacity will come online early next year based on the time line to install and validate the newer technology. Since we are already running at full capacity, we also are unable to address the additional demand coming from long lead time items in Q4. Altogether, while we still expect our base business ex-COVID to grow more than 10% in Q4, we will not be able to offset the expected $80 million reduction in COVID-19 sales. While I'm disappointed that we're lowering our forecast for the rest of 2022, I want to stress that these issues are all supply-related and not demand related. Moving to Slide 6. Our robust order book of committed orders, excluding declining COVID-19-related demand grew 20% year-over-year. Our customers have reiterated that they're looking to West to deliver the critical components and devices to address the growing injectable drug demand. And we have several customers that have notified us of potential upside demand, especially for NovaPure plungers beyond our current order book based on future drug launches. As we look at 2023, we are confident and expect most of the capacity issues will be resolved early in the year. Taking a reasonable view on capacity expansion and customer delivery timing, our preliminary look at 2023 includes the following projections. First, we now assume that COVID-19 sales will decline to a full year 2023 sales of approximately $90 million or a 75% decline from 2022. This is based on current customer forecasts, which we believe assumes a continuation of current trends and COVID booster demand. We expect non-COVID-19 overall base business to grow in the double digits and in excess of our financial construct of 7% to 9%. Base proprietary products are expected to grow in the low teens led by biologics, and we expect CM sales to rebound to growth next year. Our participation rate in recently approved new molecular entities in the U.S. and Europe remain strong. Our components by West or our partner, Daikyo, are expecting almost all the biologics and biosimilars approved so far in 2022 and majority of small molecules approved. Adding it all together, our prelimited view is that we will have positive organic sales growth in 2023, despite an anticipated decline of approximately $280 million of COVID-19 sales. We will provide more detailed guidance on our Q4 call in February of next year. Now shifting to Slide 7 and some highlights from the quarter. I want to first thank our team members who continue to focus on our purpose to deliver superior value to customers through our high quality products and solutions to make a meaningful difference to patients' lives. An example of this dedication and resiliency was evident in the recent response to the hurricanes that devastated Puerto Rico and Florida. Despite the personal impacts to our team members, they ensure their plants continued to produce and ship product with minimal impact. Just another great testimony to the strength of our One West team. We continue to make good strides with the opportunity to improve at-home management of diseases. I'm pleased to share that earlier this month, our customer, scPharmaceuticals, received FDA approval for FUROSCIX delivered via on-body infuser, utilizing West SmartDose on-body drug delivery technology. This brings us to four FDA-approved drugs using our SmartDose technology. Our strategic collaboration with Corning is moving along. We anticipate that in Q1 2023, West Ready Pack System with Valor glass vials, a ready to use sterile packaging system for use with NovaPure stoppers will be available to customers. Lastly, our West experts are pleased to be back in-person at recently held PDA Conference and upcoming CPHI worldwide showcasing our leadership with new scientific insights and technical developments across our portfolio of high quality drug delivery and devices. Moving to Slide 8. With the capital spending investments initiated in 2020 for the larger capacity expansion, we continued to drive forward to complete the installation of our 2021 expansions and initiated the next tranche of investment earlier this year. You can see from the pictures how impressed of the ongoing expansions are across our sites. While they do not happen overnight, we are making good progress and expect all these investments will result in several billion units of increased capacity for our HVP components. Now, I’ll turn the call over to Bernard.

Eric Green:

Thank you, Bernard. To summarize on Slide 15, looking ahead with a sharpened focus, we continue to ensure our growth strategy is bringing value to our customers. Our committed order book remains robust. We continue to capture the benefits of the globalization of our operating network and delivering products in this complex environment. And we continue to drive forward the capital investments across our operations to meet current and anticipated future growth. Gigi, we’re ready to take questions. Thank you.

Paul Knight:

Hi, Eric. On the CapEx, it’s now $300 million to $320 million verse $380 million prior is that a signal that you see lower demand? Is it difficulty getting equipment? What’s behind that lower CapEx guidance?

Paul Knight:

And then you mentioned that the transition from COVID and a few customers to many customers on the plunger side. Are there also some – we’ve also seen some huge prescriptions out of recent approvals. Are those also surprising you in terms of some of these large prescription trends that are being seen in the market?

Paul Knight:

And last on the plunger side, where will that product be made?

Paul Knight:

Okay. Thanks.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Larry Solow from CJS Securities.

Eric Green:

Yes. Larry, thank you for the questions. So there’s two things to give you insights on. One is, when you think about inventory management, the only part of our business where there’s fluctuation, I would say is around the COVID-19 vaccines. That has been quite volatile in the last several months. And I would argue that transition to lower volume has been a little bit faster than we anticipated. But when it comes to demand for our other products, particularly base, think about our high-value products, we’re not seeing that inventory management. In fact, just meeting with customers more recently, they are very keen for us to get the installed equipment that’s currently being worked on and validated and up and running to really alleviate some of the bottlenecks that we have today. So we don’t see that large any major movement. We did, however, for clarity, I did say in the script that as we went through 2022, our lead times were extended because of the demand we had on COVID at the time, and therefore, we had orders that we were committing to customers in early 2023. But that wasn’t driven by any inventory management that was driven by our visibility to make the order in a timely fashion. Now, on the second part – Larry, the second part on giving guidance or giving visibility of sales, I think it’s important to give context with what we just described about installation capacity and the current demand to give visibility what we’re seeing that’s going into 2023 with a high degree of confidence.

Eric Green:

Yes, Larry, that’s fair to say. So as we transition from very long runs of NovaPure stoppers to shorter runs of NovaPure plungers as an example. The equipment that we had intended to be ready to go halfway through this year, which is that’s the delay that we’ve been discussing as caused that mix shift, lack of productivity. And so once that’s up and running, we will be in a good position to fulfil those orders in a timely fashion.

Bernard Birkett:

Yes. Just on the margin, we’ll provide more color on the margins and earnings on our usual timing on our Q4 call here in February. But there are a number of things that we are monitoring really closely, just like everybody else at the moment. We’re looking to figure out how FX is going to settle in for early 2023, and it’s really – it’s much too early to make a call on that given the volatility that we’re seeing today. And then secondly, we’re looking at monitoring the inflationary costs right across the spectrum for materials, energy, labor. And again, it’s early to make a call on many of those. And then thirdly, we’re in the process of preparing our price increases for next year, especially in light of that second topic around the inflation rate costs. So that’s evolving. And so then, the fourth point, we’ll examine again, how fast we can get that extra capacity online to generate those demand – currently demand at HVP sales. So if we can do it sooner than our guidance, there’s upside there to our sales and associated profits with that. I mean, the growth in our base HVP business and HVP margins that will come with that we’re looking to offset that decline around C-19. But again, we have to manage through a lot of these issues at the moment. So, the big positive for us is, is the demand is there and we’re seeing increasing demand around high-value products, particularly around plungers that Eric just mentioned. So as soon as we are on that call, we’ll give you more update.

Bernard Birkett:

Thank you, Larry.

Derik DeBruin:

Hi, good morning. Just like clarify the comment, I mean, you’re talking about seeing positive organic revenue growth next year. I mean, is that – are we talking 1%? Are we talking to sort of back to this 7% to 9% range? And along those lines, to get to positive that sort of implies that your overall HVP next year – proprietary products next year have to grow well in excess of that 7% to 9% range. I mean, are those – can you just sort of provide a little bit more color in terms of how we should think about? I mean, the big range to sort of think about.

Bernard Birkett:

Yes. As Eric said that we would expect to see on our base business double digit growth, within that base that’s going to be north of our construct that we put out there. So we’re looking at that base business to be able to offset the C-19 and decline that we potentially could see here. And then, again, looking at the timing of capacity, there could be some upside there also for us.

Eric Green:

Yes. On getting that capacity online, that’s actually in progress. And as we mentioned in the comments at the start, we would expect to see that early 2023. So, we are reasonably confident around having that uplift.

Eric Green:

Yes, we’ll give you a couple areas. We don’t give specific customers or drug molecules, particularly on the elastomers unless our customers will articulate that publicly. But they do tend to be – first of all, we're seeing, as I indicated a little bit earlier, success is some very drug launches, particularly in biologics that were over the last few years, and that's quite positive. We are obviously in discussions around the obesity drug launches that are being looked at in the marketplaces, diabetes, obviously, those are the key large volume areas that where West is part of those conversations. But going any further into specific drug molecule or a specific customer that would be – we just simply don't go down that path.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Dave Windley from Jefferies.

Bernard Birkett:

Yes, it was the same. It was relating to the same customer. It had to get split over two quarters. So that's what we relate to and then there were some other smaller bits that were not really material, but it was primarily related to one customer.

Bernard Birkett:

Yes, it was to gross margin.

Bernard Birkett:

Yes. So in the fourth quarter, as a carryover from the issues that we experienced in Q3 with the delays and after getting equipment in place and then the impact that's having on our throughput and then also has been able to work through this mix shift change at the same time. When we layer in the capacity in early 2023 and that will resolve a lot of that problem. So it's really down to having that increased capacity and throughput. So we don't believe it will reoccur.

Bernard Birkett:

So it's not – it's actually going to enable us to clear more products through or end of lines with the capacity will actually help our HVP sales and help distribute fixed cost and improve our absorption. So it's not that we're going to layer in more cost and it's going to be detrimental. It actually gives us the ability to sell more high value products and get it through our plants actually quicker. So we can realize those revenues faster.

Eric Green:

Yes. So when you look at the portfolio, it's going to be mostly – you are right. So when you look at COVID-19, mostly it was NovaPure and FluroTec stoppers and high – nice margin associated to that. And but you think about the plungers demand that we currently have. It is a mix but mostly is NovaPure. And that is when you think about the investments we're making right now, it is around that NovaPure corridor. And so some are laminates from not laminated, but it's a NovaPure platform that we're working with.

Eric Green:

Yes. That's early stage. We think about one of the benefits we have with our ReadyPack portfolio is that it has been known to be a great accelerator of seed in the market, so particularly around the smaller pharma and smaller biotechs. They are looking for an off-the-shelf solution and we are able to provide with all the technical data to support it, so this is feet in the pipeline, large and small customers and it’s really around the early drug development phase. Just want to use us as an example as when we launched NovaPure in 2016 time frame, our avenue was through the ReadyPack, same channel, same approach, seed in the market. [Technical Difficulty] And today, you can sense from this call, we spent a lot of time talking about NovaPure is becoming somewhat now the new standard of biologics. That's the intent with the collaboration between Corning and West and I’m very pleased on both technical teams are really continuously driving that differentiation of what this means in the market for our customers and ultimately the patient. So it's early stages, but we will keep you updated, but I'm excited about the launch in the first part of the year.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Jacob Johnson from Stephens.

Eric Green:

No, thanks, Jacob. So I think there's a couple of levers to look at. One is, this puts COVID to the side after saying that I think in the last call, we talked about roughly around 50% reduction in 2023 over 2022. Right now, what we're saying it's about a 75% reduction. So that equates to that $280 million we discussed. On the growth, the underlying growth of the business, we're relatively the same as what we were looking at about mid-last year, but maybe a little bit stronger than the biologics than we anticipated. So net-net, about the same, I would say. If we are able to get capacity online sooner, I can assure you that we're laser-focused on really those two sites right now to get this equipment validated with our customers so we can produce product. But we're just conservatively saying right now, we're looking at a benefit of early 2023. But if we can get on in the next several weeks, we will do so because we do have demand and we have customers asking us to produce as much as you can in the short-term. I think one last thing about the last change, I would say, is a small piece, but see them return to growth. We didn't really talk as much about that in the last quarter, but we're seeing that starting to come back to that mid-single-digit type corridor, if not a little bit better for next year. So that's where we stand with the changes from three months ago.

Eric Green:

Yes, just a quick comment. I mean, if you talk about a lot of variability that’s one area but there is lot of variability and COVID in the last six months. So yes, there is a – if you think about there's a transition, trying to get lower doses per vial and a single dose use obviously, prefilled syringe. That shift is still occurring but it’s not as fast as we anticipated.

Eric Green:

Thank you.

Quintin Lai:

Thank you, Gigi. Thank you for joining us on today's conference call. An online archive of the broadcast will be available for 30 days [Technical Difficulty] in the Investors section. That concludes today’s call. Have a nice day.

Operator:

Good day, and thank you for standing by. Welcome to the Q2 2022 West Pharmaceutical Services Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker for today, Quintin Lai, Vice President, Investor Relations. You may begin.

Eric Green:

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on Slide 5. I’m pleased to report that we delivered an excellent second quarter. We grew 13% organically with over 18% organic sales growth in our Proprietary Products segment. Our base business continues to have solid demand across all three market units

Eric Green:

Thank you, Bernard. To summarize on Slide 14, our performance in Q2 has positioned us well for the second half of the year. We continue to have a strong base business, which is a testament to the foundation we have built over time with the right strategy and execution, leveraging the benefits of a global operating model to deliver the robust book of committed orders and continue to accelerate capital spending across our operations to meet current and anticipated future growth. Towanda, we’re ready to take questions. Thank you.

Derik de Bruin:

Hi, good morning, everyone. Thanks for taking the question.

Derik de Bruin:

Hi. So could you be a little bit more specific on the COVID headwind? I mean you called out $85 million versus prior. And you – but your prior guide have included some growth with it. And basically, I’m just trying to make sure I – trying to back into a more specific number for the organic revenue growth boost to the core business. It looks like I’m backing to roughly a 3% increase from your prior guide, just where you use, but just like to work the math out a little bit better if you give us a little bit more guide.

Derik de Bruin:

Great. Well, thanks for pre-empting my 2023 COVID question, which is going to be the follow-up to that. So thanks for that. And so I get the question, but then that also goes on like have you de-risked the number enough for 2022, right? Is there further downside to that $85 million?

Derik de Bruin:

Got it. And it looks like you called out a 90 basis point margin boost to PP. Was that related to a cancellation fee that might have come in the quarter from COVID projects?

Derik de Bruin:

Okay. And any issues in terms of I mean this comes up – this is coming up frequently in terms of my incoming questions, in terms of customer inventory stocking, just sort of any signs of anything excess in the supply chain?

Derik de Bruin:

Great. And just a question from a client. Can you just qualify the cancellation, how big a number would that was?

Derik de Bruin:

Great. Thank you very much.

Operator:

Thank you. Our next question comes from the line of Paul Knight with KeyBanc. Your line is open.

Eric Green:

Yes. No, thank you, Paul, for the question. No, we’re seeing the benefits of the biosimilar approvals and entry into the marketplaces. Although, I would say it’s relatively small in the scheme of the entire Biologics portfolio. And there’s a high-value product adoption. So when you think about the packaging configurations with our biologic customers, it’s near identical to what we see with the biosimilars.

Eric Green:

That’s one area where we’re investing heavily and specifically to give you really a specific areas on NovaPure plungers. And that is – it supports what you’re saying is that there’s a tremendous movement towards prefilled syringes. And in the Biologics space and biosimilar space we’re looking for – it’s a high adoption of NovaPure. So that’s where our investments are going. We have installations going on in 2022, but also in 2023 to start getting ahead of the curve with our customers.

Bernard Birkett:

That’s correct.

Eric Green:

Thank you, Paul.

Larry Solow:

Hi, good morning. Thanks for taking the questions. Just balancing through a couple of other calls, can you just review, so for the guidance, Eric, so the currency impact is $75 million? And then the net sales impact, I guess, is $25 million, did I get that right? It’s $85 million less COVID. And then you’re adding back essentially $60 million plus from the base business, is that – am I capturing that?

Larry Solow:

Okay. Great. And then on – then you just mentioned you kind of called out in terms of COVID-related sales, vaccine-related sales dropping this year, like you said, 20%. And then you think there may be another 50% drop in volume demand in 2023. I think I caught that right. And then the offset to that, obviously, hopefully, some offset there would be move to more to the prefilled ranges or less doses per vial. It sounds like a little bit is happening in 2022. Can you just give us a sort of an update on how you see that transforming in 2023 and as we go on? Are you still confident that we’ll see a pretty good transformation on the COVID side on the single dose?

Bernard Birkett:

Let me add to that, prefilled syringe uptake as Eric just mentioned when answering the other questions is really within our core business within Biologics. That’s where we’re seeing a lot of increased demand move in – move through 2022 and into 2023, layering in capacity. So that’s for core business.

Eric Green:

I would say what’s commercial in the market right now, the NovaPure is a lower percentage than the other parts of the high-value product portfolio. When you look at the pipeline and/or newly approved drugs that are ramping up in the marketplace, there’s a higher percentage that’s utilizing the NovaPure, particularly around the plungers. And that lines up very nicely to the investments we’re making this year and next year that we’ve committed to already to have installation and capacity expanded quite significantly. So that’s where we are in that journey. While it’s a lower percentage, it has tremendous value proposition to our customers, and that’s why we see the pipeline is very attractive, particularly in the biologic space.

Eric Green:

Larry, this is an area that we’ve been working on for a number of years. And what we talked about more recently is our customers are looking at ways of taking new molecules, but also current molecules in the market, reformulate and move it from an IV to a subcu delivery mechanism and particularly around life cycle management. And that is actually quite exciting. And hence, when you think about – I mentioned on the call in the prepared remarks that we now have 3 combination device approvals with Biologics. And so we’re starting to gain momentum to start moving products into the commercial environment versus still in development. When I look at the development projects we’re working on with a number of customers, it is now more gravitating towards the larger volumes, existing molecules in the marketplace and it’s around life cycle management. So it’s exciting. I believe we are in a good point in time. The more work investments needed to occur, and it’s going to take some time to get into really large meaningful revenues, but we’re definitely in the right direction with that part of the portfolio.

Eric Green:

Thank you, Larry.

Justin Lin:

Hi, good morning. Congrats on the quarter. I’ll just start off with a simple one. I guess, do you have any plans – I’ll just start off with a simple one. I guess, do you have any plans for any further price increases for the rest of the year? Just trying to get a sense of what’s assumed in your guidance.

Justin Lin:

Got it. And can you remind us how we should think about margin cadence for the rest of the year? And I guess, what are the underlying assumptions around raw material costs, freight, and overall supply chain?

Justin Lin:

Got it. That’s very helpful. And just one last one for me. Sort of longer term, that 100 bps of margin improvement each year. I guess, is that predicated on inflation and supply chain pressure easing in 2023? Or can you achieve that without the situation improving? In other words, will the continued uptick in high-value products alone help drive that, obviously, along with sort of the continued increase in efficiency?

Justin Lin:

Sounds good. Thank you.

Operator:

Thank you. Our next question comes from the line of Jacob Johnson with Stephens. Your line is open.

Bernard Birkett:

Yes, it’s pretty close.

Eric Green:

Yes. So the resource is more around the demand bill to deliver on the demand that has been given to us, specifically in Generics and Pharma. And there are discrete customer projects. So we’re feeling good about the work that’s ahead of us, but we do need to allocate resources appropriately to deliver those demands that for the second half of this year. That was the intent of that comment, particularly with Pharma and Generics. So if you take the first half of the year compared to the second half, those two units will be growing a lot faster than they were in the first half. So that’s – I just want to make sure that was clear. That’s going to be occurring from our plants, both in Europe and the U.S. or the United States.

Bernard Birkett:

Yes, we would expect it to take up in the second half of the year and that there are going to be two drivers around that. One is the level of DAs that we’re seeing coming through our pipeline. And then that’s really on our delivery devices and then also looking at the Corning Glass partnership that we have in place, we’ll be adding additional costs. Again, it’s all embedded in the guidance, and it’s been planned for the year, but that will happen in the second half of the year, more so in Q4 than in Q3.

Bernard Birkett:

Thank you, Jacob.

Dave Windley:

Hi, thanks for taking my question. Good morning, gentlemen. I was hoping to try to shine a little bit more light on the comments around bias toward prefilled syringe NovaPure stoppers that – or excuse me, NovaPure plungers that you mentioned, CZ uptick and workaround syringes there. Like how much of that is related? Like so as clients want prefilled syringe, is that still predominantly glass and you’re supplying what you traditionally have, but in NovaPure high value? Or is that also driving uptick in CZ resin syringes? Just anything you can add there would be much appreciated.

Dave Windley:

Okay. And then, Eric, in your comments around addressing shortening lead times. I want to make sure, I mean, it sounds like the base business is accelerating to, I think it was Larry’s bridge or maybe Paul’s bridge around the $60 million of the base that makes up for some of the weakness. How much of that is, I’ll say, pulling forward activity because space and productive capacity is freed up by the lowering of COVID and to help to shorten lead times for your clients versus kind of underlying steady-state flow of demand. Can you help us to understand the difference there?

Dave Windley:

Got it. So I guess to rephrase that last point that you just made, so you’re confident that customers are not, say, stocking because you basically couldn’t produce enough for them to overstock. Maybe to flip the question were they understocked or, I guess, a version of that would be kind of dependent on longer lead times than are comfortable. And so you’re kind of catching up and getting them shored back up to what normal should be. It sounds like if – is what you’re saying.

Dave Windley:

Yes. Got it.

Dave Windley:

Sure. And Bernard, on your point on layering in the capacity, just to confirm, this change in your – or does this change in your COVID expectations change the amount of CapEx investment or the pacing of those projects at all relative to bringing on additional capacity.

Dave Windley:

It seems like a strong sign. Last question for me. In regard to stoppers versus plungers and components that you supply for prefilled syringe. I think you’ve answered in the past that you’re relatively economically agnostic to form factor, is that true? Or is there any nuance that we should think about there?

Dave Windley:

Okay. Thanks. I appreciate you’re answering all my questions.

Bernard Birkett:

Thank you.

Quintin Lai:

Thanks, Towanda, and thank you for joining us on today’s conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. That concludes this call. Have a nice day.

Operator:

Good day and thank you for standing by. Welcome to the Q1 2022 West Pharmaceutical Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Quintin Lai, Vice President of Investor Relations. Please go ahead.

Eric Green:

Thank you, Quintin, and good morning. Thanks for joining us today. We will start on slide five. I'm pleased to report that we delivered a strong first quarter. This is driven by double-digit organic sales growth with increasing demand for our high value products. Our confirmed order book for the rest of 2022 and into 2023 remains as strong as ever, primarily driven by non-COVID based business. And to provide you more color, over half of the order book is coming from biologics demand. These results were delivered despite several macro-economic challenges that are impacting all companies and sectors. We've taken pro proactive measures to mitigate the risk of these challenges and ensure the continuity of critical components to our customers. For example, inflation, we're adjusting our pricing strategy and have enacted surcharges as a pass through to offset increasing costs of raw materials, energy and transportation. Supply chain, our raw material and proprietary medical device components are sourced from across the globe. We have increased our inventory of these key raw materials to minimize any supply disruption. And we continue to execute and monitor our business continuity plans with respect to these issues, including the war in Ukraine and the recent pandemic surge in China. Turning to slide six, our team members across the globe continue to demonstrate their passion to improve patient lives as they remain focused on our strategic initiatives of execute, innovate, and grow. Starting with the first pillar of execute, we continue to deliver the key drivers of growth in Q1 with strong customer demand of HVP components including NovaPure and Weststar. There was solid demand in the quarter across all market units and a positive outlook remains for the rest of the year. And in particular, for our biologics market segment, which is now greater than 42% of our total sales. We see both existing and new customers continue to spec our highest level of components by West or our partner Daikyo for sensitive molecules. Our capital spending investments through expansions and optimizing productivity across the global operations remain on track. To-date, almost all of our 2020 expansion phases have been installed, validated, and in production and we're making good progress on the 2021 capital expansion plans, some of which will come online in the second half of 2022 and throughout 2023. With the accelerated biologics demand for NovaPure, we have executed digital support for NovaPure future demand as well as other HVP finishing capabilities. Expansion construction is underway and will be online towards the back half of this year with commercial production, and 2023. Shifting into West team of scientific and technical experts, we continue to educate and share insights in biologics, combination products, and container closure integrity, which are priority areas in pharmaceutical packaging. At the recent PDA Annual Meeting, several of our West experts were recipients of prestigious awards. Now, to innovate, we need to feel innovation to develop future products, solutions, and services that connect the dots across science and technology to create customer value. We're doing so by investing in external opportunities that complement our current business needs, such as our partnership with Tekion to create a research center of excellence in combination with West Scientific expertise. The Corning collaboration as we expand our HVP value proposition to lead the industry from components to a truly integrated system of Elastomer and glass. And building technologies like the recent collaboration with Numa Systems to develop a family of Fluid Flow technologies for drug delivery. I'm pleased on the progress our R&D team is making around innovate. Moving to the final pillar grow, which includes uses of cash. We're working from a position of strength as we believe we have a long horizon of continued strong organic sales growth and margin expansion. As we have demonstrated, over the past two years, we have increased our capital spending for capacity expansion at existing sites across our global network to support our organic growth initiatives. In addition, we have made inorganic investments, such as partnerships with Corning. Our continued focus within these three strategic pillars; execute, innovate, and grow, allows us to be more responsive, leverage our assets more effectively, and support the trends that are happening in the industry today. This was most evident from our recent site visits in Dublin and Waterford, Ireland. For example, in Dublin, I saw firsthand how the digitalization of our manufacturing technologies is providing real-time data, enabling our team to raise the bar in operational performance with higher yields and efficiencies. At Waterford, the capital investments over the last year and a half have significantly increased capacity with additional lines producing HVP product to meet increased demand. And we're seeing early success with our next-generation fully integrated automation that we believe will scale and transfer across the network for a combined benefit of higher quality production and higher manufacturing throughput. Lastly, and proudly, the hard work of our Waterford team was acknowledged by the Ireland-U.S. Council as we received the Global Public Service Award for our commitment during the pandemic. Now, I'll turn it over to our CFO, Bernard Birkett, who will provide more detail on our financial performance.

Eric Green:

Thank you, Bernard. To summarize on slide 13, our execution in Q1 has positioned us well for the year ahead. We continue to have a strong base business despite the current macro environment in which we operate. We remain well-positioned with the right market-led strategy around execute, innovate and grow. We have a robust book of committed orders with momentum in 2022 and continuing into 2023. We continue to realize the benefits of our global operating model, and we're continuing to accelerate capital spending across our operations to meet current and anticipated future growth. With great pride, we realize the criticality of our products for health care across the globe, which is why our purpose to improve patient lives propels us each and every day. Didi, we're ready to take questions. Thank you.

Larry Solow:

Great. Good morning. Did you give the -- real quick housekeeping question. Did you give the COVID sales -- COVID-related sales number? Did I miss that?

Larry Solow:

Got it. So, there's no change to this year's outlook for that, it sounds like. Okay. Just on the cost side, clearly, everybody is facing these varying degrees of -- from inflation and supply chain issues, and you guys have done a fabulous job offsetting a lot of them, I think. But obviously, you can only offset so much. I'm just curious what the surcharges you put in today, weren't you already kind of -- is this just sort of expediting increases to keep up with the rapid -- the fluid situation with the costs coming up? I know, normally, I think, you have like kickers in there when you're selling -- in a lot of your contracts. Is this more of a broader-based, more aggressive reaction to some of these inflationary issues?

Larry Solow:

Okay. And was this kind of just enacted at the beginning of this year, I guess? And I assume there's some kind of a lag, right? I mean margins were down a little bit. I know year-over-year, there was some more -- you had this onetime -- $12 million onetime payment. I know that's skewed the margins. But even if we look sequentially, margins are down a little bit, right? Is that mostly a function of these higher costs and maybe you can't offset all of them but hopefully maybe you get a little improvement as we look out, as you enact some of these surcharges?

Larry Solow:

Right. Yes. That was kind of my next question. Was -- other than the cost impact and the labor issue you called out as sort of temporary, are you guys having any major or increasing problems just retaining labor or supply chain issues or you've been able to sort of -- even though things are not getting any better, I know?

Larry Solow:

Okay. Okay, great. And then just last question on -- just back to the COVID. Any -- obviously, there's a lot -- it's a quickly changing situation. But it sounds like for you guys, again, we've talked about it, it's not a matter of overall volume but sort of that shift in life cycle management. Have you seen any incremental evidence that this is occurring? Or any thoughts, any update on that front?

Larry Solow:

Right. Okay, great. Thanks guys. Appreciate it.

Operator:

Thank you. Our next question comes from Justin Lin of William Blair. Please proceed.

Eric Green:

Well, two ways to look at it. One is, if we think about for 2022, our confirmed order book for the balance of the year, as we mentioned earlier, it's a very -- it's much stronger than it was the same time period as last year. But if you split that out, the COVID ratio within that larger order book is relatively the same as -- is relatively steady as it was last year. Really, the expansion of that order book is really heavy around the HVP, and also due to -- over half of it is due to the success of various drug launches in our biologics space. So there are some COVID-19 customers that are adjusting their forecast, but overall, we're seeing a steady flow throughout the balance of the year.

Eric Green:

No, we're not based on what we -- current conversations with customers.

Bernard Birkett:

Yes. So on the gross margin, really, what I called out earlier in response to Larry's question, part of that was on the lower levels of absorption that we did see in the first half of the quarter. Again, that was more of a onetime event. And what we're actually seeing in operating margin, if you look at our business on a normalized basis, if you back off the one-time take-or-pay that we got in Q1 2021 and compare operating results excluding that, operating margin would have expanded by about 130 basis points. So that -- it had a 160 basis point impact on operating margin. So that -- so when we look out for the balance of the year, we are forecasting continued operating margin expansion. So that comp made it very, very difficult to expand the margin in that period.

Bernard Birkett:

Thank you.

Paul Knight:

Hi Eric, your $380 million of CapEx obviously shows, I guess, a very strong building book for biologics ex COVID. Can you talk about 42% of biologics -- of sales are biologics this year? What was it last year? And can you talk about what you're seeing that's driving your CapEx levels?

Paul Knight:

And regarding the Corning JV, what's -- I know you've indicated CapEx of $15 million, but what's the multiyear kind of timeline in your view with that JV?

Bernard Birkett:

Yes. So that's going to be a number of years before we see from a revenue and profitability perspective. That's not immediate. So it's going to take time to build that out. But in the interim, there are other configurations, as Eric said, that we're putting together, but they won't be overly material on our numbers in the short-term.

Operator:

Our next question comes from Jacob Johnson of Stephens. Please proceed.

Eric Green:

No, I think it's pretty consistent. I think what we're seeing is, absolutely, when you do life cycle management, different vial configuration, there will be a change, and that was really more towards the back half of the year. But when we look at the growth orientation of where we are today and look at balance of 2022, the ex-COVID or the non-COVID-related growth will outpace the COVID growth. And as you recall, last year and the year before, it was really quick acceleration because of our response in the market. But it's more steady -- can't quite say steady state. It's more of a lower end but still growth overall for West. But the higher element of growth in proprietary is definitely going to come from, right now our view is, non-COVID related.

Bernard Birkett:

Yes. And that's implied in the guidance, that, that -- for that to happen. And we're confident that, that will take place. And as Eric has alluded, we're continuing to see very strong growth within biologics and that mix shift within our business, and that drives a lot of that margin improvement. And we're also picking up various levels of efficiencies throughout our operations. So we would expect to see margins continue to improve throughout the year.

Eric Green:

Yes. If you think about the algorithm that we have with greater than 70% of our sales in proprietary is high-value products, the units -- number of units that we are producing for high-value products is roughly around 22%, 23%. And the way it works is about 100 basis point expansion on units is strong double-digit growth on high-value products. If you think about how biologics is becoming a larger portion of the portfolio, again, across many different customers, so it's not really concentrated on one customer or one drug, it's across the whole portfolio of the market, that will continuously drive higher revenues, higher profits with not a lot of increase on units per se, 100, 100-plus basis points. So, that's the equation, and we expect that to continue. It's the fastest growing subsegment within injectable medicine space. The pipeline is very robust. It was very encouraging to see the number of new approvals over the last 12, 18 months in this particular space, and our participation rate is as high as ever. So all this equates to -- and it translates into our confirmed order book for future launches. So this all translates into continued growth for the next five years of HVP for West.

Eric Green:

Thank you.

Derik De Bruin:

Hi, good morning everyone.

Derik De Bruin:

I just jumped on so my apologies if I'm going to repeat some stuff. But can you just sort of talk about the organic revenue growth guide? You're a little bit below in our numbers in the first quarter, yet you're raising it for 1% to 2% for the full year like that, which is surprising given the Q1. Can you just sort of walk through me -- can you just sort of walk through the math on your confidence as we're getting that increase given the start?

Derik De Bruin:

Great. That's really helpful, and I didn't catch that. Have you -- I've got a couple of clients asking. Can you just sort of confirm that you're looking for greater than 100 basis points of overall operating margin expansion this year?

Derik De Bruin:

Do you think the production constraints are largely alleviated now?

Bernard Birkett:

Yes. So we did see improvement as we moved through the quarter. And we're forecasting that to continue based on what's in place now.

Eric Green:

Yes. So our operations was impacted in the sense that our Qingpu manufacturing facility is within the region of Shanghai and obviously, our offices, too. So we did have a site closure for a short period of time, and we're working through that now. As far as materiality for West, it's very low percentage for West coming out of that facility for the local market. But we're keeping an eye on it, making sure that we can pivot and potentially import where necessary versus having materials coming out of that specific site. We do expect to see a recovery in this quarter with the demand, but we need to stay tuned because that's kind of a dynamic environment right now.

Eric Green:

Thank you.

Dave Windley:

Hi, good morning. Thanks for taking my questions. I wanted to follow up on Derik and several of the other questions -- line of questioning around the capacity. Wondering if your absorption commentary on productivity issues affected your ability to deliver to clients. Like should we think about revenue would have been higher in the quarter if you had been able to produce as much as you expected in those facilities? And like did the lag times to clients change at all?

Dave Windley:

Okay. On the -- it seems -- as people have already highlighted the gross margin impact and somewhat offset by SG&A being a little lower, should we think about that SG&A level as durable? Is that a result of kind of some permanent productivity step-ups?

Dave Windley:

Okay. And then just somewhat longer-term question around capacity. I apologize, I'm probably not great at keeping up with all this, but you've pulled forward quite a bit of CapEx, not just kind of now but over the COVID period and have a number of initiatives in place to bring more capacity online. Could you just help us understand in broad strokes when those capacity expansions are supposed to hit? And I think it's mostly FluroTec and NovaPure, as you've highlighted, Eric. And then also confirm what you said in the past that you basically expect that capacity to be taken up by order demand right away; in other words, no dilution to productivity, absorption, et cetera, as you're bringing on slugs of new capacity.

Dave Windley:

Excellent. Appreciate those answers. Thank you.

Operator:

Thank you. I would now like to turn the conference back to Quintin Lai for further remarks.

Operator:

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Operator:

Ladies and gentlemen thank you for standing by. And welcome to the Q4 2021 West Pharmaceutical Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today conference call is being recorded. I would now like to hand the conference over to your speaker for today Quintin Lai, Vice President of Investor Relations. You may begin.