Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 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. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today to Mr. Quintin Lai, Vice President Corporate Development, Strategy and Investor Relations. Thank you. Please go ahead, sir.

Thank you, Julian. Good morning, and welcome to West's third quarter 2020 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, CEO, Eric Green; and CFO, Bernard Birkett, will review our financial results, provide an update on our business and present our updated outlook for the remaining year of 2020. 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 2 is the safe harbor statement. Statements made by management on this call and in the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results, as well as those expressed or implied in any forward-looking statement made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risk 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 West's CEO and President, Eric Green.

Thank you, Quintin, and good morning everyone. Thank you for joining us today. Before we dive into our Q3 results and raised 2020 guidance, I like to make clear the importance of our mission at West and the values that formed the pillars in which we operate. In today's uncertain environment what seems like a new set of challenges each day, we remain focused on two key priorities. Keeping our team members safe and ensuring uninterrupted supply of high quality containment and delivery devices required by our customers and the patients we jointly serve. Moving to Slide 5. West is uniquely positioned to satisfy increasing market demand by leveraging our global operation of scale and resources. Our team recognized at the outset of the pandemic that need to increase production capacity. We were already supporting the growth trajectory of our base business and the future demand for our products required for COVID-19 vaccines and therapeutics meant that we needed to act quickly and decisively. To address the increase in demand, we brought forward planned capital investments and production capacity. Earlier this month, we installed new manufacturing equipment at one of our HVP sites to prepare for the future demand of FluroTec and NovaPure. As of this week, that capacity is operational and we have additional equipment being installed at a second HVP site with more installations planned in the coming months at other global sites. The strength of our performance this past quarter demonstrates the forward momentum we have built over time with our market led strategy and the One West team approach to satisfy market demand. Now turning to Slide 6. The disruption caused by the pandemic has impacted the way all of us conduct business in our daily lives. West is no exception. Thankfully, the changes we have…

Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q3 2020 revenues and profits, where we saw strong sales and EPS growth, led by strong revenue performance primarily in our biologics and generics market units and Contract Manufacturing. I will take you through the margin growth we saw in the quarter as well as some balance sheet takeaways. And finally, we'll review our updated 2020 guidance. First up, Q3. Our financial results are summarized on Slide 8, and the reconciliation of non-U.S. GAAP measures are described in Slides 16 to 20. We recorded net sales of $548 million, representing organic sales growth of 18.2%. COVID-related net revenues are estimated to have been approximately $32 million in the quarter. These net revenues include our assessment of components associated with treatment and diagnosis of COVID-19 patients, offset by lower sales to customers affected by lower volumes due to the pandemic. Excluding net COVID impact, organic sales grew by approximately 11%. Looking at Slide 9. Proprietary product sales grew organically by 20.3% in the quarter. High-Value Products, which made up more than 65% of proprietary product sales in the quarter, grew double-digits and had solid momentum across all market units throughout Q3. Looking at the performance of the market units, Biologics market units delivered strong double-digit growth. We continue to work with many biotech and biopharma customers who are using West and Daikyo high-value product offerings. The generics market unit experienced high single-digit growth led by sales of Teflon stoppers and FluroTec components. Our Pharma market unit saw mid single-digit growth with sales led by high-value products and services, including Westar and FluroTec components. And Contract Manufacturing had double-digit organic sales growth for the third quarter, led once again by sales of diagnostic and health…

Thank you, Bernard. Before I close, I'm pleased to share that last evening we received FDA clearance for West to market our 20 millimeter Vial2Bag advanced product. The team is excited to bring this innovative product to the healthcare professionals. To conclude, there are many challenges ahead of us, but we're resolute in our mission focus systems and most importantly, the team to address these challenges. We see strengths in our core business and we're confident in our long-term growth strategy. Our market led strategies delivering unique value propositions to our customers. Our global operations network is able to flex and respond to the demand, while driving market leading service and quality. And our investments in digital technology and automation will continue to keep us on the forefront of the industry. We remain focused on delivering value to all our stakeholders on a sustainable basis and doing our part to support the healthcare industry as it works to resolve this global pandemic. On behalf of the team members at West, we continue to wish you well in the days ahead. Gila, we're ready to take questions. Thank you.

Thank you, sir. [Operator Instructions] I show our first question comes from the line of Juan Avendano from Bank of America. Please go ahead.

Hello. Thank you. Congratulations on the quarter again West and everybody. My first question is, it seems like the net COVID related revenue the benefit that you've been seeing over the last couple of quarters in 3Q and 4Q is anywhere between 30 million and 35 million per quarter. Why would you or would you not advise against annualizing this quarterly ground rate in the out years? I'm talking about 2021 and beyond?

Yes. Juan, well, first of all, thank you. And we look at Q2 is approximately 19 million; Q3 was roughly around 32 million net COVID impact. And a lot of that has been around our therapeutics and supporting therapies and in Q3 saw a little bit of demand regarding vaccines to support the vaccines. But until we have visibility as our customers get product that's approved for human use, we are not able to guide any further is particularly around the vaccines. So Bernard did mention that for the full year, we're looking at about $85 million net impact of COVID-19. That's just based on what we know today and what we have visibility off.

Thank you. And would you be willing to give us the split in the third quarter between therapeutics and vaccines out of those 32 million, how much was attributable to vaccines?

Yes. So it was – the majority of it was around therapeutics and that's still, what we're seeing, now we have seen towards the back end of the quarter, some customers pull some of their demand for vaccines forward a little bit, and we have been responding to those demands, but primarily in Q3 mainly around therapeutics and some vaccine and revenues.

Got it. And within the vaccine revenue, is this vaccine revenue associated with clinical trial activity or with at West manufacturing activity?

Yes. Well we don't comment on exactly what the stages are – how our customers are ramping up. So we just can't comment on exactly the use at this point in time.

Got it. And my very last question, if I may. And the margin expansion, congratulations on the margin expansion that the gross margin expansion that you were seeing on the Contract Manufactured Products segment is been two quarters of high teens gross margin. My question is how sustainable is this? And given the comments that you had in your prepared remarks about around the digital and automation improvements that you're making operationally, that's the setup West to deliver more than 100 basis points of operating margin expansion in the upcoming years?

So to answer your first question on contract manufacturing, as we called out in Q2 we have seen significant improvement. Some of the Q2 bump in margins was related to some one-time engineering revenues and the associated profitability we saw with those. Again, we did see further improvements in Q3, if I was to look out between now and the end of the year; I would think the margin maybe a little bit lighter than that or showing again significant improvements on previous years. And then as we roll forward into 2021 and beyond, I would start to see the 18% plus being more sustainable over the long-term. But I was when we're looking at Q4; I would dampen down expectations a little bit on that one.

Okay. Got it. And in the out years, the 100 basis points upside to that, given the digital transformation, the good trends on the high value products and obviously the increased utilization in the CMO segment?

Yes. On our long-term construct, we have continuously said that we're targeting 100 basis points plus improvement year-over-year. And we continue to make the investments to make sure that we can sustain that level of improvement over the long-term and digital is part of that.

Thank you. I'll leave it with that. I'll follow-up offline. Thank you.

Thank you.

Thank you, Juan.

Thank you. Our next question comes from the line of Larry Solow from CJS Securities. Please go ahead.

Great. Good morning. Thanks for taking the questions and congrats on the quarter. Can you – you mentioned the Vial2Bag approval there at the end. Maybe just elaborate a little more on that, so that mean that the whole product line will be coming back in 2021?

Yes. What's coming back is the 20 millimeter version of the Vial2Bag which is more – majority of the demand in the adjustable market. So we are now as we got the approval late last night in the mode of ramping-up and to reenter the market or enter the market with the new innovative product that we're very comfortable and confident on will be a really solid solution. When you start thinking about transferring vile drugs from vile into a bag situation environment. So, and at the bedside of a patient, so we're excited about this launch and we're ready to move forward and thankfully the FDA has supported us on this journey

And obviously, just to follow-up on Juan's questions and a very nice margin improvement. And you mentioned NovaPure and Envision, could you just speak to and all those are two of your highest margin products, I believe sort of give us like a global look. What penetration is of those two services compared to some of Westar and FluroTec and, how much room we got to run between the two?

Yes. FluroTec is really kind of a foundational element. We start thinking about particularly in the Biologics area. So the FluroTec coating that is used on both stoppers and plungers. And so therefore as somewhat foundational and that is being, the demand is obviously increased due to the current pandemic. We started thinking about penetration of envision, which has continuously grow nicely and then NovaPure, which is the highest level quality product that we provide in the marketplace. And that is the – the adoption rate is starting to continue to – continues to accelerate. It is still less than 10% or frankly, less than 5% of our sales and proprietary, but the highest growth that we're seeing and what's really encouraging as you know, we have good visibility what's in the pipeline and what our customers are looking to use for primary containment. NovaPure is now becoming quite a, I call it a staples in the biologic space. So we anticipate strong growth in NovaPure not just near-term, but more long-term on the base business. And in addition to that, we sort of think about some of the vaccines are being looked at and being developed for COVID. We are seeing interest levels around NovaPure.

And you spoke to the, the increased capacity particularly on the NovaPure and FluroTec. I realized that acceleration is partially driven by the vaccine demand in the short run. How about in the long run, it's these vaccines are not here forever or there are other options for these vaccine providers. Do you run the risk of overhead or unused overhead absorption? They put some of this increased capacity?

Larry, the capacity that we've added was already baked into our five-year strap plan. So really what we've done is accelerated that CapEx by probably two to three years. So that this is capacity we were going to add in any case and say a vaccine didn't happen and we all want vaccines to be successful, but if it didn't, there would be some cost to cover really in the short term, but that, it's perfectly within our capability to do that. So we don't see any, no specific risk with this. It's technologies that we already have in our business, and that we are running today. So it's really expanding the current technology base. So from that perspective, there's not a huge risk, and we would not see that capacity sitting there idle for, it within the medium to long-term, if that vaccines were not successful.

Got it. And then just last question, just to clarify, actually a clarification. You mentioned, I think you said 95 million now for COVID related...

85.

85, okay. So, up from 60, so that's 25, and I think you sort of reverted back a little bit on the FX impact by about another 20 or so, so that's about three quarters of your increase on your guidance and the rest, I guess is the base business.

Yes. And so we're seeing strong growth across all of the areas of our business with COVID and ex-COVID, if you look at the growth rates excluding COVID, we're at double-digit growth rates. So it's strong across all areas of the business, and we've been showing growth in each of the market units and contract manufacturing.

Got it. Great. Thanks very much. I appreciate it.

Thank you. Our next question comes from the line of Jacob Johnson from Stephens. Please go ahead.

Hey, thanks. Congrats on the quarter. Just maybe one question on COVID vaccines, I mean, in terms of customer demand, I don't think you experienced stocking earlier this year, just generally, but as we think about the ramp up of these vaccines, do you anticipate customers building up inventories ahead of a potential launch? Or should we anticipate this vaccine work being largely made to order?

A lot of our businesses made to order, but we are in active discussion with several customers of if and when a vaccine is approved and how we can respond. So, I think, earlier in the prepared remarks, Bernard mentioned a little bit about inventory has increased and some of that is due to build on, on some components that…

That's our inventory, that's right inventory with the customer.

And that was the customer, it's our own inventory as we prepare. So we're well positioned to be able to react quickly and meet the requirements that the customers have, we have agreed upon with our customers. So, again, we're made to order, so we'll be able to respond once those – if and when those approvals come.

Got it. And then maybe a bigger picture question. I mean, in this COVID environment, we're seeing a lot of healthcare move into the home setting. Maybe it's too soon on the drug delivery side, but are you seeing any uptick in interest in products like SmartDose or SelfDose? And is this a trend, do you think, that could maybe accelerate in coming years as we come out of COVID?

Jacob, that's exactly one of the areas we're starting to have further discussions with our customers, in particularly a couple of the development agreements recently signed and it commenced on what the customers is exactly just referenced, ability to take it away from an infusion setting to a delivery device environment that SmartDose is capable of doing. Now, it does take time to ensure that it's compatible and we –obviously works as required. And we're confident in that area, but these development agreements do take time to get through over the line. We're seeing a bolt mixture of new molecules in the pipeline, but also molecules that are already in the marketplace that using other types of modalities for delivery.

Got it. I'll leave it there. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from the line of John Kreger from William Blair. Please go ahead.

Hi, thanks. Bernard, could you just expand a bit more on your comments about accelerated CapEx? When would we expect that that program to sort of come online? I think, you said one plant has come online already, but can you just give us a little bit more detail about when the other accelerated programs are coming on? And I'm curious if that is impacting your expense levels as well, obviously it's impacting CapEx, but are you – to what degree are you running sort of elevated spending through the P&L too?

Yes, so, we're onboarding the equipment as we speak and – each week and over the next coming weeks, we'll be layering in more. And as we move into 2021, we'll be layering in more capacity. There is some expense around us regarding some engineering support, validation support, but it's not overly material. As we've already commented that the equipment and the technologies are onboarding our technologies and equipment that we have used in the past. So it's not anything new for us. So we have the systems and the people in place already to be able to do that. So it's not overly material on our results at this point.

Great, thanks. And then the net COVID benefit, can we assume that is mostly flowing through the biologics segment?

That's correct, biologics and then generics have seen some.

Got it. Okay. And curious, obviously, you've gotten a really nice lift from the pandemic in terms of demand. Can you talk about sort of the non-COVID pipeline that you're seeing? And are you able to meet the underlying demand levels there? Are you having any capacity issues?

No, you're absolutely right. In the last quarter, we had double digit growth on the ex-COVID in both – in proprietary, which is really the area that were impacting the most wood sparking units probably supporting the most. And when you think about the pipeline in our biologics businesses is very robust. So not just molecules that have been launched and continue to have higher uptake in the marketplace, but it's new molecules that are being developed and we have a very high participation rate also in biologics. So the underlying growth rate of the three market units continued to do quite well. And that does put, as you referenced, additional capacity pressures on our capabilities, but that's where these investments we're bringing in and we're able to quickly install, validate, and move it into operational productivity. So the underlying business and we believe that will continue to go forward as is based on our current participation rate on new molecules coming through the pipeline.

Great, thanks. And just one last thing to clarify, can you remind us at what point in the drug development process are you typically getting engaged by the innovator? Is it preclinical or early stage clinical?

It's preclinical. So, we're very early on and a lot – in many cases, if they're not using, as you know, we have a pretty high participation rate on many of our customers' drug portfolio. So if they're looking at moving away from some – an element or products that they're already using within other parts of their portfolio then we will obviously alter and move to a higher value product like NovaPure, but it's very early on with our customers.

Great, thank you.

Thank you. I show our next question comes from the line of Danlei Yan from Jefferies. Please go ahead.

Hi, good morning. Thanks for taking my questions. I guess I just have one that hasn't been asked already. As cash builds, how is – how are you thinking about prioritizing deployment of capital?

So, right now, we're focusing on making sure that we're adding the additional capacity, the required capacity that's needed, and you can see that we've increased or had increased our CapEx guidance. And that's in the short to medium term as we look at where we deploy capital in the future. Yes, we will look at M&A, but again we take a very disciplined approach to looking at that and how we deploy capital in that area based on what are the strategic objectives that we have and what incremental value cannot bring to our customers and how we will create value from those acquisitions and add stakeholder value. And so, we have a pretty robust constructs around the hurdle rates that we have to meet, but that is something that we have started to look at. And if we have any updates for you in the future, we'll obviously communicate those to you. The one thing that we are cognizant of is that we have a very strong and robust organic growth story and strategic plan in place. And our priority is to make sure that we continue to deliver on that and not get distracted. So, hopefully that answers your question.

Great, thank you. And yes, it does.

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call back over to Mr. Quintin Lai for closing remarks. Please go ahead.

Thank you, Julian. Thank you everyone 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 through Thursday, October 29 by using the dial-in numbers and conference ID provided at the end of todays earnings release. That concludes this call. Have a nice day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.