Thank you for standing by, and welcome to the West Pharmaceutical Services Q2 2023 Earnings Conference Call. [Operator Instructions] Please be advised today's conference call is being recorded. I would now like to turn the call over to Mr. Quintin Lai, Vice President of Investor Relations. Please go ahead.

Thank you, Valerie. Good morning, and welcome to West's Second Quarter 2023 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, is our 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 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 statement 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'll now turn the call over to our CEO, 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 a solid second quarter, which has us positioned for an even stronger performance in the second half of the year. The continued success is a result of our proven growth strategy as we capitalize on the robust customer demand and ongoing capacity expansion projects. And proudly, the strength of the One West team, and unwavering commitment to our purpose continues to set us apart as the trusted market leader. I want to acknowledge the team members across the globe and say thank you. The second quarter performance was driven by our base Proprietary products business, which grew mid-teens. As expected, COVID-19 sales continued to drop as the second quarter last year was the peak of our pandemic-related sales. With respect to our base business, the Biologics market unit again grew double digits with stable demand. Our Generics market unit continued to benefit from HVP capacity expansions as the base grew strong double digits. And the Pharma market unit base grew high single digits. In addition, Contract Manufacturing experienced significant momentum in the quarter with delivery of components for injection-related devices. Turning to Slide 6. The key levers of growth in Q2 were primarily driven by HVP components and delivery systems. Our participation rate in recently approved new molecular entities in the U.S. and Europe remains strong. The components developed by West or our partner, Daikyo, are addressing some of the most critical therapeutic areas around immunology, oncology, including gene therapy applications, cardiovascular, neurology, diabetes and obesity. This is also reflected in the solid order book across our Biologics, Generics and Pharma customers, a clear reflection of the needs of the market. And we continue to…

Thank you, Eric, and good morning. So let's review the numbers in more detail. We'll first look at Q2 2023 revenues and profits, where we saw a low single-digit decrease in organic net sales and a decline in operating profit and diluted EPS compared to the second 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, Q2. Our financial results are summarized on Slide 9 and the reconciliation of non-U.S. GAAP measures are described in Slide 17 to 21. We recorded net sales of $753.8 million, representing an organic sales decline of 2.5%. COVID-related net revenues are estimated to have been $20 million in the quarter, an approximate $106 million reduction compared to the prior year. Looking at Slide 10. Proprietary products organic net sales declined 5.5% in the quarter. High-value products, which made up approximately 74% of Proprietary product sales in the quarter declined due to the reduction in COVID-related net revenues. Looking at the performance of the market units, the Generics market unit delivered high single-digit growth led by sales of Westar components and self-injection related devices. While the Pharma market unit experienced mid-single-digit growth led by Envision and Westar components as well as admin systems. And the Biologics market unit saw a double-digit decline due to a reduction in sales related to COVID-19 vaccines. Our Contract Manufacturing segment experienced a double-digit net sales growth primarily driven by an increase in sales of components related to injection-related devices. Our adjusted operating profit margin of 24.5% was a 490 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 14.6% for Q2. Excluding stock-based compensation tax benefits,…

Thank you, Bernard. To summarize on slide 14. The solid financial performance in Q2 has us positioned 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. As a global leader, we recognize the critical role our products play in health care across the globe, and that is why we're so dedicated to supporting patient health, both now and into the future. Valerie, we're ready to take questions. Thank you.

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

Congrats on another good quarter. Eric, can you just give us a little more color? You actually mentioned sort of a bunch of sort of areas where you guys are driving, seeing growth just on the product line. I know there's been a lot of talk about the GLP-1 diabetes and weight management and the growth there. But I'm just trying to get a sense. I know historically, you guys have never said or do not to get too carried away with one group of products. But in this case, it seems like there's just been a lot of positive news and noise about the GLP-1. So, can you just give us a sense of maybe color, how that's represented in your overall revenue mix today and where that could be in the future?

Larry, thanks for the question, and thanks for joining us on the call. When we look at where the pipeline is being developed in our success, what we call a participation rate, continues to remain very high as we look at year-to-date as an example, and even from last year, I think we need to be clear that we are actually supporting many different therapeutic areas and not just one or 2. And that's what's really exciting about our portfolio as we continue to evolve our offerings that we continuously be the company to support on their primary containment, again, across many different therapeutic categories. So, some will have higher demand in the market, some less, such as gene therapy as you think about the number of doses. But our focus is to make sure that we are continuing to have that high participation rate in all different areas, have different type of growth trajectories over the next 5-plus years. Q - Larry Solow Got it. That's fair enough. A question on just margins in proprietary products for Bernard. A nice sequential improvement, little bit higher sales. And I think a lot most of those sales looks like drop to the gross margin line there. Anything unusual in this quarter compared to last quarter, looks like COVID sales were about the same, COVID-related sales. So, anything we should be aware of there that drove that sort of 150 bps sequential improvement in gross margin for proprietary products?

It's really down to product mix. We're seeing that continued growth in high-value products ex COVID and retain that positive impact that's flown into margin. We're also improving the throughput within our facilities, getting better levels of efficiency, and we're seeing that partly because of the capacity that we're layering in. But in improvements to our existing infrastructure and that combination is delivering to those improved margins. And again, that's part of the overall construct that we've been talking about over the last number of years. So, we just continue to deliver on that.

Got it. Well, I got you Bernard, just thoughts on Capex and sort of this year, I think you're maintaining a $350 million number. As you look out over the next few years, do you feel like this number, and I guess that would probably be a high-class problem, but do you feel like this Capex level will remain at this area, or do you see it may be coming down as you look out?

We would expect to see it normalize back to what we have been talking about pre-COVID of about 6% to 7% of revenues. But again, it's dependent on if there are other spikes in demand or investments that we need to make, we're willing to do that. We'll continue to invest in our business where it's needed. At the moment, we're investing in capacity around plungers across our high-value product network. So, it's not just in one facility, it's right across the network to be able to meet the global demand from our customers. We're seeing the results of that materializing as we speak, our lead times are reducing significantly. So, we're getting back to pre-COVID levels. And I think by the end of Q3, our lead times will be normalized across our business. We're also layering in some strategic flex capacity, so we are able to respond to sudden increases in demand for customers. And then that capacity kind of feeds into our long-term plan as well. So it will be utilized over the kind of 5-year strategic horizon. So with CapEx, we have met that significant investment over the last number of years and maybe a little bit similar as we move forward to next year, but then maybe starting to tail off.

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

Maybe following up on the last question and kind of the investments you've made in capacity recently. I think that the number 1 question we're getting, and I imagine you're getting as well from investors kind of around the magnitude of the revenue opportunity from the NovaPure plunger capacity additions. Is there any way to frame up or quantify the revenue potential of those capacity additions? And then Eric, you also mentioned kind of early days in the ramp-up at Kinston. Just curious kind of what the ramp there might look like as we think about the next 12 to 24 months?

Yes, I'll start with the ramp-up, just to address that quickly. As you know, we've been discussing how the installed capacity is coming in throughout 2023 in second half, we're starting to ramp up. So we expect that to -- it's occurring today. It will continue throughout Q3 into the balance of the year. And it usually takes about two or three quarters to get to a pretty steady state. And then as Bernard mentioned a little bit earlier is that we're always adding a little bit more capacity to build flex. So anticipate Kinston, particularly on the NovaPure plungers be ramping up through the balance of the year.

Yes. That's the way I would frame it is that when we look at the mix of our CapEx investment, I think we've said this before, pre-COVID, it was like 50% of our CapEx deployment is around maintenance and then 50% on growth. For now what we're seeing is 70%, the CapEx deployment is around growth and specifically around growth in high-value products. It's not just the growth in the revenue, it's also the growth in operating margin given the areas that we're investing. So I think that's the way we would frame it. And that ties into our long-term construct of that 7% to 9%. And if opportunities take us above that, I think we'll be in a good position to respond.

Okay. And then maybe just a level question for you, Eric. You mentioned in your prepared comments kind of working closely with customers on demand trends. As I think about the biologic end market, I know you're not very exposed to early-stage biotech, but there's been a lot of focus on the near-term dynamics there given funding and some prioritization we've seen in the pipeline there which I suppose could maybe impact future commercializations at some point. But I'm just kind of curious from the seat you have and your perspective where you kind of have a longer-term view and conversations with players over the longer term. Has there been any kind of change in their long-term planning, given the current macro we're in?

Yes. No, I don't see a long-term change to plans. You're absolutely spot on when you say that our exposure from a revenue and profit perspective in regards to biotech funding was pre-clinical or clinical is extremely low, although we are active. As you know, the thesis of our growth is participating during the pipeline and then work through the whole commercialization. So we don't see any change long term and especially in the biologics. Very encouraged when I look at the first half of this year, a number of approved new biologics and how we're positioned. As you know very well that it takes a while for those to ramp and to get more into higher patient population. But we're positioned well, and our exposure in the biotech funding is very low right now. And this whole discussion does not change our outlook for the biologics long term.

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

Yes. Thanks, Eric. The impact, if any, is there from the Rocky Mount situation with Pfizer, does that kind of cause us to think about pacing on 3Q or what any impact in your view in the industry from that damage?

Yes, Paul, thanks for asking the question. First of all, we're always concerned about any of our customers' sites and their employees, and I know we have a slight 60 miles from there at Kinston, North Carolina. So we've obviously reached out and offered any assistance, not just from a product perspective but for a community perspective. And so a very long-standing relationship and that's first foremost in our mind when we were talking to them on the day or day after the event. In regards to us as product and revenue, we would not say there's any change in our trajectory for Q3, Q4. And we're really specifically, the organization West is ready to respond appropriately immediately to support them in any way. And we'll leverage our global operations if necessary. So the two answers to your question, we're ready to support when and needed, but no change to our outlook for the next two quarters.

And I know Michigan was opening up in the first half of the year. What was that facility? And then the other capacity question, is Waterford under expansion yet?

Yes. I'll touch on the first. I'll let Bernard touch the second one at Waterford. So in Michigan, we -- it's a contract manufacturing site. It's one of our seven contract manufacturing sites throughout Europe and the United States. And it is primarily focus of the expansion has been around auto-injectors. And that is up and running as we speak and we're doing the ramp-up with our customer at this time. So really pleased on the progress and the output of the product, the high-quality product that's coming out of there. And that was kind of a transfer of knowledge from another site we have over in Europe. And so that whole global network approach in contract manufacturing is actually another benefit for our customer. So that's where we are with Michigan. Do you want to talk about Waterford?

Yes. In Waterford, we are looking at expansion to that facility, but not going to be here in '23, probably start sometime in later in '24. Right now, we're working through Jersey Shore, Kinston and Singapore, as Eric mentioned, and then we have also expansion going on in our Eschweiler site. So it's coming.

And then, I guess, vaccine is waning or is vaccine moving to dose vials and/or is it moving to syringe yet, Bernard?

We haven't seen any major shift in that at this point.

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

So I've got several, so I'm going to pop off on. You're getting really good pricing. It looked like 5% to 6% on the quarter. That's relative to your 1% to 2% historically. How sustainable is that going forward?

Yes, Derik, it's a great question. So thanks for joining the call today. You're right. I mean, historically, we were in the 1% to 2% corridor all the way up to, let's say, 2021. And when you think about 2022, we were roughly between 3% and 4% net price contribution. And this year, we're delivering on the high end what we stated earlier this year of 5% to 6%. We intentionally built capabilities in the organization a couple of years ago that we were giving visibility of that beliefs we can be somewhere in between where we are today and where we were back in 2021. And I won't give specific guidance right now, but our belief is that we have the ability to have more of a consistent, predictable price element, and we're focused on the mix also, which is a big driver of growth here at West. So while price is important, we'll continue to deploy the strategic pricing aspect. We're also very focused on mix and making sure we're bringing customers in at the higher end, the HVP versus the lower end. So those are the two levers that we're focused on, Derik. Q – Derik De Bruin: Got it. That's really helpful. Your competitor Datwyler, called out some stocking issues, inventory issues going on with it. I mean I know you've seen a little bit of this, but I'm just sort of wondering has that had any impact on the business? Are you seeing any issues with that, that are popping up, expecting?

Yes, Derik, it's all that's taken into consideration as we kind of set the guidance for the balance of the year. Fortunately, we have a good lens with our customers. And when you think about the COVID vaccine, obviously, there's a destocking, destocking has been going on for the last couple of quarters. And then when we look at the base business, there's some inventory management here and there, but it's very low in amounts when compared to our order book, particularly last year. We have a good handle on it, and we're keeping an eye on and having conversations with customers, but it's a very low impact at West right now.

Got it. So we, like a lot of other people have done a bunch of work on the GLP-1s. And I think one of the questions we're constantly getting from investors is like how do you sort of think about the impact of the injectables business when the oral GLP-1s sort of come out? what are your customers, how are your customers thinking about the impact of those and you're obviously adding a lot of HVP capacity for GLP-1s and other products, but how are your customers are thinking about the impact of orals on that market?

Well, I'm a little hesitant to go further on that conversation, Derik. I would ask you or anyone to speak to our customers directly. They have a good line of sight of the injectable market and capabilities versus the orals. I do know for a fact that from our position, we're working with the customers to make sure that we do have the focus on capacity, the timing of the capacity and as we ramp, it's actually touching both sides of our business, not just the elastomers, HVP elastomers proprietary side, but it's also a contract manufacturing, and we're taking a very balanced approach to this. But again, we're really focused on that side, and I would defer you to anyone to the customers on the oral conversation.

Thank you. One moment please. Our next question comes from the line of Matthew Larew of William Blair. The line is open.

Hi, good morning. Wanted to ask about the expansion in Singapore. And maybe just to use that as a maybe opportunity, Eric, could you help us frame where Asia Pac in general is from more of an HVP perspective? Are you seeing an acceleration in demand for HVP and NovaPure, particular in Asia Pac, that's kind of driving the recent investment. Just kind of curious, given that you were just over there, what you're hearing.

Yes. Great question. Thanks, Matt. I'm excited about what Bernard and I were able to see the progress in Singapore with our site. As you know, it's one of our five high-value product manufacturing sites on the globe, and it supports some very exciting growth areas from a geographic perspective. I'll call out South Korea or Korea as an example. I'd also call out in other parts of Southeast Asia. And in fact, some of the products are going into Japan, so I'm really excited about how we're able to leverage this site to really drive growth through Asia Pacific. What we're doing there is we're making sure that our customers, particularly the global customers are getting the same quality product service out of any of the five HVP sites. And we expect Asia Pacific to continue to be a high-growth area for us due to the amount of investments of our customers. And also, they're not just servicing the local market. You're finding a lot of our customers in that region are supporting the global market and/or working on behalf of some of the larger global drug companies. And I'll end with this, while we were in Singapore, we had to meet with several of our customers came together in Singapore throughout the region. And it was very informative in how we think about the demand of HVP in the future because customers are expecting high-level quality and benefits that they can truly represent the products on a global scale. And that's where we come in to be able to support them. So hopefully, that gives you some context of what we're trying to accomplish in Singapore.

Okay, thank you. And then I just have two cleanups from earlier questions. One, if I'm interpreting your comments correct, Eric. Should we think about full utilization of the new Kinston capacity not really occurring until 1Q '24, just given that it takes a couple of quarters to ramp up the first plant up. And then the second, really destocking is still de minimis. But quarter-over-quarter, is it fair to say that it's been become a bit more headwind or a bit more unknown, and then I'll jump off. Thanks.

Yes. On the destocking comment, really, it's all majority of it is around the COVID-19 destocking. And so we've been pretty clear on our quarterly cadence last year and what we're seeing this year, so that's probably the majority of it. From the base perspective, we're not seeing a material difference from quarter-to-quarter. On the ramp-up of Kinston, it is a ramp-up, and it's going to take several quarters to get to a very high utilization rate. So that will be sometime in 2024. I just want to be clear, we did add additional capacity to handle flexibility and future demand that we anticipate, particularly with some of the new approvals that are just coming through. So yes, there will be some flex to that, but we expect it to be higher utilized throughout 2024.

Thak you. One moment please. Our next question comes from the line of David Windley of Jefferies. The line is open.

Hi, thanks for taking my question. Good morming. I wanted to kind of extend a couple of earlier questions. First, on the growth capex, the 70% of capex that now represents growth, is there an algorithm we can think about as to how a capex dollar translates either to revenue or say, gross profit? Do you guys think about it in that way at all?

Yes, that's not something that we share. We don't share that information. I think, David, the way we framed it is that the 70% is focused on growth. The growth is primarily in high-value products and it's to drive our long-term construct either to meet it or to create capacity to go above that. And then it's focused on higher-margin products. So, the return on investment is faster. So, it's investing in it, particularly around the biologics segment. I think that's the easiest way to frame it rather than us giving specific dollars to revenue and profit. That's not something we're willing to share.

Okay. I'll try it a slightly different way. So, I've had some investors recall to me or recount to me that the Kinston NovaPure plunger expansion doubles that capacity. Would you be willing to comment on that or confirm that?

The expansion that we put into Kinston specifically is significantly more than what we had there before. But on a global basis, it's adding more than 2 times of capacity in the NovaPure portfolio, but that's well as far as we can go with giving the details there. I'll be very clear, though, David, and it's a valid question. It is supporting multiple molecules, multiple customers, and it's a network effect. So, I got to be careful to a particular product or a category. It's across multiple. It's been leveraged in multiple ways.

Right. Okay. Got it. In thinking kind of a similar question to Paul's, I think, about the Pfizer North Carolina Rocky Mountain facility, but thinking just more broadly about sterile fill finish capacity, throughput, et cetera. So generally speaking, you hear the sterile fill finish capacity is still quite tight. In the case of some of the GLP-1s, some of those manufacturers have had some FDA-related issues that have caused a shutdown of facilities or shutdown of a facility, that's certainly more in the past, and I would think would have already impacted you if it was going to. But I guess I'm just wondering about how attentive we need to be to the capacity activities in the kind of the next downstream function from you, the folks that are using your elastomers to complete their work.

Yes. That's part of normal supply chain management. And I think that our approach is that we are getting in indications from our customers what their demand is across a number of different therapeutic. Our job is to make sure that we have the capacity in place to be able to deliver when they need it. Sometimes that timing conflicts, but we haven't seen no major impact on our business. To this point, and our focus is, as we said, is layering in capacity. And back to Eric's point, it's not just in Kinston, we're leveraging capacity across our global network to be able to provide whatever response our customers need. And we've learned a lot from the last couple of years about having that capacity at a number of different facilities that we're able to flex faster, and we can meet any spike in demand. And that's what we're doing right now, and that's where we have to remain focused. And what happens in the other parts of the supply chain, we're aware of it, which some of that is outside of our control.

Sure. Last question for me would just be to get your -- take your temperature on the progress for your Valor Glass partnership, Ready Pack seating of the market and what you're seeing there.

David, good question. I'm actually quite excited. I know we just had another review with our partner and the progress we're making. As you know, this is a multi-step journey. We have multiple launches. Right now, we're more focused on the vial launches. I think just a few weeks ago, we had [indiscernible] and bio technology launched through our channel. Customers are very excited about the opportunity to have a fully characterized complete system that the partnership with Corning gives us that flexibility and capability of representing a complete system with the 1 DMF to our customers. And so we are still on the path to be able to continue to launch various configurations, ultimately, to get to the point of a fully characterized prefilled syringe using the best technologies of both organizations but that still is going to take some time to get there. I won't give you exact dates, but over the next couple of years, you see various launches and penetration with our customers.

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

Just maybe a modeling one here to start off. How do we think about the revenue cadence here in the second half with the different dynamics at play. You have the new capacity coming online, COVID roll-off and then some seasonality. Just any additional color you could provide us there?

Yes. I would say that Q2 or Q3, like similar to Q2, plus/minus, and then we would expect to see pick up in Q4 based on the capacity that we're implementing on in Kinston and at a couple of other facilities.

Got it. And then just on biosimilars, I don't think you touched on it, there's a few of it that have been coming online. I guess how is displaying into demand you have here on revenue and any changes around the competitive environment you've seen on biosimilars, if branded switching to a competitor?

Yes. No issue for us. Actually, when we look at biosimilars and working with those customers has a very similar primary packaging configuration of others. And so it is the higher end of our high-value products, and we continue to participate very high. When we talk about a participation for biologics, we're also inclusive of biosimilars. So we look at that as kind of holistically. And feeling really good about where we are and where we're going.

I appreciate the color there. And then just last one for me. I know you commented on APAC, but would you be willing to say how much of your revenue is in China and others have called out some issues there in headwinds. Have you seen anything in the China market to call out?

Yes. It's very little. It's a very low single-digit percentage of the overall West enterprise sales. If you -- if we look at that business, we're pleased with where it's at. But if there's any headwinds, it's all around COVID-19. That's strictly where the issues are, which we are characterized basically for the whole globe for us right now. But very low exposure right now in China.

Our next question comes from the line of Justin Bowers of Deutsche Bank.

Just a quick one on the margins with revenue being flat sequentially, plus or minus. Is it fair to think of operating margins being around the same level and then as we think about 4Q and the step up there in volumes, should there be some incrementals there with respect to the margins and then part 2, pardon if I missed this, but what was the C19 contribution in the quarter?

So on – to answer the margin question, we would expect it to step down a little bit, and that’s typically what we see coming off Q2 from a manufacturing point of view, it’s usually our strongest quarter in the year. So given the various shutdowns that we have in Q3, Q4, there’s typically a little bit of a step down, and that will be normal for us. So it’s just to bake that in. And that’s embedded in the guidance. COVID-19, we did about $20 million in Q2 from a revenue perspective.

I'm showing no further questions at this time. I'd like to turn the call back over to Quintin Lai for any closing remarks.

Thanks, Valerie, 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. 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. That concludes this call. Have a nice day.

Thank you. Ladies and gentlemen, this does conclude the conference. You may now disconnect. Have a great day.