西式醫藥服務 (WST) 2002 Q1 法說會逐字稿

If you have any questions during this time, simply press, then the number one on your telephone key pad and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you. Ms. you may begin your conference.

Good morning everyone and welcome to the West Pharmaceutical Services 2002 first quarter conference call. As you know we issued the quarters this morning before the open of the market. If you have not received a copy of this announcement, please call at 212 850-5600 and a copy will faxed to you immediately.

Before management begins, I'd like to remind you that to the extent company's statements for comments this morning represents full statements, I refer you to risk factors and other cautionary factors in today's press release as well as the company's most recent SEC filings. In addition, this call is being recorded on behalf of West Pharmaceutical Services and is copyrighted material.

It cannot be recorded or rebroadcast without the company's express permission and your participation consents to our taping. Once management has concluded their remarks, we will open up the call for questions. With us this morning are Bill Little, Chairman and CEO, Dr. Don Morel, President and COO, Linda Altemus, Chief Financial Officer and , VP and Treasurer. I would now like to turn the call over to Bill Little, Bill.

Thank you very much. Well, good morning, everbody. I'd like to begin by drawing your attention to two of last month's company announcements. The first was the election of Don Morel as President and Chief Operating Officer to West's Board of Directors. The second, which is the promotion of Linda Altemus from Vice President to Chief Financial Officer.

Now in addition to and , as Treasurer and was here with us this morning. So today's program, Linda and I will have some prepared remarks after which Don, Linda and I would be happy to answer any of your questions. However, I would also like to mention that additional details relating to our growth strategy, market opportunities and new product opportunities will be provided at our annual shareholders meeting on Tuesday, April 30th.

The meeting will begin at 9:30 A.M. at our corporate headquarters in . A simultaneous webcast of the proceeding will be available on the company's website. We now begin with a review by stating that we're pleased with the implementation of our new strategy of focussing the companies resources on creating and commercializing drug delivery systems.

As you know, we consolidate our operations into two divisions. Each division is now operating effectively under the direction of strong divisional management. I'm pleased to report that for both divisions product demand and the order backlog have increased. The major investment programs we have initiated to support our strategy are proceeding as planned. This is reflected in the fact that all major new development programs are on schedule.

Also on schedule, are the manufacturing expansion programs in France and Germany. France will begin to supplying significant quantities of products from the new manufacturing space in the last quarter of this year. Germany, will commence major production in the first quarter of 2003. Information technology installation to support the company's new strategy is as forecast.

The bulk of the expense associated with project is complete. Most of the future of 2002 spending is to be capitalized. Again, a measure of the company's progress in implementing our strategy is the general increase in demand for which products and services across both divisions and all geographic regions.

From the press release, you see that our company's reported earnings per share are 42 cents for the first quarter. What is particularly encouraging about our earnings is the improvement in the strength of the income being generated by our operations. In evaluating our first quarter results, two factors are noteworthy.

One factor is that the first quarter of 2001, our reported earnings are 37 cents included pension income that was six cents per share higher than this year. The other factor is that in the first quarter of this year, we have increase in our insurance premiums that amounted to an additional two cents of earnings per share.

Taking all factors into consideration, you will note that the income from our company's business operations has improved significantly. In summary, we're on track with our new strategy. Almost without exception, all elements of the strategy are on schedule and the results continue to show improvement. We continue to forecast earnings per share for the year in the 164 to 172 range. We may now send the calls over to Linda. Thanks you, Linda.

Thank you, and good morning. As reported in this morning's press release, first quarter results reflect a continued improvement over the prior year quarter. Our of six consecutive quarters of year after year earnings improvement. Earnings of $6.1 million or 42 cents per share were reported. of $5.4 million or 38 cents per share recorded in the prior year, first quarter.

Included in the reported earning is a five cent per share foreign exchange or the repatriation of funds from operations in South America and a three cent per share loss reported in this continued operation for the extinguishment of debt previously held in a recently sold contract manufacturing unit. Excluding these unusual items, first quarter earning from continuing operations at $5.7 million or 40 cents compared to 2001 quarter one earnings of 37 cents per share.

Net sales in the quarter totalled $103.7 million. Six point six percent ahead of the same quarter last year sales measured at constant exchange rates. The company's consolidated growth margin for the quarter was 30.3% which compares favorably with the 29.7% margin achieved in the last year's first quarter. The 30.3% margin that represents the highest achieved since the second quarter of 2000. Within the division, Pharmaceutical systems reported a 5.8% increase in sales at constant rates.

Domestic sales grew 3.8% of a quarter one 2001 sales and demand in international markets continues to grow significantly with sales levels 8.2% higher than prior year sales at constant exchange rates. Operating profit and pharmaceutical systems also increased impressively by nearly percent of a fourth quarter 2001 profit.

Factors driving the improved profitability include the profit in tax of volume increases in all of the divisions and a positive sales mix, favorable manufacturing variances and lower raw material costs in the North American business. As, Bill, mentioned earlier, we achieved these increases despite having to absorb higher insurance costs at all of our global locations. The Direct Delivery Systems Division which now includes the Clinical Services Business Unit, also improved over the prior year quarter with revenues at six million.

Twenty-eight percent of comparable 2001 revenue. increases were all within the Clinical Services Unit and that unit also improved its operating profits considerably over quarter one 2001 profits. Divisional operating profit was up only slightly as net R&D spending increased by .6 million. Salaries and general administrative expenses increased by 2.3 million versus last year's same quarter.

The increase is largely due to a decline in pension investment income and increase in costs associated with the company's and increasing compensation costs. Absent these effects, ) expenses actually declined versus the prior year quarter due to a decrease in outside services spending. The expense level on the project was expected to decline as we move into the year as the project has reached the stage where future costs will be capitalized.

I'm also pleased to report that interest expense decreased by 27 percent to 2.4 million due to a reduction in third party debt and favorable interest rates. Looking towards the balance sheet for the first quarter cash flow from operations was seven million. The company's cash balance at March 31 was 28.9 million and working capital totalled 62.8 million. Debt was reduced to 186.4 million at March 31 mostly due to improved internal utilization of cash. The debt to total invested capital ratio at quarter end was 51.3 percent, down from 52.2 percent at year end. Capital expenditures during the quarter were 10.6 million reflecting our increased focus on conserving capital. The company adopted FAS #142 in the quarter. As a result amortization was not reported.

In quarter one 2001 the company reported 300,000 in goodwill amortization expense. We have not recognized any impaired loss associated with the adoption of this standard. In conclusion, we continue to be encouraged with our earnings improvement and expect additional favorable results as we move further into the year. Current order back logs remain above back logs recorded at the same time last year.

As Bill stated for the year, we are continuing to project earnings in the range of $1.64 to $1.72 per share. I would now like to turn this program back over to Bill Little.

Thanks, Linda. Let me conclude by confirming that for the third year we earning with performance strengthened. As stated in both divisions and back logs remain strong. As the year progresses our focus on improving operating sufficiencies in our major plants should yield continued improvement in those markets. In addition, we anticipate improvement in the sales mix as demand increases for West products and other value added products.

Again, for more details about our strategy and product opportunities we encourage you to join us either in person or by webcast at our annual shareholder's meeting on April 30th. We thank you very much for your time and interest and will be happy to take your questions. Thank you.

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from of Lehman Brothers.

Good morning. I had a couple of questions on some housekeeping questions. The interest rate, the increased information costs and insurance cost to carry forward to the rest of the year and are those included in corporate overhead?

The increased insurance cost will continue throughout the balance of the year. However, we do expect the cost for the E-West program to go down as those costs will become capitalized in the latter part of this year.

And is that included in corporate overhead or?

The insurance is not but the E-West spending is.

Okay. And then could I just get some housekeeping questions like DNA in the quarter and accounts receivable and inventory in our pension income quarter?

Okay, the depreciation and amortization was 7.9 million in the quarter. The accounts receivable is 70.9 million. Inventory is 36.5 million. And the pension investment income is 1.2 million.

And your interest paid pre-pension income going down even further in the remainder of the year?

No. I expect it to be flat quarter by quarter for the balance of the year.

Okay. And as for a guidance of $1.64 to $1.72 does that included 42 cents for this quarter or 40 cents?

That includes the 42 cents.

42 cents. Okay. And as far as the drug delivery back log, can you quantify that anymore or give us a little more color or, and then also talk about the R&D expenses. Do you anticipate that dropping a little or how do you expect that to trend in the rest of the year?

I think the R&D expenses probably remain relatively flat. All of the major programs are on schedule which is encouraging to us. Right now we're in the process of analyzing a rather extensive amount of clinical data from the trials that were concluded at the end of 2001 and earlier in the first quarter of this year. So it's a little bit of a quiet period there but we're very encouraged by, by what we're seeing. And the programs remain on track.

And for, uh, for license revenue did that drop down into this quarter from the fourth quarter or can you talk about any of the licensing revenue? It needs another big boost in the fourth quarter. I'm just wondering how that fit into the first quarter.

Yeah, we didn't have any licensing revenue that was actually gotten during the quarter. You know, the difficulty in making any predictions there is that it falls according to predetermined milestones which are dependant on the evaluation of the clinical data and programmed from the R&D programs.

Yeah. We didn't have any licensing revenue that was actually gotten during the quarter. You know, the difficulty in making any predictions there is that it falls according to predetermined milestones which are dependent on the evaluation of the clinical data and programmed from the R&D programs.

The most significant milestone is the early part of next year when we anticipate the division generating sufficient revenues to become profitable. And that has been our timetable now for two or three years and it remains on schedule.

Okay. Thank you very much for the detail.

Thank you.

Again, to ask a question press star, then the number one on your telephone key pad. Your next question comes from of David J. Green & Company.

Good morning.

Good morning.

I was trying to reconcile the systems operating profit to those items you mentioned. I guess the IT costs are in overhead but I was wondering the exchange gain, pension income, the insurance and I guess the good will amortization. Can you just sort of let me know, I just want to try to get apples to apples on the Pharmaceuticals systems operating profit.

Yeah. In terms of the Pharmaceutical systems operating profit the IT initiative and corporate overhead is not in Pharmaceutical systems.

Right.

There is no good will amortization in this year's expense at all.

Was it in last year's?

Yes.

Okay.

Your next question comes from Don Taylor of Franklin Advisory.

Morning.

Good morning, Don.

How are you?

A few things. The exchange gain, where is that in the income statement?

That's in other income.

Oh. In other income. Okay. So then it would be under segment basis then, right?

Yes.

Okay. And the impact of that is five cents?

That's correct.

And the three cents on the extinguishing the debt, that's the discontinued three cent, is that right?

That's correct.

So why wouldn't if you exclude the gain, why are we talking about 30 cent rather than 40? Help me understand that.

The earning per share of 42 cents includes the five cent gain.

Yeah.

As well as the three cent loss. Okay?

Aren't we taking out a three cent loss to get to the 42?

That's correct.

Oh. I guess I'm not following. I'll follow up with you later on that then.

Okay.

The, on R&D the, we said it's an increase of 600,000 at drug delivery segment versus last year. What about in Pharmaceutical Systems? Is there a meaningful change there?

No. It's relatively flat versus prior year, Don.

Okay, but then the, but the increase that we're seeing, in fact delivery systems we expect that to continue then through the rest of the year.

No, we on a comparative basis year to year we expect total expenditure to be relatively consistent with last year.

On drug delivery?

Yeah.

So just a quarter then it looks like .

On this quarter we were up slightly because of some clinical trial work that we did.

Okay. The IT expenses then if I understand you correctly that the increase year to year of a million will not be repeated or at least not to that magnitude in the coming quarters.

That's correct.

Can you give me some order of magnitude there? What to expect?

I don't have a precise quarter by quarter forecast of capital versus expense for that project.

Would it be, would the expense be closer to flat then or just can't tell me, huh?

No.

Okay. All right. What about the capital expenditure is actually that 10.6. It looks like it's pretty close to last year's run rate. Can you give me what to expect for the rest of the year and what, you know, does it switch from equipment in Europe I believe is a lot of it now and then to switch more towards the IT?

Yeah, I think they had about a million three year to year, Don, on capital. And Linda will give you some idea of the spending for the rest of the year.

Yeah, the full year thing will be approximately 40 million.

40 million full year. And the nature of those expenditures?

Predominant spending the first half of this year is the European plant expansion. And in the second half of the year we have predominant spending E-West as well as...

Yeah, the positive track, Don, is that the bulk of the investment going into capacity expansion in Europe and in the United States is due to the increasing demand for the ready to use and ready to sterilize products. So we're seeing very nice unit growth out of and in Europe in particular as Linda said with sales up on the order of about eight percent. A lot of that's being driven by clean or components so the capacity expansions are to meet that increasing demand.

And in general terms, Don, what's happened is what we've tried to, what I tried to indicate in my comment is that all the spending is no different than we've discussed pretty much as forecast with capital spending being down a little bit this year over previous years. The E-West stuff is just going in as planned and basically we in the management side are pleased with the way these things are coming together.

Are we getting some efficiencies currently in Europe? I suppose we are with the investments that we've making in the last quarters here, right?

The real benefit is going to come toward the end of this year in France and as Bill said Germany is a little bit behind that because the nature of the investment is further upstream in the manufacturing process somewhat. But certainly we expect to see our performance to continue and improve there through the beginning of, of .

Okay. Now there's still meaningful capital expenditures in Europe in Q2 then, right?

Right.

It's not done yet? Okay. Okay, I think, I think that's good for now.

Your next question comes from Rob Moses of Private Capital Management.

Good morning.

Good morning, Rob.

Two questions. First on the Pharmaceutical Systems side of the business. You mentioned a plant in Europe and the spending going on there. Could you give us a sense just to calibrate, you know, how much of the revenue base is over in Europe versus the U.S. in pharmaceuticals just as a percent or however you want to do it in a rough basis and also given the profitability in the U.S. kind of how much, how much lower the margins are given, you know, the lack of overhead absorption, etcetera. Without exact numbers, just give me some sense how much that is draining your business right now.

Sorry. Can you rephrase that?

Well, I guess what I'm trying to figure out is...

the split between...

Yeah, I'm just, the split between Europe and the U.S. and, you know, given that business is running under normalized margins how much lower is profitability in Europe than it is in the U.S. and is it 40 percent of the revenue base, 30? Or just some rough guesses.

About 35 percent of the revenue base is in Europe.

Okay. And if you'd looked at the margins in the business if you're doing 20 million in profits, say 20, north of 20 percent operating profit before corporate allocation, is the European piece which is, is it profitable but say less than double digits right now?

Yeah. The margins are still on the double digits but and they're only a couple of percentage points below the U.S.

Okay. But there's no reason to believe that as you soak up this overhead that you've been putting in place that the European business won't be as profitable as the U.S.'s in volumes ramp.

Yeah, absolutely.

It becomes better at the volumes ramp.

We have another way of rephrasing that. As we've said in our statement, Rob, we are anticipating improvement in our margins as the new facilities come on board and as a result efficiencies we're going to get from the Pharma and secondly they're producing new products and the new products themselves carry higher margins.

Understood. The drug delivery side, I know it's a lumpy business based on milestones but Bill, did you mention you prepared comments that you still expect that business all in to break even this year? That's a goal?

No, I don't think I've ever said that in a public statement, Rob.

Okay. Could you tell me what you lost last year in that business? 'Cause I think my spreadsheet has, you know, pre, you merged in the clinical business. Linda, could you give me some sense as to how much of an operating profit loss that segment was last year?

Yes. It was 4.2 million.

You all know the answer, Rob.

Okay. I'm sure everyone does. But why you will not give any public statement you obviously want to improve dramatically from that and that's true revenue milestones rather than cutting expenses?

Yeah. The most important things to achieve this year Rob are ensuring that the clinical work is done accurately and that the products are ready for marketing next year.

Right.

You know, and that is the primary goal. 'Cause you have to do some things right and we have to work well with our customers to make sure they're happy.

Okay.

The guidance we have given Rob is that we, you know, we expect that 4.2 to improve this year and we expect to be cash positive in that in '03.

Okay. Fair enough. And the milestones, you know, without going through the whole list of phase two, phase one, just some of the more immediate term things which could turn revenue in the next 12 months, could you highlight where you guys are in that process?

Yeah, we can give you some answers now, Rob. One of the things that we will be covering during our annual shareholder's meeting is a more detailed break down of some of the milestones that will be achieved, etcetera, etcetera. You may care to tune into that also.

Sure.

Yeah, for the near term, Rob, yeah, of course the major programs are the marketing which are both progressing according to plan. Behind that we've got a number of studies that were completed in phase one both internally sponsored and externally customer sponsored that are on track. So we'll have to say I'm pleased with the performance of the program. Overall we've finished 2001 strong. We expect to build on that going through the end of this year.

Okay. Now thank you and appreciate not having to discuss anymore.

I don't recognize. What was that, Rob.

I understand. Thank you.

Thank you.

Victor Little, your final question comes from Rand Guessing of David J. Green & Company.

Hello?

Good morning, Rand.

If I could just take another stab at that. I didn't quite get it when I asked first. The 1.3 million in pension income, that is housed in Pharma Systems, right?

Yeah, I think corporate overhead.

It is in corporate?

Yes.

Okay. Great. That's it. Thanks.

If there will be no other questions then we thank you very much for joining us. We hope that some or most of you might join us for our presentation from the annual shareholder's meeting. Thank you.

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