西式醫藥服務 (WST) 2004 Q3 法說會逐字稿

Good morning. Welcome to the West Pharmaceutical Services Third Quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. To ask a question, please press "*" "1". This conference is being recorded. If there are any objections, please disconnect at this time. With us this morning are Dr. Donald Morel, Chairman and Chief Executive Officer, William Federici, Chief Financial Officer, and Michael Anderson, Vice President and Treasurer. Now I'd like to turn the call over to Lanie Marcus from Financial Dynamics.

Thank you Operator, and good morning, everyone and welcome to the West Pharmaceutical Systems 2004 third quarter conference call. As you know, we issued our third quarter financial results earlier this morning. If you have not received a copy of this announcement, please call Financial Dynamics at 212-850-5600 and a copy will be sent to you immediately.

Before we begin, I would like to remind you that certain statements made on this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words estimate, expect, intend, believe, and similar expressions are intended to identity forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties. The company's actual results may differ materially from those expressed in any forward-looking statements and are dependent upon a number of factors. A nonexclusive list of those factors is included in the company's press release and SEC filings. In addition, for the purpose of aiding comparisons of period results, references are made on this conference call and in this morning's press release to historic expected financial results determined by excluding certain costs and nonrecurring items. These -- those remeasured period results are not in conformance with the United States Generally Accepted Accounting Principles, GAAP, and are non-GAAP financial measures. The non-GAAP financial measures are intended to explain or aid in the use of not as a substitute for the related GAAP financial measures. A reconciliation of these measures may be found in this morning's earnings release, which will be posted on the company's website located at www.westpharma.com.

This call is being recorded on behalf of West Pharmaceutical Services and is copyrighted material. It cannot be re-recorded or rebroadcast without the company's expressed permission, and your participation on this call implies consent to our taping. Once management has concluded their remarks, we'll open the call for questions. With us this morning are Dr. Don Morel, Chairman and CEO, William Federici, Chief Financial Officer, and Mike Anderson, Vice President and Treasurer. I would now like to turn the call over to Don Morel. Don, please go ahead.

Thank you Lanie and good morning, everyone. As you know, this morning West released earnings for the third quarter. I'm pleased to report that over the past three months, sales increased from $120.1 million to $135.3 million, an increase of 12.6% overall. 3.6% of which was due to exchange versus the comparable period in 2003. Reported GAAP earnings were 14 cents per diluted share, adjusted for the split announced in August on net income of $4.3 million. On a pro forma basis, when taking into account cost resulting from Kinston, earnings were 22 cents per share, up 10% when compared with the third quarter of 2003.

Our sales growth was even more rewarding, given the very challenging business environment we face. During the quarter, several hurricanes temporarily disrupted our Florida operations. Our European plants shut down for the traditional vacation periods and we continued the ongoing process of transferring products to the new facility in Kinston. I'd like to first provide some operating commentary on our business, and then Bill Federici will discuss our financial performance in detail.

So looking at Pharmaceutical Systems, continuing the trend for the first half of 2004, sales growth was again strong for the division with third quarter revenues increasing approximately 13%, 4% of which was due to exchange. Sales again grew in each of our four geographic operating regions with sales increases particularly significant in North America. We also experienced very good performance by our two affiliates in Japan and Mexico. With the America's region, sales growth during the periods was driven by a range of factors, including continued demand for coated closures, new product launches and strength in consumer demand for our spout pack line of beverage closures. In the Europe/Asia Pacific region, performance was driven by an improving product mix and generally solid demand for Westco parenteral packaging components.

Operations in North America were adversely affected by the four hurricanes, which struck Florida in late August and September. Although our St. Petersburg and Clearwater facilities did not experience any physical damage, mandatory evacuation of those locations resulted in 33 lost production shifts or approximately two weeks of normal production for those facilities during the quarter. The division's operating margins was also adversely impacted by the slower pace of customer testing and approval for products to begin shipping again from Kinston.

In keeping with our historical sales pattern, our backlog remains very strong and higher than historical levels for the comparable periods as we begin the fourth quarter. Those of you who have followed West for several years are aware that the third and fourth quarter is traditionally slow from the pace of the first half of the year. As our European plants go through their traditional summer and Christmas holiday shutdown periods for preventive maintenance in the third quarter and fourth quarter and customers adjust their year-end inventories and order patterns during the fourth quarter.

I'd also like to briefly address two industry issues that became public at the close of the quarter. First, the drug Vioxx was removed from the market by the manufacturer for safety reasons in late September. This is an oral drug, which does not utilize West products. The second is the announcement by the FDA that flu vaccine manufactured in the UK would not be sold in the US as a result of issues surrounding the manufacturing process. This product did not utilize West offers, but did involve the West aluminum seal. The dollar value loss sales for this item will have no overall impact on our Q4 financial performance.

Turning to Kinston. The plant is currently operating at approximately 60% of its planned production capacity. Although this is behind our original internal timeline, the North American operations team is working diligently to have a facility as close to full capacity as possible by year-end. West continues to work with customers to perform the necessary validation and sample qualification testing required to gain product approval from a new manufacturing site. As we've discussed previously, this is a complicated and time-consuming process. The specific timing of which is a function of the availability of line time in our customer's manufacturing operation. In summary, with three quarters behind us, the Pharmaceutical Systems Division continues to perform very well in all of our major market.

Turning quickly to Drug Delivery. During the quarter, revenues for the group increased from $2.2 million from $1.9 million for the comparable period in 2003. The increase in revenue was again driven by demand for early stage clinical trials. The division's operating loss narrowed significantly to $3.7 million, compared with $5 million in the third quarter of 2003. At the end of the second quarter, the company announced its intention to explore strategic options for the Drug Delivery units. That process is well under way. The detailed information memorandum was delivered to interested parties in early September, and during the next four to six weeks, detailed due diligence will take place at both our UK and US sites. As stated previously in our July call, our objective is to have a definitive deal concluded prior to the close of 2004. However, the completion of necessary due diligence by interested parties in negotiation of a final deal structure may result in closing taking place in the early part of 2005.

I'd now like to turn the call over to Bill Federici, who will provide more background on our Q3 financial performance. Bill?

Thank you, Don, and good morning. As we have mentioned in the past, I will speak in detail about the Kinston impacts on the quarter. Please bear with me and we'll answer any of your questions at the end. As indicated in this morning's press release, West reported third quarter net income of $4.3 million or 14 cents per diluted share, an increase from net income of $4.1 million or 14 cents per diluted share, recorded in the third quarter of 2003. I should mention here that all share and earnings per share data presented have been restated to reflect the two-for-one stock split we implemented at the quarter's close.

Reported results in this year's quarter include $2.4 million or 8 cents per diluted share of incremental costs associated with the company's interim plan to move production from other West plants back to its Kinston plant and other Kinston accident related costs, primarily over time, incremental material and freight costs and legal costs. Pro forma incremental Kinston costs also include non-continuing items related to rebuilding the facility, a dislocation of workers and production to other facilities and legal and other uninsured costs. Continuing Kinston costs not subject to pro forma include items such as increased depreciation and under absorbed overheads.

Reported results from last year's third quarter included $1.6 million or 6 cents per share of incremental Kinston costs. To provide a more relevant comparison of ongoing operating results, we have provided a pro forma analysis in our release that excludes the effect of these Kinston items from each year's quarter. Excluding these items, third quarter 2004 earnings were 22 cents per diluted share, 2 cents greater than the 2003 Q3 earnings of 20 cents per diluted share.

Consolidated net sales for the quarter grew 13%, 4% of which was attributable to currency, to $135.3 million, driven by domestic sales of coated pharmaceutical closures and Westar-treated components. The company's consolidated operating margin for the quarter was 4.7% versus 5.8% for the 2003 period, due to costs associated with the January 2003 Kinston fire and explosion and continuing costs being incurred at the company's new Kinston facility. On a pro forma basis excluding the effects of Kinston, consolidated 2004 third quarter operating margins were 7.2% versus 7.8% for the same period in 2003.

The Pharmaceutical Systems Division continued to perform well in the quarter with sales of $133.1 million, also a nearly 13% increase over third quarter 2003 sales of $118.2 million, with 4% of the increase due to currency. Domestic sales grew by 12% versus last year and sales in our international markets grew by 13% above their prior year sales, 7% of which was due to currency. All of the company's geographic regions experience some level of year-over-year revenue growth with the most substantial growth coming in the Americas region, where increases were largely attributable to increased sales of products employing West value enhancing processing and advance coatings for pharmaceutical components.

The Division's reported operating profit was $17.6 million in the quarter, compared to $19.4 million in the 2003 quarter. The pre-tax impact of the Kinston-related costs on the Division's reported operating profit was $3.1 million in the current quarter and $1.4 million net of applicable insurance recoveries in the third quarter of 2003. On a pro forma basis, excluding those Kinston-related charges, the Division's operating profit at $20.7 million would have nearly equaled to $20.8 million achieved in the prior year period. The favorable product mix in the America's region addressed earlier was more than offset by the increased costs associated with bringing the rebuilt Kinston facility on stream including depreciation and under-absorbed overheads and costs related to new business development.

In the Drug Delivery Systems Division, third quarter revenues of $2.2 million were $300,000 greater than last year's $1.9 million. Operating losses of $3.7 million in the Drug Delivery Division were $1.3 million lower than in the prior year quarter, due to timing of program spending. Consolidated selling, general and administrative expenses increased by $2.5 million in the quarter versus the prior year same quarter. The increase is largely due to the expense associated with the recently approved performance-based restrictive stock plan, increased outside service costs, primarily for outside legal services and costs associated with Sarbanes-Oxley compliance, higher planned compensation costs and the effect of foreign exchange.

For the nine months ended September 30, after eliminating the Kinston legal costs, SG&A expenses as a percentage of sales were 21.8% in 2004 versus 21.7% for the same period in 2003. Net interest expense was $1.9 million in the quarter, slightly lower than last year's third quarter expense of $2 million. The company's earnings this quarter benefited from the performance of its foreign affiliates, most notably Daikyo Seiko West 25% owned Japanese affiliate enjoyed significant sales and pre-tax profit growth this quarter over the same quarter last year.

Third quarter cash flow from operations was $18.4 million. The company's cash balance at September 30th was $63.3 million and working capital totaled $111.6 million. Debt at September 30th was $162.7 million, a significant improvement from the yearend position of a $175 million made possible by the collection of our yearend insurance receivable of $41 million.

As you may recall, those proceeds were used to pay for rebuilding the facility, costs associated with production transfers and other Kinston costs in addition to paying down debt. The debt-to-total invested capital ratio at the quarter end was 36.7%. Capital expenditures during the quarter were $12.2 million, including the cost associated with rebuilding the Kinston molding facility of 1.4 million. Including the Kinston investment, over 40% of the year-to-date capital expenditures were focused on new products and expansion activities, which we hope will contribute to future topline growth and manufacturing efficiencies.

Turning to guidance, we reaffirm our full year 2004 earnings guidance. We continue to expect pro forma diluted earnings per share in the range of $1 to $1.05. The pro forma results exclude one non-continuing costs associated with the 2003 explosion and fire at the company's Kinston, North Carolina production facility and two, the planned closure of our UK plastics facility, which we estimate will be between 33 cents and 37 cents per diluted share and three, a 2 cent per diluted share non-operating gain that was reported in the first quarter of 2004. The Kinston inefficiencies and under observed of overheads and increased appreciation are expected to adversely impact operating results until early 2005.

We expect our Drug Delivery Division will incur operating losses of approximately $4 million for the remainder of 2004. Our guidance assumes inclusion of drug delivery losses through the end of 2004. I'd now like to turn the call back to Don Morel. Don?

Thanks very much, Bill. Looking at the outlook for the fourth quarter, we currently believe that West will produce another quarter of strong sales growth for the company, with revenues increasing between 8 and 10% at constant exchange rates, when compared with the bottom quarter of 2003. Our orders bookings for this period are strong with approximately 80% of our sales target already booked. Based on this orders backlog, we should finish the year strongly and well positioned for 2005. This concludes our remarks for this morning. We would now be pleased to answer any questions that you might have.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press "*" "1." You will be prompted to record your name. To withdraw your request, press "*" "2." Once again, if you would like to ask a question please press "*" "1." One moment, please, for the first question. Our first question comes from Arnie Ursaner of CJS Securities. You may ask your question.

Share count grew quite sharply in the quarter, what price does that peak out at, if you could help us there?

Sorry, Arnie. Could you repeat the question? You were cut off at the beginning.

Sure. Your share count jumped quite sharply in the quarter. Can you remind us at what price that becomes less of an impact? Where is the kind of cut off price where that occurs?

I'm not sure I understand the question. The share count increase was due to a number of factors. The first was -- we had option - a number of option exercises in the quarter and in throughout the year and in through the first nine months. And of course, at the end of the third quarter, we had our two-for-one stock split.

Right. But your overall share count went up, again, incrementally 7%. I assume that some treasury method with the stock price rise?

Well -- yes. The stock price rise did have an impact on -- we do use the treasury method when figuring out what the diluted number of shares are.

OK. My other question is a little more strategic, if you will. You've talked at various times about opportunities to reinvest in your core business when you make the sale of your drug delivery systems. Could you give us a little more specific help on the types of opportunities you see and how that could affect the growth rate going-forward and a follow-on, given your cash position, why wouldn't you be implementing these already?

We can answer the last question first. That the cash position is difficult to access, because it's mainly located in foreign locales. We're obviously looking closely at the impact of the recently passed tax legislation and how that might affect how we repatriate those funds? It is kind of trapped money for the most part. But until we get favorable tax treatment on it, it's probably going to sit there. But turning back to the strategic question, in the past, we really talked about a couple of various reinvesting in the core, the first of which is manufacturing technology that can improve our quality and our process yields out of our standard rubber and metal manufacturing. So, we have a team that continually scours the marketplace for new methods of production, inspection and material technology that would allow us to do that. The second is in terms of product in-licensing. We have a similar group that's looking at technology developed in universities and smaller companies that we might be able to license in, that really can take advantage of our manufacturing capability and our knowledge of the regulatory process. And the third is our intention to grow the assembled device side of our business. We have a very small market share there. It's a more rapidly growing market especially in devices for nasal and pulmonary delivery. But when there is opportunities where we can take advantage of our knowledge of the drug material interface and combine that with large scale manufacturing technology of precision components and assembly, we think there is good opportunities for us there. So, those are the three areas that we're going to be focusing on with the core.

Final question from me, real quick, given than you intend to hopefully wrap up the sale very early in 2005, would it be likely from a building model point of view that we should assume this will be a discontinued for all of '05?

Actually, it's -- we can't answer that question right now. As you know, depending on the way you dispose of the units will indicate whether we get discontinued operations treatment or not. The accounting rules dictate that if you are going to keep a percentage of that business, which is one of the possible scenarios, that could come out of the strategic alternatives, we're looking at now, if you keep a piece of the business, you are not allowed to consider the operations as being discontinued. So, we will have to wait and see exactly what the -- what types of indications and then, how this process unfolds, before we'll be able to answer that question.

Thank you.

Our next question comes from Lawrence Marsh of Lehman brothers. You may ask your question.

Hi. Good morning.

Good morning, Larry.

Let's see, last quarter, there was a discussion that you had a large customer order that impacted the -- I guess, that impacted your materials coding business, I think. And in this quarter, you talk about your growth being a benefited by a customer's repackaging of an existing product with higher value component. Are those two different customers, and if so, -- are they of similar size and were these important drivers to, clearly, what was an acceleration in your domestic growth this quarter?

Yes. There are two different customers, Larry. You know, it really falls, kind of, within the normal variation of the business. But, the specific issue you refer to, involved what we call, our B2 coating and that goes mainly to high valued drugs in the biotech industry. It's a, bit of a, technical regulatory issue. The original formulation that we had on file with the FDA, had one of the raw materials discontinued by the supplier. So, what we saw was a surge in orders for safety stock by a customer, knowing that the formulation would be changed. The product is still on the market, but we had to go to the FDA, to re-do the filing with this one material removed from the original formulation. So, now, the products is going to continue to be on the market. We think, we'll see that curve smooth out as we go into '05. But, we did get a bump in the quarter for it, as they billed stock with the old material while qualifying the new one.

I see. And it reminds us the customer boost last quarter was just -- was that more of an anomalous situation as well?

Yes. That's one of those things, you see, in the course of the business.

Ok. Then just to elaborate on that, would you say those were important factors as to why you saw such an acceleration in currency adjusted domestic growth to 8% this quarter or were there other factors as well?

It, certainly, was a contributing factor, Larry. Encouragingly to us, we think our underlying demand is really fairly strong across the product spectrum. On the other sides of the coin, we spoke, specifically, in our comments about the growth of our spout pack closures. That continues to be very encouraging on the consumer side of our business. But, you know going forward, we've spoken in the past about how important biotech as a segment is to the company and that's where you're seeing that growth.

OK. The discussion that the Kinston wrap up, will now, take longer than originally expected, I know, last quarter you talked about some of your customers having to validate products and you have no control over that. Would we then be getting a separate break out of these Kinston-related costs in '05, like we're, now, getting by quarter in '04 that will help us understand what the extraordinary costs are versus the ongoing costs?

Yes, that, Larry, did absolutely. We will -- it will be ongoing costs. Obviously, we put up a new facility and there are increased depreciation associated with that and increased overheads, that will have to be absorbed. So, we will be -- when we give guidance in February, we will be trying to help you understand what the ins and outs are.

OK. So, your guidance, when you give it for next year, will not include what you define to be these ongoing extraordinary costs for Kinston?

No. No. I think it will include them.

Will you give a pro forma guidance and then a GAAP guidance number so -- are you going to give two numbers again next year?

We're wrestling with that issue, Larry. We're going to see, where we finish the end of the year and what Kinston looks like. You know, we continue to ramp up and improve production every month. The guys have decided doing a great job. You know, the most important point is the one that you made, in some respects this is largely out of our hands, once the samples are delivered to the customer, they have to break into their own manufacturing line time to qualify them. So, we're somewhat at their behest with this. So, we'll be back with you that in February.

OK. And then, also the process of the strategic alternatives. You noted that the indications of interest have been submitted and there you will be going to a four to six week detailed due diligence process. It sounds like you're saying you plan to conclude the review by the end of the year. Last quarter you talked about you hoped to, or sought to complete the review by the end of the year. Are you feeling, based on yearly indications of interest that this process will now move pretty expeditiously? I know you said you can't predict exactly when it's going to close. And then, last quarter, you talked about, I think, ongoing - let's see, ongoing existing plans for phase II a initial efficacy trial for some of your products, this quarter you don't mention that is that a change in thought process?

No. Let me hit the first question. Our goal, as we stated back in June with the announcement, is to have this stuff to wrapped up as quickly as possible and we hope for it to be by the end of the year. We're going to move as expeditiously as we can. As, you know, better than I do, it's always difficult to predict the pace in which due diligence and final negotiations are going to take place. You know, from a pragmatic standpoint, we're giving ourselves a little bit of room and we think the final decision in everything will be wrapped up in early '05. So, I don't think, there's a whole lot to read into it there. The trials are ongoing there. You know, they're making good progress. We didn't highlight it. They're an integral part of the value of the units, as you might expect, products that complete phase II or undergoing phase II testing because they are efficacy trials are substantial value generators. So, they are under way, for all intensive purposes on our internal timeline.

OK. So, you're not in a position to comment as to how you think the process is going at this point?

It's premature. You know, the only comment I'd make there is that we're on the timeline, we set for ourselves and we're going to work our way through the process as expeditiously as we can.

OK. Great. Thanks.

The next question comes from Steven Postal of Lehman brothers. You may ask your question.

Hi. Thanks and good morning.

Good morning, Steven.

Just a follow-up to some of the Larry's questions. The proforma gross margin was down year-over-year and I was just wondering, if you could elaborate on the reasons behind that.

Steven, are you talking about the reported margin or the pro forma?

Pro forma.

Pro forma.

It's down as a percentage of sales and, as we've discussed, we've had some impacts, positive and negative, that are moving back and forth in the equation. We did have favorable -- some favorable mix issues that have impacted both North America and Europe. We talked about the Teflon change, Don talked about as positively impacted as well as Westar, our processing of components. We've had some negative things impact as well. We had the hurricanes that Don mentioned. We also had these increased costs associated with the Kinston facility, the increased depreciation and the overheads. As I mentioned, we built a new plant, you know, and we've got additional costs associated with those that are being absorbed. Those impacts will continue going forward. So, if you look at our -- if you take all of those things together and you look at our margins as a percentage of sales, they are down quarter-to-quarter, and we expect that that will continue until Kinston gets back up running, but also those costs, the additional depreciation and the additional overheads, will have an overhang impact on operating profits going forward.

So, some of the costs from the new Kinston facility are still included in that pro forma number, they are not a part of the, you know, extra --

Yes.

OK.

Yes. And it's the stuff that we talked about in prior quarters and last year as well. You know, those things that we label business interruption, which are more related to overtime, incremental material and freight costs and legal costs.

Those won't continue. The ones that we pro formaed out are the ones that we believe will cease.

OK. This is one of the first times I guess I've heard you refer to increase in raw material costs. Can you just elaborate on that and how much did that potentially affect the gross margin?

I don't know that we've given you numbers before on that. But I can tell you directionally, what's happened is when we rebuilt the Kinston facility, we specifically decided not to rebuild the compounding part of that facility and we've outsourced that to an outside provider as well as sending it to some of our other plants that do compounding, specifically our Kearney and St. Pete facilities. As you can imagine, you have increased costs associated with that. If you look at it from a pure economics perspective, it actually was beneficial or neutral to the company because we didn't have to obviously invest CapEx in rebuilding that part of the facility and incur costs such as interest and depreciation on that.

The second part of that, Steve, as you might expect of that, because we used the last American materials in a lot of our products, those were derived from petroleum by-products and I think everybody knows what's happening with the price of oil and, you know, like most folks in this business, we're going to see some pressure there.

OK. And that's obviously included in the full year for guidance?

Yes.

And what was the -- do you have a number, an estimated number of the impact on sales from the Florida hurricanes? You talked about shutting down production hours. Do you have an estimated sales impact?

No, we didn't break that out. We were too busy making sure that our folks were OK and the plants weren't damaged.

Understood. OK. And how about -- you talked about the drug delivery unit, rationalizing that but what about this Euro business? You talked about seeing some improvement there. What's the end game with that business? Do you still think you'll maintain it or would you also look to, you know, potentially divest that business?

Yes. The answer to the first part of your question is that revenues for it, we're pretty much on par with last year up a little bit; the fourth quarter looks good. You know, it's part of the overall plan. It is not core to our base business and where we want to take the business. So, you know, we're going to look for options on that as well.

OK. And just a couple of details. The tax rate was a little bit lower than we expected, around 31%. What -- how should we think about the tax rate for the fourth quarter and perhaps into 2005?

We won't tell you about 2005 yet. We're still working on that. But it will be about 32% for the full year.

So was there some kind of a catch-up in the third quarter?

No. I think it was really a function of the mix of the earnings around the world and what happens is, you know, certain jurisdictions carry a different rate and on the whole when we added them all up for the quarter, they were more -- the effective rate on the whole was less.

OK. Thanks for the comments.

Our next question comes from Shai Gerson of Corsair Capital. You may ask your question.

Hi guys. Good morning.

Good morning, Shai.

Good morning, Shai.

Can you just break out what the pro forma EBIT number would have been for the pharmaceutical systems business?

I don't have that in front of me, Shai. I can work it up for you and get it to you.

OK. No problem.

The only difference would be -- what you would do is you would take reported EBIT and add back for the nine months; it would be the $10.8 million of Kinston impacts.

OK. Fair enough. Can you guys kind of give us a ballpark number for the costs in the quarter for trying to salvage drug delivery? I mean is that been a meaningful number?

The cost of sell drug delivery?

Whatever you're spending on consultants, lawyers, getting all the documents out.

For the quarter, it's been mostly internal costs at this point, Shai.

OK. So nothing really that's back out there.

Not substantial.

OK. And then I think you sort of answered this question before. But the reason why we're not showing drug delivery at this point is discontinued ops already is because we might end up holding on to a piece of it?

We don't know the outcome of the process. We're going to wait and see what our options are and then we will be in a better position to comment at the end of the year or early '05.

OK. All right. Thank you very much.

You're welcome, Shai.

Goodbye.

Peter Wang of John Levin and Company. You may ask your question.

Hi. This is Gary Broed. I just want to ask you guys to confirm some of the numbers that you gave earlier in the call because I'm a poor typist. If you could just please repeat the numbers that you gave for cash from ops, CapEx, cash, working capital and your estimated losses. You gave a number on the drug delivery sides and I apologize for my poor typing.

That's fine, Gary, I'll do my best.

Make sure we get them all. There was a rapid-fire series in there.

If there were any others I missed, please.

OK. Cash flow from operations was $18.4 million the quarter.

OK.

Cash balance at September 30th is $63.3 million, working capital $111.6 million, debt $162.7 million, debt-to-total invested capital ratio 36.7%, CAPEX $12.2 million.

That was for the quarter?

That's for the quarter, yes. Including -- included in that 12.2 is 1.4 of Kinston and the drug delivery loss, you wanted to know that one as well, that we expect for the fourth quarter, is approximately $4 million.

Thank you very much.

You're welcome, Gary.

Seth Daniels of Andasite (ph), you may ask your question.

Hi. A couple of questions. First, did you break out inventory and receivables numbers?

We don't normally give that information out. But they are the majority of that -- you know, you can imagine, that is a big piece of the working capital and that was the majority increase.

OK. And the cash flow from operations it looks like it was down slightly year-over-year. Can you give a little color on that?

I don't have all the components of that. It could have something to do with the increase in the inventory during that same period.

OK. And is there a 4x effect on your backlog numbers?

4x on the backlog numbers?

Yes. Do you apply any sort of 4x translation to what you have in backlog?

No.

No.

OK. And, finally, it looked like about half of the growth came from equity and affiliates and a lot of the rest of it came from a decrease loss in drug delivery. How should we think about the Pharma system profit growth going forward?

I mean that's clearly an area of focus for us. We -- what we need to do is make sure that we stay on the Kinston situation. That's going to be the biggest driver of it. In terms of the affiliates, you know, a lot of that had to do with the investments that we made with our Mexican partner, a couple of years ago. Those are coming to fruition. They're working nicely. And we're seeing strong demand within our Japanese affiliate for a new product that they launched several years ago. So you know, we think that that's very encouraging and we're going to continue to see some positive input from both of those.

OK. Great. Thank you.

Lawrence Marsh of Lehman Brothers. You may ask your question.

Two follow-ups. First of all, Don, can you talk a little bit about the process of how you address the issues of raw materials cost increases, how much of an impact, just conceptually does that have on your margins and how much ability do you have to pass on those costs to your customers as would other component providers?

Yes, you really have to split that out in two areas, Larry. On the plastic side of our business we typically have cost adjusters in all of our supply agreements that take place retroactively on a quarter basis. There we do get a pass-through. On the elastomer sides of the business, again it depends on how the agreement is structured, but we typically have an indicator that is part of our pricing structure, whether it is a performance PPI or CPI or basket depending on the geographic locations that allow us to push not a lot but a large part of those through as well.

OK. So on the plastics sides, is that fairly to on cost adjusters a fairly standard phenomenon?

Yes.

In the business?

Yes.

Is that just because of the volatility of what plastics pricing...

Yes, I mean the standard resins they will use, the polypropylenes, the polyethylene's everybody uses a standard index to work off that.

OK. Got it. OK so, that is not unique to you, but fairly standard...

Not an industry issue.

Got it. OK and then secondly, the -- oh, and just to put that in context, what sort of price -- what kind of raw materials cost increase are you seeing for some of your raw materials? I mean, we've heard some numbers that are up 50%, 60% in some cases. Is that the kind of magnitude that you are seeing and how would that translate in increased price to your customer?

No. We're seeing things really across the board. It depends on whether you've got a petrochemical-based product or you've another chemical product. Yes, for us, most of the things we purchased are not in extraordinary large quantities. What we do purchase in large quantities are the plastic resins because of the volume that we produce and we talked about how those are passed through with the contracts. On an average, we're going to seal some materials in the very low single-digit percentage increase. Others we'll probably see in the low double-digits.

OK. Right. And does that translate into the same kind of net price increase to your customers? Is that just one component of your product to them so they're not necessarily going to be seeing double-digit price increases?

No. No. That is just one component of what we do.

OK. Right. And then finally, one of the discussions you make in the increase in the G&A costs, you've already talked about your stock-based incentive plan, legal and regulatory costs, affects of currency translation, you do mention increased business development activity, I think an earlier question mentioned asked you, about some of the areas where you could look to expand. Is it fair to say that that's an ongoing process for you or is that something that you would consider doing post the resolution of the drug delivery business?

Yes. That's a good question. I think it is an ongoing process. I mean, I think everybody can appreciate the immediate aftermath of Kinston, the company's entire focus and tactic was continued supply. We did everything we could, under the circumstances to make sure that there were absolutely no interruptions in the supply of our components to our customers. And we've come out of that very well. 18 months down the road, we've got the ability now to begin turning our attention back to the longer-term growth of the business. So, going forward, as I said, we do have a dedicated group that's looking for new opportunities to augment our product portfolio, so you're going to see those costs continuing as we go forward. But it's a prudent thing to do in terms of investing in the business.

Right. OK. Very good. Thanks.

Thanks, Larry.

Thanks, Larry.

Shai Gerson of Corsair Capital, you may ask your question.

Good morning. Quick follow-up. We're looking out a couple of quarters when we finally get cleaner quarters, I guess. Would you expect, when you guess kind of the absorbed overhead and the other things and everything's kind of backwards should the emergence return in the core business to kind of, historically what you want them to be?

That's certainly our goal.

Absolutely.

OK. But there's nothing has fundamentally changed or...

Well, we've added -- we have added these additional costs of the Kinston plant.

OK.

And when you put a new plant up, it is expensive to do that. But...

I'm talking about in a few quarters when it is fully up and running and fully operational and it's, whatever.

We have no reason to expect that we wouldn't return to our pre-January 2003 operating performance.

All right. Thank you very much.

You're welcome Shai.

Bye-bye.

Thank you. Once again, if you'd like to ask a question, please press "*" "1." One moment, please. At this time, I'll turn the call back over to Dr. Morel.

Thank you, operator. West's year-to-date performance has been fundamentally solid and inline with management's expectations. The backlog remains at record levels and underlying market demand continues to be favorable. During the fourth quarter, management's focus will remain on executing our business objectives for the Pharm Systems division, bringing kits and backup, and driving the drug delivery process to completion. In terms of our guidance, we continue to forecast full year fully diluted pro forma earnings per share between $1 and $1.05 on a split-adjusted basis. In keeping with our past practice, West's year-end conference call will take place in February 2005. At that time, Bill and I will provide commentary on the outlook for the year as well as our earnings guidance for the fiscal year 2005. Thank you very much for your time today.

This concludes today's conference call. Thank you for your participation.