西式醫藥服務 (WST) 2004 Q4 法說會逐字稿

Good morning and welcome to the West Services 2004 fourth quarter conference call. I would like to inform all participants that you will be able to listen only until the question and answer session of today's conference call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. (Operator Instructions). I would like to turn the call over to our first speaker, Ms. Julie Huang with Financial Dynamics. Thank you ma'am, you may begin.

Thank you, operator. Good morning everyone and welcome to the West Pharmaceutical Systems to 2004 fourth-quarter year-end conference call. As you know, we issued our results earlier this morning. The release has been posted on the Company's web site located at www.waspharma.com. If you have not received a copy of this announcement, please call Financial Dynamics at 212-850-5628 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, intend, believe and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties. The Company's actual results may differ materially from views 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 purposes of aiding comparisons, period results references that made on this conference call and (indiscernible) in today's press release is historic expected financial results determined by excluding certain cost to nonrecurring items. These remeasured periods results are not 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 can be found in today's release.

This call is being recorded on behalf of West Pharmaceutical Services and is copyrighted material. It cannot be rerecorded or rebroadcast without the Company's express permission. Your participation on this call implies your consent to our taping. Once management has concluded their remarks, we will 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 and West's primary investor relations contact. I would now like to turn the call over to Don Morel. Don, please begin.

Thank you, Julie, and good morning, everyone. As Julie indicated, joining me for the call this morning are Bill Federici and Mike Anderson. For today's call, I will first provides some general comments on the Company's performance in 2004 and then Bill will provide a discussion of our fourth quarter and full year financial results.

As you will have seen from this morning's release, the transaction involving our drug delivery business, coupled with the ongoing costs associated with our recovery from the Kinston accident leads to some fairly complex reporting. For that reason, we have structured the written release in a way that discusses the factors affecting revenues, gross profit, SG&A expense, interest and tax separately for the quarter and the full year.

At the beginning of 2004, the management team established three primary objectives -- first, get the Kinston operation back to full production capability; second, continue to execute against our business plan for the core packaging and medical device businesses and third, reach a decision on the future of the Drug Delivery Systems division. I am pleased that these goals were all accomplished.

Although behind our original aggressive schedule, the new Kinston facility is now operating near capacity. Sales grew faster than expectations in our major markets and key product segments. As we closed the sale of our Drug Delivery Group to Archimedes Pharma, a UK company formed by Warburg Pincus International, in early February. As 2005 begins, it looks to be a year with its own unique set of challenges.

That having been said, the Company is an extremely favorable position from the perspective of our market, the staying power of our product and service offerings and our portfolio to support those markets and the strength of our custom base.

I would now like to review the primary drivers behind the robust sales growth achieved by the Pharmaceutical Systems Division during the fourth quarter and the full year.

The Pharmaceutical Systems Division finished 2004 on a strong note with sales in the fourth quarter increasing 14.7 percent, including currency versus the fourth quarter of 2003. For the full year, sales grew to just over $541 million, an increase of 12.1 percent compared with 2003, again, including currency. This robust growth in sales was slightly ahead of our expectation and driven by four principal factors -- growth in demand for our core packaging and medical device components; surge demands in our coated closures due to raw material change by a vendor; continued strong demand for West (indiscernible) new products and an accounting change for how the Company records revenues from customer-funded development and tooling arrangements.

The surgeon orders for coated closures systems affected by the raw material change while benefiting sales in 2004 will lead to a subtle shift in our overall product mix during the first half of 2005 as customers work down the inventories built up to accommodate the change. We expect these bookings to return to a more normal pattern in the second half of the year.

From a geographic perspective, although both regions achieved higher than market unit growth, sales grew faster in the Americas region than in Europe taking into account the effects of currency translation. In the Americas region, sales growth came from the Company's Westar line of treated closures and the previously discussed increase in orders for coated closures. The region also benefited from growth in customer funded development programs and an increase in laboratory services to support customer product development programs.

In Europe, sales growth came from Westar's sales from the newly validated facilities in Germany and France, prefilled syringe components and continued overall strength in the Diabetes Packaging segment. The Company's results were also helped by income in unconsolidated affiliates due to strong sales from Dykio (ph) and a strong performance by West Rubber de Mexico as their operation returned to profitability following the restructuring in late 2002.

Turning briefly to Kinston, I am pleased to report that the new plant is currently operating at its planned production capacity. All of the temporarily displaced workers have returned to North Carolina. We have completed the qualification testing of the new equipment and our customers have completed the necessary tooling validation and component testing for all products to be manufactured in the new facility. The challenge for the operations team is to improve production efficiency as quickly as possible.

I would now like to turn briefly to the drug delivery sale. In late June 2004, the Company announced the strategic review of its Drug Delivery Division following an evaluation of business opportunities and investment requirements in both of the top-rating divisions by the Board. This process was completed in late December with the announcement of a sale of a substantial portion of the business to a new company, Archimedes Pharma, to be based in the UK and financed through the health care group of Warburg Pincus. West retains approximately a 14 percent stake in the new Company and could receive royalties of up to $19 million as products reach commercial sales from the new entity. Warburg plans to invest $40 million over approximately the next 12 months to accelerate product development. Part of the Drug Delivery Division involves a clinical research center which performs Phase I trials for a range of clients. As we announced, the Company plans to divest this operation as well by year end.

I would like to turn the call over to Bill Federici who will provide more background on our fourth quarter and full year financial performance.

Thank you, Don, and good morning. As indicated in this morning's press release, West reported fourth quarter income from continuing operations of $7.3 million or 23 cents per diluted share versus income from continuing operations of $20.8 million or 69 cents per diluted share recorded in the fourth quarter of 2003. For the full year 2004, reported income from continuing operations was $33.5 million or $1.09 per diluted share compared to $42.9 million or $1.48 per diluted share in 2003. Non-GAAP income from continuing operations for 2004 was $1.33 per diluted share, which is within the guidance we previously provided for 2004.

This morning's press release included a paid (ph) GAAP to non-GAAP earnings. Primary items impacting comparability are the costs associated with Kinston, the restructuring of our UK plastics plant, tax valuation allowance adjustments, and a reduction for an affiliate's non-operating gain. I would continue to refer to that table to help describe the issues impacting 2004.

In December of 2004, we announced the sale of our Drug Delivery business and our decision to dispose of our Clinical Services business. These two businesses comprise our Drug Delivery Systems Division. The Drug Delivery Systems Division's operating losses and the associated loss on disposal have been reflected as discontinued operations in West's financial statements. The 2004 full year loss from continued operations was $14.1 million or 46 cents per diluted share compared to $11 million or 38 cents per diluted share in 2003. The 2004 results from discontinued operations are comprised of an $8.9 million, or 29 cent per share, loss from operations and a $5.2 million or 17 cent per share transaction loss resulting from the sale of the drug delivery business.

As you can see on the reconciliation table attached to the earnings release, reported results in this year’s quarter and full year include pretax costs of $2.5 million or 5 cents per diluted share and $13.3 million or 30 cents per diluted share, respectively, of continuing incremental costs associated with Kinston's interim plan to replace production from its Kinston plant and other Kinston accident-related costs primarily over time; incremental material and freight costs, special handling equipment and legal costs.

We have segregated the Kinston costs into two components. The first component includes the dislocation of workers and production to other facilities and legal and other uninsured costs which will not continue and are subject to our calculation of non-GAAP earnings measures. Reported results from last year's fourth quarter and full year included a net gain of $18.6 million or 63 cents per share and $12.1 million or 42 cents per share, respectively, related to the January 2003 Kinston plant explosion.

Q4 2003 also includes 7 cents of income related to insurance recoveries recorded in the quarter in excess of the Q4 2003 Kinston-related expenses incurred. Excluding the effect of these items as well as the plastics plant restructuring charges, fourth quarter adjustments to tax valuation allowances and provisions and the 2004 affiliate nonoperating gain from each year's quarter and year end. Fourth quarter 2004 and full year 2004 income from continuing operations were respectively 24 cents and $1.33 per diluted share versus fourth quarter 2003 and full year 2003 income from continuing operations of 25 cents and $1.32 per diluted share.

Consolidated net sales for the quarter were $142 million, 14.7 percent above 2003 fourth quarter sales with 4.1 percent of the increase due to currency. Full year 2004 net sales were $541.6 million or 12.1 percent above 2003 net sales with 4.7 percent of the increase due to currency.

Domestic sales grew by 15 percent and 9.5 percent from Q4 and full year 2004, respectively, over same period 2003 sales and sales in our international markets grew by 5.9 percent and 5.2 percent above prior year sales, excluding currency.

All of the Company's geographic regions experienced 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's value enhancing processing and advance coating for pharmaceutical components, including accelerated (technical difficulty) customers for safety stocks in anticipation of a formulation change.

Our sales order backlog at December 31, 2004 was $152.7 million versus $131.6 million at December 31, 2003. The increase was due to domestic biotech customers, favorable foreign exchange and strong international orders. These firm orders represent approximately 26 percent of our full year sales. Our full year consolidated gross margin declined by 3 percentage points to 29 percent in 2004 versus 32 percent in 2003. More than 2 percent of the decrease is attributable to Kinston. Excluding the Kinston impact, gross margins were at 30.9 percent in 2004 (technical difficulty) percent for 2003. The remaining gross margin decrease is attributable to underabsorbed overhead connected with placing our new Kinston plant in service and lower margins from tooling orders.

Consolidated selling, general and administrative expenses increased by 3.2 million in the fourth quarter and 14.1 million for the full year 2004 versus the prior year's same periods. The increases are largely due to the expense associated with the recently approved performance-based restricted 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 offset by less bonus and pension expense. After eliminating the Kinston legal costs, SG&A expense as a percentage of sales were 19.1 percent for the full year 2004 versus 18.8 percent for the full year 2003.

The restricted stock plan approved in 2004 represented a $5.1 million increase in expenses, or nearly 1 percent of net sales. Sarbanes-Oxley expenses approximated $2 million.

The Company's consolidated operating margin for the quarter was 6.2 percent versus 28.8 percent operating margin achieved for the same period in 2003 on an as-reported basis. Excluding the effects of Kinston and the plastics plant restructuring, fourth quarter operating margins were 8.6 percent in 2004 versus 9.9 percent in 2003. On a full year basis excluding Kinston-related costs and the UK restructuring, operating margins were 11.6 percent versus 12.8 percent before 2003. The remaining decline in operating margin for the fourth quarter and the full year is primarily due to the restricted stock plan expense of 2004.

Net interest expense was $7 million for 2004, $0.5 million lower than last year’s expense of $7.5 million primarily due to lower average borrowings. The 2004 full year effective income tax rate on continuing operations of 27 percent was favorably impacted by fourth quarter adjustments primarily related to a 2004 change in tax valuation allowances due to a change in French tax law extending the life of net operating loss carryforwards and the utilization of previously reserved for acquired tax credits. Our normalized tax rate is approximately 32 percent.

The Company's earnings were favorably impacted in 2004 by the performance of its affiliates. The Company's 25 percent owned Japanese affiliate enjoyed sales and pretax profit growth over prior year due to formulation changes, the strengthening yen and an investment gain, less full-year share of affiliated income increase from 1.6 million for 2003 to 4.4 million for 2004. The 2004 affiliate results include a non-operating real estate gain recorded by our 49 percent owned affiliate in Mexico, resulting in a 600,000 increase in West's equity income.

The 2004 full year operating cash flow from continuing operations was $81 million. The Company's cash balance at December 31, 2004 was $68.8 million and working capital totaled $110 million. Debt at December 31 was $160.8 million, a significant decline from the 2003 year-end position of then (ph) $175 million. The debt to total invested capital ratio at year end was 34.8 percent. Capital expenditures during the fourth quarter and the full year 2004 were 16.5 million and $57.4 million, respectively, including the costs associated with rebuilding the Kinston molding facility of $13.1 million for 2004. Including the Kinston investment, almost 50 percent has a year-to-date capital expenditures (technical difficulty) our new products and expansion activities.

Turning to guidance for 2005, the Company's core business continues to grow due to favorable demographic trends, growth in biotechnology drugs, tightening of FDA oversight and the emergence of drug package counterfeiting. Our expertise in and innovation around the drug material interface and our global manufacturing capabilities also continued to contribute to our growth. We are expecting sales growth to be in the range of 5 to 7 percent, excluding currency, driven by continued growth in components for the biotech industry, components for delivery systems, including prefilled syringes; CID products and modest price increases. The expected higher revenue growth will be offset by continuing Kinston inefficiencies and increased overhead; declines in advanced coating orders relative to the 2004 formulation change which impact both 2005 sales of components and West's -- our processing of those components; raw material price increases in excess of our estimates of that which we can pass on to our customers and information technology upgrade costs in our plan. These mix issues can impact our margins by as much as one-half of a percent of sales. Our projected gross margin for 2005 is approximately 30 percent.

We expect additional 2005 expense of 3 to 5 cents per share due to a change in accounting rules covering deferred compensation, including requiring the expensing of stock options. Had expensing of options been required in 2004, earnings would have been negatively impacted by 4 cents per diluted share. We expect interest expense on our variable interest rate debt will increase by 100 basis points in 2005. The American Jobs Creation Act will allow West in 2005 to repatriate previously untaxed investments in its international subsidiaries at a favorable tax rate of approximately 5.25 percent. While we are still in the process of assessing the impact of AJCA on West (technical difficulty) repatriated funds will require a 2005 tax provision. We expect the AJCA will have a net positive impact on West's future effective tax rate.

On that basis, we expect 2005 diluted earnings per share to be in the range of $1.37 to $1.47. I would now like to turn the call back to Don Morel. Don?

Thank you, Bill. As Bill summarized in his comments, the management team believes 2005 will be another solid operating year for the Company. We're looking to achieve sales growth net of currency effects in the range of 5 to 7 percent, consistent with our previous guidance. We believe the Disposable Medical Device segment will be flat year-on-year and that unit growth in the Pharmaceutical Packaging segment should be in the range of 3 percent versus 2003. The Biotechnology Segment incorporated prefilled syringe components and coated closures should continue to grow in the 8 to 10 percent range. We also expect continued growth in our Analytical Services business and customer funded tooling and development orders.

The surge orders experienced in 2004 will produce some unevenness in our quarter-to-quarter revenues due to inventory adjustments by several key customers as they work off excess inventories resulting from the change. We expect to return (technical difficulty) order pattern in the second half of the year once these products move through our customers' inventory. Thus, the year will see a shift in product mix for higher volumes as standard pharmaceutical packaging products and components during the first half of the year versus the higher value added coated package products in the second half. Also, like all companies that utilize petrochemical-based raw materials, we expect to see price pressures in this category to continue throughout the year. Overall, we expect earnings from continuing operations to be in the range $1.37 to $1.47, as Bill indicated.

This concludes our remarks for today. We would now be pleased to answer any questions that you might have.

(Operator Instructions). Steven Postal, Lehman Brothers.

Thanks, and it's Lehman Brothers. Can you guys -- my first question is on the accounting change that you referred to in the call. Can you just elaborate on that?

Are you referring to the tooling and the development agreements?

Yes.

Yes. We are now booking those as a percentage of completion.

I see. And so that was obviously unanticipated relative to your expectations coming into the quarter?

In essence, what happened, Steven, was part of our value capture initiative that was put into effect over the last couple of years, we had a switch in how we were looking at these development agreements. They had previously been looked at as a service that we provided to the customers that we were not asking them to pay for. What we decided was that there was real value in that service and that what we would do is look to bill the customers separately for those arrangements. We have some real -- the accounting rules are interesting in this area. Depending on whether you act as an agent or whether you're acting as a principal, we have some real P&L (indiscernible) in these development agreements. So what we had previously been doing was booking those agreements as a -- on a net basis, so the net amount of the margin, which was very small, would be a reduction of cost of sales otherwise. But as a principal and with P&L risk and part of our value capture initiative, we're now looking at those as true revenue generators and we are grossing up the bulk of revenue and the expense line. So while the margins are less than our normal margins in our other components of our business, it is a component of both revenue and expense as opposed to the way we had been treating it before.

Another way to look at that encouragingly is that the customer's willingness to fund the programs indicates their commitment to it. And that is a category we expect to grow in over the next couple of years.

Okay. And can you clarify the tax rate in the quarter? I know there was some benefit there. It looked to me like the kind of pro forma tax rate was about 22 percent in the quarter?

In the fourth quarter, Steven, we, as we said in the commentary and in the release, we looked at the valuation allowances associated with our deferred taxes, and we also had a change in the French law on how NOLs are able to be utilized. They used to have a maturity window on it I believe of 5 years, and that was changed to an unlimited deferral -- an unlimited ability to utilize those NOLs. And so the valuation allowance that we had previously established for them was freed up.

So the effective tax rate in the quarter is somewhat unusual because those adjustments were made in that period. But on an ongoing normalized basis, look at 32 percent being a pretty good proxy for what we think the rate will be going forward.

A couple questions on -- for clarification in 2005 guidance. Does your tax rate assume any repatriation or (technical difficulty) right now?

No. We have busked (ph) that off the table, Steven. As we suggested, we're not quite done with the analysis of it. Being a global company, there are a lot of moving parts to that analysis. It's not only what you're going to bring back, but also how -- where you're going to put, if you're going to put some debt on the books overseas, where it would be put, now that's going to impact the overall mix of earnings around the world. So we're going to hold off. Our 32 percent is before any effects of AJCA.

Regarding capital spending, is it fair to anticipate that, now that Kinston is behind you, that that should decrease somewhat in 2005?

Yes. Our belief is that on a normalized basis, the CapEx will be in the $45 million range, plus or minus. So, yes, it will decrease from the 57 that you see in this year's full-year '04 CapEx, but it's not going to go down by half or anything like that. It's -- 45 plus or minus is a good proxy.

One more question and I will hop off, for Don or Bill. It sounds to me that based on some of the commentary in the press release, that you're saying sales growth could be back-end loaded. Is that correct, and any color on the timing of sales created (ph)?

Yes. The backlog is as strong as it has ever been, which is encouraging. What we do know and we have seen this in the past is that often when we get these surge orders that result from a raw material change, the customer has a window to first work down the inventory with the original products and at the same time, they build up the inventory with the closure systems without the change in them. It is often difficult to predict because we won't get our normal visibility. So we're just basically going to see some unevenness through the year.

We're very comfortable on the full-year guidance. We know we're going to get there, it's just that you may see an order dealt with in the third quarter that would ordinarily be in the second because of this raw material issue. But we're very comfortable with the full year number.

Great, thanks.

Arnie Ursaner, CJS Securities.

Hi, good morning. Can you focus a little bit more on this whole concept of the surge orders? Obviously, this is something you're highlighting pretty dramatically. Kind of when did it happen and can you give us a little better feel for the magnitude of what your revenues in the quarter you think were driven by "surge orders"?

Actually, it's something that we have been combing (ph) out for (indiscernible) commentary in prior quarters and we had indicted that we were seeing this. And principally, it falls into the products that are B-2 coated or B-2 coating as well as task (ph) mark. I don't think we've called out the magnitude. We'll have to wait and see what happens in '05. But the thing that we are absolutely sure of is that those orders are not disappearing (technical difficulty) simply being shipped out by perhaps a quarter or two quarters of the inventories that are worked down. So the orders are still robust, they're still there; it's just a timing issue.

Okay. Focusing on the margin issue for a little bit; obviously, you've been spending a great deal of money rolling out Westar. Perception we had as of Westar was dramatically higher margin, yet you seem to be getting no benefit from it in your '05 guidance. Could you expand on that a little bit?

We do expect -- part of what you're seeing in the '05 guidance, there are a lot of moving parts, Arnie. And what we're seeing is that the surge orders that Don talked about not only impact the component sales, but they impact the processing of those components through our Westar process. So on the higher end, you can have customers that not only requested an advanced coating on the (technical difficulty), but also those stoppers to be Westar. If you have surge orders, those surge orders will also, if they don't appear in the first two quarters or first half of the year, neither will the Westar processing of those as well. So we do see some effect of the surge order as well on that. But (technical difficulty) the margins are better than the normal margin. They are somewhat sold sometimes as a package instead of individually Westar, so we don't really cull it out separately for you. But it is in general a higher margin than our normal margins.

When you look at your revenue for the upcoming year, what percent of your products do you think will be Westar coated?

For the full year, we are probably -- we have got to be careful here, because there's a split between the med device segment and the packaging segment. But we're approaching mid-double digits between those two.

(indiscernible).

Probably on the range of -- 15 percent and growing.

Got it. You gave your tax spending guidance, if you will, of 45 million. What's the D&A expected in '05?

We haven't called it out. It was 33 -- it was 37 in this year. Let me just make sure I got that number right. Depreciation was 33.2 in this year; number will go up obviously as the impact of the Kinston assets come online, and that will number will go north. I don't think we've culled out what (technical difficulty) 2005 is, but you can assume that it's north of there.

You mentioned a -- from the precut syringe components, which are dramatically higher pricing, that you were adversely affected by the delay in the planned commencement. Where do we stand on that?

We're just basically waiting for guidance for the customer once they get their plan up and running. We feel plungers are a product that came through the pharmaceutical closures. There's a range of them that are at our standard margin, there's a range that are at the higher margins because they're Teflon-coated and because they go through the Westar process.

A lot of our growth has been in the lower end of that as Europe has converted some products out of the end fuels (ph) into a prefilled syringe format. So as a segment, it's is going to be one that grows and continues to grow. One of the more positive trends there is that on the biotech side, and this is where the coated closures from Westar come in, customers are looking for not only a vial format for presentation, but they're beginning to move more and more to a presorb (ph) solution. So those two things worked positively for us in that segment.

Again, I'm a little confused perhaps by your revenue guidance for the upcoming year. Obviously, we talked about the surge orders and that will impact your revenues, but you've also put in pretty hefty price increases hopefully to recover some of the margin. There's still unit growth in the business, and yet you're giving the same guidance you have given of revenue (technical difficulty) even though you have exceeded it pretty materially. Are you being cautious, are you seeing some change in your business?

It's easier for us to talk about the full year. As we look at the makeup of the revenue growth as I've walked through (technical difficulty) pretty confident with that. But the things that we're keeping an eye on is this issue of product mix quarter-to-quarter. I think the thing that makes the comparisons very (technical difficulty) that although Kinston is back up and operating fully, there are going to be some efficiencies there. (technical difficulty) although we have a fairly detailed plan for how we work those out, as we saw with getting the plant back online, sometimes you get the slight delays in there that are out of your control. So the things that we're focused on right now are Kinston has got to be brought up online and in terms of its operating efficiencies as soon as possible and optimize, and the mix of the products was a little bit out of our control depending on what our customers' inventory strategies are.

And Arnie, just one other comment. Let me be clear -- on the full-year sales increase, when you net out the impact of FX, was 7.4 percent, and that includes those surge orders.

My final question if I could -- Kinston, you separated out as a line item in your '04 on the non-GAAP basis, if you will. I assume you're not going to do that in '05. Can you quantify what sort of negative impact you're going to continue to see in Kinston?

That really is impossible to do, Arnie. It's going to depend on how efficient the plant operates. It's very complex because you are essentially starting a greenfield site from scratch. What we do know is that we expect those inefficiencies to be worked out by the end of (technical difficulty) '04.

Again, you gave a specific quantification for Q4 and I believe you indicated you have ramped up production pretty dramatically during the quarter. Why wouldn't Q1 and 2 be materially lower than Q4?

Because, again, we're running new molds off new presses with new processing equipment. And although we have (technical difficulty) having gone through the validation process, rubber's a fairly finicky material. And we're still going to be working through some of those issues. Again, these cycle times off the press optimized as well as the trimming processes where the products are punched out of the webs themselves. So although the plant is operating back up at capacity, our yields are not where we would like them to be and the issue is that we've got to get our yields back to where we were pre the January 2003 level.

And Arnie, your view of things that (technical difficulty) the impact should not be as great as they were in '04 makes a lot of sense. So it's not going to be -- continue at the same levels it has been, but it will (technical difficulty) as the year goes on.

okay, thank you.

Beth Lilly, Woodland Partners.

Good morning. I was (technical difficulty) you could speak longer-term to where you think you could drive operating margins to in the sense of -- as Kinston comes on (technical difficulty) work out the inefficiencies and get it up to full operating capacity and the price increases get pushed through and such, where do you think you can drive the business to longer-term over the next couple to years? Do you think it's realistic to get into the low double-digit operating margins?

Our operating margins now on a stand-alone basis for the Pharmaceuticals Systems Division are in the midteens. What we think we can do is improve on those. And certainly over the next couple of years, we may not hit it, but we think we can get close to 20.

You think you can get close to 20 percent operating margins? (MULTIPLE SPEAKERS)

If you look at a normalized number, if you take the chart that we had and you add back the (technical difficulty) Kinston, we are right about -- for '04, we're right about 12 percent; 11.6 I think was the number that it worked out to be, 11.6 percent. So we can expect some benefit and some continued benefit as Kinston efficiencies continue to move forward, but we do have these other mix issues, et cetera, that are impacting.

Great. And then that 12.6, so I just fully understand this -- that 12.6, you think you can drive to 20 percent?

No. I said just talk about the division as a stand-alone before corporate expense. Bill is talking about the operating margin with corporate included.

I was expressing it the way you would look at it, which is on a consolidated basis. It's 11.6 percent when you add back Kinston.

Okay. So let me ask it this way. If Don says that you can drive operating margins to 20 percent before corporate costs, okay, what was that number -- what were operating margins before corporate costs in the quarter?

In the quarter before corporate cost, let me look at this here. Fourth quarter was 13 percent.

Okay, and how about for the year?

For the year, they were -- as Don said, they were right at 15 percent.

15?

Yes 15, 1-5.

Okay. So we're talking about the potential for 5 percent growth in operating margin over the next couple of years.

With an emphasis on (technical difficulty) we have a very active program in terms of lean manufacturing ongoing, and as best we can in the categories we can control are focused obviously on our SG&A at the corporate level. But with a little bit of hard work, over the next three years, you're going to see some improvement in that margin.

Along those same lines, which I know you've spoken about this, can you talk about your emphasis on return on invested capital and time compensation to it and where you're at with all that? And I know you've been reluctant to talk about what your return on invested capital is publicly, but if you could just address that issue and (technical difficulty) it has on the organization and what you're doing with that concept?

All of our compensation programs are performance-based and we split them between short and long-term. In the short-term, corporate is based on EPS grows and cash flow. In each one of these divisions' operating regions, the Americas and the Europe/Asia Pacific are comprised pharmaceuticals (ph) is partially based on the corporate parameters, but it's also based on revenue growth, regional cash flow and operating profit. And the waiting is with an emphasis on the operating profit side.

In terms of our long-term, this is a new program that was put into place last year to drive our decision making, and that is based on a combination of revenue growth as well as return on invested capital. Our goal is to achieve a target that's in excess of what we believe our weighted average cost of capital is. So the thinking is that that would drive decision-making behavior in a different way within the operating businesses, and I believe it has had that effect. I think the discussions around capital investment and the where and how we make those investments, the analysis that go into the background in our capital expenditure request, is much more rigorous, the questions are much more difficult and the justification for the capital is much better. So it is driving the desired behaviors.

Is there going to be a point in time, Don, that you think you're going to talk about what your return on invested capital is?

I don't know. That's an internal target. Probably not.

Is it fair to say that today, all of your businesses, all of the operations, are earning its cost to capital?

There are individual segments of the Pharmaceutical Systems Group that are probably (technical difficulty). On the whole, we believe that for the first year the plan was in place, we were slightly below our target, but the forecast for '05 is that we will exceed our target.

Okay great. Thank you very much.

(Operator Instructions). Steven Postal, Lehman Brothers.

Hi. I just had a couple of things. Capacity for Westar -- can you just address that capacity? And I believe last quarter, you talked about potentially moving some production of Westar to France.

It's not that we're actually moving production, Steven. Over the last couple of years, as you know, what we've done is increase capacity through our Jersey Shore and (technical difficulty) and we have put comparable capacity into (technical difficulty) Germany to serve the European markets. For right now, looking at the growth in Westar and looking at the capacity, we have gotten those three facilities, we think we have adequate capacity for the next couple of years.

What we're also planning to do is get Singapore up to the same standard as those three plans so we'll have four Westar producing facilities (technical difficulty) globe. And what that allows us to do is basically have a second source option for all of our customers as part of their risk mitigation so that there's multiple plants that can supply the same product. It also gives us some manufacturing flexibility if we need to (technical difficulty) plant to plant where it gives us either a cost advantage or a timing advantage if we get a surge order.

Okay. And then regarding raw materials costs, can you just touch on that a little bit? And what -- are you satisfied with your ability to pass along as much as those -- the increase in raw material costs as much as possible?

You're never (technical difficulty) to pass through on the fixed contract that have a purchase price adjustor, the majority of those, that having (technical difficulty) are some smaller outlying accounts where there's been a bit of (technical difficulty). We don't know what the year's going to bring. We think that most of the pricing on our major raw materials has been fixed. But depending on what happens with oil prices and (technical difficulty) polymers in particular, we may see some additional increases throughout the year.

What would you say the mix is, in terms of the costs that have those prices adjustors, and then kind of the variable cost there?

It's a hard number to come to, only because different contracts have different trigger points in terms of the price adjustors. But I think probably in 50 percent of the cases, we've been able to pass them through. And rubber is slightly different than the standard resins on the plastics side of it because each one of the supply agreements basically have a quarter-to-quarter adjustment based on an indicator. So we lag by 90 days, but we eventually get it.

And then just one final question. On the revenue growth guidance of 5 to 7 percent, can you just go through the components there? You talked about -- it seemed like you talked about reasonable pricing in 2005. I recall you talking about 100 points in pricing. What's kind of the components of that 5 to percent?

Most of it's going to come from volume growth. There is some moderate growth due to pricing. The pricing that we've been able to get, however, has been offset by some of the raw material prices that we have incurred. So if you look at the individual market segments, as I discussed in my comments, med (ph) device, which is the lower margin part of our business, is going to be relatively flat in terms of units. We're going to see some growth in the standard form of packaging, and we will see some fairly nice growth on the biotech and the pre-billed (technical difficulty) both the Westar treatment as well as the coatings sold.

So a fairly broad mix, but the prices that we've been able to get in some respects has been offset by the raw material increases.

So is it fair to say, if you think you're getting 100 basis points of price increases, the majority of that would be offset by increases in your cost?

Yes, that's fair.

Thanks a lot.

If there are no further questions, I will turn the call back over to Dr. Morel (technical difficulty).

Thank you, operator. (technical difficulty) the Company's performance during 2004, a year which represented an extremely challenging business environment. We continue to refocus the Company's attention on its core pharmaceutical packaging and medical device businesses. What bodes well for our future is that our capital investments have given us the capacity in key product lines, such as Westar, to satisfy increasing market demand. Market trends (technical difficulty) in our key markets. Our balance sheet is strong, allowing us to make strategic acquisitions to complement our core business and demand remains robust with a strong and growing backlog as the year begins. During 2005, the management team will remain focused on the execution of our operating plans due to the delivery of world-class products and services to support the meetings of our global customer base. Although there are many challenges ahead, the Company's now in a very strong position to generate sustainable revenue and profit growth over the next several years. Thank you very much for your time today.