西式醫藥服務 (WST) 2005 Q2 法說會逐字稿

Welcome to the West Pharmaceutical Services second quarter 2005 results call. Following today's presentation there will be a formal question and answer session.

[Operator Instructions].

Today's conference is being recorded. If you have any objections you may disconnect at this time. Now I will turn the meeting over to Ms. Julie Huang of Financial Dynamics. Ms. Huang you may begin.

Thank you. Good morning everyone and welcome to the West Pharmaceutical Services 2005 second quarter conference call. As you know, we issued our results this morning. The release has been posted on our Company's website located at www.westpharma.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" are 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 non-exclusive list of those factors is listed in the Company's press release and SEC filings.

In addition, for the purpose of aiding comparisons, period results references made on this conference call and in today's release, (inaudible) expected financial results determined by excluding certain costs to non-recurring items. These re-measured period results are not within the US Generally Accepted Accounting Principles, GAAP, and our non-GAAP financial measures. The non-GAAP financial measures are intended to explain or aid in the use of, and certainly 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 re-recorded or rebroadcast without the Company's expressed permission. Your participation on this call implies your consent to our taping. Once management has concluded their remarks, we will open the floor for questions. At this time, I would like to turn the call over to Dr. Don Morel, Chairman and CEO. Don, please begin.

Thank you Julie and good morning, everyone. I will be joined by Bill Federici and Mike Anderson for this morning's discussion of our Q2 performance and our outlook for the remainder of 2005.

The second quarter was quite an active one for West. We continue to generate revenue growth in our core components business, ahead of expectations with particularly strong growth in Europe. We closed the acquisition of The Tech Group and we entered into an agreement to purchase 90% of Medimop, Ltd. This acquisition is expected to be close in the next 2 weeks.

As outlined in our release this morning, revenue growth during the second quarter was very strong, with sales growth in our core components business increasing 14.2% versus the second quarter of 2004, 2.5% of which was due to currency. Taking into consideration the acquisition of The Tech Group which closed May 20th, sales increased a total of 27%.

Our gross margin declined slightly from 31.1% in the first quarter of the year to 29.2% largely due to the inclusion of lower margins Tech business, in addition to a less favorable product mix and somewhat higher cost in our core components business.

Net Income from continuing operations was $12.2 million or $0.38 per fully diluted share versus 10.5 million or $0.34 per share in 2004. During the quarter, sales growth in the core components business remained ahead of our expectations and resulted from several factors. Growth in serum closure sales continuing strong demand for pre-filled syringe component in Europe, demand for Westar treated products and growing demand for analytical laboratory services in addition to development and tooling services. As expected, we would say in May 2004 sale of Teflon coated closures and lyophilization closures in particular, were approximately level with the comparable period in 2004.

From a geographic perspective, excluding currency, sales growth in dollar terms was $11.6 million in the Europe, Asia Pacific region, approximately three times of that in the Americas. Growth in the Americas region was driven by solid demand for Westar treated closures, and demand for engineering and laboratory services. In Europe, growth was due primarily to increased demand for pre-filled syringe components for the diabetes market.

At the end of the second quarter, our backlog stands at approximately $153 million versus a $148 million for the comparable period in 2004. Our operating cash flow- was very strong at $29.8 million versus 21.6 million for the second quarter of 2004. With regard to Kinston, as reported in our April call, the plant is now running at planned production capacity. More importantly, the plant is operating profitability and looking at projected demand for the second half of the year, should continue to do so, despite the increased depreciation expense we are incurring.

Turning to our acquisition of The Tech Group, the integration process is running very smoothly. Our current expectation is that Tech operations and the West Device Group will be substantially integrated by the end of the third quarter and complete by year-end. Following the closing, our primary goal is to ensure that Tech achieved its full-year 2005 objectives as their fiscal year ends June 30th. From the closing to the end of the quarter, Tech added $17.5 million in sales and 1.1 million in operating profits, to our consolidate results for the quarter right in line with our expectations. Currently, we anticipate Tech contributing a run rate of approximately $10 million to $11 million in revenue per month through the end of the year exclusive of tooling and engineering services.

Turning to the acquisition of Medimop, on July 5 we announced our intention to acquire 90% of the stock of Medimop Limited, an Israeli medical device company specializing in re-constitution system and devices for fluid transfer for injectable drug administration. Medimop presents a unique opportunity for West to lead with global sales and marketing capabilities in components consistent for injectable drug delivery. In addition to our plastics moldings and assembly expertise which will significantly enhance through the acquisition of the Tech Group. The purchase price agreed to was 40 million, of which 36 million will be paid in cash and the remainder in Company stock.

It is anticipated that Medimop will contribute revenues of approximately $1.5 million per month through the end of the year, but will be earnings neutral for 2005 due to increased interest expense. The acquisition of the Tech Group and Medimop accomplished a major goal for the company, disclosing a significant presence in the assemble device market, while looking for selected opportunities to add proprietary technology in our core market.

Coupled with the organic growth in our components business, West is well positioned for the next 2 to 3 years to achieve substantial revenue growth. The challenge of our management will be to deliver enhance profitability from those sales going forward, and for a strong emphasis internally on controlling spending and quickly implementing lean manufacturing in our operation.

I would now like to turn the call over to Bill Federici, for a more detailed commentary on our financial performance during the quarter. Bill?

Thank you Don and good morning, everyone. We are very pleased to be reporting for the first time West results, including the results of the Tech Group, the plastics components and assembly manufacture we recently acquired. The Tech Group acquisition is a major addition to West, and combined with West's existing plastics business, provides us within established platform to service the assemble device market, a multi-billion dollar industry that is growing faster than our core stoppers and seals business.

As a result of the acquisition, we have divided our operating units into 2 reportable segments, which we are preliminarily calling the pharmaceutical systems segment, composed of our traditional parentheral components businesses, and the Tech Group segment, which includes West Device Group that was formally included in the pharm systems segment.

As noted in this morning's press release, West reported second quarter 2005 income from continuing operations of $12.2 million or $.38 per diluted share, versus income from continuing operations of $10.5 million or $0.34 per diluted share recorded in the second quarter of 2004. Reported results in this year's quarter included several special items that were either non-recurring or not a part of prior-years' earnings. These special items reduced our diluted EPS by $0.03 for the quarter on a net basis.

Our 2005 second quarter earnings are inline with management's expectations. The 2004 second quarter was impacted by Kinston production and legal costs aggregating $3.6 million or $0.08 per diluted share. The company's core pharmaceutical Systems Division performed very well in the quarter, with sales of $139.5 million, 15% above 2004 second quarter sales, with nearly 3% at the increase due to currency.

Unit sales growth was approximately 6% in the division, and each of the geographic regions contributed to the positive growth. International growth at 18% excluding exchange effects was driven by strength and demand for pre-filled syringe components, serum stoppers and seals. The more modest domestic growth was driven by added demand for syringe components, continuing increased demand for the Company's high value Westar products, higher revenue from the Company's laboratory revenue services unit, including those from the recently acquired Monarch Labs business, and a higher level of customer funded product development and production tooling projects.

As we've indicated in prior calls, we believe that customers' inventories of certain products had increased due to safety orders during 2004. As a result, sales of advanced coating products have slowed during Q2 2005, as customers appeared to be consuming some of that inventory. This pattern as it anticipated to continue into the fall of this year.

The Tech Group division, including West Device Group, also faired well in the quarter with sales of $35.8 million, substantially greater than the prior-year quarter do mostly to the 17.5 million of sales generated by The Tech Group since the May 20th acquisition. Sales in the division of existing plastic unit increased by 7% from the prior-year quarter on the strength of continuing increase demand for its consumer products container closures, and product development and tooling projects.

As noted in our release, consolidated gross profit margins for the quarter were 29.2% versus 31.1% margins we achieved in the same quarter of 2004. The decline is largely due to the effect of the relatively lower margins generated by The Tech Group business, and the less profitable product sales mix noted above, as well as continued increases in raw material component costs, labor, and overhead

Reported operating profit for the combined business division was $30.7 million in the quarter compared to 24.4 million in the year earlier quarter. 27.5 million after adding back the Q2 2004 Kinston cost. The increase was largely due to a 1.4 million reduction in our restructuring reserve for the recently closed UK plastics facility. And the $1.1 million operating profit generated by The Tech Group since its acquisition.

Consolidated selling general and administrative expenses increased by $5.6 million in the quarter versus the prior year quarter. This increase is due to the expense associated with the Company's employee stock purchase planning and the effect of expensing stock options aggregating $2 million, neither of which was accounted for in the P&L last year, as well as SG&A expense for The Tech Group, increased compensation cost, and increased outside services cost.

As a percentage of sales, Q2 2005 SG&A expenses decrease by approximately one percentage point from the second quarter 2004 level. Debt interest expense was $2.9 million in the quarter, $1.2million higher than last year's second quarter expense of $1.7 million. Approximately 700,000 of this increase was derived from increased volumes associated with the Tech Group acquisition. The remainder of the increase is due to higher interest rates on our revolver debt.

The Company's effective tax rate was essentially flat to the 32% prior-year's second quarter tax rate. The effective tax rate includes $1.1 million or $0.03 per diluted share of provision for previously permanently reinvested overseas cash of approximately $70 million, repatriated or to be repatriated under the American Jobs Creation Act or AJCA. The repatriation tax expense was lower than our earlier estimate, primarily as a result of lower than anticipated state income tax expense. We recognize the charge in this quarter because a critical and favorable regulatory clarification of the rules was issued during the period. We are evaluating whether further repatriation under the AJCA is warranted.

We estimate our effective tax rate for 2005, excluding repatriation expense, would be approximately 31%, which is slightly lower as a result of the Tech acquisition, which has a lower effective tax rate. The Company's cash balance at June 30th was $61.5 million, and working capital totaled $140 million. Debt at June 30th was $278 million, a significant increase due to the debt added to acquire the Tech Group. The debt to total invested capital ratio at quarter end was 47%, the increase in the ratio is associated with the added debt required to support the Tech Group acquisition.

Operating cash flow was $29.8 million for the quarter. Capital expenditures during the quarter were $10.5 million with more than 70% of the year-to-date capital focused on normal maintenance and replacement manufacturing equipment and tooling, mostly in North America and Europe. Regarding our earlier earnings guidance provided for the full year 2005, we are now projecting full-year sales to increase by 8% excluding currency, and we project earnings to be in the range of $1.43 to $1.51 per diluted share after adding $0.02 to $0.05 to the anticipated impact of the Tech Group acquisition. This excludes the effects of currency for the remainder of the year, and all income tax expense related to the AJCA repatriation.

Tech was marginally profitable for the 6 week period we owned in during the quarter. Our order backlog has remained flat compared to the prior-year end, was approximately $5 million higher than at the end of Q2 2004. Historically, our third quarter results are the weakest of the year, due to planned plant shut downs in our European and US facilities and that related restarts. Additionally, We continue to expect the impact of this quarter's less favorable sales mix caused by customer inventory levels built in 2004, as well as continued increases in raw material, labor, and overhead to result in dampened sales and operating profit for the rest of the year.

For the remainder 2005, we will continue on focus on monitoring and controlling discretionary spending. And through our lean manufacturing initiative focus on increasing operating efficiency. I would now like to turn the call back over to Donald Morel. Don?

Thank you Bill. This concludes our commentary for this morning. We'd now be pleased to answer any questions that you may have.

[Operator Instructions].

Our first question comes from Bentley Offutt with Offutt Securities.

Good morning. A couple of questions here, a number of the companies that we cover here we have another significant European activity and this is not going to be a factor, have not be effective but likely will be affected beginning in the second half of the year, and particularly in the first half of 2006, and that's relate to the Euro versus the dollar. Assuming that the dollar continues strong at a $1.20 or lower have you, in the last couple quarters or so, has the favorable, or the strong Euro versus the dollar, has that had a significant impact on your earnings in your forecasts for the rest of this year? Do you take that into consideration as far as your forecast?

The a simple answer is, yes we do take that into consideration in our forecast. But not in this forecast here when we explain the -- when you look at our guidance, what we said is that the guidance that we are putting on the table $1.43 to $1.51 excludes the impact of currency.

Either favorable or unfavorable.

Correct. That is the way we have traditionally done it in the past.

Okay. And the second question, Bill relates to, you'd indicated that your gross margins were down in the recent quarter or partly due to rising raw material costs. And there is a release this morning relating to rubber reaching record high prices due to China's tire demand. I understand you do not use that type of rubber. But, because of rising oil prices, what impact is that having on your principle raw material cost, and are you able to -as the price passes get enough price increases to offset the higher material costs?

We have, definitely we have seen the increases in raw material costs, and we have -- a little bit of an explanation is in order. We have been able to generally pass these on through additional price increases thus far. Most of our contracts, as it relates to our plastics business has CPI accelerator's in them so when the price of resin goes up, and most we generally in on a one quarter lag basis.

On the rubber side in the business, our synthetic rubber primarily, is we have long-term contracts with our customers, and those customers don't provide for a quarterly increases, but do provide for an annual increase based on a basket either direct CPI or some basket of raw materials, including the increase in the synthetic rubber prices. So, generally we are able to capture the increases, but they are on a lagged basis. And thus far, throughout this year, we have been able to capture most of that through increased -- pass on most of that to increase prices to our customers.

Okay and your principle raw material for stoppers and that type of product with what --butadiene is it called, is that correct?

There are 2 types of synthetic rubber that we use Bentley. There is butals (ph) various chemical composition also IsoPrime.

Okay. And also, getting back to The Tech Group, your principal raw material there is what?

They're commodity plastics as you would expect the polypropylenes, polyethylene's and things of that nature, as is our plastics business.

Okay great, thank you, and good quarter.

And your next question comes from Arnie Ursaner with CJS Securities.

Hi good morning. Couple of bookkeeping questions, first what was your D&A in the quarter and with the acquisition what do you think that would be going forward?

Okay hold on a second.

D&A, it's $10.8 million for the quarter and it was 8.3 million in the same quarter from the prior year. And we do have a -- we will experience Arnie a step up from the Tech Group acquisition. That step up -- we are still waiting for the final valuation to come in from our external experts, but that step up will be approximately $2 million to $2.5 million or for any particular year.

For each additional year?

Correct.

Got it. Okay. I want to try to focus on the margin issue for a second if I can, obviously you described some of the -- you are seeing excellent revenue growth many of the businesses you're getting excellent revenue growth are in your margin business, Westar, pre-filled syringes, -- is there anything other than the week advance coating sales due to surge activities or anything else that is clearly causing the 200 basis points hit the gross margin?

Let me try to explain it. There are a number of things of there. You are right, there were some increases in Westar, as you had suggested. But there are also increases in, for instance tooling orders and we call that out as well and those generally come at lower margins than our traditional pharmaceutical business. In addition, the Tech Group margins are generally lower than the margins in our pharmaceutical systems business.

We talked about in prior calls we've talked about additional depreciation and overhead related to new Kinston plant. Those are ongoing cost that we will continue to incur going forward. And we also talked about the raw material and labor and overhead increases that we have dealt with. So, when you put all those mix issues together, including the Tech piece, and the mix issue, and then the increased cost in Kinston, and then our increased cost overall, that is where the margins ends up.

Okay, focusing again a little bit on Tech Group if I can, you gave us a revenue number, which again is a lot higher than kind of the 10, 11 million per month. Is that just because that was at the end of their fiscal year, people try to ramp up some orders --?

...It is more a timing issue Arnie. There was an additional 2 weeks of sales in that number, the results of the closing May 20.

And we had tooling - a very heavy month and a half or so of tooling orders. About 4.6 million of that 17 million was tooling.

Got it. Going back and front excluded from your what I guess called --what I would call the core business?

Yes

You had a pretty big hit for the operating margin. If I X out the benefit from the restructuring where you got that 1.4million benefit? If I kind of take that out and the operating profit contribution from the core ...

...Right

...Your operating margin was in the lower 11s, and you have been running more in the 12 range?

Yes.

Can you give us a sense of where you think we are going to settle out for the balance of this year on operating margin?

We have not given operating margin guidance. We did give you gross margin guidance of approximately 30% plus or minus, and that was before the acquisition. Obviously with the acquisition added in there it would be a little less than that. In terms -- go ahead, I am sorry.

What would be, again, one of the line items that would make quite a bit of difference is what your gross margin expectation would be. Are you bring it down essentially?

We are -- on the core business we are still comfortable with the margin that we gave you. Tech business, what we have said is that, it's less than our core business. If you try to do -- and it is not easy to do, because there is a tooling mix and the molding mix going on at Tech as well. But our anticipation for the rest of the year would be in the 15% to 20% on the molding side, and less than that on the tooling side. The tooling margins are in the mid to high-singles.

Okay, I will jump back in line. I will come back later thank you

Our next question comes from Steven Postal (ph) with Lehman Brothers.

Hi, good morning. I just had a few questions. First on the organic sales growth, as I calculated I think it was a 11.7% ex-currency. And I guess my question is that you talk about slowing sales growth over the next couple of quarters related to inventory, if you could just provide some context so we can get a sense of where organic growth would be for the next couple quarters?

Sure. You may recall Steve and when we kicked off the year we were guiding the sales growth overall outside of currency of about 5 to 7, and because of the strong first quarter we increased that into 6 to 8. We think with a full-year as we indicated this morning is probably going to be on the order of 8% outside of full-year outside of currency.

We've always tried to qualify the fact that the second half of the year it is a little bit bumpier for us because of the third quarter, and the fourth quarter when we've got our customers going through their production planning exercises to close out the year and then place orders for the next year. We are going to see a little bit of slowing, it's historically -- it averages out for the year. For us, the important thing is that overall, when we look at the picture for the core business in total, we are right where we thought we would be.

And should we view that 8% type number as a normalized number with your entire business now?

Not with the entire business including the acquisitions. That number would apply only to what we expect to see in terms of revenue growth in the historical injectable components business in pharm systems (ph).

Okay understood. But, if we were to look out to say 2006, inclusive of The Tech Group, all in-organic growth would it be a little bit above that, because of the growth that you're seeing from Tech?

Yes.

Okay. And then, just a follow-up to the question on raw material costs. I understand that you have the escalators to the plastics business and then annual adjustments in the rubber business, -- we are now in second half of 2005, if you look at 2006, do you think you will see a greater impact on margins from the raw material costs based on that rubber business?

We really have not guided there, Steven. We're pulling together our budgets and our planning information starts in the late summer early fall. We have not gone there yet. If I knew where oil prices were going, I think -- I wouldn't be in this business that's for sure. I don't think anybody really knows for sure. We know that generally the indications are that there will be continued upward pressure from prices in general, including not only our synthetic rubber and plastic, but other raw material components overheads, labor, etc. So that's our view is it's generally increasing, but I cannot venture I guess that to what that would be.

Okay. And then, Bill, could you repeat -- I think you mentioned that tax rate excluding the repatriation for '05?

Yes, 31% Steven is where we are thinking we are going to come out, and that excludes the AJCA impact.

Steve Postal Okay. And do you have a goal for our debt to cap ratio?

Yes, we've talked externally about our comfort level being kind of at the 50% range, Steven. Internally our goal has always been since 2002, to get that into the mid-30s. So you know, a comfort range for us is in that 33% to 35% range outside of any debt related acquisition.

And In that context, obviously -- few acquisitions in addition to the Tech Group, can you just talk about your view on future acquisitions and the environment in general?

The pricing environment has been difficult. We have looked at a range of things over the last couple of years, but getting to a place that we're comfortable with given the forward characteristics of the business and it's ability to grow we have not been able to consummate one. We like Tech and Medimop very much obviously, we've done those deals. They are completely in line with the strategy that we tried to layout, and that is to nurture the growth of our core business, grow that as profitably as we cane while adding a new proprietary technology. Which is exactly what Medimop does in the key segment of reconstitution and fluid transfer, while also giving our sales the possibility to growth, in faster growing markets that is assembled devices, which of course is what Tech brings to the table.

In terms of looking at other potential acquisitions going forward, clearly one of the number -- the top items on the table for us right now, is to make sure that the integration of these does goes as smoothly as possible, and we deliver on what we have continue communicated. We continue to look at opportunistic acquisitions that complement the core. The focus there again is on novel technologies and novel approaches in the components business that could enhance our current position in that market.

So, kind of a long answer but, we like what we have done. It is consistent with what we have talked about. We've got to nail those in and grow them, but we're going to look to (inaudible) bonds that could also really complement the intellectual property, the proprietary side of the injectable portfolio.

And Steven getting back to the debt to total cap, we have -- we talk about the money we are going to repatriate under the AJCA, our view right now use that money to pay down debt.

I see, okay. And then, just a couple more questions from me, do you have any kind of guidance, or a prospective on where the share count will be for the full year, you mentioned the stock price obviously moved up, any kind of comments on that?

We have been growing the number of shares each year. This year with the employee stock purchase plan, there was a significant increase as well we have seen in the last year-and-a- half or so, significant increases due to option exercise activity. The wildcard is really how much of that will continue, and that is a function of where the stock price goes and other things. So, I can tell you it's going to go north. I would not want to venture a guess as to how high.

Okay, and then, last nit picky question from me. For your guidance, if you take the previous comments of a $1.37 or $1.47 and then you take the $0.02 to $0.05 accretion from the Tech Group the high-end of that would be at $1.52. And obviously you didn't take it up to that level, any kind of contact for how you determine the new guidance?

Well I think at the end of the first quarter looking at our sales growth, we took our guidance to the upper end of the 1.37 to 1.47 range. So, that's looking at the mix as we saw it. It was clear that we would were going to be kind of, in that mid 1.40s range. There are a couple of unknowns as we go forward obviously raw materials in product mix being the 2 things that we're looking at. We think the realistic scenario right now, as we see it with the acquisitions included, it's going to be in that upper 1.40s to low 1.50s range. So, you know we are trying to be a little consistent and like I'd said, we are comfortable with that range right now.

Okay, I'll go for one more, if you would try to break out the components of the organic growth 11% to 12%, how would you break that out in terms of price and volume?

We talked about our volume increase of with that's 6% I think it was, unit increase in the quarter. If you take out the FX, if you take out Tech, and if you take out the increased tooling orders, the increase in sales without those things in it is about 8% to 8.5%.

I think your question though Steven was directly related to organic growth in the components side. Correct?

Yes.

The majority of this volume. There is a little price and there but most of it is volume growth.

Okay, because I guess what I was trying to get at in terms of -- some of the driver for the organic sales growth (inaudible) price increases from raw materials?

Some of that is yes. But not a large component of it thus far.

So, less than a few hundred basis points?

Yes, absolutely.

Okay. So your view in terms of overall price increases-- that it's still I think, you use to talk about maybe 100 basis?

We typically do our price increases at the beginning of the year, and I think in the earlier call, we kind of, guide it to the 1% to 2% range, in some accounts, 2 to 4 but averaging down ended about 2%.

Okay. Thanks very much guys.

Thank you. Our next question comes from John Waltoser (ph) Paradigm Capital Management (ph).

Now that in the midst of having done a few acquisitions, could we review what the financial criteria that you are using in evaluating whether to do or not to do that the acquisitions? And then also talk about what degree do you expect to integrate them, and what timeframe that should be over?

Well let me talk to the second question first. As we said in our call commentary specifically with regard to Tech. Tech is going extremely well and we expect that to have that fully done by the end of the year. Tech is rather the unique because the fit with our existing strategy -- their strategy and our structure is so good that it does not require any significant degree of rationalization of facility or personnel. It just fits like a lock and a key.

The Medimop acquisition, which we hope to completed by the early part of August or in the next couple of weeks is probably the best qualifier. Again, it's one of these very neat fits in terms of a piece of a puzzle as opposed to having significant overlapping capabilities. So, again, we expect that to be done and fully in place by the fourth quarter. In terms of criteria, when we sit down and we look at potential candidates, we look at -- obviously number one the product portfolio and the fit with our existing business, and the fit with our strategic goals.

The financial parameters are -- we would like to achieve growth at a reasonable price. The key internal hurdle is the acquisition has to provide the right target for return on invested capital. We have not disclosed that number, but as we talked about even in our incentive plans it has to be in excess of our cost of capital.

And I guess, that the question would be, what do you consider as your cost of capital and what sort of timeframe should it achieve your target within?

We've always wrestled with the cost of capital, because of data and what you look at in terms of your risk free rate of return but, if you go through and look at our current debt and equity a number somewhere less than 8% or right on the order of 8% is probably in the ballpark.

And that is obviously increasing as the risk free rate of return goes up?

Right. And what timeframe should an acquisition achieve the target rate of return?

It depends on the nature of it I mean, the strategic ones like Medimop would probably be a little longer. Medimop was attracted to us because of their position in a very specific niche of the market and with the technology. And as we talked about before, in our business it is often a number of years before you get these products fully into the marketplace; you get them tested, you get them validated, and you start to achieve volume growth. So those would tend to be a little longer. For the other acquisitions that are more tactical, you're probably in the range of 2 to 3 years.

Okay, okay. That is very helpful. Thanks again.

The next question comes from Gregory Mcaskov (ph) with Lord Abbott.

Good morning. Yes, could you give us a little more color on Westar. Basically you said it was -- give us some sense of the growth rate there and what we should look for going forward?

Westar growth is probably in the -- let me think about this for just a second and get my numbers right. In terms of the unit volume process, going through, it is about 20% quarter-on-quarter. Not in terms of revenue, but in terms of the units going through.

So, it's pricing -- cut that a little bit. Make that less?

I am not sure I follow your question.

Is a price factor --?

Let me see if I can structure it the right way. Pricing is higher on the Westar, as you know, but again it is not the total component of the increase. So, to go in a linear relationship between volume increase and prices probably over region.

We price it on a package deal. A lot of these are done on value, so as opposed to what the -- a cost plus kind of scenario, Greg.

And then, with regard to the inventory bulge, I guess that has been back and forth. I know in the last quarter it did not materialize and now you are seeing it is that the point?

Absolutely. That is the point.

So, should be gone by the beginning of the fourth quarter, maybe into the completion?

We do not have a complete picture of that right now Greg, but what we're seeing thus far, and the orders we have on the books in the backlog, we are seeing that it will continue to go through the fall.

And is that the reason for the flat backlog sequentially?

(Multiple speakers)

Is that backlog include The Tech Group?

No that does not include Tech Group. That's just a core business.

Does The Tech Group have a backlog?

Yes.

Okay, are you going to share that with us the next quarter?

We are still working through it.

But, typically what is the order cycle for that, for Tech Group?

It all depends on the nature of the product that you are making. On the consumer side it tend to be relatively shorter like ours, on the pharmaceutical side it tends to be a bit longer.

Okay, so not dissimilar to your own business?

No

Okay. With regard to the repatriation of cash, are you going to use all of that to pay down debt is that the idea ?

That is our current view. I mean there is -- obviously we have got to look at cash flow needs for the rest of the year etc. But our current view is that that cash that we can call back from Europe and Asia will be used to pay down debt in the short term.

And you may do more than $70 million?

We are looking at as you know, the law allows you to repatriate not only what you have in cash but also your actual investment up to I think, $500 million or some tremendous number like that. I don't think we're thinking of that kind of level, but we have if you look at our investment in our overseas businesses, it is substantial, it's greater than $200 million.

So, in other words, you could monetize some of those?

Well you don't monetize it per se what you are able to do is, you are able to bring -- right those investments are considered permanently reinvested overseas, so you don't have to provide taxes on them under the current rules. And if you wanted to take that money back without that AJCA it would be very expensive from a tax perspective. So, what we're looking at is, we are saying gee under the AJCA, you get to take the money back at a reduced income tax rate, so we're looking at it. We have no plan right now to do any of that, but it is something we are looking at the rest of the year.

And then, finally, with regard to the sales growth, you went through some of the product areas a little bit quickly which ones were weaker than expected or weaker than average? You emphasize the ones that were stronger?

We had what we call our advance coating products where the primary decrease in what we saw during the quarter.

And that was negative?

That was a negative increase.

I think it's very moderate, if anything it was flat as the prior year. And again it's the work done in this inventory bulge from mid-'04

And that's the inventory bulge, the main part of it?

That is what it is. That was due to the raw material changes somewhat declare which you recall.

All right very good. Thank you.

Thank you our next question comes from Arnie Ursaner with CJS Securities. .

Can use a little bit more help on the SG&A line both in the quarter and going forward since again we only had Tech Group in there for a little bit, can you give us a breakdown of a couple of things. One, if you look at the actual dollars involved in SG&A in the quarter, can you give us a sense of how much The Tech Group contributed to that as a starting point?

I don't know that we give those -- that kind of level of detail, but it was about $1million.

So should we assume that on a go forward basis incrementally would be another $2 million or so each of the next several quarters?

2 million, maybe a little north of that. I don't remember what there -- I think it would be a little north of that, Arnie. I would say for a quarter it would probably be closer to 3.

Incrementally going forward.

Incrementally going forward.

Got it. And so we basically have 1.6 million -- 400,000 basically that's somewhat are non- recurring. Can you give us again your view on the employee stock purchase plan, how much of that will be more recurring?

That is the interesting point. For this year, the way that the plan works is that you have 2 traunches. The first half of the year which ended in May I believe, had a very substantial participation. The rule is that you could only participate up to $21,000 or so per year. Most people have maxed out under the plan. So, we believe that the second half, which would come through in December, would be substantially less than the amount you're seeing here for this one. The other thing we're doing is, we're looking at the plan in total to see if there are any modifications that we might want to make to the plan on a go-forward basis.

Okay, again I'm a little unclear how we sum this up. so, if we eliminated the 1.6 -- again I - you indicated you had a million of SG&A from the acquisition so, if we are adding an incremental 3 on top of that?

No that is including that million. So, each quarter if you look at it it's a million a month or so, it would be 3 million a quarter rough numbers.

So is it fair to say your pro forma SG&A expense going forward is around 33 or 33.5 is that about the ballpark kind of number on a go-forward basis?

Hold on, Arnie. I think you are probably a little high on that. I do not want to go ahead -- we traditionally have not going into that level of detail.

Arnie Ursaner But you're also not getting as help on the operating margin line. So we have to kind of get there?

Yes I understand.

So more in the 32.5, 33 kind of range?

I don't think It's going to be that high.

Okay. Going back to the incremental depreciation expense we are running through for Kinston, other than just the D&A line, where else will that be running through the P&L?

Say it again? On Kinston in particular D&A increase?

Yes.

It's coming through as you would imagine most of it is in the plant, but there is a piece that sits in the - Is any of it sitting in SG&A? No. It's all in the plant I'm sorry. It would all be in the gross margin line Arnie.

Okay. Now that we have fully integrated Tech Group again, is it fair to say 100 basis -- again, I'm grappling with 2 issues. Obviously Tech Group is a lower gross margin, but most of the incremental adds that you're doing and biotech and other things are dramatically higher gross margins and Westar is dramatically higher gross margin. Summing the 2 up, I'm trying to get a better feel as we think out 18 months to 24 months where the gross margin should settle out? I know you don't give formal guidance, but we're weighing 2 pretty distinct factors here. Could you give us a little bit of help going forward where that ought to settle out?

I think you have the right way to look at it. You got the core business, which we talked about 2 things. You talk about the demographic increases, increases in biotech and continued increased usage of Westar and advanced coatings. Those things will generate positive growth to margin. Working the other way in the core business is the increases in raw material prices, labor, and overhead working against us on that.

On the Tech side, we know that their margins are traditionally less than our - than in the core business, and we also know that in activating lean initiative across all of our business units, and we expect to be able to generate operating efficiencies out of that. So that will be a positive to gross margin. There are so many --I guess what I'm trying to say Arnie, that there are so many variables, it is very, very difficult us to give you-directionally it I think, on the core business certainly directionally we expect margins to increase before acquisitions.

When you add The Tech Group to that, it brings a down some and where that exactly lays, we have not done the analysis.

We will be in a better position towards the end of the year to provide more color that Arnie. Like the mix issue in our core business between the higher margin biotech and Westar products and the standard products driving margin for the year. Tax margin is going to be driven by business mix in terms of tooling and molding services, and yet there are 2 other factors under moldings that come into play as well, which is a mix of consumer versus pharmaceutical, and the mix of internal develop verses mold transfer business coming in.

So, at the end of the day as some of the higher margin projects come into the commercial queue over the next couple years, that margin is going to increase, but I think we will give you a little better flavor later on this year.

Thank you.

[Operator Instructions].

At this time I show no further questions.

Thank you very much operator. In assessing the outlook for the second half of the year our results during the first 6 months have set the stage for a good operating year. Our order both book for the remainder of the year looks very good, due to substantial percent of plant sales currently in the production system.

We now believe our overall sales growth will for the full year will approach 8%, excluding currency and acquisitions, and that our earnings will be at the upper end of the guidance provided in February of 1.37 to 1.47 per dilute share from pre-acquisition operations. Taking into account the acquisition of The Tech Group and Medimop, we now believe earnings will fall at the upper end of the range of $1.43 to $1.51 per share.

As I mentioned in our April call, although we are optimistic about the year, there are still some factors beyond our control that warrant observation. We continue to experience raw material price increases, on petroleum based materials, and although we have been able to largely offset these through a combination of price increases, contracted price escalators and expense controls, they are likely to be further increases for selected materials as 2005 progresses.

Also, as we previously discussed, the second half of our year has historically been a little bit more difficult to forecast due to the summer holiday plant shut downs in Europe, and customer production planing adjustments towards year end. Overall, I'm very pleased with the Company's excellent start of the year through the first 6 months our sales have grown ahead of expectations, and we have strengthened our products and service portfolio through acquisition of Monarch Labs, The Tech Group and Medimop.

Overall, the business is in a very strong position to achieve it's full-year target of those previously discussed, the next 6 months will not be without a series of challenges. I am very confident that West is well-positioned to not only address these challenges, but to also generate sustainable revenue and profit growth in our core components business, and The Tech, and Medimop device businesses over the next several years. Thank you very much for your time this morning.

This concludes today's teleconference. Thank you for your participation and have a great day, and you may disconnect at this time.