西式醫藥服務 (WST) 2005 Q4 法說會逐字稿

Welcome to West Pharmaceutical Services fourth quarter and full year 2005 earnings call.

All participants will be able to listen only. Following today's presentation there will be a formal question-and-answer session.

Today's conference is being recorded. If have you any objections you may disconnect at this time.

Now I will turn the meeting over to Ms. Julie Wang of Financial Dynamics. Ms. Wang, you may begin.

Thank you, Frances. Good morning, everyone, and welcome to the West Pharmaceutical Services 2005 fourth quarter and 2005 [inaudible] results conference call.

As you know, we issued our results this morning. The release has been posted on the Company's Web site located at www.westpharma.com. If you have not received a copy of this announcement please contact Financial Dynamics at 212-850-5600 and a copy will be sent to you immediately.

Before we begin I would like to remind that you certain statements that may be made by management of the Company orally may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historic or current facts.

They use words such as estimate, expect, intend, believe, plan, anticipate, and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or condition. We cannot guarantee that any forward-looking statement will be realized, if known or unknown risks and uncertainties materialize, or if underlying assumptions are inaccurate, actual results could differ materially from past results and those expressed or implied in any forward-looking statement.

For a non-exclusive list of those factors which could cause actual results to differ from expectations please refer to the factors listed in today's press release. The Company assumes no obligation to update forward-looking statements as circumstances change.

Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company's 10-K, 10-Q and 8-K reports.

The call is being recorded on behalf of West Pharmaceutical Services and is copyrighted material. It cannot be re-reported or rebroadcast without the Company's express written 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.

Thank you very much, Julie, and good morning, everyone. We appreciate your taking time to join us for West's 2005 year-end conference call.

With me today are Bill Federici, West's Chief Financial Officer, and Mike Anderson, our Treasurer and primary Investor Relations contact.

In looking back over the last 12 months, 2005 was a very strong year for West, and I'm very pleased with the Company's operating and financial performance.

We completed a range of strategic objectives to better position the Company for sustainable growth. We managed to again produce a year of record sales, operating profit and earnings.

As we look forward to 2006 and beyond, West is a very different company than we were four years ago. Sales have grown significantly from $376 million at the beginning of 2002, to just shy of $700 million at the close of 2005.

We have expanded and upgraded our manufacturing operations in Europe, North and South America, and in Asia through our Japanese partners, Daikyo.

During this period, productivity in the core injectable components business nearly doubled as measured by sales per employee. However, at the beginning of 2005, we faced a range of challenges.

The new Kinston facility was just beginning to ramp up to full production but was not running efficiently or profitably. It was also unclear how the raw material changes in our Teflon and B-2 product lines and subsequent surge orders during 2004 would flow through the year and affect our financial performance.

Following the evaluation of a range of options for our drug delivery unit in late 2004, we sold the drug delivery group in February and also our Phase I clinical trial business to Covance in August.

As 2005 progressed, we completed three acquisitions that strongly complement our core manufacturing business. Monarch Labs to assist our understanding of drug material stability to support customer regulatory filings, the Tech Group to better position West in the growing device market, and Medimop Medical Projects with a proprietary range of products to aid reconstitution and fluid transfer.

Taken collectively, these actions have refocused the Company on our strengths, developing and manufacturing components and systems for the pharmaceutical, medical device and consumer markets. In addition, our growth prospects for the coming years have been significantly enhanced by the range of new products and services these companies bring to the West portfolio.

And finally, with the Kinston recovery and production restart, as well as the integration of our recent acquisitions firmly behind us, we are well positioned to generate continued revenue growth in the low to mid double-digit range for 2006 and beyond.

From a financial perspective, 2005 was a good solid year with revenues exhibiting strong growth, increasing from 541.6 million to 699.7 million. Resulting earnings for the full year from continuing operations were $1.39 versus $1.09 for 2004.

Our operating cash flow was $85.6 million, also a record year, and we finished the year with a debt to total capital ratio of 45.4%.

Overall, the financial health of the Company is excellent. Bill Federici will review the details of our financial performance in a few moments.

We also finished out 2005 with a very healthy backlog of approximately $183 million, which has since grown to $206 million at the end of January. While part of this growth is due to blanket orders placed by certain customers for the full year and to build inventories in advance of planned customer shutdown, a portion also represents strengthening demand for key products such as insulin packaging components, prefilled syringe components and trim tech IV closures in Europe.

Finally, subsequent to December 31st, two very important events took place. First, both the EMEA and FDA approved Exubera inhalable insulin on January 26th and 27th.

Exubera is thought by many to offer great potential in treating both type 1 and type 2 diabetes and we expect it to be a major contributor to our Tech Group sales and profitability.

The second event [inaudible] as the West settled a major Kinston-related lawsuit with the Company's contribution limited to insurance deductibles.

Looking at the Pharmaceutical Systems segment, 2005 finished on a very strong note, with sales in the fourth quarter increasing 9.5% to $136.4 million and 11.9% for the full year, to 538.3 million. Revenue growth for the year was driven primarily by strong demand in Europe for a range of products including pharmaceutical closures and seals, components for insulin packaging, closures for IV bags, and [CLOTED] coated plungers for prefilled syringe systems.

We currently believe that this strong demand experienced at the close of 2005 will carry over into the first half of 2006.

In North America, overall sales gains were more modest in Europe due to the negative impact mid year of customer ORDER slowdown through Teflon and B-2 as they worked off excess inventory related to the raw material changes that occurred in 2004. However, this decline was offset somewhat by increased demand for laboratory services, tooling, disposable medical device and diagnostic components and Westar treated product.

As we begin 2006, we believe the majority of the excess inventory levels for coated products have now been worked down and that we will see a return to a more normalized demand pattern throughout the year.

From a pricing standpoint, we have been able to obtain a wide range of price increases in both Europe and the United States. That, barring any unforeseen events will mitigate forecasted raw material increases budgeted for the year.

Coupled with our lean initiative to improve manufacturing efficiencies and an improving product mix, we believe we will see improvements in our gross and operating margins by year-end.

Turning to the Tech Group, sales for the Tech Group segment were $61.4 million in the fourth quarter, an increase from 19.3 million in the prior year, with the increase fully attributable to the acquisition of Tech. For the full year, segment sales were $170.1 million, 98.9 million of which came from the Tech acquisition, and 71.2 million which came from the pre-existing Quest Device Group.

Overall growth in this segment was driven by a wide range of programs including surgical devices, insulin pens, contact lens casting cups, and consumer closures. While there are a broad range of new programs ramping up simultaneously within Tech, clearly one of the primary drivers of revenue growth for Tech in the future will be sales of devices for the recently approved Exubera product.

In 2005, West recorded revenues of approximately $3.5 million associated with manufacturing, engineering and validation services, in support of the device.

It is anticipated that volumes for the device will ramp up by year-end. However, a range of risks are still present that could impact sales volume, such as actual launch timing, patient acceptance, physician prescribing habits and eventual insurance coverage.

I'd now like to turn the call over to Bill Federici for a more detailed review of our 2005 financial performance. Bill?

Thank you, Don, and good morning, everyone.

We have included with our earnings release a table that breaks out our reported results by segment and details the impact of our acquired businesses. The release also includes a table which breaks out our expected 2006 sales in margins by segment. So this table should help you follow along with my comments today.

As noted in our release, West reported fourth quarter 2005 income from continuing operations of $12.9 million, or $0.39 per diluted share versus income from continuing operations of $7.3 million, or $0.23 per diluted share recorded in the fourth quarter of 2004.

The results of the 2004 fourth quarter contained Kinston accident recovery and legal costs of $2.5 million, expenses of $900,000 associated with our U.K. plastics plant shut down, and then $2.1 million favorable impact of two discrete tax items. The effect of these issues netted to $0.02 of additional costs that was contained in our 2004 fourth quarter results.

The Company's core Pharmaceutical Systems division continued to perform well in the fourth quarter with sales of $136.4 million, 6.6% above 2004 fourth quarter sales excluding the impact of acquisitions. If you also exclude the unfavorable effect of currency exchange in the quarter, sales in the division grew by 10% over the prior year quarter.

International revenue growth at 19.4%, excluding exchange effects and our acquisition impact, was driven by increased demand for IV stoppers and prefilled injection rubber and metal components.

Much of the European growth was in the pharmaceutical market in support of insulin. In addition, much of the added volume in Europe was coated with West's advanced FluroTec product.

Domestic revenues in the division declined versus the prior year quarter as customers continued to work down inventories of coated products built in late 2004. The domestic product sales mix was unfavorable in Q4, primarily from Teflon-coated products by approximately $5 million.

As we indicated in our prior call, we expect a return to normal order levels during 2006. Domestic demand did continue to increase in the fourth quarter for the Company's core pharmaceutical products and high value Westar products.

The Tech Group division, which includes West's former plastics unit, achieved sales of $61.4 million in the quarter, substantially greater than its prior year quarter, due to the $42.5 million of sales generated by the recently acquired Tech Group. The acquired business increased sales by more than 30% over those achieved in Q4 2004 under its prior ownership, due to a variety of new programs established with existing as well as newly acquired customers, and increased volumes in pre-existing programs.

Sales in the division's previously existing plastics unit declined by nearly two percentage points from the prior year quarter principally due to the prior year closure of the units U.K. production facility resulting in the transfer of certain customers to our European farm systems operations.

As noted in our release, consolidated gross profit margins for the quarter were 26.5% versus 26.9% margins we achieved in the same quarter of 2004. The decline is largely due to the effect of relatively lower margins generated in the acquired Tech Group business, which reduced overall gross margins by approximately four margin points.

In the Pharmaceutical Systems segment, gross margins increased over the prior year quarter by 3.2 margin points, with the improvement in both Europe and North America. Margins improved in Europe mostly through our ability to more than offset raw material and utility cost increases with price increases, labor and yield efficiencies and improved overhead absorption.

We also had a modestly favorable sales mix in Europe versus the prior year quarter. In North America, gross margins improved by nearly five margin points over Q4 2004.

Gross profit impact of the Q4 unfavorable Teflon sales mix of approximately $1.5 million, and raw material, labor and overhead increases of approximately $1.2 million, were more than offset by price increases and plant efficiencies during the quarter. North America's improvement was also due to a reduction in worker's compensation costs, and also because Q4 2004 margins included 2.2 million of Kinston accident-related startup costs.

Tech Group's margins continued to be adversely affected by the ramping up of key programs such as Exubera. Actual shipments of Exubera devices were minimal in Q4.

Reported operating profit for the combined business divisions was $25.2 million in the quarter compared to 19.8 million in the year-earlier quarter. Increase for the quarter was largely due to the strong operating results achieved by both Europe and North American operations, and the $2.4 million of operating profit generated by Tech Group, Monarch and Medimop acquisitions.

Consolidated selling, general and administrative expenses increased by $4.4 million in the quarter versus the prior year quarter. Virtually all of the net increase relates to the SG&A expense of our Tech Group and Medimop acquisitions.

Other increases over prior year include increased compensation costs including the expense associated with expensing of stock options. These increases are partially offset by $3.1 million decrease in the cost of director and employee stock-based compensation due to the quarter four decline in the Company's stock price, and a reduction in costs associated with the Company's long-term restricted stock incentive plan.

As a percentage of sales, Q4 2005 SG&A expenses of 16.6% decreased by 3.1 percentage points from fourth quarter 2004 levels of 19.7%.

Net interest expense was $3.5 million in the quarter, $1.9 million higher than last year's fourth quarter expense of $1.6 million. The increase was due to increased borrowings to support the Tech Group and Medimop acquisitions, and an increase in borrowing rates.

The Company's effective tax rate of 20.3% for the quarter was higher than the prior year quarter rate due to the 2004 discrete items previously discussed.

Earnings of affiliates increased by $200,000, or $0.01 per share due to increased sales of products produced by West's Mexican affiliate.

Briefly turning to full year results, we reported 2005 income from continuing operations and $45.2 million, or $1.39 per diluted share versus income from continuing operations of $33.5 million, or $1.09 per diluted share reported for the full-year 2004.

Consolidated sales grew by 28.7%, excluding exchange effects to $699.7 million, aided by sales of 106.6 million in our three acquired businesses. Excluding the impact of acquisitions and exchange, full year sales grew by 9% over 2004 sales.

We improved gross margins in our core Pharm Systems business units by 1.1 margin points to 31.6% driven by increased sales of our advanced coating products, Westar processing of product and increased plant efficiencies.

Full year selling, general and administrative expenses increased by $15.1 million versus the prior year with $9.8 million, or 65% of the increase related to expenses incurred in the acquired companies. Full-year consolidated operating profit grew by approximately $24 million, or 50% excluding exchange.

Full year interest costs were also substantially higher at 12 million versus 7 million in 2004, due mostly to the increased debt taken on to support the Company's acquisition activities and to an increase in interest rates.

The full year effective tax rate on continuing operations was 28.8%, which includes $1.5 million, or 2.5 percentage points due to the repatriation of foreign earnings of approximately $170 million under the AJCA.

The company's cash balance at December 31 was $48.8 million and working capital totaled $111.8 million.

Cash balance principally resides in Europe. We anticipate utilizing a majority of that cash to pay down debt in the first half of 2006.

Debt at December 31st was $281 million, and the debt to total invested capital ratio at year-end was 45.4%, a slight increase from the last quarter end, and significantly higher than the 34.8% at December 31, 2004. The increase was primarily attributable to funding our 2005 acquisitions.

In early February 2006, we initiated the refinancing of our $100 million private placement notes with lower fixed rate notes and expect to reduce annual interest costs by approximately $2.5 million per year through 2009. Operating cash flows were $32.3 million for the quarter and $85.6 million for the full year.

Capital expenditures during the quarter were $21.5 million and for the full year the Company made capital investments of $54.1 million, including approximately $8 million of Cap Ex associated with our Tech acquisition, with 83% of the full-year capital focused on normal maintenance and replacement upgrades and manufacturing equipment and tooling mostly in North America and Europe. We also expended capital during the year on capacity expansion projects at our Germany, Denmark and Serbia facilities.

Our order backlog is significantly stronger at December 31st of $183 million, compared to the prior year-end backlog of $153 million.

Turning to guidance.

In this morning's earnings release, we detailed our guidance for 2006. We expect our 2006 earnings to be $1.60 to $1.70 per diluted share, based on expected sales of between 810 million and $830 million.

The release broke out those projected sales and the gross margins between our core Pharm Systems segment and our Tech Group segment.

We expect our Pharm Systems segment will achieve gross margins of 32% for the year. The increase in margins is expected to come from a favorable mix of sales and better plan efficiencies.

Anticipated 2006 price increases, lean activities and plant deficiencies are expected to offset the expected increase in raw materials, labor, energy and overhead costs. We expect our Tech Group gross margin will improve by nearly three percentage points for the full year 2006, due to a favorable product mix including sales of Exubera devices, and higher plant utilization.

We believe that sales of Exubera devices and components will generate between 10 and $0.17 of aftertax operating profit for the full year 2006.

Selling, general, and administrative expenses are expected to increase in 2006 due to an approximate $10 million increase from the inclusion of Tech and Medimop acquisitions for the full year versus partial year expenses included in 2005.

Increased innovation spending of approximately $5 million and increases in our pension expense of approximately $4 million due to lower expected returns on assets, and lower discount rates.

We expect our effective interest rate will increase by approximately 50 basis points, as a result of a full year of acquisition debt levels offset by lower expected interest rates, due to the anticipated refinancing of our senior debt.

The 2006 effective tax rate is expected to be approximately 30.5%.

Our annual 2006 earnings guidance does not include the effects of any significant additional increase in raw material or energy costs, the effects of currency valuation changes, particularly the Euro, which is reflected in our 2006 estimates at $1.22 per euro, or the anticipated first quarter $6 million pretax charge related to the early retirement of our senior debt.

We do not provide guidance for any interim periods. However, historically, our business has been stronger in the first half of the year. We anticipate this trend to continue in 2006.

I'd now like to turn the call back to Don Morel. Don?

Thanks, Bill.

As Bill just summarized, we believe the full year sales for 2006 should fall between 810 and $830 million. This forecast is based on continued growth in the Pharm Systems segment of 6 to 8% and estimating the full year impact of our acquisitions.

As in past years and given historical order patterns, the first half of the year should be stronger than the second half, when we typically experience uncertainty due to changing customer inventory strategies and summer plant shutdowns in Europe. At this point, however, order book is very healthy and in general, our plans are operating at a very high level.

In terms of revenue growth, we expect revenue in the Pharm Systems segment to be continue to be driven by demand for insulin packaging and delivery systems, coated closures and reconstitution systems for the biotech segment, Westar treated products and IV and prefilled syringe components in Europe.

Growth in the Tech segment will be driven by organic growth in existing manufacturing programs in addition to new programs coming online and ramping up throughout the year, such as Exubera devices.

In terms of management's focus for the coming year, this will be in four different areas. First, executing our business strategy relative to our core business, delivering anticipated growth from our recent acquisition, improving our gross and operating margins through our lean initiative, and finally, investing in innovation.

Our current plan calls for an investment of $5 million in excess of R&D spending in 2005 to accelerate development of a wide range of new products and processes, including but not limited to the next generation of Westar, novel coatings, new manufacturing technology, and automation technology to improve product quality. In short, the steps we have taken during the last three years have set the stage for a period of sustainable growth in terms of both sales and earnings.

Thanks very much for your time today. This concludes management's commentary. We'd now be pleased to answer any questions you might have.

[OPERATOR INSTRUCTIONS] Our first question comes from Arnie Ursaner of CJS Securities. You may ask your question.

Hi, good morning.

Good morning, Arnie.

Can you expand a little bit, obviously you're talking about increasing your investments in infrastructure and new product development, can you give us a little more feel for where these investments would go? And could you specifically address where you stand on a China expansion?

In terms of the new products, the bulk of the money is going to go into product line extensions for things where we're looking at the next generation. As I mentioned, Westar where we'll be moving from a product that's currently ready to sterilize to a product that's ready to use in the marketplace.

We also expect investing in the next generation of coatings for the biotechnology segment which is very important.

And also in terms of manufacturing technology into systems that can be used to automatically inspect and take the human element out of quality control, as well as new systems for the actual manufacturing itself. So fundamentally, it covers the process from mixing the rubber all the way through final trimming and processing. So it's a fairly comprehensive program.

In terms of China, we continue to evaluate alternatives on the ground there. We have a couple of options that we think are most attractive right now and we're continuing to vet those and that process will continue throughout the year.

But as we've said in our prior calls, we want to make sure that that process is exhaustive and we're very comfortable with the final decision that we make. So that will be continuing throughout the year and we'll keep you updated as we go.

And just want to clarify something on the international sales gain, you mentioned you had a 19% sales gain in, well, you didn't use the "surge activity" per se, it certainly sounded like there may be some language that you had some pre-buying in Europe in anticipation of a shutdown.

We think that that's actually part of the backlog, Arnie. We know that several customers are ordering ahead, which is good news, because it's in anticipation of actually increasing their production capacity where they're going to need to shutdown for a longer period than normal.

I guess the biggest question I'm still grappling with, two questions related to margins. One is, when I think you acquired Tech Group you indicated the operating margin on it would be similar to your core business and now that it's been there for a few quarters, we're materially below. Can you comment on what is holding back margins there? And --

Let me clarify, Arnie. I don't think we ever said that they would be equivalent to the core on the operating line.

What we said was that there's certainly going to be less on the gross line, but their infrastructure, their SG&A is less as a percentage of sales. But it still doesn't equate to an equivalency on the operating profit line.

We do see, as we said in the release and I said in my commentary, we do see some expectation of increasing the margins. Obviously Exubera, sales of Exubera devices will help that as well as other programs, and better throughput through their factories. So we see a nearly three percentage point increase in their gross margins coming through in '06.

Two more questions.

One is, you finally are discussing the potential contribution from Exubera. We know in the past you "included Exubera in your guidance" and since there's no change in the revenue, I'm assuming it's similar to what you had thought. Since you're only going to have it for a portion of the year, what do you think the contribution will be in '07?

I think we're going to have to defer on that until we see how the launch goes and what happens in the marketplace in terms of the way it's being prescribed by the physicians and the frequency, as well as patient acceptance. The biggest thing is going to be the acceptance by the diabetic populous.

Are you assuming you have it for half the year? I mean you are making an assumption, what is it?

We assume the launch around the mid year, Arnie, but there are products that we're selling, we're delivering them, devices right now, in advance of their launch.

Okay. I'll jump back in queue. Thanks.

Okay.

Our next question comes from Steven Postal of Lehman Brothers. You may ask your question.

Thanks. Good morning.

Good morning, Steven.

I just wanted to clarify, I think last quarter, you talked about 5% to 6% price increases, obviously, the sales guidance hasn't changed so is it fair to assume that those are the price increases that you got for '06?

You have to be careful. I think what we've got into is that on average, those would be the increases but they'd be applied to a smaller revenue base because it would be primarily the contracts that were coming up for renewal at the close of '04.

Okay. But you are pleased with whatever price increases you got?

Yes, what we've been able to put in those increases, those increases are sticking and they are effectively right on target with where we expect it to be so we're very pleased with that.

Okay. Now outside of Exubera, you can talk about how the Tech Group has performed relative to your expectations?

Overall, I think on the revenue side, we're pretty pleased. In terms of their contribution, we're a little bit behind where we thought we'd be.

What Tech is doing, and the pace of their growth, and obviously is very complex, we've got a range of programs, including Exubera, that have been in development for the last couple of years, and they are in some respects coming online all at once. You know, it's a challenge you'd like to have but the reality is that the complexity of the products and the ramp-ups are challenging.

You know, the good news is we think we're getting those under control. We're very optimistic about the accretion from Tech this year, so overall, I'd say we're very pleased.

All of the back office integrations effectively were complete by the end of the year as we expected. Now it's a matter of executing against the production plan.

And I know that you previously said that in terms of synergies with your existing device business you aren't looking for any immediately. You can just update us on your perspectives there, short-term or long-term percentage--

I think that's still pretty much true. If you recall, with when we talked about the acquisition, you had a business mix that was 75 consumer, 25 health care for West and 75 health care and 25 consumer for Tech.

The synergies that we expected early on simply would come from advantages and raw material purchasing due to increased volumes but overall, I think things have panned out the way that we expected. So we're pretty pleased with where we're at.

Okay. And Bill, could you just repeat, I think you mentioned the cash and the debt numbers. Could you just repeat them?

Sure.

The cash at the end of the year was $48.8 million and the debt was $281 million. Debt ended up being 45.4% debt to equity.

And can you talk at all about guidance for cash flow and capital spending for '06?

We haven't so far. I can tell you, what we've basically said is normalized Cap Ex for the core business will be somewhere in that 45 to $50 million range. And Tech's normalized Cap Ex would be somewhere between 5 and $20 million, and that really depends on the, you know, Don talked about the ramp-up of programs, obviously, as you're ramping up programs you're bringing on a lot more of the equipment to satisfy that demand.

So it's really a -- between Tech and normalized and the core business normalized, you're talking somewhere in that mid-60s kind of a range. And that's where we expect to be for '06.

In terms of cash flow generation at the operating level, we certainly expect it to be modestly better than what we had in '05.

Okay. Thanks very much.

You're welcome.

Once again, to ask a question, please press star one on your touch-tone phone. One moment, please. Arnie Ursaner of CJS Securities, you may ask your question.

Hi.

I want to try to focus a little bit on the gross margin guidance in Pharmaceutical for the upcoming year. In looking at the acquisitions that you're now including in there, based on the operating profits which you've given us, they appear to be dramatically higher margin businesses, plus you're also -- the areas of growth are all some of your highest margin businesses, and you've eliminated some of the inefficiencies related to Kinston and other issues.

I'm a little surprised you're only talking about a 32% gross margin. It seems to me it should be higher given the dynamics you're referring to.

You're right on with the dynamics, Arnie. You have it exactly right.

One thing you got to remember is that Medimop and Monarch are relatively small compared to the base that you're talking about, so to move the meter substantially, you really have to have, you know, a significant increase. We do expect to see increasing efficiencies coming through the plants, and we do expect to see -- we've seen it in the backlog, the increase in demand for our coated products, the Westar processing, insulin's a big driver.

We really -- we think those things are all going to have an impact on our margins in the core business, but to just suggest that Monarch and Medimop are going to move the meter substantially is probably over-stating their import based on the sales, the relative size of their sales.

Well, again, some of the other products have you in that, we believe, are in the 40 to 50% gross margin area, so it seems you should have a lot more room there.

I guess the question I'm grappling with is, obviously in '05 you got clocked by raw material costs and the inability to recover them or the unwillingness to get it back from your customers. When you went into these year-end negotiations, did you either attempt or have you changed the formulas under which you price?

Are you now trying to not have annual prices that lock you in and give you no ability to recover raw materials? Have you changed the --

Just to maybe step back a second. On the core Pharma Systems business, about half of the sales are under contract. And those are, as we've suggested before, multi-year type contracts, and those have prescribed in them a mechanism to increase price, through either -- most of them through a PPI inflator.

The rest of the sales in the Pharm Systems business are either on the, you know, through customers purchase orders or through a spot market mechanism. But what we've seen is that, you know, the ones where we do have contracts, long-term contracts, you know, we abide by the contract, and we work with our customers as we see those increases coming through, you know, the contract basically allows us to pass it on in the form of a PPI.

So you were not able to change any of the mechanisms to prevent this issue going forward?

Unless we're going to change the contracts, you know, this is kind of an historical way we've done business with these customers.

You have a lot of one-time items you're referring to here like worker's comp. Will there be any ability, will it be spelled out in any other document or is there any way we can get a better feel for some of these one-time items?

Sure. We can try to help you try to understand the ones that you need to understand.

The worker's comp was a small number. It's not a large -- I think it was about $700,000 affecting the core business.

Okay. And the impact of the stock price comp issue, what was the change there?

Our stock price went from are, at the end of the third quarter was about 29.67 down to 25.03 at the end of the year. That $4.60-some decline translates because of the way our plans work, translate it into lower expense. The total of that was about -- I think was about 3 million roughly, Arnie.

Okay.

That's a pretax number, obviously.

Got it.

One other item. In your breakout for '06, you're presenting your '06 in a way that actually is very good in helping people get a better feel for the upcoming year by segment, but can you give us a better feel for things, tooling and development for example, hurt your margins severely in Q3.

What was the full year '05 tooling and development in Tech Group because that's a big number that hurts you?

The revenue in Tech Group or the margin?

The revenue for that. And I'm assuming again it was still basically minimal if any margin.

My recollection of that number, Arnie, hold on, let me just check one thing really quick. For the year, I have it for the year, I don't have it for the quarter, Arnie.

The year is perfect.

The year was about $24 million.

Okay.

That's the sales number.

Correct.

And that's obviously very difficult to predict on a go-forward basis because you're basically responding to customer demand.

But typically, the pattern is once have you tooling it will eventually lead to some additional revenue?

That's correct. You view tooling as sort of the price of entry to the business.

Exactly.

Okay.

You have a number in here that kind of is very important to me, it slipped through the cracks. Your acquired business in the time you owned them showed 31% growth. Can you expand a little bit on that as to the breakdown of the 31% growth in your acquisitions?

And moreover, if you can give us an annualized number, if you have it, for both Medimop and Tech Group?

We haven't gone out with a number on -- I mentioned the Medimop number is small. It's insignificant.

The growth you're talking about is versus the prior period when we didn't own them in Q4 '04, and that was about $30 million versus the 42 when we owned them which is that 30% increase.

But that growth is really being driven, Arnie, by the ramp-up of the new programs. I mean when we completed the acquisition of Tech, they really were in the process of beginning to commercialize a lot of programs that have been in development in kind of the '03-'04 time frame. So what you're seeing is organic growth out of those programs going commercial.

Well, we had built in 10 to 12% growth organic for Tech Group, kind of consistent with where it had been historically. It sounds like it's much faster right now. What growth rate are you assuming for Tech Group in '06?

I think we're still kind of in that mid teens range.

Absolutely. Absolutely, Arnie. And just so you have a number for Medimop, the Medimop sales for the full year, just so you get some sense of size, we're only -- for the time we owned them, were only $4.4 million.

Right. But what would be the annualized sales from Medimop been?

Well, if you take that, we owned them for five months so you figure 8 million, $9 million, that kind of a range.

And you were going to hopefully expand the growth of this by controlling the distribution and eventually the manufacturing. Are those steps you are taking?

Yes, what's going to happen is that many of the systems are actually add-ons to the package that the manufacturer will distribute. So whereas West, for example for a lyophilized drug would sell a lyostopper a seal and a button, the sales point is to include one of the Medimop reconstitution systems as part of that package. So we're still attacking it that way.

We're in the process of looking at where demand is going to occur, principally, and that likely is going to be Europe and the United States. But the manufacturer of the Medimop systems is a fairly direct integration for us, either into a tech facility, or one of our facilities in Europe.

Okay.

One of the negatives that you had a sell through or managed through has been the FDA and products not getting through the FDA in kind of an orderly manner, much slower process. You can give us a feel for how many drugs you were designed into or are a part of in '05?

And sitting here today, obviously, if a product is going to come through, you're designed into it in '06 and '07, can you give us a feel for the number of drugs?

It's actually pretty hard to do. I think if you took a rule of thumb and looked at the market share as we've talked about, you know, probably seven out of ten is not going to be a bad estimate.

The truth of the matter is, unless our customer chooses to tell us, we honestly don't know because we get a letter of authorization request from the FDA to review the DMF but it will not necessarily mention what application it's referring to.

Thank you.

Thanks, Arnie.

Our next question comes from Gregory Macosko of Lord Abbett. You may ask your question.

Yes, thank you.

Good morning, Greg.

Could you talk a little bit more about the stock compensation, the impact? Should we expect a similar swing in the stock price on a quarterly basis to have a similar impact on the corporate costs?

It's basically, you know, if the stock price goes up we incur more expense in our comp program. That's just kind of the way of the world.

Right. But you have not, there's been no change or no contemplated change in the incentive plan that you have in place?

Greg, these were put in, the long-term incentive plan was put in in 2004, and the stock option rules changed in terms of expensing of those options in '05, January 1st.

Okay.

And then with regard to the Americas, you mentioned that they were flat on the year. Remind me again what your expectations are for Americas in the Pharmaceutical area particularly?

I think they're probably going to follow the general guidance. We'd be in that kind of mid-level single-digit range.

North America in 2005 was disproportionately impacted by the slowdown in the Teflon and the B-2 orders. So as a result, their growth was very modest, low digit, over the prior year in '04. But going forward, it's likely that they'll achieve that kind of six, seven, range, depending on demand.

Okay. Good.

And then the U.K. situation, that manufacturing is moving, being transferred to the continent?

It was. It was, a part of it was transferred over to our Germany facilities.

And that's all in place and running smoothly at this point?

It is.

Okay.

And with regard to just generally speaking the SG&A line, are there any particular costs in any of the product ramps or anything that you're kind of looking at it in '06 that will raise or lower those in any particular way?

Yes, I mean we talked about R&D spending of about $5 million. That will be lumpy. I mean that's, you know, a number that we'll spend throughout the year as we need to.

The pension expense increase that I talked to of $4 million is going to be spread pretty much throughout the whole year, you know, the actuaries give us that number and we expense it over the period. And the 10 million of additional expense that will come through from Tech and Medimop will pretty much be ratable over the year as well.

And so, and if I go back to Arnie's question about tooling, you said tooling was a 25, $6 million in '05?

24 for Tech. There was some in the core business as well.

I mean but on a normalized basis, are we saying that's going to 35, but I mean how fast are you expecting that to grow?

Well, it's not to aim for it to grow, Greg. You want it to grow, but it's very spotty because it all depends on customer initiated programs.

So unlike the West core business where we've got a program to replace and replenish tools on a regular basis because they wear out, within Tech's operations, all of that demand is customer pull. It's customer driven. And that's absolutely impossible to predict.

Okay. But you're expecting some fairly decent growth in that group, do I understand that correctly?

Yes.

Okay. And that's going to have a, I would assume, a dilutive effect on gross margin?

It does. It does.

Okay.

And that's, you know, part of the equation.

Okay. Yes. Just want to understand that. Thank you very much.

Thank you.

Once again, to ask a question, please press star one on your touch-tone phone. To withdraw your question, please press star two. One moment, please. At this time, you have no further questions.

Thank you, Operator.

In closing, 2005 was a very good year for West and as we begin 2006, there is a great deal of positive momentum within the Company. We are now back to full operation in Kinston and all litigation directly involving West is now behind us.

Likewise, we've worked very hard to integrate Monarch, Tech and Medimop and believe these additions to our product and service portfolio will be drivers of revenue and profit growth in the coming years.

We've been able to push through a broad range of price increases which will offset anticipated increases in raw materials, labor and other costs. Coupled with our focus on lean and our manufacturing operations, we believe we should see improved growth in operating margins by year-end leading to EPS growth in the range of 15 to 20%, or to $1.60 to $1.70 per diluted share.

Thank you again for your time today.