西式醫藥服務 (WST) 2006 Q1 法說會逐字稿

Good morning and welcome to the West Pharmaceutical Services First Quarter 2006 Earnings Conference Call. At this time all the participants are in a listen-only mode. After the presentation we will conduct a question and answer session. To ask a question please press star one. 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 your host Ms. Julie Huang of Financial Dynamics you may begin.

Thank you. Good morning everyone and welcome to the West Pharmaceutical Services first quarter 2006 results conference call. As you know we issued our results this morning, the release has been posted on the company's website located at www.westpharma.com. If you have not received a copy of this announcement please call Financial Dynamics at 212-850-5600 the copy will be sent to you immediately.

Before we begin I would like to remind you that certain statements that may be made by management of the company or it may contain forward-looking statements as defined in the Private Security Litigation Reform Act of 1995. These forward-looking statement set forth anticipated result based on management plans such statements give our current expectation or forecast issuance they do not relates strictly to historical or current fact, In particular, these include statements concerning future actions, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings and financial results. We have tried, wherever possible, to identify such statements by using 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 or 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 conclusive list of those factors which could cause actual results to differ for reputation please refer to the factors listed in today's press release. The company undertake no obligation to publically update forward-looking statements whether as of result of the information retrieved them or otherwise. Industries are advised however to consult any further disclosure the company makes and is reflected in the Company's 10-K, 10-Q and 8-K reports. This call is being recorded on behalf of the West Pharmaceutical Services Incorporated material it cannot be re-recorded or rebroadcast without the Company's express permission. You are participation on this call and pleasure, conceptual, are taking. Once management has concluded their remarks, we will open the floor for question.

At this time, I would like to turn the call over to Dr. Donald Morel, Chairman CEO.

Thank you Julie, and good morning everyone. Welcome to our first quarter conference call. Joining today are Bill Federici, Chief Financial Officer, Steven Ellers, our President and Chief Operating Officer, Mike Anderson, our Treasurer and primary Investor Relations contact.

As our press release this morning confirms, this year results to good start strongly anticipated sales especially in Europe, and improving product mix in greater production efficiency in our operations, generated significantly improved performance versus the same period in 2005.

From a market perspective the favorable trends we discussed last year continued to drive the market for inject able packaging and delivery system. Robust growth is continuing in the biotech market with growth in sales of approved drugs and launch of new products. These drivers particularly important, some of these products utilizes our most advanced coated product such as [water]. Insulin packaging continues to grow inline with overall market growth in diabetes. In Europe especially conversion from the standard voile and fuel format and the prefilled syringes continue to occur at a healthy pay. Resulted in acquired resurgence from vaccines research leading to the launch of several new Vaccine. And finally, market demand for clear product continued to drive conversion to West Therapeutic products for via closures as well as syringe components.

Revenues grew in all of our major operating units, according to quarterly sales of $222.8 million and earnings from continuing operation of 54 cents per share before these type of non recurring items. As noted in our release, we took a charge of 12 cents per share for prepaying our existing private placement and refinancing our remaining day. This action should reduce our interest expense by about $2.5 million per year on a pre-tax basis.

Our balance sheet remains fundamentally very sound, with $31.3 million in cash on hand, and debt of total invested capital ratio of 42.4%. Joe will review our financial performances in greater detail in just a few moments.

From an operation perspective, I first like to provide some highlights from the pharmaceutical system segment. Sales growth in these segment was very robust increasing $25 million overall for just over 18% to $160 million. Sales grew in all of our operating region, but were primarily driven by North America and to especially Europe.

In North America, growth was driven by increased demand Westar components and generally higher demand pursuing (inaudible) hospitalization closures in addition to Flip-Off seals. Sales of Teflon coated products were slighted below the first quarter of 2005, but orders have accelerated recently and the second quarter looks to be much improved for these products versus 2005.

In Europe strong sales were driven by continue demand for prefilled syringe components and lining material used in specialized seal. We believe Europe also benefited from accelerating customer orders to build inventory and advance of the anticipated new product launches, than plant shutdowns, plant for capacity expansion later in the year. While, we expect the demand will continue to be a very strong for the second quarter and the order backlog remains at record levels. We believe that was soften as we entered the traditional summer shutdown period in July and August. I am particularly pleased by the strong performance of our team in Kinston. In the first quarter of 2005, the new operation was not quiet back before production capability, as we continued to work through validation, training and customer product qualification issues.

In 2006, with the plant fully loaded, Kinston contributed $1.8 million to our improved gross margin, which increased to 35.4% from 32.6% in this segment. Based on our first quarter performance, our order bookings for the second quarter and our full year backlog, we expect the pharmaceutical systems segment to have a very strong year overall.

Turning to the Tech Group segment, first quarter sales which incorporates our historical plant is molding in assembly business. First, we acquired Tech business, were $65.7 million, 47.3 million of which was due to the acquisition. For comparison purposes, first quarter sales for West portion of the business, grew 9.9%. Demand was strong for a wide range of products including Beverage closures and inter company sales of plastic buttons used for Flip-Off seals in the pharmaceutical systems segment.

Over 50 percent of the revenue for the segment during the quarter originated from products for the health care markets including devices like Exubera for drug deliveries. The remaining sales was split approximately, 65% consumer and 35% tooling and engineering services projects.

Consolidating gross margin for the segment was 15.7%, a 1 percentage point improvement over the comparable period in 2005. For the acquired Tech business, the gross margin was 14.3%. Overall, Tech is performing in line with our expectations. Our primary focus in this segment will be moving a broad range of projects simultaneously from development to commercialization over the next two quarter.

I would now like to turn the call over to Bill Federici, who will provide some initial commentary on our financial performance, Bill.

Thank you Don, and good morning everyone. We have again included with our earnings release a tape of the breaks out of our reported results by segment and details of the impact at the three businesses we acquired in 2005. The table sheet help you follow along with my comments.

As noted in our release, West reported first quarter 2006 income from continuing operations of $14.3 million or 43 cents per diluted share versus income from continuing operations of $13 million or 41 cents per diluted share recorded in the first quarter of 2005.

This year's reported results including $5.9 million prepayment cost equating to 12 cents per share associated with the refinancing of a portion of our fixed rate debt. As you may recall in our February call, we indicated that the change to lower fixed rate notes is expected to reduce our annual interest cost by approximately 2.5 million per year.

Results in the quarter also include the positive effect of a ruling received in the IRM incurring with a tax division, we had taken on a deduction in our 2001 tax return. As a result, our current period earnings also included the favorable impact of a $4.4 million or 13 cents per share, reversal of tax reserves and associated interest income. For a sense of which, this recorded in earnings from discontinued operations.

Earnings per share from continuing operations for the quarter excluding the effects of these two items were 54 cents per diluted share. This compares favorably to the 41 cents earned in last year's same quarter. Consolidated sales were $222.8 million, a record level for West and an 18.3 percent increase over Q1, 2005 sales excluding acquisition and currency effects.

The company's core pharmaceutical systems division performed above expectations in the quarter with sales of $160 million, nearly 15 percent above 2005 first quarter sales excluding the impact of acquisitions. 19.5 percent, if you also exclude the unfavorable currency effects. The largest growth came from our international markets with revenue growing 24.5 percent excluding the exchange effects and the acquisition impact.

Growth was especially strong in Europe and was driven by increased demand for prefilled injection rubber and metal components, feared stoppers, lining materials, and Westar processing of those components. Much of the European growth is in support of high growth insulin, biotech and oncology drugs in the pharmaceutical market and much of the added European volume was coded with west advanced FloroTech product. Some of our increased European demand is related to specific customer product launches and inventory bills in anticipation of later in the year, customer production line shutdowns, and increased safety stock levels.

The growth rate will remain strong for the second quarter but is expected to return to a more normalized rate of growth throughout the remainder of the year. Domestic revenues in the pharmaceutical systems division also increased at a healthy pace. 11.8 percent versus the prior quarter with the most prominent increases coming from the regions core pharmaceutical products both prefilled and disposable syringe components CEM stoppers and Flip-Off seals.

Domestic demand also continued to increase from the quarter for our high value Westar products. As we addressed in prior calls the return to normal audit patterns or high margin coded products has begun to materialize and is expected to return to a more historic trend line as we move further into the year.

The Tech Group division, which includes West pharma plastics units achieved sales of $65.7 million in the quarter, substantially greater than its prior year quarter due to the $47.3 million of sales generated by the acquired business. Sales related to our production of Nectars multi component insulin inhalation device includes a $3.3 million in the quarter and after the FDA approved Pfizer's in super drug in January.

Sales in the divisions previously existing plastics unit also increased by approximately 10 percent from the prior year quarter principally due to increased sales of receivable dispensing fitness for juice product cartoons and inter segment sales on plastic buttons.

As noted in our release, consolidating gross profit margins for the quarter were 30 percent versus the 31.1% margins we achieved in the same quarter of 2005. The decline is due to the effect of relatively lower margins generated in the acquired Tech Group business, which reduced overall gross margins by approximately 4 margin points.

In the pharmaceutical systems segment gross margins increased over the prior year quarter by 2.8 margin points, a strong improvement in both Europe, Asia and America's regions.

Higher sales volumes generating improved overhead absorption and efficiencies from our main programs are favorable product mix and increased places more than offset higher raw material utility and labor cost.

The Kinston facility also achieved significantly better margins in this year's quarter after operating in a loss in a start up mood in last year's quarter. In the Tech Group segment, gross margins improved by 1 margin point over the prior year quarter due to the favorable impact of added sales volumes on overhead absorptions.

Consolidated selling and general administrated expenses increased by $12.8 million in the quarter versus the prior year quarter. Nearly 40 percent of the increase was $4.7 million relates to the SG&A expense of our Tech Group and Medimop acquisitions. Another $3 million of increased over prior year is due to the cost of directorate employee stock base compensation associated with the nearly 40 percent Q1 increase in the companies stock price.

Increase compensation cost and higher cost associated with the companies US defined pension, defined-benefit pension plan account for much of the remaining increase. As a percentage of sales Q1, 2006 SG&A expenses of 17.1% increase by 0.2 percentage point, from the first quarter 2005 level of 16.9%.

Net interest expenses was $3 million in the quarter $1 million higher than last years first quarter expense of $2 million. The increase was due to the additional borrowings required to support the Tech Group and Medimop acquisitions, which will partially offset by a decrease in borrowing rates on our refinance senior notes. The companies expected annual effective tax rate is 30.3%. For the quarter the affected tax rate is lower then the prior year quarter rate. Due to the previously mentioned reversible tax reserves and the companies geographic split of earnings aided by lower tax rates in our acquired company's international locations.

The company's cash balance at March 31st was $31.3 million and working capital totaled $134.7 million. Much of the tax balance resides in Europe and we anticipate utilizing the cash to continue to pay down debt and fund our capital programs. Debt at March 31st was $272.2 million down from 281 million at year end. The debt to total investment capital ratio at quarter end was 42.4% a decrease from the year and do partially to our debt reduction.

Operating cash flows were $4 million for the quarter and CapEx were 11.4 million was 75 percent of the capital focused on normal maintenance and replacement upgrades of manufacturing equipment and tolling, split relatively even between Europe, Americas and the Tech Group. We now expect full year capital expenditures increased by $12 million to approximately $80 million reflecting additional capital for newly capacity expansions in Europe and Asia to be increasing customer demand.

Our order backlog at March 31st is significantly stronger at $210 million excluding our acquisitions compare to last March backlog of $153 million and a year end backlog of $183 million. Approximately $20 million of the backlog reflects changes in customer order and inventory patterns. In summery, we experienced exceptional first quarter sales and operating results.

I would now like to turn the call back to Don Morel. Don.

Thanks Bill. I would now like to comment briefly on the outlook for the remainder of the year.

In our February call, we indicated the full year sales for 2006 should fall between $810 million and $830 million. Net earnings per share between $1.67 and $1.70. However with the strength of our core business in the first quarter and the current backlog, we now believe sales will fall in the range of $840 million to $860 million for the full year. From the assumption, that our product mix remains favorable and inline with current trend. We now believe net earnings per diluted share, will fall in the range of $1.68 to $1.78 outside of buyback and currency cost associated with refinancing of our debt and continued increases in raw materials and energy cost.

This concludes our remarks for today both Steven and I would now be pleased to answer any question you might have

[Operator instructions]

Our first question comes from [Harney Harsaner] of CJ & Securities your line is open

Hi, good morning and congratulations for the quarter

Good morning Harney

I try to focus on the core margins which had tremendous improvement and yet, I think in your prepared remarks you indicated things like Teflon which is one of your higher margin products was lower then in Q1 of 2005.

Can you tell little bit more on what row the particularly you know, much better than expected margin performance and going back to the specific issue on Teflon last year you have had very sizable surge activity was that part of the reason why your Teflon sales made lower then the year-over-year.

Yes, may be a couple of points to make only one you know, clearly the margin benefited from production throughputs in our plants with the loadings that we had. And also Kens been clearly coming back up the speed without some of the additional cost associated with training salvation etc help us quite a bit. Relative to the Teflon question your Teflon issue was specific to North America.

So, when we refereed to the sales being slightly below Q1 2005 this year that was relative to the North American part of the market. Sales on the FluroTec side were FluroTec is used for the Biotech and Oncology market, and also in the pre build applications in Europe were sales of been very strong tended to increase the margin as well. So, we had a combination of very favorable product mix Kinston returning to normal operation level and just normal efficiency start through the plant, do our plant loading contributing to the margin improvement.

Okay. And I just want to try to again understand you clearly indicated in your press release that you do to about 5 million of sales growth in the quarter, is an inventory built by some customers. But, yet you also indicated in your prepared remarks of the 210 million backlog of about 20 million relates to changes in orders for some clients and I think that may be coming related, again to try to avoid any surge activity issue, could you expand on both of those place

Yes, there is really two answers in the question, the first of which is that, we know that some of the increase volume, we are going to see in the first half of the year relates to product launch bills and their inventories. And also goes in our inventory because we have got several customers that are going to rather significant capacity expansions in Europe as well. So, large part of the 20 million that we are seeing in the backlog is well as the 5 million relates to those two things.

And in addition Harney, we had some customers have some launches that there preparing for in Europe and you know, that caused bit of that rise in the first quarter and you know, the plants are running free heavy right now there are running in specially in Europe their capacity.

So what you are seeing is the lead times that plants have in terms of getting the product out the door are increasing and that is also having downstream effect on the customers. Where there layering in their orders earlier, we try to make sure that they get their products on time. So, all of those things are kind of holding together they caused us to believe that about $20 million from the backlog is and surges a wrong word for its more just timing of demand.

My final question again is you are indicating pretty substantial build up or increasing your capital plans, and mentioned Europe and Asia, I assumed it's not specific to China which you have spoken about. As you think about the capacity additions are these with in existing facilities and more product upgrade or west our height investments or these actual capacity expansions?

You comment relative to Westar is a permanent one, what we are actually doing is incremental layering in capital plans that we have for '07 ahead of schedule. We will be doing expansion in existing facilities, so that we have capacity were demand is high, right now in Europe that is for FluroTec treated products and its more rest our treating products. So, we in a factor expanding incremental and your capacity for those, two key product areas that capital is not relate to our plans with China

And I know you are conservative and it's early in the year and you tried really hard never been had yourself, but in hearing the volume improvements in the likely improvement in margin, I am actually surprised is your guidance is moving up is little as his.

Well, I think if you look at the second half of the year the traditional things we have always talk about are going to come into play. One, we know during the shutdown it is going to be some expanded shutdown with certain customers because of the capacity expansion. You know the second thing is getting I am sure of those people commenting on energy cost, oil costs are going to be relatively volatile and stable for a period of time. And it is now our ability to recover someone else sank in the rubber business where changes is as prices.

I just add a couple of other things to, right now innovations spend, which we have called out in the year end call is expected to increase between $4 and $6 million during the year. We had not yet in terms of our budgeting for that spend versus what we actually incurred in the first quarter it was light. So we expect in the later part of the year that innovation spending will be heavier than it is today. Also we had pricing that kicked in on January 1st and you know, some of our supply contracts for energy raw materials et cetra, means that that does increases on the supply side.

So, we be the guide some the lays in what we see in terms of energy cost increases will have some hedges that are in place in terms of the contracts et cetra and that will cause, we think that the raw material price will continue to go up despite whether we have any unexpected surgeons or spikes in crude etcetera. Kinston, we mentioned Kinston earlier, Kinston had a very positive impact in this quarter as you start to compare quarter-to-quarter down road, down the stream quarters 2, 3 and 4 the comparisons will get a little hotter because Kinston in last year's second, third, and fourth quarter was running at or near capacity.

And as we mentioned with the - we have mentioned some of the customer shutdowns and some of their bills, the factor throughput is really running in a very high level. Normally, our normal patters are that with the shutdowns in the third quarter, we see a decline in throughput, as well as our historically Q3 and Q4 have not been strongest in first half. So those are some of the things there is lot of moving parts and there on, (inaudible) systems thinks we see that acquires us to believe pretty strongly that we have got a good hand along where our guidance is.

Okay, thank you.

Once again if you would like to ask a question please press "star one". Ethan Parks of Lehman Brothers, you may ask your question.

Thanks, good morning guys.

Good morning.

You may have mentioned some of these in and out, but Don can you just maybe elaborate or the session of the impact of raw materials and what I am trying to get out is a kind of a contributions to revenue growth from price and volume?

Okay. In terms of price we did as I mentioned we had a price increase that came into effect in the first quarter, that didn't help because all of that price increase comes through. So, we have got to lift from price about if you taking them in terms of the gross margin roughly I say a third, not even a third, about a quarter of that was due to price.

In terms of volume, volume was significant especially in Europe and it was in the areas where as Don mentioned they were the higher volume higher value products like FloroTech, so we got some list from that as well. The efficiency piece of the puzzle running the factories especially in Europe that very high rates was also beneficial to margins that was probably not a quarter to may a fifth of that increase. We had some increase from Europe and Asia Pecific from our Medimop acquisition that helped us as well. Those where some of the big approvers of the difference in there.

Okay. In terms of how do you think you are various market and market growth rates has there been any changes in to clear view of the long-term growth of the market?

I don't think so, you know, it is going to even flow little bit with new products launches but in terms of where we have got it before, I think we are still pretty comfortable with that. We are going to see healthy growth in prefills and biotech and in oncology kind of in the you know, high single low double digit range. We are continue to see growth in our core business somewhere in that 6% to 8% range on an normalized annual basis.

When you look at growth out of the plastic group you know, that's going to be again in kind of that mid double-digit range, when we look at that and we also expect double-digit, low double-digit growth on the diabetes and insulin side of the market. So, the real change is that its going to be some ups and downs in individual segments but for those who are all to the next couple of years we see things staying pretty healthy in those areas.

And so, that you try to say that maybe the your markets falling or growing quite a bit in a mid single digit range high single digit range?

I think all ended, if you combined to [YSS] well is it (inaudible) you probably in the high single low double digits.

Okay. And then final question from me. It definitely seems like the focus right now is now internal investment I suppose to you know, looking for more acquisitions is that fair?

I think for right now that's a fair statement.

Okay. Thanks a lot.

Thank you.

Thank you.

[Operator Instructions]

At this time, there are no further questions.

Thank you very much operator. As a management team we are very please with the strong start to the year. Based on our backlog and customer orient trends 2006 should be a very good operating year for the company. As in past years given historical order patterns, we expect the first half of the year to be stronger than the second half. When we typically experience uncertainty due to changing customer inventory strategies and some of our plants shut down in Europe.

However at this point our order book is very healthy and in general our clients are operating at a very high level. We also need to carefully monitor energy prices in oil derived raw materials going forward.

Looking ahead to the remainder of the year the priorities for the management team outlined in our February call remains the same. These are executing our business strategy relative to the core business, delivering growth from our acquisition, improving our gross and operating margins through our new initiatives and investing in innovation for the future. In short we are specially taken to in the last three years is set the stage for a period of sustainable growth in terms those sales and enduring.

Finally I would like to remind every one there are annual shareholders meeting will take place May 2nd at our corporate headquarters in Lionville, Pennsylvania starting at 9:30 am. Also Quest will be hosting an investor and analyst meeting Wednesday May 10th in New York City. During that meeting management from each of our business segments will review a ranger of topics including opportunities in our key markets our growth strategy and our investments in innovative new products and new technologies to meet the demanding requirements of our customer. This will than will be webcast and can be accessed on our website at www.westpharma.com.

Thank you very much for your time today.

This concludes today's conference call. Thank you for participating.