西式醫藥服務 (WST) 2007 Q2 法說會逐字稿

Welcome and thank you for standing by.

(OPERATOR INSTRUCTIONS).

I would now like to turn the meeting over to your host for today's call, Ms. Theresa Kelleher. You may begin.

Thank you. Good morning, everyone, and welcome to the West Pharmaceutical Services' Second Quarter 2007 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 FD at 212-850-5600 and a copy will be sent to you immediately.

Before we begin, I would like to remind you that certain statements that may be made by management of the Company may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements set forth anticipated results based on management's plans and assumptions. Such statements give our current expectations or forecasts of future events. They do not relate strictly to historical or current facts.

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 conditions.

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 statements. For a nonexclusive list of those factors, which could cause actual results to differ from expectations, please refer to the factors listed in today's Press Release. 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 Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. 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 express permission. Your participation on this call implies your consent to our taping.

Once management has concluded their remarks, we will open the floor to questions. At this time, I would like to turn the call over to Dr. Don Morel, Chairman and CEO.

Thank you very much, Theresa, and good morning, everyone. Welcome to West's second quarter 2007 investor call. As Theresa mentioned earlier, I'm joined this morning by Bill Federici, West's Chief Financial Officer, and Mike Anderson, our Treasurer and primary Investor Relations contact.

This morning we released our second quarter earnings, and I am very pleased to report that West's overall performance reflected solid growth over our prior year performance. Let me start with some brief highlights. Reported earnings were $0.74 per diluted share, $0.12 better than the $0.62 we reported in the second quarter of 2006. Excluding the positive effect of two discrete tax items from our current period results, second quarter 2007 earnings per share was $0.68 or 10% better than last year's record second quarter results.

On a year-to-date basis through June, earnings per share excluding non-recurring items were $1.45 per diluted share, $0.30 or 26% better than last year's comparable first-half earnings of $1.15 per diluted share. Overall, West had another good quarter and an extraordinary first-half of the year.

In the Pharmaceutical Systems segment, product demand remained solid and very much in line with our expectations. Fundamentally, the underlying drivers remained unchanged from recent quarters. Continued growth in Westar-treated products and coated products including prefillable syringe components, and strong sales of metal seals accounted for the bulk of the sales increase.

From an operations perspective, we're experiencing some temporary downward pressure on margins in selected operating revenues, which are simultaneously experiencing strong demand while undergoing capacity expansion. This is particularly true in Europe and Asia, where we have five facility expansions underway. We are well on our way to addressing the capacity issues, and as required validation studies and customer testing are completed, we should begin to see limited production of some of the new equipment later in this year, with the more significant capacities coming online in 2008.

In the Tech Group segment, sales increased modestly versus the second quarter of 2006, due to softer than anticipated tooling orders, and lower than forecasted sales in selected consumer and disposable medical device product lines. With regard to Exubera; as you know, the Tech Group is one of the two manufacturers of the inhalation device with Pfizer's inhalable insulin product.

Well, West had another very good quarter on the production and sales front. Lower than forecasted market demand for the product has resulted in the buildup of inventory of devices, which has slowed orders for the remainder of this year and into next. Still, it will continue to be a profitable product for us even at a reduced run rate in the foreseeable future, and we're carefully watching Pfizer's direct to consumer advertising campaign, which began in July.

On a positive note, several customer proprietary OTC and surgical device projects entered commercial production during the quarter. Perhaps most importantly, Tech is nearing the conclusion of the relocation of its Grand Rapids, Michigan operation into a larger facility that will accommodate the significant new business Tech secured last year with Power Chord in addition to the historic medical device business at the old facility.

The increased cost and production interruptions associated with the move have largely offset the higher than forecast Exubera profits. However, we believe most of these costs will be behind us by the end of the year.

I would now like to take a few moments to review our outlook and priorities for the remainder of the year.

Our backlog remains at historically high levels and the underlying long-term fundamental drivers of our business remain firmly in place. There are a number of initiatives and developments, however, that are worthy of note.

First, on the capital spending front, most of our key European and Asian expansions are well under way. But the start of construction of our planned facility in China has been further delayed by the local implications of the national reforms on the land acquisition process.

We recently hosted a visit to our Lionville headquarters from a delegation led by the Governor of Shanghai, Qingpu District, and are confident that we will receive our land use certificate in the very near future. Despite the government delay, we remain committed to our geographic expansion strategy, and our long-terms plans for China remained unchanged.

Second, the primary growth drivers for our Pharmaceutical Systems segments products remain stronger than ever, as we continue to see developments such as new vaccines and biologic therapeutics that require advanced packing systems and are commonly delivered by injection. Our sales mix has been especially positive as high demand for the biotechnology packing segment has continued resulting in increased sales of Westar process and FluroTec and Teflon coated products.

In the second-half of 2007, we expect sales growth to moderate somewhat due to historical ordering patterns from our customers, as well as a combination of issues including the impact of regulatory actions affecting significant customer demand in drugs, anticipated demand shifts for some of our customer's product offerings, and some customer's inventory management programs.

On that front, we are already aware of inventory management related issues that have been accounted for in our guidance for the full-year. We believe we can make up the sales, but the mix is unlikely to be as stable during the second half of the year. We are also in the process of finalizing negotiations with several key multiyear customer supply contracts, which we anticipate completing over the next three months.

Third, concerning the Tech Group we will continue to support Exubera. But as a result of reduced production at our dedicated facility, we expect to see 2007 revenues coming towards the lower-end of our previous guidance range of $32 million to $36 million. We believe second half revenues will be in the range of $12 to $14 million compared with the more than $20 million in sales during the first half of the year.

Another key short-term objective for our Tech group is to complete customer acceptance procedures at our new facility in Michigan, and begin to benefit from the additional medical device component production capacity available at this site. We expect incremental products resulting from the relocation to the new facility and start up costs incurred in connection with initial production to abate in the second half of 2007.

We also continue to evaluate all products in Tech's portfolio as we focus on margin improvement for this business. In the business development side, we've been successful in running a range of new programs with higher-than-average margins for the segment, and we continue to look for technology and product acquisitions to bring more proprietary programs into the pipeline.

All in all, we expect Tech's performance in the second half to be relatively good, with contributions from other parts of the business more than compensating for the slippage in the Exubera outlook.

Finally, on the innovation front, we have accelerated our plans to develop the market for Daikyo CZ resin, now branded Daikyo Crystal Zenith by our Japanese affiliate Daikyo. While Daikyo Crystal Zenith products will not contribute significantly to revenue in the near-term, we remain firmly convinced that its inherent cleanliness and unique surface properties offer a dramatic improvement in the functionality of containers and syringes using the material.

Responses from key customers to previews of the product has been very positive. Container and delivery systems that utilize Daikyo Crystal Zenith have the potential to become a revolutionary product line, and we see it evolving along the lines of what we've seen for our current product growth for years, FluroTec and Westar with significant upside potential.

We are also pursuing development of proprietary pen injection products based on technology we acquired earlier this year. As always, we are keeping our eyes open for opportunities to add new technologies and products to our portfolio and hope that the revaluations that have hit the markets recently will bring some new opportunities to us. Financially, we are in very good position to take advantage of the situation if it does unfold this way.

Our management priorities remain unchanged from those outlined in our February call, delivering maximum value from our key growth drivers; Westar, FluroTec, prefilled syringe components and reconstitution systems for biologics, running our operations as efficiently as possible in light of our aggressive capacity expansion program, expanding our geographic footprint, shipping the Tech model towards proprietary products in the long-term and commercializing products coming out of our innovation program.

In summary, we continue to expect another very strong year. Demand remains at historically high levels in our key product lines in the major therapeutic segments we serve. And keeping our focus on the priorities we've outlined, we expect to deliver our third consecutive year of record performance for our shareholders. We still believe full year sales will slightly exceed $1 billion, resulting in earnings of $2.27 to $2.37 per fully diluted share. This would be a terrific operating year coming up with 39% increase in 2006 earnings.

I'd now like to turn the call over to Bill Federici to provide more in-depth commentary on our financial performance.

Bill?

Thank you, Don.

Good morning everyone. As indicated in this morning's press release, West reported second quarter 2007 income from continuing operations of $26.5 million or $0.74 per diluted share, $0.12 per share higher than the $0.62 per diluted share we reported in the second quarter of 2006.

Results in this year's quarter include two discrete tax items that reduce tax expenses. Excluding the positive effect of these tax items on the current period earnings, second quarter 2007 earnings per share from continuing operations were $0.68 per diluted share, $0.06 better than last year's record second quarter results of $0.62 per share.

The Company's consolidated sales in this year's quarter were $263.7 million, a 9.8% increase over second quarter 2006 sales with 3.8% points of the increase related to currency. Sales growth in the core pharmaceutical system segment continued to be strong although not as strong as we've seen in the past several quarters.

At $189.3 million, second quarter sales were 13.8% above 2006 second quarter sales with 5.1 percentage points of the increase due to currency effects.

Growth in Pharm Systems' international markets accounted for the majority of the segment's growth with sales increasing over 12.2% over second quarter 2006 sales excluding currency. European growth was particularly strong at 13% excluding currency.

Pharm System's domestic sales is growing more modest 3.5% in the quarter after an unusually strong first quarter. If you remember, our Q1 2007 sales growth was more heavily skewed towards our domestic units versus international.

On a year-to-date basis, sales growth excluding currency effects was more balanced; domestic growing 12.8% and international growing 10%. The Tech Group segment generated sales of $77.7 million in the quarter, 1.5 percentage points above sales in the prior year quarter with 0.8% due to currency.

Turning to margins, consolidated gross profit margins for the quarter were 29.1%, compared to the 29.6% margins we achieved in the second quarter of 2006. Gross margins in the Pharmaceuticals System's segment were 35.4%, 1 percentage point lower than last year's quarter with much of the effect in our Europe-Asia business stemming from incremental overtime and other production inefficiencies resulting from our current capacity constraints, higher labor costs and increased plant overheads, much of which is in support of our expansion programs.

These cost increases more than offset the positive impact of the region's increased sales prices, volumes and a favorable product mix. In the Tech Group, margins decreased over the prior year quarter by 1.3 margin points to 12.5%. The decline resulted from the incremental costs incurred with the relocation and start-up of our new Michigan facility continued under utilization and tooling capacity and higher raw material, utility and labor costs at other Tech facilities.

Consolidated SG&A expenses increased by $3.3 million or 9% in the quarter versus the prior year quarter. The increase was primarily due to increased compensation costs, mostly in the Pharmaceuticals Systems division related to the headcount additions in support of our expansion programs, increased outside service costs, again mostly in the Pharm Systems division, information systems development activities and the impact of foreign exchange.

These cost increases were partially offset by lower stock-based compensation expense and lower costs associated with the Company's U.S. pension plan.

As a percentage of sales, Q2 2007 SG&A expenses at 14.5% were equal to second quarter 2006 levels. Our Q2 2007 R&D expenses increased by $1.2 million over Q2 2006, due to increased development activities and spending on increased staffing within the innovation group, primarily resulting from spending on the development of injection pen technology acquired in Q1.

The effective tax rate for Q2 was 28.4%, which excludes $2.5 million of discreet tax benefits from tax planning activities that increased recognition of R&D and foreign tax credits.

Turing to the balance sheet and liquidity, the Company's cash balance at June 30th was $177.3 million, a substantial increase from the $47.1 million we held at year end mostly due to the receipt of proceeds from the debt offering we concluded earlier this year.

Working capital was higher at $303.2 million also principally due to the debt offering. Debt at June 30th was $384.7 million and our net debt to total invested capital ratio at quarter end improved to 29.4% declining by 1.4 percentage points from year end.

Operating cash flow was $42.4 million for the quarter ended June 30th and we incurred capital expenditures of $24.2 million in Q2, with more than 50% of the capital focused on new product and expansion activities, mostly in our Tech Michigan and Pharm Systems, Europe and Asia capacity expansions.

In summary, we experienced another very strong operating quarter, improving earnings by nearly 10% over a quarter that was at that time the best in the Company's history.

As a reminder, Q2 2006 EPS growth was 39% on 16% sales growth excluding currency and acquisition effects.

Looking ahead, our order backlog at June 30th remains strong at $243 million, although declining slightly from our year-end backlog of $250 million, but significantly higher than our June 2006 backlog of $209 million.

Consistent with historical patterns, we expect second half sales to moderate as we and our customers shut down plants for summer vacations and the annual maintenance.

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

Don?

Thank you very much, Bill, this concludes our commentary this morning. We'd now be pleased to answer any questions that you might have.

Thank you. We'll now begin the formal question and answer session.

(OPERATOR INSTRUCTIONS). Arnold Ursaner of CJS Securities, you may ask your question.

Hi good morning.

Good morning, Arnold.

Good morning, Arnold.

My first question is the expenses related to this move on the Tech Group facility. I believe in the first quarter you indicated it might have cost you something like $700,000 of margin impact.

Can you give us a feel for what the impact may've been in Q2 and what we should expect perhaps in Q3 and Q4 for the move?

Well, in Q2 the impact was $1.2 million. In terms of the impact going forward, I would have to say that we do expect it to, as Don had mentioned in his remarks, to abate by year-end. The exact how it's going to play out over the year, Arnold, it's not something that we want to say.

Okay, I'd added back $700,000, I thought that alone would've been 100 basis points or so of margin impact in your Tech Group. So this is really one of the big items?

Yes, it is.

Yes it is. And just to color maybe what Bill had mentioned, Arnold, clearly this depends on the testing done by the customer as product comes off the relocated lines before we ramp up production.

Okay. In your guidance reviews for the balance of year, you highlight a -- you've been notified by a significant customer for coded pharmaceutical components that it's likely to reduce its requirements. You have a very visible public customer in Amgen and I assume you may not want to apply too much, but I assume you produce their product Epogen and Aranesp?

We don't comment on specific customer programs, Arnold.

Okay, but you have basically been primary supplier to Amgen on every one of their products. I think it's not an illogical conclusion to reach?

Amgen is a very major and a very good customer.

Okay, I'll kick ball, let me perhaps word my question a slightly different way.

Can you give us a feel without disclosing the customer the financial impact -- what sort of revenue impact you expect this change to have without disclosing the customer in the balance of the year?

Yes, we don't think it's going to have an impact on the balance of the year going forward obviously our mix is going to change, but in the second half of the year we're going to get a better indication of what their orders are going to be for '08 and '09, but for the current year we don't expect any major impact.

Okay, two more quick questions.

The contracts you alluded to, I think you had -- obviously these are multi-year contracts that had sort of expired or are expiring, you had indicated that you thought they would be closed by mid-year, and we've indicated in our view that we think you've been materially under-priced. Can you perhaps give us a little feel for what's causing these to not get done? Are you being more aggressive or is your customer being more aggressive?

That's probably a little bit of both, I mean, it's a challenging pricing environment given on some of the things that are going on in the industry, we did complete one in the second quarter. We've got two others that are very near to completion, we'd hoped to have them done as soon as possible, but there's always that fine balance between getting what you want, and letting the customer have a little bit of what they need too. So it'll be -- it's a challenge.

Okay. My final question relates to Exubera, I think the fact that you're lowering your view or changing your view towards lowering is far from a surprise to anybody, but I think the bigger issue is given the final sales of Exubera to date, the bigger impact it may likely have on '08. While it's obviously a little premature, given the excessive inventories that appear to be out there, how should we think about '08 for Exubera in terms of direction or perhaps even magnitude?

Yes, I mean -- yes, your thinking is obviously going in the right direction with where the market is, we're in negotiations with the customer right now, we're taking a look at what the demand is likely to be, across not only the commercial sale of the product, but also clinical use of the product as there's still some trials that they're going through and sampling, so -- again, this is one of those things, we'll have a better indication on -- towards the end of the year.

Okay. Thank you very much.

Thanks Arnold.

Steven Postal of Lehman Brothers, you may ask your question.

Thank you, and good morning.

Good morning, Steven.

Good morning, Steven.

Just to follow-up on the [anemia] products and your comment, do you have exposure to both suppliers of those products, or is it just one significant customer?

It's both. [technical difficulty]. Hello?

It's only Steven?

Everybody.

Can you hear me?

Oh, I'm sorry, there you are, I'm sorry.

(inaudible) Steven you had blacked out.

Oh, sorry about.

We thought we had lost you.

It's probably my line. On Exubera, I think you previously talked about 30% gross margin there. Is that still a fair assumption to use?

Yes, absolutely.

Yes.

It's a cost plus contract.

Okay. And then you alluded to raw material costs, some comments in the release in the -- in your remarks about raw material costs. I am just wondering if you could elaborate in terms of how you're dealing with, raw material costs there, and -- what specific, component there, whether it's rubber or other raw materials are impacting you?

Yes it's the big -- the bigger -- it wasn't so much of an impact on Pharm Systems on the rubber side of our business. The impact was more -- it wasn't huge, but it was more pronounced in -- on the Tech side with plastic resins and if you remember, Steven, we do have with most of our business, we have the contractual right to pass on those increases, it's just a function of how quickly we can pass them on, some are -- some of our contracts are on a spot basis, those obviously we pass on very quickly, but others have as much as a quarter's delay before we're able to pass on those increases. Though it did have an impact on Tech, albeit it wasn't the -- it wasn't huge, but it was an impact during the quarter.

Okay, but it sounds like the overall view is that raw material costs are, manageable and under control.

Right, other than -- again, if we had some kind of out of balance kind of -- Katrina-type situation again, some large spike in any of those raw materials, we would obviously have some impact there, but the way we see it, we're doing a pretty good job of controlling it through our price increases, through our lean activities and, trying to run our plants as efficiently as possible.

Okay, and then onto corporate costs, you may have alluded to some of this, but that line item has been somewhat volatile, over the past few quarters, really. How should we think about corporate costs over the next six months of the year?

The majority of the corporate costs are fairly stable, we had an impact this quarter from pensions, a positive impact and that will continue each quarter as we go through the rest of the year, that's basically because at the end of last year, you recall Steven when we made changes to the pension plan. And those changes are manifesting themselves in lower expense during the year this year.

The other big driver in the corporate cost is the impact of stock price on our compensation plans, and the problem with that, we have variable accountings for our -- some of our -- components of our deferred comp plans, and with variable accounting, you mark to market the impact on compensation of the change in the stock price. So as the stock price goes up in a particular quarter versus a prior quarter, or as it was the case in this quarter, goes down in a quarter, compared to what it was in the prior quarter, prior year's quarter, you end up with a delta in the expense.

So that was about $1 million this quarter. So, those were the two big drivers. The other pieces of the puzzle are -- obviously, we have compensation increases, and we also had some significant number of heads that were added to make sure that we're able to keep track, and keep up with the level of expansion activities going on around the globe.

And you're -- when you were speaking SG&A, you were excluding R&D from that comment, right Steven?

Yes.

Yes, okay. Those are the main components of the SG&A.

Okay, and then my final question, can you -- Bill, maybe can you talk about, working capital trends and either inventory turns for you in DSOs and how that's trended and where you expect that to be over the next year?

Yes. We have some initiatives that we've -- that we have underway to look at our working capital and try to make sure that we're doing the best that we can. We do monitor days sales outstanding, it -- it has -- in the quarter, it got slightly worse on a consolidated basis than it was in the prior quarter, albeit not significant. We do also monitor the inventory turns and again, they were slightly negative to where we were in the prior quarter. But we feel very confident in our ability to continue to not only monitor, but hopefully be able to increase turns and reduce DSOs as we go forward.

Okay, thanks a lot for the comment.

No problem, Steven.

(OPERATOR INSTRUCTIONS).

Arnold Ursaner of CJS Securities, you may ask your question.

Okay, a couple of follow-ups if I may. Can you give us your tooling revenues in the quarter, please?

Yes, we can Arnold.

And more importantly from a strategic point of view, normally tooling revenues are an indicator of future revenues. Perhaps you can comment a little bit on, what is out -- what is happening about replacing some of your sales if you will with better business?

Yes, the first part of the year on the tooling side was a bit soft, Arnold.

Yes.

Positively, the activity has picked up over the last couple of months and we see that trend continuing through the end of the year.

Yes. We had -- in the quarter, Arnold, we had $6.9 million worth of tooling versus last year's second quarter was $13.7 million.

Got it.

Significantly lower this quarter versus last.

Sure. My other question relates to -- you obviously are having problems with manufacturing inefficiencies driven by tremendously strong demand particularly in Europe, given that you normally have summer plant shutdowns from customers and yourself, would you -- shouldn't you be able to implement a lot of these changes during these shutdowns and more quickly get rid of some of these inefficiencies?

It's a two-edged sword, Arnold, you can get a lot of the equipment in, because production on the floor has stopped, but the fact of the matter is you're incurring expense, because you need the people to run the validation, the installation and the sampling programs. The other thing is that we do get a bit of inefficiency just from the natural startup of the operations after the shutdowns. So it's a bit of a two-edged sword.

Okay. And regarding your U.S. growth, given the price increases you put into place at year end and your overall shift towards higher value-add products, given you had that -- but that modest space revenue increase, it would -- almost would imply that you've had declining volumes, which to me seems inconsistent with strong demands, could you comment on that?

Yes, the volumes were -- price and volumes were both positive as was mixed, what really was the deflator was increases in salaries, overtime -- the overtime that we talked about associated with running those plants pretty hard, depreciation and overheads were increased as well.

Yes, I was focusing on revenues, 3.5% revenue growth given higher volume and higher price and --

Yes, I'd almost characterize it as the market taking a little bit of a breather, Arnold. I mean, we had such strong demand domestically in first part of the year, I think we had some bulge orders coming out of the end of 2006.

Would it be fair to say now with hindsight perhaps customers concerned about the stretch-out of deliveries may've over ordered, and once they got more comfortable you --

Yes, that might be, Arnold, but it's really hard to put a finger on that. I mean, given some of the ordering activity that we've seen, particularly with new product launches, I can't say positively that that's definitely the case.

I mean, one just side note on that, Arnold, and in all of the key areas prefilled in Europe, the coded products, we're seeing increases in a lot of those -- still seeing, in the quarter, increases in a lot of those product lines.

Okay, thank you.

Thanks, Arnold.

[Aaron Margolis] at AG Asset Management. You may ask your question.

All right, thank you very much.

Good morning.

Good morning. I'm just thinking about -- as you go through the second half of this year and through 2008, can you maybe help dimensionalize exactly how much capacity you're adding, what the utilization is right now, the utilization rates, how they will -- to the best that you can forecast, right, how they will hopefully grow through '08 and what the incremental margins are going to be?

Yes. It's a little bit difficult right now to focus on that way, but if I start with the capacity question, in Europe and Asia in particular, where we've had the real bottlenecks over the last couple of quarters, we're running as hard as we possibly can. And that effectively to us means 21 shifts per week, and running in excess of 90% of our actual machine capacity. That's very hard for mechanical systems of the type that form our asset base.

Okay.

We are adding 99 heating platens, which is kind of the way we measure rubber capacity overall between our European facilities and our facility in Singapore. That's roughly about a 20% to 25% platen increase versus our historical base. So, the exact capacity that, that will generate will depend, in large part, on what products and what formulations, actually go into the presses. But in terms of pure platen capacity, it's about 25%. We were a bit surprised with our last expansion in the '04-'05 timeframe. We thought that capacity would carry us out to the end of '08. If we finish our expansions towards the end of '08 like we're forecasting now, that capacity is probably going to be fully utilized somewhere in the '10-'11 timeframe.

Okay. So it looks like back in -- if I look back in time, it looks like some time in '03 or '04, you actually had operating margins in the mid-teens, 14% to 15%. Is it possible that as you kind of move -- as this new capacity comes on and it gets utilized the way it's described and you can potential reach higher operating margins than that?

I mean, I think of the Pharmaceutical System side; the answer is, yes. I mean, we will work the efficiencies out of the process. Getting consolidated margins higher as we include Tech because that traditionally has been the lower margin businesses.

Right.

It's a bit more of a longer term prospect. But again, the plan has always been build on the Tech platform, begin a conversion of their base more towards the proprietary side and drive the margins that way.

Okay. All right, well, thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS).

Steven Postal, Lehman Brothers, you may ask your question.

Yes, I just had two quick follow-up questions, and you really already went through my first one. On Europe I think you previously suggested that your growth there was constrained because of your capacity issues. I mean, is that still the case? Can you -- the growth there seems pretty consistent in 2Q in Pharm Systems.

And yes, we're squeezing out everything we can, Steven, we need to have that capacity on line. There's no doubt it will continue to grow.

And it will come on line as Don said later this year and through '08.

Yes. We should see some positive impact and have seen some positive impact from mix as we work our way towards the treated and touted products as well.

Okay, and then would you just clarify on the timing of basically what Bill has been alluding to, towards the end of the year, is that 4Q or is that during this quarter?

I'm sorry; in terms of what Steven?

Oh, when the capacity is going to come onboard?

Oh, it will be coming onboard sequentially. I mean, again these aren't bricks and mortar expansion. They are effectively new lines and new equipment going into the exciting footprint for the most part. So as demand evolves, as customers finish their online testing of products that have come off of the new systems, you'll see it go into commercial production. So it's going to be phased in not only throughout the end of the year, but through the first-half of '08 as well.

Okay. And, Bill did you -- I don't know if you mentioned this, but what was the D&A in the quarter?

D&A was $14.3 million in the quarter.

Okay. And then my final question and I know this has already been talked about too, but you mentioned one customer that's going to be adjusting its inventories. You also mentioned that U.S. appeared to slow down and maybe there was some -- the market taking a breather. Were there -- to your knowledge, has there been or in the short-term do you expect any other customer inventory adjustments or do you think that customers right now are comfortable?

Right now all of the adjustments that we know about have been incorporated into our guidance for the full year, Steven. The third quarter and the fourth quarter we know that we'll see some more activity as we have historically, but there's nothing out there right now that we haven't accounted for. But I'm sure that we will see some other subtle changes toward the end of the year. It's just a natural part of our business as our customers work their end of the year as well.

Okay, thanks a lot.

Thank you.

There are no further questions at this time.

Good. In that case thank you very much, operator. Six months into the year, West remains on track to deliver another year of solid financial results as we continue to invest in the programs critical to our future.

Thank you all very much for your time today and your participation in today's call.