西式醫藥服務 (WST) 2009 Q1 法說會逐字稿

Welcome to the first quarter earnings conference call. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS)

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

Now I will turn the meeting over to Miss Theresa Kelleher from Financial Dynamics. Ma'am, you may begin.

Thank you. Good morning, everyone and welcome to West's first quarter 2009 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 forecast 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 in terms of similar meaning in connection with any discussion of future operating or financial performance or condition.

We cannot guarantee that any forward-looking statements 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 10K, 10Q, and 8K reports. The Company undertakes no obligations to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, management may make reference to adjusted operating profit and adjusted diluted EPS that are considered non-GAAP financial measures. These measures have no standardized meaning prescribed by US GAAP, and therefore, they may not be comparable to and should not be viewed as a substitute for US GAAP operating income and diluted EPS.

Reconciliations of the non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in the materials accompanying this morning's earnings release.

This call is being recorded on behalf of West and is copyrighted material. It cannot be rerecorded for rebroadcast without the Company's expressed permission. Your participation on this call implies your consent to our taping. Once management has concluded their remarks, we will open the floor for questions.

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

Thank you, Theresa and good morning everyone. Welcome to West's first quarter conference call. As Theresa mentioned, joining me for the call today are Bill Federici, West's chief financial officer, and Mike Anderson, our treasurer and primary investor relation's contact.

As we have done in prior calls, I would like to begin with a brief overview of our results for the quarter followed by an update on our major product development and capacity expansion programs.

After some comments on our outlook for the remainder of the year in the long term, Bill will provide a detailed summary of our quarterly results. We'd then be pleased to answer any questions you might have.

Looking back at the past three months it goes without saying that the first quarter of 2009 was quite challenging. Despite the extremely difficult economic climate, our first quarter sales declined only modestly when compared to the first quarter of 2008 at comparable exchange rates. And for the most part we're in line with our expectations.

Consolidated revenues for the quarter were $242.4 million, a decrease of less than 3% at constant rate. Adjusted fully diluted earnings per share were $0.42 before the positive impact of a discrete tax item. Earnings for the first quarter of 2008 were $0.72 per share and benefited from a weaker US dollar.

Consolidated gross margin fell 2.2 percentage points to 28.6% primarily due to foreign exchange effects, higher raw material and energy costs, and plant inefficiencies as a result of the lower sales volume.

Capital spending during the quarter totaled $17.8 million versus $22.8 million in the first quarter of 2008, with the bulk of the spending focused on new products.

Looking at our balance sheet, West's financial condition remains very strong. Our net debt to total capital ratio is at 40% and we believe our operating cash flows provide ample liquidity to fund our capital requirements.

As we mentioned in our February call commentary, West has no immediate financing needs, however we will begin negotiations to renew our revolving credit facility in late 2010.

Looking quickly at our segment results, sales in the Pharmaceutical Systems division were just over $183 million, a decline of $23 million overall, of which $18.5 million was due to currency translation effects. The remaining shortfall was due to volume and mix effects related to lower demand resulting from market conditions and tight customer inventory management.

The majority of the sales decline occurred within the North America region where we experienced lower unit volume across virtually all of our product lines but with no concentration within one or two specific items.

Sales in the European region were fundamentally flat for the quarter at constant exchange rates but on a positive note, the backlog in North America increased over the last few weeks while the backlog in Europe remains strong, approximately equal to the first quarter of 2008 levels.

Within the Tech Group segment revenues were down slightly to $62.3 million for the quarter, a decrease of $4.1 million versus the first quarter of 2008, primarily as a result of foreign exchange effects and lower resin prices which are passed through directly to the customer.

Demand for self-injection devices was strong versus prior year and results benefited from improved operating efficiencies within our Grand Rapids and Puerto Rico facilities. Encouragingly, Tech continued its margin improvement with gross margins expanding 2.3 percentage points overall versus the prior year to 15.2%.

Turning to our ongoing capacity expansion projects, all of our major facility expansions remain on schedule or have been completed. Singapore is the last major program and is on track for completion in the third quarter.

In North America, our SAP conversion project remains on schedule with three facilities converting in July and three more in October.

I'm also pleased to report that our China plastics facility has been completed and formally handed over to West by the contractor. The first production systems, which we call [troikas], are now in place and undergoing engineering validation. We expect to sample customers through the third quarter of the year and begin commercial sales during the fourth quarter.

Most importantly, our primary customer has received authorization from the Chinese Regulatory Authorities to begin marketing their IV system in the domestic Chinese market.

Turning to our major new product development programs, West hit a major milestone and received authorization from the FDA to begin marketing the NovaGuard passive neo-safety system. While we're not forecasting significant revenues for the device this year, we do expect that it will contribute in 2010 and beyond. NovaGuard is currently the only truly passive needle protection device available for Luer syringe application.

We also continue to make progress on the development of ConfiDose, our proprietary Auto-Injector platform and the CD Syringe platform where interest remains very strong within the biologics community. Customer sampling has continued at a robust pace for a broad range of indications.

Earlier this month West also formally launched a new elastomeric product line called NovaPure. This product incorporates all of our value-added attributes-FluroTec coating, Westar processing, vision inspection and enhanced laboratory testing, and is targeted specifically at helping our customers meet the emerging FDA quality-by-design initiative and the overall market demand for ultra-clean products.

Looking ahead to the remainder of the year, all indications are that customers will continue to be somewhat cautious with their ordering patterns. Although our backlog remains strong overall, many customers continue to look for ways to reduce working capital and are being more careful placing orders, resulting in some uncertainty relative to our normal visibility.

The composition and timing of orders in the current backlog leads us to slightly reduce our consolidated revenue expectations for the full year to between $1 billion and $1.02 billion before currency effects and narrowing our earnings guidance to $2.05 to $2.18 per share.

Consistent with our February call commentary, 2009 is shaping up to be a different kind of year where atypically our second half will be stronger than the first six months.

Going forward, we expect gross margins to improve as mix improves, pricing flows through the full year and we recognize the benefits of lower oil prices and the cost of key raw materials and our operating efficiencies improve.

Simply put, we will remain focused on running our business efficiently, continuing to invest for the future and building value over the long term as we seek to deliver against our full year targets. Our operating cash flows and balance sheet provide us with the ability to manage conservatively through near-term economic challenges as we continue to fund our primary R&D and global expansion programs.

Over the three to five year horizon, we remain optimistic about the prospects for our business. Although the global market growth in the pharmaceutical segment is forecasted to moderate to between 2.5 and 5 -- (technical difficulty)

-- and the North American market to contract slightly for the first time in many years, the fundamentals driving our growth remain in tact - that would be global demographics and the increasing prevalence of chronic disease, the broad biologics pipeline and the growing industry need for novel clean packaging and delivery systems for these sophisticated therapies.

Our value proposition remains fundamentally sound-the global manufacturing footprint with expansion opportunities in China and India, unmatched technical expertise on drug material interfaces, global regulatory knowledge and a strong portfolio of innovative technology and new products in the pipeline for the next two to three years.

I'd now like to turn the call over to Bill Federici. Bill?

Thank you, Don and good morning everyone. Today West reported first quarter 2009 net income of $15.4 million or $0.46 per diluted share versus $0.76 per diluted share reported in the first quarter of 2008. As we explained in the release, reported results in this year's quarter include a $1.7 million discreet tax benefit that was partially offset by $400,000 in after-tax restructuring expenses in our Tech Group.

Reported results in the first quarter of 2008 included a net combined after-tax, special item benefit of $1.3 million. Excluding the net positive effect of these items in both years, first quarter 2009 earnings per share were $0.42 per diluted share versus last year's first quarter earnings of $0.72 per diluted share.

We should also mention here that the relative strength of the dollar versus 2008 Q1 rates and the impact of year-over-year increase in pension expense reduced comparable 2009 first quarter earnings by a combined $0.10 per diluted share.

The Company's consolidated first quarter sales were $242.4 million, a decrease of 2.9% from first quarter 2008 sales excluding the negative effect of foreign exchange. First quarter in Pharm Systems segment were $183.2 million or 2.7% below first quarter 2008 sales excluding currency effects.

Much of the decline was in North America and was due to reduced customer demand for both standard and enhanced stoppers and seals mostly relating to customers' inventory management programs and specific regulatory delays for certain customers' products. None of the reduced demands reflect any expected loss of business.

The Tech Group segment generated sales of $62.3 million in the quarter, 3.4% below sales in the prior year quarter excluding exchange. The decline was mostly in Tech's Americas business and was due to a combination of the contractual pass-through effect of reduced resin prices, changes in customer order patterns and the discontinuation of sales as part of our Tech restructuring program.

Partially offsetting these decreases were strong increases in demand for several products including IV and blood filter products and EpiPen self-injection devices manufactured in our US facilities, and an intranasal allergy device made in our Ireland facility.

Consolidated gross profit margins for the quarter were 28.6%, 2.2 margin points below the 30.8% margins we achieved in the first quarter of 2008. Gross margins in the Pharm Systems segment were 32.7%, 3.4 margin points below last year's first quarter margins, with declines in each of the regional units.

Declines are due to higher raw material, labor, utility and plant overhead costs that weren't fully recovered with sales price increases. We were also impacted by lower sales volume and mix and lower capacity utilization.

Because our supply contract terms delay the impact of changes in the underlying commodities on our costs, recent raw material price declines haven't yet worked their way into costs. However, we continue to expect Pharm Systems margins will improve as the year progresses from the favorable impacts of lower raw material costs, scheduled price increases to customers, more normal customer order patterns, additional lean savings and cost control measures.

In the Tech Group, margins increased over the prior year quarter by 2.3 margin points to 15.2%. The margin improvement was due to substantially higher sales levels and increased plant efficiencies at the Ireland and Grand Rapid facilities. The cost reductions from the Tech restructuring effort also contributed to the margin improvement.

Consolidated SG&A expenses increased by $2.8 million or 7% in the quarter versus the prior year quarter. The increase was due primarily to higher pension expenses due to investment losses incurred on plan assets in 2008, higher compensation costs associated with limited head count increases, annual salary increases granted in last year's second quarter, and severance expenses related to select workforce reductions, higher depreciation expenses mostly for our information technology upgrade.

Expense increase is partially offset by the effect of foreign currency translation, lower stock compensation expense from the decline it the Company's share price during the quarter compared to an increase in last year's first quarter, and lower incentive compensation and outside services expenses.

As a percentage of sales first quarter 2009 SG&A expenses excluding currency effects and the increased pension expense, were 16.2% versus 14.8% in Q1 2008.

Net interest expense was $500,000 higher than the 2008 first quarter. We had less cash on hand and earned lower interest rates throughout the year than we did in last year's first quarter.

The effective tax rate for the quarter was 14.6% which includes the effect of the discreet tax benefit we mentioned earlier. Our estimated full year tax rate for 2009 excluding any discreet tax items is 24.6%.

Our balance sheet remains strong and our business continues to provide necessary liquidity. The Company's cash balance at March 31 was $62.7 million. Working capital totaled $217.5 million at March 31, $10 million higher than at year end.

We've been relatively unaffected by the global credit crunch. Some customers have slowed payments somewhat but we have seen no signs of any significant collection problems at this point.

Debt at March 31 was $388 million, $2 million above year end levels, and our net debt to total invested capital ratio at quarter end was 40%, 2 percentage points higher than at year end with the increase primarily due to the reduction in our cash balance.

Operating cash flow was at negative $3 million for the quarter and includes a $10 million voluntary pension contribution made in January of 2009.

We incurred capital expenditures of $17.8 million in the first quarter with nearly 60% of the capital focused on new products and expansion activities, mostly for our Pharm Systems European plant expansions, the construction of our new China facility and our innovation program initiatives.

Looking ahead, our order backlog at March 31 was $224 million, roughly the same as our year end backlog and about $16 million or 6% below March 2008 levels, excluding exchange effects.

Based on current forecasts, we have decreased our full year sales projection by $0 million or roughly 1%. We now expect sales in the range of $1 billion to $1.02 billion at actual exchange rates.

Consolidated gross margins are still expected to come in at 30.3% for the full year. We now expect adjusted earnings per diluted share excluding restructuring costs to be between $2.05 and $2.18 per diluted share, assuming an exchange rate of $1.28 per euro for the remainder of the year.

We project full year sales in the Pharm Systems segment at $760 million to $775 million, down from earlier estimates, and expect to achieve full year gross margins of 34.5% in Pharma Systems.

To achieve these margin levels we're counting on pricing, more normal customer order patterns, reduced raw material costs, and on driving additional lean savings in our facilities.

Tech Group gross margins are still expected to reach 15%, an improvement of 1.3 margin points over 2008 margins on sales of approximately $250 million, with the gross margin improvement due to lean savings, cost reductions from our restructuring and sustained strong margins in our Grand Rapids and Ireland facilities.

The adverse effects of currency, slower customer orders and continued higher raw material costs flowing through our income statement are expected to continue to compress margins in the second quarter. Q2 results are expected to increase to exceed Q1 results by approximately 20%.

We continue to expect the resumption of more normal order patterns, maintain pricing to realize the benefit of lower raw material costs and to increase lean savings to produce favorable quarterly comparisons to 2008 periods during the second half of this year.

We continue to expect that full year capital expenditures will be approximately $130 million at current exchange rates, but we are monitoring the impact of the global economic situation and our expected demand and have positioned ourselves to restrict our capital spending accordingly.

To that end, we have identified approximately $30 million of capital spend that we can delay.

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

Thanks very much, Bill. This concludes our remarks for this morning and we'd now be pleased to take any questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from Larry --- from CJS Securities.

Good morning. This is Larry Solow calling in for Arnie Ursaner.

Good morning, Larry.

Good. Just a couple more global questions, on your Tech Group, I know you guys have a three to five year goal of reaching gross margins of 20%. Is that still in tact and how do you see yourselves getting there?

It's still in tact and it's the strategy that we've discussed over the last year, which is a shift of proprietary products to the fundamental basis of revenue drivers.

So if you look at what we talked about in the context of new products, whether it's NovaGuard, whether it's the CZ Syringe, the ConfiDose Auto-Injector, those are all individual injection molded plastic items or their assembled systems. And the assembled systems that are proprietary along with the individual components command higher margins. And the driver is going to be shifting that business base to a higher percentage of proprietary products.

Then just in terms of NovaGuard as an aside to new products, is that in line with expectations or is the approval a little earlier?

No, it was right in line with expectations. We had talked about early in the second quarter and that's when it took place.

And I assume it just takes a while to ramp up and do you have any expectations that you care to share for 2010 on sales of that?

No, not yet. What happens is that fundamentally now with the authority to market the device, we can begin really to sample on a large scale. Customers can undergo the trials they need to do to test it and look at what they've got to do to integrate it into their manufacturing lines.

And like with any other product, that will take probably anywhere from 8 to 12 months and then after that we would expect to see revenue start to develop.

Okay. Then I know you guys recommenced some ESA packaging components sales, and you expect it to ramp up in 2009. How's that going?

No real change there. Volumes will be down from their peak of a couple of years ago but we expect them to slowly ramp up. The last projection we talked about I believe was somewhere between $4 million and $5 million for the full year and we're still no track with that.

Okay, and then just in terms of customer buying patterns or trying to preserve working capital and kind of the tightening environment, anecdotally or sequentially through the quarter did you see any change in that? I see you left your CapEx at the original $130 million but you're still monitoring, so have you seen anything plus or minus?

No, I think what we've done is the old fishing analogy where the sinker's bouncing along the bottom. Most folks are being a little cautious. They're ordering with kind of that two to three month time frame. We haven't really seen a return to the blanket POs that we would traditionally get from customers for a full year which allows us to level load the factories.

So my guess is that they, our customers, will continue to monitor it closely and then we're going to see discreet POs than we are the broader volume POs. And that's probably going to take place for the next three to six months.

And then in terms of the capital expenditures, I know you -- so I guess you're -- of the $130 million you've identified $30 million that you could kind of delay. Could you kind of just briefly focus on what the $100 million is going to be focused on and what that $30 million component is that you can delay?

Yes. Primarily it'll be the maintenance CapEx that will be expended. Obviously you've got to maintain what you have. Within the $30 million that we've identified where we could cut if we had to, if you recall the discussions on the facility expansion, the brick and mortar work has been done and a lot of the support infrastructure-water systems, air systems, clean rooms and what not, is done.

We had always planned to phase in the actual presses, the trim presses and the other support systems as demand evolved in the market place. So we do have some flexibility there.

Got it. Great. Okay, thanks a lot, guys.

Thanks Larry.

Thanks Larry.

Thank you. Our next question is from Derik De Bruin from UBS.

Hi, good morning.

Good morning, Derik.

Good morning, Derik.

So let me just -- a couple of questions here. So you mentioned that Pharma sales were affected by "regulatory issues." What exactly were talking about?

Every once in a while we run into situations where our customers have regulatory issues within their production facility. In this particular case, we have two that have to shut down their production temporarily and address some short falls in their manufacturing method.

I see, okay. Is that in line with -- is that one of the drivers in the 1% [renewed] reduction?

Yes. It is. You get these surprises every once in a while, completely unrelated to our products. They've got to clean up their manufacturing floor.

Okay. I guess, with the -- you had NovaGuard and there's obviously nothing in your 2009 numbers. How should we look at this -- how should look to think about modeling NovaGuard in 2010 and beyond? Is it incremental to -- how incremental is it to the margin?

In terms of Tech, it will have a pretty nice uplift on the margin. In terms of guidance, I'll defer on that until we get to the latter part of the year. We'll probably provide some guidance in the Q3 call, certainly the year end call in February of next year.

We'll have to see how the evaluation work goes over the next six to nine months within our customers.

And I guess, any dramatic changes from your R&D and SG&A expectations relative to the prior call?

Not really. R&D was about a million dollars below where we were last year. My expectation is that we will continue to fund those programs to get them to market as soon as possible, so no real change there.

We still expect R&D expenses to be up versus 2008 levels in total. And SG&A, a lot of that cost is fixed --

Right.

-- unfortunately, but we are -- everything that's discretionary is being looked at and we are very, very much looking to control those costs where we can.

Okay, and just another two quick questions. I've had a number of clients ask me questions but with maybe a little bit more breakdown in your customer mix. Can you just give us percentage of sales that are kind of tied to biologics, vaccine and consumer products?

Consumer products overall within Tech is somewhere in the $70 million to $75 million range out of their total revenue.

On the vaccine side and the biologics, I would kind of lump those together. They're kind of in that 18% to 20% range.

That's kind of what we thought. And I guess just one final question. I think there's -- some of the questions I've gotten this morning have been people are concerned that historically the Company's sales (inaudible) have certainly been more weighted to the first half of the year and this year it looks like there's a lot more backend loading on this.

I realize a number of the factors in terms of cost and the margins and stuff like that, but is -- how comfortable are you that you're going to see this pickup?

We have a bunch of things that we've laid out. We talked about on the last time that we known are fixed. For instance, the pension costs, we know exactly what that is each quarter. We know what currency was last year and if you have -- if currency stays where it is, we have a pretty good beat on how that's going to impact favorably going forward.

Raw materials, we talked about that. It was very unfavorable in the back half of last year, the second half, so if we get through this quarter and into the third and fourth quarters, that will turn around and be a very big positive for us. We're looking at some significant lean savings coming through our manufacturing facilities that will help us as well.

And the order patterns returning to a more normal level, Don mentioned right now customers are very tight with ordering. They're only ordering out maybe two to three months. Hopefully towards the end of the year our projections are that that should return to more normal ordering patterns.

And just one final thing, the 1% revenue reduction, is that on the organic revenue growth rate?

Yes.

Yes.

Okay, thanks.

Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is from James Sidoti from Sidoti & Company.

Good morning, can you hear me?

Good morning, Jim.

A question on the raw material pricing and costs in general, now that oil's back down, is there any way you can lock in some long term purchasing agreements so you're not so sensitive to the pressure of the oil going forward?

Yes, we do have a long term agreement with our suppliers for synthetic rubber and that -- those are generally 10 and 12 year contracts. The issue is really our ability to take advantage of this lower price.

What we've done is we've gone out and we have purchased some options in the futures market and literally what we're trying to do is not gamble. We're not trying to speculate on the price of oil, but trying to protect the amount that's going to flow through our income statement should oil prices spike into the future.

So what we've in essence done is taken about, when you look at the materials that we have on hand, the delay that we have in terms of the pricing between when the underlying commodities change and when we see it in our inventory, and these options contracts, we've got about 50% of those -- of our material needs are in essence locked in to a price that will make sure that we are enjoying the benefit versus what we saw in our income statement last year in the second half.

So are these options in effect a hedge against an increase in the price in the oil?

They are, exactly. We look at them almost like an insurance policy. Again, we're not trying to speculate on any particular price, but what we've done is we've locked in a price not to exceed.

Okay. And then a general question on the capital expansion. When you make the decisions to build out some of these facilities, do you get any commitment from your customers on minimum purchasing at these utilities or is this all your speculation for the market to grow?

For the majority of them, it's based on our analysis of unit growth rates in the market so we'll look back over a five year horizon and then extrapolate that curve out. Then that's the fundamental driver for the decisions.

There are exceptions such as the plastics facility in China, which does not have a specific minimum volume tied to it but does have a contract tied to it for the customer that receives the IV caps.

But the bulk of the decisions are driven off a regressive analysis of historical growth rates.

Okay, great. Thank you.

Thank you.

Thank you. Our next question is from Adam [Foussard] from Barclays Capital.

Good morning, guys.

Hi Adam.

Hi Adam.

Bill, I just wanted to clarify a comment I thought you made. Did you say the EPS in the second quarter was up 20% -- you expect it to be up 20% sequentially?

Sequentially, that's correct, from the first quarter.

So 20% up from Q1.

And that's an approximation and adjusted for the fact that anything else that may change violently between now and the end of the quarter.

Understood. And then do you guys still anticipate knowing your (inaudible) obviously the Q3 kind of sequential coming down? Do you still expect Q3 to be down sequentially or just kind of maybe flat to up now --

No, we actually think it'll be up.

Okay.

How much is going to depend on what the order flow looks like. Right now our visibility is very good. The orders are coming in nicely for the second quarter. We do have some for the third quarter but that's what's unusual about this year. We've got kind of a flip between the first half and the second half.

And again we've got those things that we -- that the other variables that we know are going to impact. For instance, if you look at raw materials in the third and fourth quarters just reminding you from last year, there was about a $2.5 million negative impact each quarter from raw material pricing. That will not only go away but it'll get slightly better from where it is right now.

So those benefits should be absent some major calamity, should be locked in.

There's going to be bumps in the road. It could come down to the timing of a couple of orders here and there that may just skip from the second to the third or the third to the fourth or the fourth into the first, so we feel good about the year, picking up quarters on the quarters.

Okay. And then Don, I guess as far as your competitors in this environment, have you seen any kind of surprise, any change in behavior from them or is it kind of as usual?

No, not from our fundamental competitors. We have begun to see some lower cost competition come into the markets in South America from China, from India, and from China, India into the Eastern markets as they were, but in terms of the North American and European markets, the real drivers of our business, no.

As a matter of fact, they've spent capital to increase capacity as well.

And that kind of the phenomenon lowers cost competitors. Is that something new or is that something that's kind of been going on for some time?

It kind of goes on. They nibble around the edges on a constant basis. Mostly the really lower margins, disposable med device and/or low margin items for bulk produced antibiotics and things like that.

And the last question for Bill, just on the pension, is that all still kind of what you -- same expectations as what you communicated last quarter?

Yes, absolutely. It's a $10.3 million increase and it'll -- and it's roughly $0.05 per quarter.

Okay, and I think you made the payment this quarter --

We did. We made the $10 million payment in January. And it will help offset some of those losses from the second part of the way the pension expense works, which is you're also earning income on those assets that you have, so by providing $10 more million worth of cash into the plan we should hopefully earn some more interest income to offset those service costs.

All right. Thanks a lot guys.

You're welcome Adam.

Thanks Adam.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is from Ross Taylor from CL King.

Hi, just two quick questions.

Hi Ross.

Hi. First, somewhat related to the last question, I just wondered if the more difficult economy has made it harder for you all to sell some of the add-on services, some of the codings, Westar processing, that sort of thing, whether customers have been more reluctant to purchase those.

No. I would answer that question two ways. One, we saw a slight uptick in the value-added products for the quarter, so that's still a positive. And depending on how the customers do their regulatory filings, it's not a switch on-switch off kind of thing. Once they have decided to go with it and it's in their regulatory filings, they stick with it.

The other thing that's happened is that there is emerging from the FDA this initiative called "Quality By Design," and that actually will help us in terms of the value added products as the regulatory agencies slow push the big guys toward the cleaner, vision inspected coded products. So we actually may get a bit of a benefit there.

But we haven't seen an impact on that segment as a result of economic conditions.

Okay, and the final question. You may have addressed this already, but I'm working remotely and missed part of the call. But is the economy still seeming to have an impact in terms of customers reducing inventories, bringing down their working capital or do you think that's' more or less stabilized at this point?

No, there's no doubt that that's happening. The big question is whether or not we think it's reached its nadir and it's impossible for us to tell. We have seen an uptick over the last couple of weeks over our North American backlog, which is a positive, so the gap between where we are now and where we were in 2008 has closed.

Europe has been pretty solid. Its backlog is fundamentally right on where it was in the prior year. So yes, we are seeing them trying to reduce their working capital. We'll just have to follow this as we go through the year.

Okay, that's helpful. Thanks very much.

Thanks Ross.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to Dr. Morel.

Thank you very much, operator, and thanks to everyone for your time. This concludes our call for this morning.

Thank you. This concludes today's conference. You may disconnect at this time.