西式醫藥服務 (WST) 2009 Q2 法說會逐字稿

Good morning. Welcome to the West second 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. And now I'll turn the conference over to Mr. Matthew Duke from FD. Sir, you may begin.

Thank you operator. Good morning everyone and again welcome to West's second 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 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 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 also 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 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.

Again, this call is being recorded on behalf of West and is copyrighted material. It cannot be rerecorded or rebroadcast without the Company's express permission. Your participation in 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, Matt, and good morning everyone. Welcome to West's second quarter conference call. Joining me for the call today are Bill Federici, our Chief Financial Officer and Mike Anderson, West's Treasurer and primary Investor Relations contact.

I'll begin my commentary this morning with an overview of our financial results for the quarter then provide a brief update on our major product development and capacity expansion programs then conclude with some comments on our outlook for the last half of the year and our longer term planning horizon. Bill will then provide a more detailed review of our quarterly results before we open the call for your questions.

Let me begin with a high level overview of our second quarter financial performance. Revenues for the quarter were $261 million, $18 million below our record second quarter in 2008, but $19 million ahead of the first quarter. Reported earnings of $0.57 per diluted share exceeded our expectations as outlined in our April call.

Our European operations in both business segments had very solid quarters with strong throughput and a more profitable sales mix. The weakening of the dollar through the quarter helped improve our results versus our earlier expectations.

Overall, the dollar remained stronger than it was last year, contributing to weaker comparisons to West's record 2008 second quarter.

In North America, our other major geographic market, we did a little better than expected as a result of several customers requesting order deliveries ahead of the planned SAP conversion at three of our facilities in July. Our SAP project remains on schedule with the July plant conversions going smoothly and all converted systems are running well with no operating disruptions.

The Asia-Pacific region also produced solid gains in sales from a relatively small base. The overall sales increase was modest on a constant currency basis but not enough to overcome the dragging effect of currency, which pushed the US dollar value of our sales down about 7% on a consolidated basis.

I'm pleased with our operating performance during the quarter, especially in light of the challenging global economic environment. There is no doubt, however, that we still face some big picture issues. As you know, many of our pharmaceutical customers are reporting stronger than expected results for the last quarter with a significant portion of the difference being generated by cost savings in their operations.

While we have not seen any significant changes in prices, there continues to be a broad-based effort by our customers to control their production costs and inventories. However, as their sales begin to grow, we expect that we will see an end to this inventory contraction process and we'll resume growing at least in line with their end markets.

From an earnings perspective, our Q2 net earnings of $0.57 per diluted share were adversely affected by currency translation and higher pension and stock-based compensation costs. Gross margin improved slightly but slower growth impacted operating efficiency as we bring new capacity online.

SG&A costs continued to grow with the majority of the increase being attributable to pension costs resulting from the 2008 market downturn along with the effects of share price on stock-based compensation.

We continue to monitor our discretionary SG&A spending closely yet those cost increases together with the currency reduced sales and gross profits from foreign operations combine to produce lower quarterly results versus the comparable period in 2008.

In terms of our two operating segments, highlights included a very good first half for the Tech Group where year-over-year gross margin improved dramatically as throughput was strong and the cost savings benefits of the restructuring we started in 2007 were realized.

In Pharm Systems we've seen specific strength in product lines particularly around insulin related packaging material and components and in reconstitution devices produced by Medimop. We've also seen demand associated with ESA drug packaging components, which are pretty much in line with our earlier expectations. The combined effect of these and other positive sales items helped to limit the effects of continued inventory reductions at many of our customers.

Despite the challenges presented by the current market conditions, we remain committed to our growth strategy. We will continue to seek opportunities to add value to the products that we sell and to grow our portfolio of innovative products for packaging, reconstituting and safe administration of drugs, and thus increasing our participation in the value of the administered dose.

If we're successful on both fronts, we remain convinced that West will generate revenue growth at a rate in excess of the underlying market unit growth.

Turning to our major expansion in the new product development programs, in the safety and administration system segment, the NovaGuard 510k was approved early in the quarter and the market introduction is now underway. We continue to see interest in specialized applications for Medimop's vial adapter and reconstitution technologies and now have several new iterations of these products in development.

The development programs continue around the silicon-free prefillable syringe incorporating Daikyo's Crystal Zenith and FluroTec technologies. Sampling orders remain strong, keeping our limited capacity fully utilized and we're on schedule with a next-generation manufacturing cell.

Feedback from customers working with the CZ products continues to be very positive and we are aware of no significant doubts or concerns with the products coming out of what is now a very large body of customer data and experimentation.

In our recently completed China facility, installation and validation of the production lines continues on schedule. We will have the formal ceremonial ribbon cutting in September and remain on target to begin commercial sales in early Q4.

Our Singapore expansion was completed in June, bringing to a close the overall Europe and Asia expansion program announced in 2006. We finalized our site selection for India and now are in the process of going through the acquisition of the land for the new facility. We hope to finish the detailed plan for the facility in the fourth quarter and break ground early in 2010.

Finally, following the close of the second quarter, we announced the acquisition of Plastef's device business and most particularly the manufacturing rights for the Eris safety syringe product. Eris is a safety system for fixed-needle prefillable syringes complementing our NovaGuard offering, which is designed for use with Luer Lock syringes thus giving us a safety portfolio that covers the two principle types of syringes.

Sales for Plastef are expected to be on the order of $6 million for the next two quarters and earnings neutral.

In summary, a good quarter overall with substantial progress being made across the board on all of our key initiatives. Financially, the Company remains on very sound footing. Capital expenditures for the quarter were just over $27 million while cash flow from operations was $49 million.

We expect full year capital expenditures to be in the range of $110 million to $120 million versus the plan of $140 million at the start of the year.

Turning to our expectations for the remainder of the year, as outlined in this morning's release, we are adjusting our guidance for revenue and EPS upward to between $1.01 billion and $1.03 billion and $2.10 and $2.20 per fully diluted share respectively.

Revenue guidance is about 1% better than our earlier estimate and also about 1% better than last year on a constant currency basis. Currency has been a headwind to lower reported sales and profitability through the first half and if it stays at $1.40 per euro, we're now using our guidance for the rest of the year that will remain a problem for comparisons through the third quarter.

More fundamentally, our backlog is strengthening in Pharm Systems and if we're not completely through the inventory adjustments that have hurt our topline over the last nine months, this at least suggests that we're seeing the end of the trend. Organic revenue growth should improve to between 3.5% to 4% on average over the second half to the year versus being relatively flat during the first six months.

We've also seen some one-off lift in our order pattern attributable to the ongoing H1N1 situation. Although several of our customers are currently working on vaccines, these products are still months away from being able to be marketed as an approved product.

Looking at the longer term, the factors that we have outlined in previous calls continue to drive our performance and remain fundamentally in tact. our future growth will be driven by aging populations in our primary market, the increasing prevalence of chronic disease in these markets treated with drug of biologic origin, the broad range of new biologic based drugs under development and the market need for innovative ultraclean packaging and delivery systems for these therapies.

Our value proposition remains sound and the strength of our current product portfolio supported by our solid financial base will enable us to grow with and ahead of our markets over the next three to five years.

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

Thank you, Don and good morning everyone. This morning West recorded second quarter 2009 net income of $19.7 million or $0.57 per diluted share versus the $0.82 we reported in the second quarter of 2008.

As we explained in our release, the reported results in this year's quarter include the negative effect of $200,000 in after-tax restructuring expenses in our Tech Group. Reported results in last year's second quarter included a net after-tax benefit of $3.3 million from a customer contract settlement net of a tech restructuring charge.

Excluding the effect of these items in both years, second quarter 2009 earnings were $0.58 per diluted share versus last year's second quarter earnings of $0.73.

The majority of that year-over-year difference is due to the relative strength of the dollar versus 2008 second quarter exchange rate and the impact of the year-over-year increase in pension expense which collectively reduced comparable 2009 second quarter earnings by $0.13 per share.

The Company's consolidated second quarter sales were $261 million, an increase of less than 1% from second quarter 2008 sales, excluding the negative effect of foreign exchange.

Second quarter sales in the Pharm Systems segment were $197.8 million, 1.6% above second quarter 2008 sales excluding exchange.

International sales in Pharm Systems grew over the prior year quarter by 1.9% and domestic sales increased by 1.1%. The modest growth was expected and was due to continued customer caution in light of the current economic condition and continued emphasis on inventory management programs. We don't believe that the reduced demand reflects any appreciable loss of long term business.

The Tech Group segment generated sales of $66.8 million in the quarter, 1.1% below sales in the prior year quarter, excluding exchange. The decline was in Tech's Americas business and was due to a combination of the contractual path to effective reduced resin prices, reduced demand for consumer products and the discontinuation of sales to a customer in Mexico where we exited that business under Tech's restructuring program.

These declines more than offset solid increases achieved in domestic demand for IV and blood filter products and self injection devices.

In Tech Europe, sales increased over the prior year quarter by 11% excluding exchange with increases driven mostly by strong demand for a customer's device made in our Ireland facility.

Consolidated gross profit margins for the quarter were 30.2%, three-tenths of a margin point above the 29.9% margins we achieved in the second quarter of 2008. Gross margins in the Pharm Systems segment were 33.8%, six-tenths of a margin point below last year's second quarter margins with declines in both our North America and European regional units.

Declines are largely due to higher raw material, labor, depreciation, plant overhead and utility costs that weren't fully recovered with sales price increases. Because our supply contract terms delay the impact of changes in the underlying commodities on our costs, recent raw material price declines are just beginning to work their way into our income statement.

We expect to see Pharm Systems margins improve as the year progresses from the favorable impacts of lower raw material costs, contractual sales price increases, more normal customer order patterns and additional lean manufacturing savings.

In the Tech Group, margins increased over the prior year quarter by 2.8 margin points to 17.7%. The margin improvement was due to reduced resin prices and substantially higher production levels driving increased plant efficiencies at the Ireland and Grand Rapids, Michigan facilities.

Consolidated SG&A expenses increased by $4.2 million or 10% in the current quarter versus the prior year quarter. $2.6 million of the increase was due to higher pension expenses related to the investment losses incurred in our plant assets in 2008.

The remaining increase is due to higher compensation costs, mostly related to annual salary increases, higher depreciation expense, mostly for information technology upgrades and higher stock compensation expenses related to the increase in the Company's share price in the current year quarter versus a decline in the share price in the 2008 quarter.

Expense increases were partially offset by the effect of foreign currency exchange.

As a percentage of sales, second quarter 2009 SG&A expenses, excluding currency effects and increased pension expenses, were 15.4% versus 14.1% in Q2 2008.

The effective tax rate for the quarter was 24%, and our estimated full year tax rate for 2009, excluding any discreet tax items, now stands at 24.4%.

Our balance sheet remains strong and our business continues to provide necessary liquidity. The Company's cash balance at June 30 was $84.3 million and we generated $49.4 million of operating cash flow in the second quarter.

Working capital totaled $234.7 million at June 30, $27 million higher than at year end, but $30 million lower than at June 30, 2008.

We currently don't see any signs -- any significant collection problems but some customers have slowed payments down a bit.

Debt at June 30 was $390 million, $4 million above our year-end debt balance and our net debt to total invested capital ratio at quarter end was 36.5%, 1.5 percentage points lower than at year end with the decrease primarily due to our increased equity position.

We incurred capital expenditures of $27.4 million in the second quarter with approximately 50% of the capital focused on new product and expansion activities mostly for our Pharm Systems European plant expansion, the construction of our new China facility and our innovation program initiatives.

Looking ahead, our order backlog at June 30 is $234 million, $4 million stronger than our comparable year-end backlog and about $7 million or 3% above June 2008 backlog levels, excluding exchange effects.

Based on current forecasts and a revised foreign exchange outlook, we have increased our full year sales projections and now expect sales in the range of $1.01 billion to $1.03 billion at assumed exchange rates.

Our margin forecast has dipped a bit with consolidated gross margins now expected to come in at 29.9% for the full year. Our earnings projection has been revised upwards to reflect the favorable translation impact of the weakening dollar. We now expect 2009 adjusted earnings per diluted share, excluding restructuring costs, to be between $2.10 and $2.20 per share, assuming an exchange rate of $1.40 per euro for the remainder of the year.

The weakened dollar's favorable impact on our second half earnings is approximately $0.07 compared to our previous guidance. On a constant currency basis our earnings guidance is slightly lower due to the expected reduced throughput in our Tech segment.

We project full year sales in the Pharm Systems segment of $780 million to $795 million, up from earlier estimates and now expect to achieve full year gross margins of 34% in Pharm Systems. To achieve these margin levels, we're counting on pricing, more normal orders from our customers, reduced raw materials, and on gaining additional lean statements in our Europe and Americas manufacturing facilities.

Our expectation for our Tech Group margin remains the same at 15% gross margins. This still reflects an improvement of 1.3 margin points over 2008 Tech margins on sales of approximately $235 million to $245 million with the gross margin improvement due to lean savings, cost reductions from our restructuring and sustained strong margins at our Grand Rapid's facility.

We continue to expect the resumption of more normal order patterns, to realize the benefit of lower commodity prices on our raw material costs, to increase lean savings and as a result to produce favorable quarterly comparisons to 2008 periods during the second half of this year.

We now expect full year capital expenditures to be between $110 million and $120 million at current exchange rates and continue to monitor the impact of the global economic situation on our expected product demand.

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

Thanks very much, Bill. Before we turn to your questions, I'd like to reiterate several key points from our commentary. First, our expectation is that Pharm Systems sales growth will average 3.5% to 4% for the last two quarters in a market with very little unit growth.

Second, gross margin should continue to improve through year end through lower raw material costs and the impact of lean initiatives.

Third, we plan to reduce overall capital spending by approximately $20 million versus our plan at the outset of the year.

And finally, our operating cash flow and financial position remain very strong, allowing us to continue to fund our expansion and major development programs.

This concludes our prepared remarks for this morning. We'd now be pleased to answer any quarters that you might have. Operator?

Thank you, sir. We will now begin the question and answer session of today's conference. (Operator Instructions) One moment please as we wait for questions to queue. Our first question from Arnie Ursaner with CJS Securities. Your line is open sir.

Hi, good morning.

Good morning, Arnie.

Good morning, Arnie.

Starting first with the capital expenditure plan, can you comment on where the reduction's occurring? Is it geographic or just a little more color on where the reduction is and how that might impact 2010 spending.

Sure. The reductions are really just deferrals on the equipment that would go into the areas where we did brick and mortar expansion, so some of the equipment is being deferred as we wait for demand to develop. And it goes primarily within the European facilities but also some within North America.

With regard to spending in 2010, as we said before, we expect to kind of be in that $130 million to $140 million range for the out-years. We'll have to wait and see how things unfold through the end of the year but I don't think it changes our long term outlook. We'll still be in that range and we still expect that capacity to be filled.

And how would the success of CZ resin impact your capital spending and needs over the next year or so?

Depending on timing, it's probably going to require a little bit of extra capital on top of that number.

And relative to the guidance you provided previously, two big changes, one is currency but the other is we've seen a dramatic increase in the potential for swine flu vaccines, which you did highlight. Can you comment on how that impacted revenues in Q2 and how you see it impacting revenues for the balance of the year?

Yes, there was no impact in Q2 and currently on the books we've got orders in the range of about $8 million specifically to swine flu. We'll have to wait and see how things unfold because if you follow the news, on the one hand those producing the traditional kill vaccine are seeing yields out of the egg process that are lower than they would see with traditional seasonal flu vaccines.

On the other hand, the nasal version, the way that that's produced, because that's a live attenuated vaccine, they're actually getting yields comparable to or slightly higher than what you would see for a traditional seasonal vaccine.

So the orders right now are pretty strong. They're $8 million. We'll have to wait and see how the dosages evolve as we go through the end of the year and they go through the approval cycle.

Yes, so we really can't comment on how much is going to fall into this year, Arnie, but certainly nothing in the second quarter.

Okay. My final question is, I've been a critic of your SG&A spend as probably many of your other shareholders have, yet this quarter you had a particularly tight control over SG&A. Were there any one-time items in there or are you in fact more aggressively attacking your cost structure to improve your profitability?

There were, as we mentioned, a couple things that ran away from us. You have pension in there. You have $2.6 million, which is as we expected. Our normal compensation increases as we expected. Currency actually was a benefit of $2.4 million in there, Arnie, but other than that, it's just as you suggested, just tight controls over spending.

Thank you. I'll jump back in queue and look forward to seeing you at our conference.

Thanks Arnie.

Thanks Arnie.

Our next question from Ross Taylor with C.L. King Associates. Your line is open.

Hi. I have a couple a questions. I guess first of all, can you outline some of the reasons behind the change in your gross margin expectations for 2009 compared to your previous guidance?

Sure. We can walk you through that, Ross. What we've seen is on the Tech side primarily the margin has stayed the same. And that again is, we had a very strong first half and we're expecting some continued weakness in consumer products and also in the healthcare segment that they have. But the margins we believe are going to be able to hold in there because we have savings from the restructuring in the past. And when we look at everything and we put all those variables together, we think we're going to hold right around that 15% gross margin.

Pharm Systems, we've actually lowered the gross margin guidance by a half a percentage point and that's reflective of reduced -- a delay in the raw material benefit that we were seeing. We actually expected it to come a little quicker into our P&L. It's just starting to hit now. We still expect that that will be a positive to the second half of about $6 million but instead of where we expected it to be, which was neutral for the first half, it actually cost us about $3 million in the first half of the year.

That's the primary driver and then there's mix and all the other variables that are flowing through. When we add it all up, we believe we're going to be at 34% even for Pharm Systems for the year.

Okay and is there anything in particular that is causing the delay in the raw material benefit compared to what you expected?

It's really just first half demand being a little bit slower than we thought it would be. As demand picks up in the second half of the year, we work through the raw material inventory quicker and you'll start to see the flow through in the third and fourth quarter.

Do you remember, Ross, we had the delay in our contract, so that slows it down and then that gets it into our inventory and then it's just how fast we use it from our inventory and how that then falls into our income statement.

Okay. That all makes sense. Thanks. And for your revenue guidance, my guess would be that kind of upward move in your revenue guidance is all driven by foreign currencies. But is there anything else that might be working for or against your revenue expectations?

That's kind of a push-pull, Ross. You've got strengthening in Pharm Systems where we see some nice strength in our backlog. You've got swine flu pushing that a little bit. And of course you've got currency with half our sales coming from overseas.

The other issues that's working against it is that within Tech, where we do not have the visibility we do in Pharm Systems. We've seen a continued slowness on the consumer side of the business. And because their medical business produces a lot of consumables and disposables, we've seen some softness there as well. So you've got a little bit of a push-pull and that's how we come out to this slight increase of about 1% for the year.

Okay. And last question is, Don, in your prepared remarks, I think you mentioned some of your Pharm customers and how they're emphasizing cost savings. But can you just maybe give us a little more color on kind of what kind of pricing pressure you might be seeing from some of your Pharmaceutical or Tech customers at this point?

I think it's been pretty constant. Nothing's really changed in the last part of the year. They're managing their inventories closely. They're looking for tighter delivery times. They're looking for us to put more value into the products that we sell to them.

Outside of that, the ordinary pressures within the market I think are really what we're facing. We come into it around the price negotiations as we enter the fourth quarter and we'll see how things evolve.

Yes, and just as a reminder, Ross, that about half of the Pharm System's business is under contract. So those prices, for this year anyway, are locked in. And as Don said, we'll start negotiations in the fourth quarter.

Okay. Thanks very much.

Thanks Ross.

You're welcome.

Our next question from Jim Sidoti with Sidoti & Company. Your line is open.

Good morning, can you hear me?

Good morning, Jim. We can hear you fine.

Good. I just want to be clear now, is the restructuring over and going forward? Should we see the GAAP number and the pro forma number in line with each other?

The restructuring, there's still about, I'd say about a half million dollars left in Mexico, if that at all. And absent any other major change, yes, your GAAPs and your adjusted numbers should be in line with what we've incurred already through the first half of the year obviously.

And how much do you expect the restructuring to benefit you in 2010?

Well, what we had said was the numbers were running about $6 million to $7 million favorable from the Tech restructuring. And we have no reason to believe that's not still the case.

Okay. And then on the tax rate, it was down I guess below what you expected a year ago this quarter. What's a normal -- what should we model going forward for the second half of 2009 and into 2010?

24.4% is the rest of 2009. Obviously we'll take a look at it again and it depends on what happens with our geographic mix and what happens with tax legislation going forward in our various jurisdictions. But absent any major change in law or geographic mix, that 24.4% is a good rate for 2010 as well.

Okay. And then on the R&D line, it sounds like you took that number down a little for the year. Can you just give us some color as to what's being delayed or postponed?

Yes, we had several longer term programs that we pushed out a little bit just to make sure that the funding is allocated to CZ and to the ConfiDose in the near term. The other thing that you had was that NovaGuard of course was shifted over into the commercial space so there's no R&D funding for that going forward.

Okay. And then --

Let me clarify that. It'll be reduced going forward. We are working on some other iterations of it but it won't be at the level that we had up to this point to get the 510k approved.

And by -- on the CapEx front, by delaying I guess some of the production equipment purchases in some of the expanded buildings, what is that -- is that going to have any impact going forward on margins? I mean is there any overhead that you're going to carry now that you didn't expect to carry or is that pretty cost neutral?

It'd be marginal. You will see some. Obviously the bricks and mortar are there but the equipment hasn't been ordered so those costs won't be there. And again, it's a reflection of our customers demand and we're trying to meter that appropriately.

Okay. Understood. Thank you.

Thank you.

Thanks Jim.

Our next question from Derik De Bruin with UBS. Your line is open.

Hi, good morning.

Good morning, Derik.

So could you quantify the revenue pull through from Q3 to Q2? Any idea --?

Yes, so it was actually fairly moderate. It was only a couple million dollars.

Okay.

I assume you're referring to the North America comment?

Yes, absolutely yes. I guess it's ahead of your SAP?

Yes, not large.

Not a large number and just customers a little skittish about how some companies are having their SAP implementation done. Ours is working just as we expected.

Right. And it wasn't clear to me from the -- I guess as the Plastef deal, the $6 million you spoke about, that is in your current guidance?

That is in the current guidance.

Yes, it is.

Okay. And it's earnings neutral.

Earnings neutral.

But to clarify, it's $6 million per quarter.

$6 million per quarter. Okay. Okay.

It's $6 million in the back half of the year, Derek. $6 million in the back half of the year.

Okay. Back half of the year.

$3 million per quarter.

And could you just talk a little bit more about that acquisition? Was there some -- my understanding was there some sort of litigation around some of the Plastef assets?

For the one system there has been some litigation with another party that has a comparable system. We're free to market in Europe, which is where our intent is to focus. We have a second generation system under development for the United States.

But the key thing about the product is that it gives us a total portfolio now of the Plastef system for both the stake-needle prefilled market and for the Luer prefilled market.

Okay. Now there's been some issues with some of the biotechs basically having some -- slowing down some of their manufacturing in some of their plants. Have you seen any slow down in orders from any of your biotech customers?

Nothing that I would quantify as being out of what we've dealt with for the last six to nine months.

As a matter of fact, in some segments we've seen an improvement because our prefilled orders in Europe were stronger than we thought they would be and that predominantly tends to be biotech customers.

And I guess the -- you're saying you're potentially going to see an $8 million benefit from the flu in the back half of the year. I guess, what's your best guess from your conversations with customers I guess how potentially recurring it's going to be? How are your customers looking at this, as looking at this -- the pandemic?

I think it's a combination of producing at normal levels for the seasonal and the pandemic is being somewhat a one-time event as we go into the fall flu season. The wild card here I think is that the H1N1 has already mutated and whether or not the vaccines that are currently under development are going to be effective is still kind of an ongoing question. I think most of them think the answer is yes. So they're producing right now predominantly according to governmental demand both in the United States and in Europe.

Is there some upside to the $8 million? Sure, depending on the effectiveness of their production capabilities, but right now $8 million is a good number and we'll see how things unfold and soon approvals come through for the last six months of the year.

Yes, and that's the key is the timing, Derek.

Right.

We really don't know the time.

And then just one final question. As we start to see the Pfizer and the Merck deals starting to potentially close in the second half of the year, are you aware of any big changes in the manufacturing capacity of those companies?

No. The thing that will probably hit us the most is that we've got ongoing development programs with most and as they sort out their priorities, some of those programs may be affected, but to date we haven't seen any fallout that I'm aware of from the ongoing mergers.

And then just one final question. You said that the R&D was going to trend down or basically flatline in the back half of the year. Is that a -- do you see that ramping back up in 2010?

Yes.

Okay. Thank you.

Thanks Derik.

Our next question from Adam Foussard with Barclays Capital. Your line is open.

Good morning guys.

Good morning.

Good morning.

Don, you talked about last quarter I think some of the order sizes coming down and the length of orders coming down. Have you seen any expansion in that in your customer base?

The backlog's picked up obviously. Some of that is the fact that we've got some customers whose quarters end on September 30 and guys prepping going into the fourth quarter. But the overall trend in the industry now is to slightly smaller orders in a lot of respects, but more importantly shorter delivery times. And it's all back to the fact that these guys are, like everybody, focusing on their working capital and their inventories.

So no real change I guess to what you saw last quarter.

No, nothing out of the ordinary really.

Yes. And then as you know we've seen some -- I think with like Lantus and a few other products as far as some kind of safety issues. Do you guys have any exposure to any of these products? And if so, kind of quantify the headwind, I guess?

We do but I don't think we can quantify the headwind. Actually components for insulin were very strong for us in the second quarter as were devices. So when you have an issue like safety questions about a single product, because there's so many competing products within that category, often the downturn in one is picked up with volume in another.

So I guess we shouldn't think of the magnitude being anything close to what the ESAs were from last year?

Absolutely not. Absolutely not.

And then I guess, I think you mentioned the NovaGuard issue. Are you still assuming very modest I think contributions this year and then more -- obviously a larger contribution next year?

Yes, that's correct.

And then I think you guys -- I think you mentioned I think it was like 20% growth for Q2 last year. Are you commenting any on kind of how we should think of Q3 as far as EPS?

In terms of EPS, we've given you the full year guidance as our best guess. The timing of some of the orders is really the issue both Pharm Systems -- from a Pharm Systems perspective, our expectations for margins are much higher in the second half than they were in the first half. We're expecting less margin from Tech than we got in the first half. So you can put together the puzzle for yourself on that one.

All right, well that's it for me. Thanks a lot guys.

Thanks Adam.

Thanks Adam.

(Operator Instructions) Our next question from Carlos Garcia-Tunon with Morgan Stanley. Your line is open.

Good morning and thanks for taking my questions.

Good morning.

Sure, good morning.

I was looking at your numbers from the second half of last year and it looked like revenues were roughly $501 million and EPS I have $0.37. In the third quarter $0.56, in the fourth for $0.93. So it looks like in terms of revenues we're expecting kind of a 2% to 5% growth in the second half of the year, but for EPS, that would translate to more like 15% to 25% growth.

So first if you could just clarify whether my numbers are more or less accurate and then comment if there are some one-time numbers affecting the comparability. And then otherwise, if you could just walk us through the factors that are driving that kind of operating leverage in the second half of the year.

Sure.

The two main factors and then I'll turn it over to Bill, principally are currency and the changes over the last part of the year as well as raw materials.

And it's really a bunch of factors, but just to clarify your numbers a little bit. The back half for the consolidated entity for the full year, as we said, it's about 1% on a real basis over the prior year. The back half will be between 3.5% and 4%, as Don has suggested, so a little higher than you had quoted.

The various variables that are in there, pricing is very strong versus the prior year. The -- Don mentioned the currency and the raw material list, additional lean savings that we're expecting in the various parts of the businesses and mix. Those are the variables that go into the equation and we've loaded it from the bottom up and these are the numbers we're coming up with.

Okay. And maybe if you could comment to help us think about 2010. If you were continuing to experience that sort of mid single digit revenue growth, what would operating leverage more than likely be like going forward from 2009? Would it be more reasonable to expect EPS growth in the 7% to 9% range with that sort of revenue growth?

I think what we commented on in the past and we will give our guidance for 2010 come the February call when we do the year end call. But because of the timing of the way that some of our products come to market and the way that the pharmaceutical approval process works.

When we look at our three to five-year planning horizon, we've typically talked about middle single digit revenue growth on average. And there will be some lumps up and down there. And the leverage there between lean, between pricing, between raw materials, and the margin improvement that's coming out of our product mix with some of the newer devices coming to market in any given year should push that to somewhere kind of in the high singles or in some years in the low doubles.

But on average, the way our planning has worked and again looking at the longer term, we're pretty much in line with our expectations there. So you're looking at kind of mid to high singles on the sales, up and down all little bit over the five years, but in the region on average. And then a couple of points above that on the operating side.

Okay. Thank you very much again.

You're welcome.

Gentlemen, I have no further questions in the audio queue.

Thank you very much operator and thanks to everyone for your time this morning. For the remainder of the year we're going to 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.

Thank you very much for your time this morning.

This does conclude today's conference. You may disconnect at this time. Thank you for participating.