西式醫藥服務 (WST) 2009 Q3 法說會逐字稿

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 objection, you may disconnect at this time. And now I'd like to turn today's meeting over to Mr. Matthew Duch from FD. Sir, you may begin.

Thank you, operator. Good morning, everyone, and again, welcome to West's -- this is actually their third 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 or 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 discussions 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, 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.

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 may not be comparable to and should not be viewed as a substitute for US GAAP operating income and diluted shares, EPS. Reconciliation of the non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in 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, re-broadcast without the Company's express permission. Your participation in this call implies your consent to our taping.

Once management has completed 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 third quarter conference call. Joining me for the call today are West's Chief Financial Officer, Bill Federici, and Mike Anderson, our Treasurer and primary investor relations contact.

This morning I will begin the call by briefly summarizing our third quarter financial performance and then review key ongoing development and expansion programs. I will also discuss the restructuring plans outlined in this morning's release and conclude with some comments on our outlook for the remainder of the year and some preliminary expectations for 2010. Bill will then provide a more detailed review of our quarterly results before we open the call for your questions.

On a consolidated basis our third quarter results showed improvement over 2008. Although sales increased a modest 1% to just under $259 million, adjusted operating profit grew $2.3 million to $22 million, an 11.7% increase. As expected, quarterly growth in the Pharmaceutical Systems segment was the strongest this year but was offset by lower sales in the Tech Group segment. Our consolidated gross margin improved 2 full percentage points to 27.7% versus 25.7% for the third quarter of 2008.

Fully diluted reported earnings per share were $0.50 for the quarter, which included $0.05 of tax-related benefit. Excluding the discrete items from both the current and prior-year periods, adjusted earnings grew more than 20% from $0.37 per share to $0.45 per share.

Financially, the Company remains on very sound footing. Capital expenditures for the quarter were just over $25 million, while cash flow from operations was $39 million. For the full year we expect our capital expenditures to be between $110 million and $120 million.

Turning to the Pharmaceutical Systems segment, sales increased 4% to $198.1 million and, excluding the impact of currency, grew an impressive 7.8%. Revenue growth during the period benefited from H1N1 packaging system sales, higher sales of pre-filled packaging and delivery systems for insulin and modest growth across a range of value-added products.

Excluding currency effects, sales gains were recorded in both North America and Europe with more modest gains in Asia. During the quarter we finally started to see the combined benefit of higher prices and a better product mix coupled with falling raw material costs, even as petroleum prices drifted higher. Nonetheless, contractual adjustments in annual selling prices, which are based on trailing PPI or customized indices, are having a larger impact as our existing sales agreements continue to take into account the higher costs that prevailed during 2008.

Our lean programs also contributed as our manufacturing teams continued to do a very good job of controlling costs and eliminating waste.

Offsetting these positive contributions were higher depreciation and personnel costs, but overall positives outweighed the negatives, leading to improved growth in operating margins.

Turning to the Tech Group, sales for the quarter totaled $62.9 million, a decrease of 6.4% from the third quarter of 2008 excluding currency effects. The revenue drop occurred for several reasons including lower resin prices, continued [slight-ish] demand in the consumer segment, discontinued customer products and the sale of our Mexican operation in late 2008. The sales decline in North America was partially offset by strong sales in Europe, which grew 5% excluding the impact of the Plastef acquisition.

Turning now to some of our ongoing development and expansion programs, we have largely completed the integration of the Plastef acquisition into our European operations, and quarterly revenues were largely in line with our expectations. The combination of the Plastef Eris Safety system and West's proprietary NovaGuard technology offer proven needlestick prevention systems for both staked needle and Luer Lok Syringes from a single source. Sampling of silicon-free Daikyo CZ systems continues to be very strong.

Within our Tech operations we have completed allocation of the unit cavity system and construction of a new, higher-capacity production line. This new line will undergo validation in the fourth quarter and should be ready for full-time operation early in the first quarter of next year, effectively quadrupling our sampling capacity as we begin planning for full-scale production. This added capacity is quickly needed to satisfy continuing strong customer demand for these products.

The formal dedication of our China plastics facility took place on September 22, and last week West received approval from our major customer for that facility to begin commercial production following the completion of our validation and engineering trial.

On the corporate side, we continue to focus on keeping costs down and streamlining our operations to the greatest extent possible. As you will have read in this morning's release, we will be taking steps in the fourth quarter to eliminate some underperforming assets and reduce our headcount. The realignment will have its greatest impact in our North America operations and, to a lesser extent, in the Tech segment.

In the Pharmaceutical Systems segment we have completed the North American SAP implementation project and are phasing out our legacy IT systems. We can now begin reducing the associated ongoing operating costs and capture the process advantages offered by the SAP system. We will also be exiting certain specialized laboratory service businesses which are not growing as expected and, due to their specialized nature, do not fit with the remaining lab services business.

The Tech Group actions are to prepare one of our facilities for an expansion of clean room production capability for several West proprietary programs. We will also relocate two programs currently within this facility to other West facilities while simultaneously rationalizing some low-margin business. Collectively, these plans will cost about $9 million but will begin generating savings during the fourth quarter with additional savings next year.

Although not quite up to earlier expectations, overall it was a pretty good quarter with strengthening revenue growth in the Pharmaceutical Systems segment and operating earnings up strongly versus prior year. We also made good progress across the board on our expansion projects and our new product development programs.

Turning to our expectations for the year, we are raising our revenue guidance to between $1.03 billion and $1.05 billion, primarily due to the effects of the weaker dollar and H1N1 sales. We've also revised our earnings outlook for the year to a range of $2.08 to $2.13 and adjusted diluted earnings per share. Our revised revenue guidance includes additional sales of H1N1 components and is almost 2% better than the prior year on a constant currency basis. Our backlog in Pharmaceutical Systems has remained very strong exclusive of the H1N1 business, affirming our view that the overall inventory contraction has run its course and we can expect to see organic revenue growth begin.

For 2010 we expect to see growth of between 3% and 5% excluding any currency effects. This estimate is based on pricing that will be relatively modest versus 2009, most likely on the order of 1% overall. We also expect volume growth to be rather modest in North America and Europe with stronger growth in Asia. The biggest contributor to our growth is expected to be in improving product mix as higher-margin, value-added product production increases throughout the year.

Looking at the longer term, the fundamentals driving our growth remain intact, driven primarily by the market trends we have previously discussed. Favorable global demographics, the increasing prevalence of chronic disease, high sales of biologic drugs, novel vaccine developments, growing demand for health care in developing markets and the industry need for novel, clean packaging and safe, accurate and easy to use delivery systems.

While the last 12 months have been challenging from many viewpoints, West remains well-positioned to take advantage of these trends. Our new product pipeline meets a range of unmet market needs ranging from safety systems and ultra-clean packaging to accurate, easy-to-use delivery systems. Our financial position remains very strong. The steps we have outlined to expand our operations will enable us to grow with and ahead of the markets we serve for the foreseeable future.

I would now like to turn the call over to Bill Federici.

Thank you, Don, and good morning, everyone. We issued our third-quarter results this morning, reporting net income of $17.2 million or $0.50 per diluted share versus the $0.40 per share we reported in the third quarter of 2008. As we explain in our release, excluding the effects of the special items in both years, third quarter 2009 adjusted earnings were $0.45 per diluted share versus last year's third quarter earnings of $0.37 per diluted share, a 21.6% year-over-year increase.

We achieved this earnings increase despite the $0.05 negative quarterly effect of a year-over-year increase in pension expense caused by the decline in the value of our pension assets in 2008 and continued $0.01 negative effect of currency translation versus the prior-year quarter. The Company's consolidated third-quarter sales were $258.9 million, an increase of 4.3% over third quarter 2008 sales excluding the negative effect of foreign exchange.

Pharm Systems segment sales were $198.1 million and improved 7.8% over third quarter 2008 sales when currency translation is excluded. Domestic sales in Pharm Systems grew over the period prior-year quarter by 12.7%, while international sales increased by 5.1% excluding currency.

Demand increased in the quarter for many of the Company's high-value coated and Westar-treated packaging components. H1N1-related sales were approximately $9.7 million in the quarter; and, excluding those sales and currency translation, Pharm Systems sales increased by approximately 3%. The sequential increased sales growth over 2009 first- and second-quarter levels was expected and, we believe, reflects a modest recovery in basic sales demand. Reduced demand in earlier quarters was due to customers' cautions regarding economic conditions and their emphasis on inventory management programs.

The Tech Group segment generated sales of $62.9 million in the quarter, a 6.4% decrease from sales in the prior-year quarter excluding exchange. The decline was primarily in Tech's Americas business and was due to a combination of the contractual pass-through effect of reduced resin prices and continued declining demand for consumer products.

In Tech Europe, sales increased over the prior-year quarter by 34% excluding exchange with the increase driven mostly by sales associated with the third quarter acquisition of Plastef's safety syringe business and continued strong demand for our customers' intranasal allergy device. Excluding the sales from the acquisition, Tech Europe sales increased by approximately 5%.

Consolidated gross profit margin for the quarter were 27.7%, 2 full margin points above the 25.7% margins we achieved in the third quarter of 2008. Gross margins in Pharm Systems segment were 32%, 2.5 margin points above last year's third quarter margins, with solid improvement in both our North American and European regional units. Increased Pharm Systems margins were largely due to lower raw material cost, a favorable sales mix and contract-based sales price increases which more than offset increased depreciation, plant overhead and utility costs.

In the Tech Group, margins decreased over the prior-year quarter by 1.2 margin points to 13.2%. The margin decline was mostly due to lower sales volumes caused by lower demand for our consumer products components and an unfavorable sales mix, offset by the impact of lower material cost and improved plant efficiency at some locations.

Consolidated SG&A expenses increased by $2.8 million, or about 7% in the current quarter versus the prior-year quarter. The net increase was primarily due to $2.8 million of higher pension expenses related to investment losses incurred on our plan assets in 2008. As a percentage of sales, third quarter 2009 SG&A expenses excluding currency effects and increased pension expenses were 15.8% versus 15.6% in Q3 2008.

The effective tax rate for the quarter on a reported basis was 26.5%, and our estimated full-year tax rate for 2009 excluding discrete items now stands at 23.8%.

Our balance sheet remains strong and our business continues to provide necessary liquidity. The Company's cash balance at September 30 was $79.5 million and we generated $39 million of operating cash flow in the third quarter. Working capital totaled $236 million at September 30, $29 million higher than at year end but about $9 million lower than year-ago levels.

We haven't seen any signs of significant collection problems with our customers. Debt at September 30 was $397 million, $11 million above our year-end debt balance, primarily due to currency, and our net debt to total invested capital ratio at quarter end was 35.9%, 2.1 percentage points lower than at year end, with the decrease primarily due to our increased equity position.

We incurred capital expenditures of $25.2 million in the third quarter with a majority focused on our new product and expansion activities, mostly for our Pharm Systems' European plant expansions, the completion of construction and equipping of our new China facility, our innovation program and our information technology initiatives.

We are continuing to expect full-year capital expenditures to be between $110 million and $120 million at actual exchange rates and continue to monitor the impact of the global economic situation on our expected product demand and related capital spending plan.

Looking ahead, our order backlog at September 30 of $237 million is equal to our comparable year-end backlog and about $14 million or 6% above September 2008 backlog levels, excluding exchange effects. Excluding currency and H1N1 effect, our backlog is approximately 2% above prior-year levels. Based on current forecasts, including expected sales increases in support of H1N1 vaccine activity and our revised foreign exchange outlook, we have increased our full-year sales projection and now expect consolidated sales of between $1.03 billion and $1.05 billion at actual exchange rates.

Our gross margin expectations are lower with consolidated full-year gross margins now expected to be about 29.2%, down from our prior guidance on a less favorable mix including the effect of Q3. This still reflects a 40-basis-point improvement over 2008 results.

Our Q3 results were very positive versus 2008 but were short of our expectations. We achieved our sales number through sales of H1N1 components and Plastef's safety devices, but the mix was unfavorable to our expectations as we sold less high-end products due to some continued customer inventory management issues and a change of one of our key high end raw materials that did not produce the sales we expected. Additionally, our raw material cost reductions were not as strong in Q3 as expected, as the products did not move as quickly through our inventory into our income statement. Also, we experienced some additional SG&A expenses above expected levels in the quarter, reflecting some severance and adjustment of reserves.

We still expect Q4 to be favorable to both 2008 and Q3 2009 results due to continued contractual price increases, a favorable mix, raw material cost reductions and additional lean savings. We now expect 2009 adjusted earnings per diluted share, excluding restructuring costs and out-of-period tax items, to be between $2.08 and $2.13, assuming an exchange rate of $1.48 per euro for the remainder of the year.

We expect 2010 sales will increase by 3% to 5% over 2009 amounts on a currency-neutral basis.

This morning we also announced the restructuring of our Tech and Pharm Systems businesses to reflect the current and anticipated customer demand for our products and services. Certain Pharm Systems services and projects will be discontinued and associated assets disposed of. We will make longer-term facility upgrades in certain Tech Group facilities to meet the future needs of our customers, but these will take some time and we will be reducing staffing levels in the near-term. These programs will result in approximately 100 positions being affected and result in a total charge estimated at $8 million to $10 million including $3 million to $4 million of severance and other cash costs and $5 million to $6 million of non-cash asset impairments.

The restructuring is expected to yield savings of $5 million to $6 million in 2010 and $7 million to $9 million per year thereafter. We expect all but approximately $1 million of the sales at the affected facilities will be transferred to other West facilities.

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

Thanks very much, Bill. Our fourth quarter is shaping up to be the strongest of the year. Currently, more than 90% of our orders are on the books and our operation continues to run at high levels in the pharmaceutical packaging side of the business. We expect the revenue growth to accelerate during 2010, coupled with improving gross margin. Our backlog remains near record levels, and we continue to turn to tightly manage both our capital and discretionary spending.

This concludes our prepared remarks for this morning. We would now be pleased to answer any questions you might have. Operator?

(Operator instructions) Ross Taylor, CL King.

First, regarding your outlook for 2010, can you give a little bit more color, just because the material went by pretty quickly, just a little bit more color on your pricing expectations for next year and how that might relate to your 3% to 5% organic revenue growth forecast?

The pricing expectations are probably going to be lower than they were in 2009, probably on the order of about 1%. We're looking at very modest unit growth for the year. We will see some growth in Asia, more moderate growth in Europe and North America. But again, that's probably going to be in a very, very low single digits.

Much of that growth is going to be driven primarily by an improving mix, so we expect that to contribute the largest part of the 3% to 5%.

Okay. And, Don, I don't know if I heard you correctly in your last comments, but did you mentioned that gross margins might be at a record level in 2010?

No. No; they will be improving, but I wouldn't look for them to be at a record level.

Okay, so you do expect gross margins to be a little bit better than --

Yes.

-- this year?

Yes.

Okay. And finally, just in terms of your outlook for Q4, if I work through your numbers, can you talk about your gross margin expectations at all for the quarter compared to last year or versus Q3?

Sure, Ross. We are expecting them to be better than both last year's fourth quarter and the Q3 2009 numbers. You have those historical numbers. We are expecting both -- when you look at 2009's fourth quarter, we are expecting the margins to grow on the order of, in Pharm Systems, sequentially about 200 basis points, and Tech will actually be a lower than what we had in the third quarter. So on a consolidated basis we are expecting, as you can imagine, with our full-year expectation at 29.2%, we are expecting consolidated margins for the fourth quarter to be just above 30%.

And, last question, the H1N1 vaccine business that you have -- can you comment at all on its gross margins relative to the Company average, whether they help or hurt the mix?

Relative to the Company average, they are a little bit lower, as you can imagine, because our customers have government contracts at a fixed price to supply these. Our pricing and our margins on these products are typically lower because of those contracts.

Arnie Ursaner, CJS Securities.

You mentioned your backlog of $237 million. What sort of order delivery times are people getting as they come in now?

We are pretty much on the 10- to 12-week time frame, which is where we would like to be, for rubber. Metals are a little bit lower, in that eight to 10 kind of range.

And I'm trying to sort through how the H1N1 is impacting your results. My sense is you were running five or six facilities pretty aggressively, but I also thought they were above Pharma System margins. So I guess, if you can give us a little better feel for the revenue expectation we ought to have for the next few quarters, is it replacing 60%-65% margin business with 40% margin business? Is it creating any manufacturing inefficiencies? I'm just trying to understand how H1N1 is impacting your revenue and margin.

The revenues in the third quarter were just shy of $10 million for H1N1. The fourth quarter will probably be just a little bit north of that. So total, about $21 million for the year. There will probably be some overflow into '010. It won't be a great amount, maybe $5 million or so, I think we currently are looking at. It hasn't really impacted our operations except for the fact that these products are sold at a lower margin than our standard Pharma products, for the reasons that I just gave Ross. Typically, they command lower margins within the agreements that we have with the customers that are the vaccine producers when they are selling to governments.

And you are required to produce these under government type contracts or mandate?

No, we're not required to produce them, but we traditionally supply them under our existing supply agreements.

And a follow-up regarding your views for next year. You mentioned currency neutral, and obviously the euro has had a fairly sizable change. Were it not for the currency change -- I assume, when you say currency neutral, you are using the euro at $1.48 or so?

We were using the euro as if it were -- you could use $1.48 or any other amount. We're saying that, whatever it was this year for the full year -- and I -- Arnie, to be honest with you, we haven't run quite $1.48 through three quarters where -- let me give you a number through the three quarters. We are at $1.38 through three quarters, is the average right now.

So, yes, you are going to have some increase in the fourth quarter based on the exchange rate hovering right now around $1.46, $1.47, $1.48. But we won't get to $1.48 for the full year. So whatever it is that that amalgamation -- we've taken that out of the review from 2010 to 2009, so we've made it currency neutral.

So you can assume any number you want and predict your expectation, but the 3 to 5 excludes all currency impact.

So saying it another way, you said 1% price. That would imply 2% to 4% from volume improvements for next year?

No (multiple speakers) volume is not going to be there.

Volume growth is going to be relatively modest. What we expect is a continuing shift in the mix, which became more positive in the third quarter, and we see that continuing into 2010.

It's selling the high-value end products, Arnie. That's the key.

Okay. And, Don, in your prepared remarks you indicated you thought that you were seeing some kind of churn in terms of customer demand. Can you expand a little bit more about what you are actually seeing? Because your customers have had a fair amount of inventory. You mentioned it impacted Q3 margin. I'm trying to get a feel for what your customers are actually telling you and how it's manifesting itself into manufacturing improvements and mix.

It's kind of all over the board. We are seeing improvements in our backlog as we go into the end of the year. That's the more traditional seasonality that we would expect under normal conditions. If you will recall, that was actually declining at the end of 2008, although our backlog was still strong overall. The shape of the curve has returned to a more normal type of pattern. The one thing we haven't seen any real change in is that the releases against the backlog are tending to be smaller orders with shorter lead times. So that part has continued.

The good news is that the backlog is picking up. And I would guess that, as we get into the first three to six months of 2010, the releases against the orders are going to come back to a more traditional pattern as well.

Bill, in your prepared remarks you mentioned that you had a $1.9 million benefit from lower raw material costs, but also indicated you didn't get the full benefit in Q3 because it was a little slower moving things out. Can you quantify what you hope to see in the way of improvement?

We were hoping for a little over $3 million, so we didn't get it. And it's really, Arnie, what we think is that it's hung up in the inventory right now. It didn't flow through as quickly as we had expected.

Is that part of your margin improvement view for Q4?

Yes, it is.

Okay. And, finally, I know you are going to be negotiation with a number of your customers, and the back half of this year is benefiting from the dramatically lower energy prices we saw earlier in 2009. But they reversed themselves and moved quite a bit. And yet you mentioned you thought you would see some gross margin improvement next year. So I'm trying to weight the higher raw material costs we are likely to see, very modest price increases and your view that margins can improve -- so really, a two-part question. One is, if you do get 1% price, is that even enough to cover your higher costs? And, two, how much of the margin improvement would be based on higher volumes or mix?

Mix is going to be the driver.

Mix is the big driver.

That's the simple answer.

Yes, and we are going to -- remember the tail as it relates to the costs that go into the inventory from raw material and then come out when it's sold. It's a delay function both on the supply contract and then based on how long it sits in our inventory. So we'll get the benefit of that going through into, beginning into 2009. But you are right; the prices do seem that they're -- that they have come back up, and we will have to face that at some point in time. Our belief is that the mix issue plus the pricing, a little bit of price, will help us offset that, more than offset that.

And the other contributor will be continuing to lean the operations. The operations guys have done a terrific job this year. I'm sure we'll get more efficient in the factories, then help offset some of our inflationary cost.

Final question, if I can. You've talked before about capital spending this year in the $110 million-$120 million range, but you had thought 2010 spending could return to more like the $130 million level. With this new facility you are building for the evolving product mix, how should we think about capital spending for next year? And give us some of the key highlights where it will be spent.

I don't think you are going to see an immediate return to that kind of $140 million-$150 million level that we thought we would be running at two years ago. What we talked about in the release today is that we are actually going through a transition at one of our facilities for some programs that are going to come to commercialization quicker than we thought. So we need clean room capacity for those programs, and the capital will actually go into the conversion of that facility.

I think, capital going forward, you will see expansion capital going into India and China, again, as those markets develop. You will not see expansion capital, for the most part, going into North America and Europe. What we've done over the last couple of years should hold us in pretty good stead through probably 2012-2013.

Where you will see capital going is into ongoing improvements in our quality. So the processing that takes place after actual production in terms of Westar, vision systems for quality inspection -- that's where the majority of the capital will be spent in Europe and North America.

There's also some capital that will be spent as we begin to increase our capacity in CZ and as we begin to put production capacity in for NovaGuard as well. So probably a little bit more capital going into the new product capacity, a little bit less going into existing capacity in Pharm Systems.

And one further comment, Arnie, is that, with the new, innovative products the square footage and the capital expenses associated with that revenue dollar are not nearly the same as they are for the standard business. So we do get some leverage out of that product as we go.

Derik De Bruin, UBS.

How do we look at the pension expenses in 2010?

It's something we are working on with our actuaries right now. As you know, the way it works is we'll take another snapshot at the end of the year based on where the asset values are. But, in addition to that, that also plays into this game, is our assumptions on interest rates and our assumptions on the growth of salaries.

So we are looking at it right now. We certainly -- if the year would end today, there would be a benefit to what we expensed in 2009 because of the increase in the value of assets. Running against us, though, is the interest rate situation that we currently find ourselves in. So we are going to look at that. We're looking at it right now with our actuaries. We'll have more for you when we get to our call in February, but our hope is that we'll have some benefit. Just how much is still being thought through.

And I guess SG&A, excluding the pensions and currency -- do you expect modest decreases/increases in the SG&A next year?

Yes, we do. As a percentage of sales, when you take out the factors, yes.

Okay. And I guess could you talk a little bit more about some of the discontinued items? What services did you exit?

Yes. What we had done was make an investment in inhalation testing for pulmonary delivery systems. All indications were in 2007-2008 that that was going to be a nice complement to the testing that we do on the injectable side. Unfortunately, the business didn't materialize, and we decided to exit.

Okay. And then, finally, could you talk a little bit more about the drag from the consumer business in the Tech Group and I guess how do you see that playing out?

Yes. A large part of it is simply due to the resin. But sales were down across the product lines that we've served over the last couple of years. I don't think you have to be a genius to look outside and hear what everybody else is saying. We've seen things improve a little bit over the last couple of weeks. My expectation is that it will modestly improve as we go into next year.

By the time we get to the end of the year, I don't think we'll be quite back at the levels we were at in '08, but we should see some improvement. The more encouraging sign is that we are also starting to see some tooling releases, which is kind of a big harbinger of what's coming down the pike.

And how big a chunk of that is the -- of consumer, of the Tech business?

Yes, it's about $60 million overall.

$60 million to $70 million; right.

(Operator instructions). James Sidoti, [Fidelity] & Company.

Wow, [Fidelity] and Company. That's a switch. Capital spending -- you guys said about $110 million this year?

$110 million, $120 million.

Okay. How much of that is maintenance, and how much of that is expense?

The maintenance is roughly between $50 million and $60 million. If you break the other piece of it out, there's about -- $15 million of that is IT spend, and the rest is for growth and expansion.

And then so that other -- well, the remaining capital spending, I assume, has been China and India? Because it sounds like you don't expect a lot of volume in Western Europe and the US.

Yes; it's already been spent. Yes.

And it is -- as Don said, it's in vision systems, quality systems, it's in the water systems, etc. It's in those areas that we expect to see growth going forward.

(multiple speakers) I'm sorry, I was just going to say that, remember, we just finished up the Singapore expansion in the middle of the year, which was part of that five-plant expansion that was announced back in 2006. So in the last couple of years we've completed expansions of our tooling in Bodmin, we've completed the expansion of Eschweiler in Germany, our Serbian facility, and now Singapore.

Okay, so basically, you're done building plants for the time being, and now it's just upgrading the equipment in the plants?

Except for China and India.

Except for China and India.

In China there will be a small amount coming in, obviously through the rest of this year, but also into next year as we build out a small rubber facility there. And we will begin to work on construction of an Indian facility as well.

Okay, and you said that the plant that you had started in China is now complete?

That's the plastics facility.

That's the plastics facility, yes.

And when will you start recognizing revenue from that plant?

Fourth quarter. That was the comment I made in my remarks about the customer having approved the lines, now that the validation studies are done. With those approvals, we are now starting commercial production for them.

Okay, and will it take a couple quarters for margins to ramp up here, or do you think you will --?

No; it will be directly related to the volume ramp up.

Absolutely.

Adam Poussard, Barclays Capital.

Don, I guess I was wondering if you would comment, maybe, I guess on the timing of the restructuring, kind of why now versus earlier in the year and just the thought process behind that.

If you look at the two major parts of it -- one, SAP, we've completed everything in North America on the Pharmaceutical Systems side. That allows us to basically write down the legacy systems that we had to run in parallel until we got everything up and going. With that, we don't have the personnel load that was commensurate with the project, not only getting up but also the running of the legacy systems.

Also some affiliated cuts with regard to the laboratory services, given the fact that we are going to exit parts of that business. Tech happens to be more opportunistic because of some of the new products that we want to get up and going a little faster than we had originally contemplated. We don't want to put bricks and mortar in the ground. We have a facility that's somewhat of a hybrid facility. It simultaneously serves both the Pharm Systems business as well as parts of the Tech business. So, in effect, what we are doing is relocating some items that are currently produced there. We are freeing up that space. We will convert that space to the clean rooms we need to run some of these device programs.

So timing driven more by those factors than anything else.

As I think of next year, I know you guys mentioned currency neutral and that pension potentially could be a benefit, and obviously the cost savings. Is there anything else that maybe we should keep in mind -- potential headwinds, tailwinds -- as we think of next year?

Well, we certainly have talked about mix being a big driver. That will be a nice tailwind for us. We think about lean, lean savings in our manufacturing facilities, which we also think will be a nice tailwind for us. Those are the big movers.

Any update, I guess, on the -- last quarter you mentioned the customer payment slowdown. Any update there? And then I think you made a brief remark of some reserve adjustments? If you could just elaborate?

First, on the customers, we see no significant collection problems in our customer base, and that's the same as we had said in the past. And the figures on the reserve side -- there are a number of things in there, but the one that sticks out is we made an adjustment to the incurred but not reported reserves from workers comp claims at tech that increased [that].

And, gentlemen, I have no further questions. I'd like to turn the call back over to you.

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

You may now disconnect your lines. The call has concluded at this time.