西式醫藥服務 (WST) 2010 Q1 法說會逐字稿

Welcome to the West Pharmaceutical Services First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference.

(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. John Woolford from Westwicke Partners. Sir, you may begin.

Thank you, operator. Good morning, everyone. And welcome to West's first quarter 2010 results conference call. We issued our financial results this morning. And the release has been posted in the investor section on the Company's website located at www.westpharma.com. If you have not received a copy of this announcement, please call Westwicke Partners at 443-213-0500. And a copy will be sent to you immediately.

There's also posted on the Company's website a slide presentation that management will refer to in their remarks today. The presentation is in PDF format. And you may need to download appropriate software in order to view the presentation. A link to a free download of that software is provided at the website.

Before we begin, I remind you that statements being made by management may contain forward-looking statements within the meaning of the US Federal securities law and that are based on management's beliefs and assumptions, current expectations, estimates, and forecasts.

Statements that are not historical facts, including statements that are preceded by, followed by, or that include words such as estimate, expect, intend, believe, plan, anticipate, and other words in terms of similar meaning are forward-looking statements. West's estimated or anticipated future results, product performance, or other non-historical facts are forward looking and reflect our current perspective on existing trends and information.

Many of the factors that will determine the Company's future results are beyond the ability of the Company to control or predict. These statements are subject to known or unknown risks or uncertainties. And therefore, actual results could differ materially from past results and those expressed or implied in any forward-looking statement. You should bear this in mind as you consider forward-looking statements.

For a non-exclusive list of those factors which could cause actual results to differ from expectations, please refer to today's press release. Investors are also advised to consult any further disclosures the Company makes on related subjects in the Company's 10-K, 10-Q, and 8-K reports. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.

In addition, during today's call, management may make reference to non-GAAP financial measures, including adjusted operating profit and adjusted diluted EPS. 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, or diluted EPS. Reconciliations 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 or rebroadcast without the Company's express permission. Your participation in this call implies your consent to our taping.

At this time, I'd like to turn the call over to Don Morel, Chairman and CEO. Don?

Thank you, John. And good morning, everyone. Welcome to West 2010 first quarter conference call. Joining me for the call today is Bill Federici, West's Chief Financial Officer, and Mike Anderson, our Treasurer and primary Investor Relations contact.

As we work our way through the call this morning, Bill and I will again utilize the PowerPoint slide that I posted on our website. And we'll call out the slide number we are referring to in our commentary.

I would also like to remind everyone that we will be reporting our results using the pharmaceutical packaging systems and pharmaceutical delivery system segments outlined in our February year-end call. The pharmaceutical packaging system segment is comprised of our global components business, which is currently forecasted to yield $770 million to $790 million in revenues for 2010. This segment has responsibility for brands such as Westar, FluroTec, Envision, and NovaPure in addition to our historic disposable medical device, veterinary, diagnostic, and dental products businesses.

Delivery systems brings together the tech group contract manufacturing operations, Medimop, Plastef, and programs approaching commercialization, such as the Daikyo Crystal Zenith silicon-free syringe system, NovaGuard, our proprietary auto-injector ConfiDose, as well as our ongoing innovation programs. The delivery system segment is expecting sales in the range of $320 million to $330 million for 2010.

00 a.m.. Details for this meeting and information on attending can be found on slide number three.

The presentations will highlight market trends in our major pharmaceutical and device markets, key growth initiatives in both operating segments to achieve our five-year financial targets, and a new product case study that illustrates the timeline for capital investment, production system validation, and regulatory and customer approval leading to eventual sales, representing a typical West product. There will also be a series of displays highlighting our [CUD] platform and other new products.

Turning to the first quarter, we have completed the business unit realignment presented in November 2009. And both operating segments are off to a strong start for the year. Our sales and order flow were quite strong for the first three months, continuing the trends we observed during the fourth quarter of 2009. We're particularly pleased that solid sales gains were achieved in all of our major markets and across virtually all of our major product lines.

Slide number four summarizes our operating performance for the first quarter. On a consolidated basis, our first quarter results showed strong improvement over 2009 with sales increasing 9.3% to just over 700 -- excuse me, $274.7 million, excluding the effects of currency translation. Sales within the packaging system segment grew 7.8% to $198.9 million. And delivery system sales for the quarter totaled $76.9 million, an increase of just over 12%, again, excluding currency effects.

Our consolidated gross margin improved by 1.3 percentage points to 29.9% for the quarter. Excluding discrete items from both the current and prior-year periods, adjusted earnings grew approximately 38% from $0.42 per share to $0.58 per share.

I'd now like to turn the call over to Bill, who will provide a more in-depth summary of our first quarter performance. Bill?

Thank you, Don. And good morning, everyone. We issued our first quarter results this morning, reporting for the first time under the Company's new segment structure with net income from continuing operations at $19.8 million or $0.57 per diluted share versus the $0.46 per diluted share we reported in Q1 2009. As explained in the release, both periods included restructuring charges, and Q1 2009 included discrete tax benefits.

Excluding the effect of those special items in both periods, Q1 2010 earnings were $0.58 per diluted share versus $0.42 per diluted share for Q1 2009, a 38% year-over-year increase. $0.03 of the increase in 2010 was due to currency translation.

Slide five in the accompanying PowerPoint presentation shows the components of our consolidated sales increase. Sales grew by $32 million to $274.7 million, a 9.3% increase over Q1 2009, excluding exchange. Price increases contributed $1.6 million or 0.7 of a percentage point of the increase. Volume and mix contributed $14.2 million or 5.8 percentage points of the increase. Our July 2009 Plastef acquisition contributed $3.9 million or 1.6 percentage points. And H1N1 component sales contributed $2.8 million or 1.2 percentage points of the increase.

Slide six shows our consolidated gross profit, adjusted operating profit, currency impact, and FX-neutral growth rates. Our gross profit, excluding currency, increased 14.4%, helped by modest price increases, favorable volume and product mix, and improved plan efficiencies, offset by increased raw material, labor, overheads, and depreciation expense.

Adjusted operating profit, which eliminates the restructuring charges and discrete tax benefits from each quarter, increased by 27% reflecting the increased gross profit and effective SG&A cost controls.

Slide seven analyzes the 130 basis point increase in consolidated gross profit margin in the quarter versus last year. Critical factors were volume increases and overall production cost efficiencies that were helped by volume and by our lean manufacturing programs. Higher depreciation costs reflect the increased investments we've made recently in capacity for higher-margin products.

From the segment perspective, pharma packaging systems Q1 2010 gross profit margin was significantly higher than Q1 2009, which offset a decline in our Q1 2010 delivery systems gross profit margin.

Pharma packaging systems gross profit margin increased by 280 basis points to 34.8%, driven by favorable volume and mix and improved efficiencies due to higher plant loads during the quarter. Mix improved as a large portion of the sales increase was for a high-value coated and Westar process components. We also saw modest price increases. These increases more than offset the effects of increased labor rates and depreciation expenses. Material costs were not significantly different.

Delivery systems gross profit margin declined by 210 basis points to 17% as a result of the Plastef acquisition sales being essentially breakeven at the gross profit -- at the gross margin line, increased labor and overheads, partially offset by increased pricing and some increased volumes.

We expect our 2010 full-year delivery systems margins will increase versus 2009 due to continued favorable volume and mix, some increased pricing, lean savings, and savings from our restructuring program.

Slide eight shows the detailed changes in consolidated SG&A expenses. As I previously mentioned, Q1 2010 cost controls helped to limit the overall growth of our SG&A expenses. As a percentage of sales, SG&A expenses declined from 17.7% in Q1 2009 to 16.9% in Q1 2010.

External market-driven factors accounted for more than half of the $3.7 million overall increase with currency translation and share price-sensitive stock-based compensation costs rising, partially offset by lower US pension cost. Other net increases were for incentive and other compensation and depreciation related to our IT systems upgrade.

Turning to business segment sales, slide nine shows the details of the $22.5 million or 12.8% increase in pharma packaging system sales. Excluding currency effects, sales increased 7.8%, driven by volume increases and a favorable mix. Including in favorable volumes were $2.8 million of H1N1 component sales.

Sales increased in all regions with North America supplying the majority of the increase. High-value product sales increased 23% to $72 million versus Q1 2009. Excluding H1N1 related sales, high-value product group sales increased by 18%. Standard product sales were essentially flat at $91 million versus Q1 2009. And disposable medical device component sales increased by roughly 5% to $27 million versus Q1 2009.

As a reminder, H1N1 component sales were roughly $22 million in 2009. But we expect only about $5 million of H1N1 component sales in 2010, the majority of which were sold in Q1.

Slide ten provides the details of the $9.4 million or 13.9% increase in pharmaceutical delivery system sales. On an ex-currency basis, Q1 2010 delivery system sales increased by 12.3%. Our high-value safety and administration system sales increased to $12 million in the quarter, including $3.9 million of sales associated with our July 2009 Plastef acquisition. Contract manufactured device sales increased by 5% to $64 million due to increased sales of devices used in surgical and other healthcare applications, such as auto-injection pens. Excluding acquisitions and currency effects, delivery system sales increased by nearly 7%.

Key balance sheet -- summary balance sheet information is presented on slide 11. Our balance sheet remains strong. And our business continues to provide necessary liquidity. We paid down debt by $2.5 million during the quarter. And currency translation accounted for the remainder of the $10 million decline in debt from last year-end.

Net working capital declined by $5 million versus the prior year end due to a reclassification to current liabilities of the $20.6 million of outstanding amounts due under our revolver. We're in the process of refinancing the existing $200 million revolving credit facility, which is now current because it matures in February 2011. We are working closely with our banking partners and expect to finalize any refinancing this quarter. The new facility is expected to have a maturity of at least three years and is expected to carry a higher interest rate than our current facility by approximately 100 basis points.

Accounts receivable increased by $7.9 million. And inventories increased by $15.6 million. Our receivable collection metrics remained unchanged from the prior year-end levels. And so the increase is attributed to increased sales. Inventories increased due to higher levels of strategic stock of certain raw materials and advanced purchases of certain materials to manage expected changes in material pricing.

Slide 12 shows our key cash flow metrics. Operating cash flows were $11.5 million in the quarter. The increase over the prior-year quarter was due to increased income and the $10 million pension contribution made in Q1 2009 with no corresponding Q1 2010 pension contribution. We do expect to make a 2010 contribution to the pension during the second quarter.

CapEx was about $7 million less in Q1 2010 due to the relatively high 2009 spending on our China facility and our European and Asian facility expansions, which were completed in the third quarter of 2009. Of the $17.7 million of CapEx in the quarter, about half was focused on maintenance activities and the other half on new products and expansion efforts.

We are updating our full-year guidance, which is summarized on slide 13. We have based our revised guidance on an exchange rate of $1.36 per euro for the remainder of 2010 due to the relative strengthening of the dollar. Our previous FX guidance was $1.40 per euro. This revised currency outlook has a $0.04 unfavorable effect on our full-year EPS. Despite the unfavorable currency revision, we continue to expect consolidated sales at between $1.09 billion and $1.12 billion.

Our backlog remains strong at $252 million, which is $24 million higher than our year-end backlog and $19 million more than Q1 2009 levels, excluding currency. More than the normal amount of the backlog is for product to be delivered in the next several months. Therefore, our visibility to the second half of 2010 is limited by our customers providing more frequent but smaller orders.

Our consolidated gross margin guidance remains unchanged at 30.5%. But the products mix expectation has changed slightly. Our revised EPS guidance reflects our strong first quarter results, offset by the unfavorable currency trend. We estimate our second quarter 2010 earnings will exceed our second quarter 2009 earnings by approximately 8% to 10%. We expect full-year CapEx to be in the range of $115 million to $130 million at the assumed exchange rates. We will continue to monitor our markets for any projected changes in demand and will modify our spending plans accordingly.

It is important to note that our retiree benefit plans do not offer a retiree drug benefit. And so we did not have a charge in the quarter relating to the federal healthcare reform. Additionally, it is not clear at this time whether the healthcare reform tax on medical devices will apply to some of our products when it takes effect in 2013.

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

Thanks very much, Bill. As Bill highlighted in his commentary, orders for Q2 remain strong. And our backlog has improved to just over $250 million. Although we believe that the cautious inventory management and ordering we experienced in 2009 has largely run its course, we do see the trend toward shorter lead times and smaller order quantities continuing through the second half of the year.

Despite the change in longer-term visibility and the challenges presented to our operations, we remain confident in our ability to deliver against our full-year financial targets. Revenue growth should fall in the range of 3% to 5% for the year, excluding currency, despite non-recurring H1N1 sales from 2009, which totaled just over $20 million.

In our February commentary, we listed one of our key objectives for the year as being the validation of our four-cavity 1-mL CZ cell in the delivery systems group. This critical program remains on track. And we expect to begin delivering samples from this line to customers late in the second or early in the third quarter. The capacity from this line will help alleviate the backlog currently built up due to strong sample demand. At this point, we also expect the first large-scale orders for validation and stability to be placed by customers evaluating CZ sometime by midyear.

For the longer term, the business drivers that we have outlined in prior calls remain fundamentally intact. As Bill discussed, we're still assessing the downstream impact of the recently passed Patient Care and Affordability Act. But intuitively, the influx of newly covered individuals should be a positive driver of growth when the Act goes into effect. It is unclear whether the device tax provisions will apply to part of our healthcare portfolio. However, we will not see a major charge for costs associated with retiree health plans, as Bill mentioned. One of the keys for our future success is continued growth in the biologic space, which should benefit from the follow-on biologics provision, which was outlined in the Act.

This concludes our prepared remarks for this morning. And we would now be pleased to take any questions that you might have. Operator?

Thank you. (Operator Instructions). And your first question comes from the line of Arnie from CJS Securities. Please proceed.

Hi. Good morning, Don and Bill and Mike.

Arnie.

Good morning.

I guess my first question is it seems -- price is obviously not driving your revenue growth. It's less than 1%. And what seems to be driving your growth and positive trends are volume and mix. You gave us some numbers regarding high-value products, which were up 18%. Can you expand a little bit more on what you're including in your high-value products, give us a better feel for what they are, what's driving that type of strong growth, and perhaps a little more color on what are the standard products and what's causing them to be flat?

Yes, a lot of information there to answer. But simply put, the high value-add products include the FluroTec and B2 coated products, Westar processed, and what we call Envision and NovaPure. So those are the products that go through vision inspection for particulate. And those products usually carry with them a great deal more laboratory analysis and chemical analysis before they're actually shipped to the customer.

And the driver for that really is twofold -- one, we're seeing more stringent regulatory requirements in certain markets, where cleanliness is paramount. Many of our customers are beginning to make stronger entry into Japan, which has much more stringent quality standards. And those markets are requiring the highest quality that we can possibly produce.

On the other hand, standard products are comprised of closures that don't incorporate those attributes. They're usually uncoated. They may be Westar washed. But they go into the lower-margin markets, which would include some of the tender business and developing economies. It would include veterinary products, dental products, and things of that nature. So we're pretty pleased with the growth and high value. Of course, we had called that out last year during the call. We expected a better mix. And it's materialized during the first quarter.

Of your $250 million of backlog, can you give us a little better feel for how much are the high value-add products, more the standard? And you don't break out anymore the separate backlog numbers for tech?

No, we usually -- yes, we don't break out the tech numbers. And we usually don't break out the high value-add numbers. The thing about the backlog I think that's key is that it's kind of become compressed into a three- to four-month timeframe versus the six- to nine-month timeframe that we used to have.

Just to add what Don said, the tech number, Arnie, for your information, in the backlog is modest. It's only about somewhere less than $15 million included in that $250 million. The rest of it is for the packaging systems.

Okay. You mentioned -- I think this is new information -- printer ink cartridges. How much of your tech group revenue is related to that new rollout? And I assume that's not a long-term project.

No, that actually is an old product that we produce out of our Ireland facility, Arnie. And we just happened to get a bump in this quarter from it. But it's not a big number.

Not significant, Arnie.

Okay. Bill, my question for you on the CapEx -- obviously, if you're going to do $110 million to $130 million for the year, you only spent $17 million in Q1, half of which was maintenance. Can you give us a little better feel for the drivers of your CapEx number for the balance of the year? And what would cause the $20 million or $30 million potential swing high versus low?

Basically, it's -- I'll answer the last question first. In terms of the variability as we have been doing in the past -- we did it last year. And we'll do it again this year. We're trying to keep a close eye on our markets and the demand -- the ultimate demand for our products. And as we did last year, when we saw demand slowing, we pulled back on our CapEx.

If you remember, we had projected that we'd be in the $140 million range last year. And we ended up at $105 million. So that variability, Arnie, is really reflective of the fact that as we continue to go through the year, we'll continue to test the market for demand and adjust accordingly.

In terms of the how we get there in terms of the spend, we have projects that are ongoing. We have some work that's being done in one of our facilities in the US, converting it from a standard product plant to a -- to one that produces high-end pharmaceutical components. We have work that we've begun at the end of last year and we'll continue to go forward in terms of spending on the innovation products, building more capacity for things like the CZ product.

We also are spending a considerable amount of money this year on -- in relation to quality on our global quality initiative, which is the lion's share of the increase that we'll see in the expansion products. So those things plus the maintenance increasing slightly year over year is where we see the big gap forward in that number.

Okay. Two more for you, Bill, if I can before I jump off.

Sure.

In your guidance or in your comments regarding SG&A, you talked about external consulting services primarily relating to business development activities. Was there a write-off or an expense for an acquisition that didn't move forward? Because (inaudible).

No.

No. No, we did have -- we had a lot of activity in the information technology space and in -- basically in other areas around the innovation.

Okay. And final one on the pension expense -- as it relates to your guidance, I believe you had built in as much as $10 million pension expense previously. It looks like it now will be -- just freshen up what you had --

Sure.

-- in your previous numbers for pension expense and what you're assuming now.

We had last year -- pension expense in the US was about 8 -- $18 million. And what we ended up with this year, based on the fact that we were able to increase the value of the assets that we hold in the pension plan, we were able to reduce the amount of expense versus last year by approximately $2 million. You see -- you're seeing $0.5 million of that in the first quarter. And you'll see $0.5 million each quarter as we go forward.

If you remember, Arnie, an important point about pension is you only get one crack at the expense during the year. It's set by the actuaries at the beginning of the year based on our assets, the expected return on those assets, what we expect for the interest rates to happen, and what we expect for expense. We basically are looking at a -- again, a reduction of $2 million versus the prior year as we go through the year. And that won't change again until we get to the end of 2010.

Thank you very much.

You're welcome, Arnie.

And your next question comes from the line of Derek DeBruin from UBS. Please proceed.

Hi. Good morning. This is [Rafael] in for Derek. How are you?

Good. How are you?

Good. Just a couple questions on the -- basically your statements on the ordering patterns -- and I mean, it looks like with the shorter lead times and smaller order sizes these are becoming the new norm for your customers. I guess I was just wondering what West was doing to better align itself with these new ordering patterns? And as a follow up, just curious to know if during the quarter West may have benefited from any potential stocking from customers as it relates to new product launches slated for this year?

I'll try the second one first. Certainly, we benefited from some restocking due to the short-order quantities in 2009. Whether or not those are related to new product launches, it's difficult to tell. But certainly with the strong fourth quarter we had and the strong first quarter, there's been a bit of restocking after the workout that we saw end of '08 through '09. In terms of what we're doing, the best thing we can do is keep our account reps and our global account managers as close to the customer as possible.

I think we're kind of focused on what their inventory strategies are going to be going forward. If we can level out our plans, the timing of the orders really isn't that big an issue, as long as we know a couple months ahead of time what we can expect to produce. It's the level loading that's the key because that allows us to stock raw materials and then plan our labor accordingly. So we can only go on what they give us. Sometimes, they're right. Sometimes, they're not so right.

Got it. Appreciate that color. Now separately, I was just curious to know a little bit more about the -- I think last year there was -- you omitted the amount of spend on R&D for 2009. I was just curious to know if there were any projects that would be in revamp this year and if you could give us a little more information on the types of projects you're looking for, too?

Well, the ones that didn't have any reduction were the CZ, the safety products and the auto-injector. And in effect, what we did was pull back on a couple of the longer-term projects that we just put into the holding pen. So the decrease through 2009 was simply due to some of the longer-term projects in the conceptual phase being deemphasized in favor of the CZ in particular.

Understood. Thank you for the information. I'll jump back in the queue.

Thank you.

Thanks, Rafael.

And your next question comes from the line of Ross Taylor from CL King. Please proceed.

Hi. Just have two or three --

Hey, Ross.

Hi. How are you all? First, your revenue guidance, I think you mentioned in terms of absolute dollars your revenue guidance is staying the same despite the change in foreign currencies. I just wondered what might be driving -- it appears some strength or improvement in the organic growth.

The organic growth is going to be a combination of India, China, and what we think is going to be continued positive mix versus '09 in the major European and North American markets. So it's kind of across the board.

Yes, there's some volume, a little bit of price, but a lot of mix.

Okay. And also, you mentioned that you might start to see -- or some of the orders for CZ that might come in the middle of the year, I mean, how significant a contribution might they be to revenues this year?

It's not going to be major when compared to the total revenue base. But the key is that first and second customer that are going to begin quantity orders that will allow them to do line studies and formal stability studies with validated product. So our expectation is that once the four-cavity cell comes online, as opposed to shipping 500 and 1,000, we're going to be jumping up into kind of the 10,000- to 20,000-lot sizes.

And if things hold their course, we should see some major orders probably by the midpoint in the year of the third quarter in the couple hundred thousand-unit range. So the news there is very encouraging. The key thing for us is to stay on track with the validation of the cell, which is targeted for completion end of the second quarter.

Okay. Good. And last question relates to inventories and raw materials. I think you've commented that maybe you had bought some raw materials ahead of time. I mean, is there much risk from raw material price in the earnings forecast for this year do you think?

It would be muted for this year. I mean, what we -- and it's a little bit of a long-winded conversation here. I apologize. But if you remember, it's two pieces. One is it's the supply contracts that we have that mute any increase by anywhere between four and six months. And then secondly, we've also gone out into the marketplace and brought forward some hedge against the increasing prices in those -- basically crude oil, which is the underlying material that's used in manufacturing the synthetic rubbers that we use.

So between the two of those, should the price of oil continue where it is in that kind of $80 to $85 range, we feel pretty comfortable where our guidance is without any issues. Should it go to the kind of $140, $150 levels that it went to a couple years ago in the summer, that would have an impact. But that impact would not start to hit us until the very back end of 2010 into 2011.

Okay. That's helpful. Thank you very much.

You're welcome, Ross.

Thanks, Ross.

(Operator Instructions). And your next question comes from the line of [Andrew Hilgenbrink] from Jefferies & Co. Please proceed.

Good morning, guys.

Good morning.

-- on a strong quarter.

Thank you.

Can you give any sense of the sales mix in the delivery segment, how much of that is from contract manufacturing versus proprietary products? And then how quickly do you expect it to shift over to more of the proprietary? And following on that, what roughly speaking is the margin difference between the two types of products?

Okay. To answer the last question first again, the margins, the gross margins, on the contract manufactured product are significantly less. They're in the kind of high singles to perhaps as much as 20% to 25% gross margins. On the proprietary base, the margins are much higher. They are equivalent to our packaging systems margins, kind of in that -- starting in the 30s and running up through about 50%.

In terms of numbers, in the first quarter of the rough number $75 million worth of sales in that group, $12 million of it was the high-value safety and administration system and Plastef sales. So that's the high-value product in that space, the proprietary basically -- it's basically [Minima] products.

Okay.

And it's about $12 million. And the rest of it was contract manufactured.

And in terms of the timing, clearly with CZ and some of the other products coming in kind of 2012, 2013, our goal is to be over the 40% to 50% of revenue range coming from proprietary sometime in that 2013, 2014 timeframe.

But the expectations are built into 2010 for what we think's going to happen, Andrew, in the rest of 2010. We will continue to see mix. As I mentioned, we do expect that that margin for that group will be better than the 2009 margins. And a big piece of that is the mix.

And then along the lines of the CZ orders and interest that you're seeing, can you comment on the majority of those coming from current -- pharma that has currently marketed products or whether they're products under development? Or is it a mix of both?

It's a mix of both. Yes, it's a mix of both.

And also on the shorter lead times and smaller order sizes, do you see a difference in margin on that ordering pattern versus what you experienced a year ago or two years ago when companies were ordering large quantities?

Yes, I think if the -- I'm not sure I got the question right. But if the question is have we seen a change, yes, the change has been fairly dramatic. We used to have customers that a few years ago would put in blanket orders for the entire year. And they'd put them in, in the -- either late in the fourth quarter of the preceding year or early in the first quarter of the year. And they would cover not only the near term, but they would cover almost a whole year's worth of their needs. That has evaporated.

And has the gross margin that you guys realized changed now because -- are you charging more for smaller orders, quantity discounts that don't exist?

There are some volume rebates. But it's on the amount that the customer will buy. It's not based generally on their orders. It's based on how much they actually bought.

It's based on full-year sales.

Okay. And then lastly, do you expect -- it seems like H1N1 has run its course pretty well. Do you expect to receive any revenue from a reemergence of, I guess, a new flu vaccine or whether they'll be separate this year?

You never know what you're going to get. But our understanding this year is that an H1N1 component will be part of the seasonal vaccine. So you won't see the incremental volume that we got in '09 from a separate H1N1 vaccine.

All right. Thank you, guys.

Thank you.

Thank you.

And your next question comes from the line of Jim Sidoti from Sidoti & Company. Please proceed.

Morning, Don.

Good morning, Jim.

Morning, Bill.

Good morning, Jim.

Just -- I'm trying to work out my model for the back of the year. It seems like a lot of your growth now -- you have a little bit of a currency tailwind. You've got the acquisition adding a little bit. You still have a little H1N1. As those things start to fade away towards the back of the year, do you think you'll see revenues fall a little bit below last year, especially in that fourth quarter when you had such a big H1N1 quarter?

Well, I think logically you would go that direction. For us right now, the issue we're dealing with is simply the longer-term visibility. A couple of years ago, if you looked at the backlog, it had a much more gradual slope towards the three or six months at the end of the year. But it would refill itself. What we're looking at now is that that backlog is compressed into a shorter timeframe.

And we simply don't have the visibility in a later -- really the third quarter and the fourth quarter that we would have. New orders are coming with greater velocity at the end of a quarter for the ensuing quarter. They're just not coming large at the beginning of the year and then being worked off through the year.

All right, all right, so I mean, it's feasible. You might see a little bit of a slowdown toward the end of the year? But then you would expect a pickup?

Yes, I wouldn't expect a fourth quarter like we had last year. That was really extraordinary. We don't expect a drop-off the cliff either. It should be a return to what I would call a more normal quarter as customers are working off their end-of-the-year targets. And the orders will come in accordingly.

And then you made a comment about some of the capital expansion projects. I think you completed a couple in Europe in the quarter or at the end of last year. Is that correct?

Yes, at the end of last year. The major one that was out from the program announced in '06 was the Singapore expansion. And that was challenging because we were increasing our capacity within the footprint of the plant, not adding additional space adjacent to it. But that was completed in July of last year. And everything is running well. The only other one we've got going on now Bill referenced is the conversion of our Kingston plant to more of a pharmaceutical component plant than a device plant like it is now.

So are there some startup costs associated with that? Or are they pretty minimal?

No, there's a little bit because once your equipment is in, you go through the expense of doing the validation when you're not getting any sales off of the equipment. So there's always some startup expense there.

And did that hit you in this quarter? Or is that like a second quarter -- ?

Some of it, Jim. But it's not -- it's certainly not significant. And we don't expect it to be material for the year.

Okay. So those are pretty immaterial compared to this.

Yes, they're manageable, yes.

Okay. All right. Thank you.

Thank you, Jim.

Thanks, Jim.

And you have a follow-up question from Derek DeBruin from UBS. Please proceed.

Hey, good morning. It's Rafael again.

Hey, Rafael.

Just one quick one on the guidance, the top line guidance. Just wanted to know what the assumptions were there for volume-price mix and effect. And can you remind us again how that has changed from the last update?

Sure. I'll take the last question first again on the currency effect. We were -- our previous guidance was at $1.40 per euro. And the current guidance is at $1.36 per euro. That had an effect on the full-year guidance, a reduction effect of $0.04 EPS.

In terms of the sales growth and the portions of it, we expected very minimal price increases kind of in that same 0.5% to 1%. The largest impact on sales was going to be the mix, which we expect to be most of the difference. There is some volume in there. Again, it's very modest amount of volume increase. We're really counting on the conversion of -- continuing conversion of product to the higher-end product that gives us both revenue and then also drives the margin as well.

Great. Thank you.

You're welcome.

And you have no more questions at this time, sir.

In that case, thank you very much for your time this morning. And we look forward to seeing everyone in New York City on the 6th of May. Thank you very much.

Thank you for participating in today's conference. This concludes the presentation. And you may now disconnect. Good day.