西式醫藥服務 (WST) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the West Pharmaceutical Services Second Quarter Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objection, you may disconnect at this time. And now I would 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 second 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 is 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 and 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 would like to turn the call over to Don Morel, Chairman and CEO.

Thank you very much, John, and good morning, everyone. Welcome to West's Second Quarter conference call. Joining me for the call today are Bill Federici, West's Chief Financial Officer, and Mike Anderson, our Treasurer and primary investor relations contact. Please note that we are using a PowerPoint slide deck to aid in our discussion this morning. We hope the slides help you follow our commentary and we will call out the slide number we are referring to during the course of our remarks. For those who are unable to view the slides during the call, the information they contain is covered in both the release and our remarks.

In keeping with our usual agenda, I will begin with an overview of our second quarter results, give an update on several ongoing development programs, and summarize our outlook for the remainder of the year. Bill will then discuss our financials in greater detail.

There are three points to capture where we are six months into the year. First, on a positive note, we had a very good first half. Sales growth was a little ahead of our expectations and demand continues to be strong in both operating segments. Second, the steep rise in the dollar versus the Euro during the second quarter, and nonrecurring H1N1 sales in the second half of the year will make comparisons with 2009 difficult. And, finally, we are beginning to see tangible results from our investments in our key new product development programs, notably the CZ 1-mL syringe and the ConfiDose auto-injector system. I will provide a little more detail on these programs in just a moment.

Turing to our second quarter results on slide No. 3, West reported revenues of $281.8 million for the quarter, representing growth of 8% versus the second quarter of 2009. Excluding the effects of currency and contributions from acquisitions, revenue growth was approximately 8.3% on a consolidated basis.

Fully adjusted diluted earnings increased by 10% over the second quarter of 2009 to $0.64 per share. Our consolidated gross margin was 29.5%, representing a decline of 0.7 percentage points in the prior year and resulted largely from the impact of the acquired businesses within the Delivery System segment. Our operating margin was 11% for the quarter on our adjusted earnings, and down slightly from the 11.1% reported in the second quarter of 2009.

In the Pharmaceutical Packaging System segment, sales increased 5.7%, or 8% excluding exchange effect, driven by gains in each geographic operating region and a favorable product mix. Established value-added products such as Westar process components and FluroTec coated closures continue to show healthy growth, even as the next generation of products, like Envision and NovaPure begin to secure a broader foothold. Our customers clearly see the value proposition in these components as the broader market continues to place an emphasis on biotherapeutics as evidenced by recent M&A among our larger customers, and the continued in-licensing of early stage contents.

Overall, I am very pleased with the performance of the Packaging segment which, on top of the reported sales gains, also showed an improved gross margin and would have achieved an expanded operating margin but for currency translation and increased R&D spending of roughly $0.5 million. These investments in products like Westar RU and NovaPure will ensure that we solidify our market-leading position with injectable packaging systems that meet the requirements of an evermore demanding global regulatory environment.

Sales in the Delivery System segment increased 8.6%, excluding the effects of currency and sales gains from acquisition. The increase was driven by higher demand for contract manufacturing services serving the healthcare consumables and consumer markets, in addition to higher sales of proprietary safety and reconstitution systems, as well as Daikyo CZ products.

Overall, the contract manufacturing sector continues to be challenging on two fronts -- pricing pressure on existing business and the competitive landscape for new programs. However, sales of proprietary products grew nicely in the quarter and now comprise 20% of the Delivery System segment revenues. As we have stated in the past, our goal is to generate 50% of revenues in this segment from proprietary West systems by the end of 2014.

R&D spending in the Device segment also increased by $0.5 million as we prepared to ramp up manufacturing of samples for customer evaluation with the primary emphasis being on the 1-mL CZ syringe and the ConfiDose auto-injector. We plan to further increase R&D spending on these key projects in the second half of the year to accelerate commercial entry into the market. Overall, it was a solid quarter for both segments despite the volatile environment with revenues up 8% and a 10% increase in per-share earnings on a consolidated basis.

In terms of our key development programs, the second quarter was one of considerable progress as highlighted on slide No. 4. Starting with the Daikyo CZ programs, we completed engineering validation runs on the new four-cavity production cell and are now manufacturing and delivering product from this cell to our customers for stability in clinical filling trials. More importantly, we booked our first large sale order for the 1-mL syringe and expect to ship several hundred thousand units by the end of the year. We have also booked orders from a range of customers for traditional 5-mL and 100-mL vials manufactured by Daikyo, and have started a number of customer-funded projects to evaluate custom design containers that can be integrated into different delivery devices.

One of the engineering advantages of CZ versus glass is that it can be molded into highly complex shapes with tighter tolerances. All told for the year, we expect CZ sales to exceed $5 million. However, the best sign of the market's interest is in the breadth and scope of the customer-funded programs currently underway.

As a result of rapidly growing customer requirements, we have begun the expansion of our Scottsdale production facility ahead of the original plan with the goal of being in a position to produce commercial quantities of the 1-mL syringe by mid-2012.

The proprietary West auto-injector platform, ConfiDose, is finding a unique niche among applications requiring delivery of highly viscous drug. We anticipate finalizing several large scale development agreements in the next several months, which involve customized designs and manufacturing of units for human use trials in clinical evaluation. The potential also exists to provide CZ-based containers for use in the ConfiDose system to further mitigate the risk of breakage inside the device during use.

The Delivery Systems Group also completed one small technology acquisition in July, which will form the basis for a novel platform that can deliver a moderate volume of drug over a long period of time. The system can be easily customized depending on the volume of the drug to be delivered and the time frame over which delivery must take place, which can be up to several hours. We have already signed our first customer-funded development agreement for the device, and based on market interest, anticipate having at least one more completed before year-end.

The level of market interest in all of these platforms grew strongly during the quarter, and we achieved several key milestones. We remain fully on track to achieve our growth objectives through these products beginning, most importantly, with commercialization of the 1-mL Daikyo CZ syringe.

Looking ahead, as I mentioned earlier, comparisons for this second half of 2010 with a comparable period in 2009 will be more challenging due to several factors -- continued currency fluctuations, year-end inventory adjustments by our customers, planned increases in R&D spending within the Delivery System segment, and the absence of revenues to fully replace nonrecurring H1N1 sales which contributed roughly $22 million in the second half of 2009.

Consequently, we have adjusted our full year earnings expectations to $2.08 to $2.20 per fully diluted share. The full year effect of currency, assuming a dollar/Euro conversion rate of $1.30, is expected to impact earnings on the order of $0.11 per share versus earlier guidance, and a planned increase in R&D spending, primarily on CZ and ConfiDose, will absorb another $0.04 per share in the near term, which should generate significant sales opportunities.

In the Pharmaceutical Packaging segment, we are holding our revenue guidance despite the impact of the stronger dollar, whereas, we have slightly lowered our revenue expectations in the Delivery System segment primarily due to visibility within the contract operations and the difficulty in forecasting when large development programs will be formally under contract.

I realize there are many moving pieces at the midpoint of the year, but the key takeaways are as follows -- the Pharmaceutical Packaging Systems business is performing right in line with our expectation. The third quarter order book is filling up and ongoing demand remains robust. However, due to the ongoing trend of reduced lead times and smaller order quantities, we do not have our historic visibility into the fourth quarter, although our expectation at this point in time is that it will fill in over the next two months.

Outside of currency effects, we anticipate the segment being on plan for the year. For the longer term, we see nothing that would impair our ability to achieve our stated objective for this business of generating approximately $1 billion in revenue by the end of 2014.

Within the Delivery Systems segment, we expect revenues to be marginally down versus our original expectation. However, we achieved a key milestone of securing the first large sale CZ production order and are accelerating our capacity build at our Scottsdale facility to meet the forecasted demand.

And, finally, although predicting the timing of revenues generated from customer-funded development programs is difficult. I am greatly encouraged by the level of customer interest in and commitment to the development of our major platforms.

I would now like to turn the call over to Bill for a more in-depth look at our Q2 numbers. Bill?

Thank you, Don, and good morning, everyone. We issued our second quarter results this morning, reporting net income of $21.7 million, or $0.62 per diluted share versus the $0.57 per diluted share we reported in Q2 2009. As explained in the release, results in both periods included restructuring charges, and the results of this year's quarter also included some discrete tax charges. Excluding the effect of those items in both periods, second quarter 2010 earnings were $0.64 per diluted share versus $0.58 per diluted share for Q2 2009, a 10% year-over-year increase. The growth rate was achieved despite the current quarter's results being negatively affected by $0.03 of currency translation.

Slide 5 of our accompanying PowerPoint presentation shows the components of our consolidated sales increase. Consolidated sales grew by almost $21 million to $281.8 million, a 10.2% increase over Q2 2009 sales, excluding exchange. Volume and mix contributed $20.2 million, or 7.8 percentage points of the increase. Acquisitions we made since Q2 2009 contributed $4.9 million, or 1.9 percentage points. And price increases contributed $1.3 million, or 50 basis points of the increase.

Slide 6 details the second quarter's $10.8 million or 5.7% increase in Packaging System sales. On an ex-currency basis, sales increased 8%, driven by volume increases, a favorable product mix, and modest price increases. Sales increases were strong in all our geographic regions with the European region supplying the majority of the increase when excluding exchange impacts. High value product sales increased almost 25% to $76 million versus Q2 2009, with the most significant increases this quarter in Westar treated and FluroTec coated components Standard product sales were about 2% lower than the prior year at $101 million. And sales of Disposable Medical Device components increased by about 8% to $28 million.

Slide 7 shows the factors driving the $9.9 million, or 13.7% increase in Delivery System sales. Our proprietary product sales increased to almost $16 million in the quarter, including $4.7 million of sales associated with our July 2009 Plastef acquisition. Excluding acquisition effects, Proprietary Product sales increased approximately 20%. Contract Manufacturing sales increased by 5% to $66 million due to increased sale of devices used in healthcare applications such as auto-injection pens and increased volumes for selected products in the Consumer unit. Excluding acquisitions and currency effects, Delivery System sales increased by 8.6%.

Slide 8 shows our consolidated gross profit, adjusted operating profit, currency impact and FX neutral growth rates. Our gross profit excluding exchange increased 7.9% driven mostly by modest price increases, favorable volume and product mix, and improved plan efficiencies that were offset by increased raw material costs, labor, overhead and depreciation expense.

Adjusted operating profit, which eliminates the restructuring charges from each quarter increased by 11%, reflecting the increased gross profit and the effectiveness of our SG&A cost controls.

Slide 9 shows the details of our consolidated second quarter 70 basis point gross profit margin decline. Packaging Systems Q2 2010 gross margin was higher than corresponding 2009 margin partially offsetting the decline in delivery systems gross margin. Packaging Systems gross profit margin increased by 50 basis points to 33.6%, driven by modest price increases and favorable volume and mix, as a large portion of the sales increase was for our high value coated and Westar process components.

We also saw improved efficiencies due to higher plant loads during the quarter, especially in Europe. These increases more than offset increased raw material, labor and depreciation expenses.

Delivery Systems gross profit margin declined to 19.1% as a result of increased raw material and other costs, the sales of our acquired businesses being essentially break-even at the margin line, and lower sales prices under a mature manufacturing agreement. These were partially offset by increased volumes and product mix.

We continue to expect that both segments' full year 2010 gross margins will increase versus 2009 due to continued favorable volume and mix, some increased pricing, lean savings, and savings from our restructuring program.

Slide 10 shows the changes in consolidated SG&A expenses. As I previously mentioned, the cost controls we implemented earlier in the year continue to limit increases in our SG&A expense. The overall increase was $750,000 over the prior year quarter, aided by the decline in stock-based compensation expense due to our reduced share price in the quarter. Additionally, increases in depreciation related to our IT upgrades, outside service expenses, and compensation costs were partially offset by reduced pension expense.

As a percentage of sales, SG&A expenses declined from 17.3% in the second quarter of '09 to 16.3% in the second quarter 2010.

R&D expenses increased by $1 million versus the prior year quarter due to increased spending on our various development projects including our Crystal Zenith prefilled syringe system and ConfiDose, our auto-injector.

Slide 11 shows our summary balance sheet information. Our balance sheet remains strong and our business continues to provide necessary liquidity. We made year-to-date net debt repayments of $5.2 million, and currency translation provided the remainder of the $22 million debt decline. Working capital increased by $19 million from year-end due mostly to increases in accounts receivable and inventory. Accounts receivable increased by $7 million, and inventory increased by $14 million. Our receivable collections metrics improved slightly from the prior year-end levels to 47.4 days. Inventories increased due to higher levels of strategic stocks of certain raw materials including advanced purchases to manage expected changes in material pricing.

We completed the refinancing of our revolving credit facility in the quarter. Our new $225 million facility has a $50 million accordion feature and a four-year maturity with interest at LIBOR plus a margin ranging from 175 to 275 basis points depending on our leverage ratio.

Slide 12 shows our key cash flow metrics. We generated year-to-date operating cash flow of $43.1 million, $3 million lower than the prior year. The decrease versus the prior year is due to increases in working capital partially offset by $2 million less in pension contributions in 2010.

Capital spending was about $16 million less year-to-date in 2010 due to the relatively high 2009 spending on our China facility and our European expansion. Both of those projects were completed in the third quarter of 2009.

Of the $32.6 million of year-to-date capital, about half was focused on maintenance capital with the remainder focused on IT systems upgrades and new product 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 $1.30 per Euro for the remainder of 2010, reflecting current rates and representing a relative strengthening of the dollar versus the $1.36 per Euro using our previous guidance. This revised currency outlook has an unfavorable effect on our EPS of $0.11 per share versus the previous guidance. That change is larger than expected relative to the change in the Euro/US dollar rate primarily because of lower US dollar value of some cross-currency sales of proprietary products and the higher rate volatility in the first half of the year. We expect that the US dollar/Euro rate will continue to impact certain cross-currency sales and profitability.

In addition to the adverse currency effect, we now expect to spend approximately $0.04 more EPS on our critical product development initiatives based on strong customer interest in those programs. Our gross margin guidance has been reduced to reflect the general lack of Q4 visibility and a more cautious outlook of product mix in the second half of 2010.

Comparisons of our second half of 2010 versus the same 2009 period will be less favorable due to adverse currency comps and substantial nonrecurring H1N1 sales, which contributed about $0.16 of EPS to the second half of 2009.

The aggregate adverse currency translation impact on EPS for the second half of 2010 is expected to be between $0.10 and $0.12 per share versus the second half of 2009 at current exchange rates. The effect of these items are expected to have greater impact in Q4 than Q3.

Our backlog remains strong at $227 million, which is $10 million higher than our year-end backlog, and $7.5 million higher than June 2009 levels, excluding currency. The third quarter order book is relatively full, but visibility into the fourth quarter remains less predictable as a result of shorter lead times and still more frequent but smaller orders. We expect full year CapEx to be in the range of $100 million to $110 million at the assumed exchange rate.

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

Thanks very much, Bill. This concludes our business review for this morning and we would now be pleased to answer any questions that you might have. Operator?

(Operator Instructions) And the first question comes from the line of Dave Windley from Jefferies & Company. Please proceed.

Hi. Thanks for taking the questions. I wanted to, I guess, start in the CZ product development efforts that you have. Don, is the pricing for your CZ products as you are now rolling out this first large scale order, is it matching your expectations from earlier on?

Yes.

Okay. Well, that's good, certainly.

Yes, the only color I can add to that, Dave, is that remember we are in the early stages here on the clinical and the engineering evaluations. The price is going to be higher because the units are lower. But certainly the first tranche here out of the gate is right in line with where we thought it would be.

Okay. Okay. And from the logistics standpoint, I think you commented that you are beginning to produce product in the four-cavity cell, is that right?

That is correct.

So, this large scale order you would supply out of the four cavity as opposed to the single cavity?

That is correct.

Okay. On the other end of the spectrum, I guess, on the contract manufacturing you named off a couple of challenges -- price pressure, competitive environment. Are the volumes in contract manufacturing relatively stable? I guess I'm wondering how much visibility you have on that? How much is tied up on longer term contract?

Yes, we don't have as much, obviously, as we do on the (inaudible) system side of the business. Typically it, depending on the customer, can be anywhere from two to four weeks. Demand has been strong in the areas that we thought they would be strong in. You know, disposable components that go into cardiovascular ops for our customer there.

On the sampling side and consumables, where you have components that we make going into blood collection, blood analysis, those have been strong. The filters have been in line with expectations, and consumer has been pretty strong. We have some ins and outs here and there depending on inventories and timings, but demand is certainly more favorable at this point in the year than it was last year.

Okay. And I'll ask one more and then drop out, and it's in the Eris contract that preexists your acquisition there that is no margin. I guess I wondered if that was contractually provided to that customer at cost, or is it a function of, say, the size of the runs that you are doing that make that cost inefficient, or something like that? Should we expect that that will be no margin going forward?

Yes, Dave, it's Bill. On that particular one it is contractual. We are producing it in the same space that they produced it. We acquired the plant as well, and the -- in the absence of other customers, that business will continue to provide very limited margin.

Only on that contract. The only thing I would add to that is we have begun to aggressively market the device in Europe. There is a lot of interest in it for a lot of applications. That pricing will be much different than the pricing under the existing contract, obviously.

Okay. All right, great. Thank you.

And the next question comes from the line of Derik De Bruin from UBS. Please proceed.

Hi. Good morning. You mentioned, I was actually surprised to see your comments that Europe actually was so strong, and I'm just wondering, could you talk a little bit about what you're seeing there and particularly, I know some of the other companies have reported about pullback in spending on European healthcare. And I'm just wondering, could you just talk a little bit about that environment and why you are doing well in that geography?

Yes. A lot of it is in the high value part of the business, the FluroTec coated stoppers and the Westar processing. We continue to see strong demand there. Overall, I think there is probably some inventory restocking that is going on in the first half of the year after the downturn we saw last year. The third quarter so far for Europe looks fully in line with our expectations. The only issue that Bill and I both highlighted is that because we are seeing smaller order quantities and shorter lead times with the new capacity online, we don't have the visibility we would like to have into the fourth quarter, but we have seen nothing that would indicate that won't fill in.

And, also, Derik, the currency has been a negative drag on Europe, particularly. So, when we talk about strength we are excluding currency in that regard.

Okay. And, I guess, obviously, there has been some chatter recently about some more M&A particularly in the biologics area. I mean, as you kind of watch all of the news items kind of flow with that, I mean, how would you see that potentially impacting your business?

Well, it depends on who is acquired and who the acquirer is, obviously. But what we usually see, and we have talked about this before, is that you come to a halt in a lot of your development programs. The good news is that the programs that we have underway are with a range of customers, both large and small. Although we may see some delays depending on who is involved, my expectation is that the momentum that has been built to this point is going to continue to carry forward on our major programs.

Okay. Could you talk a little bit about some of the -- some of what you are increasing your R&D spend on, just the type of projects you are undertaking?

Yes. Well, it is principally the three. The demand on CZ is making us push that ahead faster than our original plan, so there are both some expenses associated with that and some capital investment that we will accelerate. ConfiDose is getting an awful lot of attention, particularly in the niche I mentioned, which is in the highly viscous drugs, where the pressure to deliver the drug is somewhat higher than with an ordinary formulation, and you need the properties of the CZ within the auto-injector. So, that is all positive.

And then I mentioned briefly this new platform that we have acquired, which is basically a patch pump. And for compounds that need to be delivered in the 3 mL to 5 mL range but can't be delivered in a bolus, it is a perfect solution to an unmet need where it can deliver over a period of a couple of hours. So, those three areas are principally the ones that will receive the R&D funding.

Great. And, I'm sorry, did you talk about the tax rate for the full year?

No, we did not mention it specifically, but our expectations are it will be about in line with what we have been talking about, which is just about 23.9% for the rest of the year.

Great. I'll get back in the queue.

(Operator Instructions) The next question comes from the line of Arnold Ursaner from CJS Securities.

Hi. It's Arnie Ursaner from --

Good morning, Arnie.

I'd like to see how that new name looks in print. A couple of questions. Looking at the quarter, your gross margin, at least relative to my expectations, was pretty disappointing, and your SG&A offset it. But, again, most of the SG&A improvement were things out of your control, your stock price and pension expense. The discretionary parts of SG&A all actually increased in the quarter, and yet your comments regarding the product mix should have let to dramatically better gross margins. You had much more of your value-added products kick in. Maybe you could help us on both of those items and how it would affect operating margins.

Sure. Obviously, we did see an increase in the Packaging Systems space of 50 basis points over the prior year second quarter. The main components, Arnie, and I know you know all the moving pieces, but I'll give them to you. Price was up about half a percentage point, volume and mix was positive as well, providing about 0.08 of a point increase. We did have materials cost increase, and that impacted the margin. And it was all the things you would expect from labor, overhead, depreciation and other expenses increasing, offsetting those. So, from a gross margin perspective, we did get 50 basis points increase, which, again, is fairly much in -- for Packaging Systems is in line with our longer term growth expectations for that business, about a 50 bps increase each year.

So, we feel pretty good about it. Yes, the increases were in the high value product space, and we expect to continue to see those increases, but at the same time we have increases in our cost pool that are somewhat muting all of that increase. But, again, we feel very comfortable with the view that we will see some increases continue in that business over the near term.

My second question, obviously, you do provide full year guidance, but there is a lot of discussion points within your prepared remarks about the timing of various things between Q3 and Q4. I think Don clearly indicated your Q3 backlog and bookings looked terrific. You're a little concerned, if you will, about Q4 trends, not because of a glaring problem, but just because the recons are shorter, there is a currency impact, there is an R&D impact.

So, I guess my question is, if I were to think about the breakdown that you would like us to think about for Q3 versus Q4, I know you don't normally provide quarterly guidance, but maybe perhaps give us some better sense of how we ought to break down the back half of the year, since you are obviously raising a lot of questions about the various components.

I think the currency impact, and I'll give you some numbers, Arnie, to help you run through this. In last year's third quarter, the dollar/Euro conversion was $1.43 to the Euro. In the fourth quarter it was $1.48 on average to the Euro. So, obviously, you can see there that it's a much steeper climb on the fourth quarter than the third quarter given our $1.30 that we are at today. So, that is number one.

Number two that we called out is the increase in the R&D expenditures of $0.04. If you are thinking about that, again, I would think that not exactly 50%, but fairly ratably over the third and fourth quarters with slightly more hitting the fourth quarter than the third.

In terms of the visibility, Don mentioned and I mentioned it, we have been talking about this for a while. Due to the change in the order patterns by our customers and our decreasing lead times, which allows them not to have to put in so many orders way ahead of time, it is providing a much better view of the third quarter, but a much less predictable view of the fourth quarter. So, we are somewhat cautious about the mix in that fourth quarter, and that is really, if you were to try to do -- there is no easy way to do this, but if you're trying to do an apportionment, you certainly have much more of the impact, probably two-thirds of the impact in the fourth quarter and a third in the third quarter.

And, Bill, most of the H1N1 revenues you had were in Q3 last year?

No, they were pretty balanced.

No, fairly balanced. And, in fact, what we are seeing, Arnie, is if you look at it on a -- there is about $10 million of currency impact on sales, and roughly about $12 million impact of H1N1 in the fourth quarter. And when we look at the H1N1 -- when we look at sales in general, and you take the currency effect out, we see that the fourth quarter sales are actually going to be lower than the fourth quarter 2009 at the current projections that we've got right now by about 3%.

But the one thing I would add to that, Arnie, is last year we talked about the halves being reversed because of the unusual finish to 2008. So, this year in the first half we earned $1.22 versus $1.00 in 2009. You are going to see a flip-flop, where we will go back to our traditional seasonality, and the second half of the year will be softer than the first half, which is what we talked about at the outset of the year.

Okay. Two more questions, if I can. You, Don, obviously highlighted the new hatch product. What were the trailing 12 month revenues of this product, and can you describe you plan to distribute or sell this product?

Yes, this is still in the development phase, Arnie, so there are no trailing revenues. What we are doing is adapting the fundamental platform to our customer's needs, and the acquisition was done to fill an unmet need in the market and what we perceived to be a gap in our portfolio offerings. So, what you are seeing with formulations, especially in the biotherapeutic area, there is a desire for a platform that can deliver modest lines, not a 1 mL or 2 mL injection, but in that kind of 3 mL to 5 mL corridor, but over a long period of time, where you want the drug to work its way in slowly to maximize its therapeutic effect.

So, this acquisition, it is basically in the prototype phase, and the first agreement that we have in place is for prototypes to go to the customer for evaluation. We don't expect substantial revenues off of this until we get to probably that 2012 timeframe as well. Everything kind of comes together at the end of 2012, beginning of 2013 in the portfolio.

Don, to follow-up on that, you obviously are accelerating your R&D spend, your customers are increasing their R&D funding for you. You have told us you are going to increase your capital spending. Since you are accelerating all the components of CZ, shouldn't we see commercial revenues at an earlier time than you had previous (inaudible).

That is wholly out of our control. It all depends on the evaluation and the stability work done by our customers.

Yes, but at this point it is still mid-2012 or beyond before we see what should move the needle (inaudible) in terms of commercial opportunities?

For CZ in particular, yes. Yes.

That's correct.

Thanks. Look forward to seeing you at our conference. Thanks.

Thanks, Arnie.

Your next question comes from the line of David Windley of Jefferies & Company. Please proceed.

Hi. A couple of follow-ups. In the press release a couple smaller descriptions on some external consulting costs declining in packaging but increasing in corporate. I wondered if that was something that you were scrutinizing in terms of trying to keep those external costs under control. Just curious if there was anything going on there?

Yes, of course, and it's a myriad of things. I mean, we did have some M&A activity, the legal costs were a little higher than we expected. We did have some increase in some audit fees and some tax fees relative to some of the activity going on around the world on a tax basis. Those were the primary drivers and, yes, absolutely, we do scrutinize all of those costs, especially the discretionary ones, and make sure that we are doing the best that we can to keep those under control.

And then the press release also talks about restructuring in the second half of the year was described as charges, and I wanted to make sure I understood whether those were new charges to be taken to the P&L or just expenses against the reserve?

It is new charges. If you remember the way they changed the rules on restructuring, that you can't take a [bolus] charge upfront and then have it all come against the reserve. You have to wait until the actual activities are exited before you can take the charge. It's a small number, Dave. We are talking about somewhere between $500,000 and $700,000 for the rest of the year, and it is mostly severance associated with exiting some activities.

Okay. And then coming back to CZ, Don, you described this ConfiDose, if I understood correctly, ConfiDose/CZ combination for the high pressure inside the auto-injector. Is that the area, I think you described to me prior, that that was kind of a surprising -- pleasant surprise to you that that was a market opportunity. I guess is that the most exciting area for CZ, or where is the area where you are seeing the most development activity, sampling validation type activity for CZ?

It's collectively, David, within the biologic space. So, if you take that as kind of the umbrella, you've got a situation now where there have been some issues in the marketplace with breakage where CZ is a logical alternative that can help solve that issue. But it's also being driven by the older issues of the silicone glomeration as well as the tungsten. So, I think the impetus on the breakage issue has brought a lot more attention to CZ as an alternative either in a cartridge or a pre-fill. But certainly the original drivers in terms of cleanliness and noncontamination for the biologics is there as well. So, it is really both of those factors, but wholly within the therapeutic protein space.

Okay. And getting a little bit at Arnie's question, maybe a little bit different way to come at it. At this point is the number of customers that are inquiring or sampling CZ containing product, or CZ containers of one sort or another, is that interest level at the expectations that you set forth as you were working up to this point or ahead or behind? I mean, could we look at it that way?

We have a lot of ins and outs. I think my simple answer would be it is in line with expectations. But what we are seeing is that because of its versatility, there is a market opportunity for what we fundamentally have called lifecycle management for the customer. So, if they are producing bulk active at the early clinical stages of product development, they can do that and store it in CZ, and they begin to get data. So, we have seen demand, for example, for larger CZ containers come out up to storing 1 liter of active.

Behind that you would have them potentially go to the market within a single dose vial, somewhere in the 2 mL to 5 mL range. And after that you've got the opportunity to convert into the syringe. But what you have all the way through in the eyes of the regulatory bodies is a single primary container material. And we think that will provide some regulatory advantages.

The other thing to think about is that as we progress through that chain, the attributes of our rubber products in terms of Westar process, in terms of RU, also apply to the vials. So, they can be done -- as well as the syringes -- they can be done in a format that is ready to sterilize, or they can be done in a format that is ready to use. But as a single packaging option, the material really gives them a lot of flexibility and may provide some advantages from a regulatory perspective.

So, we see new things emerge every time we talk to a customer, but the flexibility in terms of design and the flexibility in terms of primary container format are going to drive it, in addition to those earlier things I mentioned about cleanliness and breakage.

Okay, that's very interesting. Maybe one last follow-up. I think you talked about, or you have talked about other competitive types of materials that would be trying to get at this high durability, maybe low friction value-add. Are you seeing any competitors develop products alongside kind of a similar stage of development as you, and how is that landscape settling out?

There is no doubt that there will be competitors entering in. There is always new resins coming to the market, but remember the thing that really helps us in our IP is the timing mode around getting these things to market. So, even as new options emerge now, there are a number of months and years before they are actually going to get to the point where CZ is.

The thing we keep reminding people about is that CZ had been in development with our Japanese partners since the middle 1990s. Now you've got a really robust dataset, you've had the emergence of their biologics over that time. And we have been working on the compatibility studies and everything over that 10- to 15-year period. So, although new entrants are going to come in, it's going to be some time before they get to the stage where CZ is.

Okay, great. Thank you.

Thanks, David.

Your next question comes from the line of Arnie Ursaner from CJS Securities. Please proceed.

Hi. A couple of follow-ups. One, you didn't really say anything about international and growth opportunities there, capital spending internationally. Can you freshen China, India and your other opportunities for us?

Yes. China and India are fundamentally right on track. Year-to-year comparison for China up roughly in that mid kind of twenties percentage range. I think we've seen 25% year-on-year growth or a little bit better. India has been a little bit stronger. We have seen year-on-year growth there north of about 30%. Interestingly enough, within the Generic segment, we have seen one CZ opportunity come to fruition out of India, which we think is a positive.

But right now, so far right on track. Within China, the plastics facility, we've got four troikas up and running. We are beginning to produce a variant of the (inaudible) cap that that plant was dedicated to ostensibly for export business to South America and other countries. So, it has been very strong there. Asia has been right on target overall. Europe, as we talked about earlier, solid through the first half. So, internationally, pretty much on target.

And plans for additional capital spending, new facilities in either China or India?

We are in the process of finalizing plans for a smaller rubber facility, which will be really developmental in its scope and mission in China. We expect to put shovel in the ground we hope by the end of the year. Nothing has really changed there. And we continue to evaluate the prospects for India. India brings a special set of circumstances because of (a) the breadth of the generic industry currently, which we serve out of Singapore. But looking downstream in five to ten years, there is no doubt that India will be a hub of innovative development. So, our question is, do we invest in a baseline facility initially and then grow it into a fully fledged advanced Westar facility, or do we look at an advanced Westar facility from the get-go? Still in evaluation. We'll see how things unfold over the next six months.

It is very preliminary, but if you were to think about CapEx and obviously a lot of people talk about free cash flow for the next 18 months, any insights you care to share?

Well, as Bill said, our capital spending from this year is going to be down substantially from our original plan. That is pretty much in response to what we have seen develop in the marketplace. Our expectation going forward is that we will be in that 120 to 140 range, as we talked about over the five-year plan period. What could change that, I think there would have to be some dramatic development in the marketplace that would make us really accelerate our plans for India, in particular.

Arnold Ursaner. Okay. And, Don, you obviously, you know, when were asked about the pricing of CZ, you gave a pretty abrupt answer, so maybe we'll expand on it a little bit. How much of a premium is it getting versus glass right now in the preliminary stage? And given the price premium that it is likely to have, is it likely to just be new biotech applications, or is there any retrofit opportunity given the cleanliness and the cost premium that it is going to trade at?

Yes. The answer to the second part of your question, Arnie, is that we are seeing broad opportunities both for existing products on the market as well as new products. So, our belief at the current time is that it will not be exclusively reserved for the realm of new products coming to market.

With regard to your earlier question, it is difficult to give an answer to that only because sampling prices tend to be dramatically higher than commercial volume prices. So, initially out of the gate here with the order that we have on the books, the price is substantially higher than it would be at commercial level. Our expectations overall is that it will go to market depending on the drug and the volume at somewhere in that 5X to 8X a glass price.

And you're saying that safety and other issues warrant that kind of premium?

Yes.

Okay, thank you.

Thanks, Arnie.

And we have no further questions at this time.

Thank you very much, Operator, and thank you for your time today. This concludes our call.

Ladies and gentlemen, you may disconnect at this time. This is the conclusion of the call.