西式醫藥服務 (WST) 2010 Q3 法說會逐字稿

Welcome to the West Pharmaceutical Services third quarter earnings conference call. (Operator Instructions) And know, 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 third quarter, 2010 results conference call. We issued our financial results this morning and the release has been posted on the investor's section of 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 the remarks today. You may need additional software in order to view the PDF formatted presentation and a link to a free download of that software is also provided at the website. I remind you that statements will be made by management may contain forward-looking statements within the meaning of 'U. S' . Federal Securities law and that are based on management's beliefs and assumptions, current expectations, estimates and forecasts. Statements that are not historical facts include statements that are proceed by, followed by or that include words such as estimate, expect, intend, believe, plan, anticipate and other words and terms of similar meaning are forward-looking statements.

West 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 result 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. Except as required by applicable security laws the Company undertakes no obligation to publicly update forward looking statements. Rather 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 'U. S' GAAP and therefore may not be comparable to and should not be viewed as a substitute for 'U. S' GAAP operating income and other EPS.

Reconciliation of the non-GAAP financial measures to the most comparable financial results compared in conformity to GAAP are provided in materials of the Company's this morning's earnings release. This call is being recorded on behalf of West and is copyrighted material. It cannot be re-recorded 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

Thank you, John and good morning, everyone. Welcome to West third quarter conference call. Joining me for the call today are Bill Federici, our Chief Financial Officer and Mike Anderson, West Treasurer and primary investor relations contact. Please note that you can follow our presentation this morning via the Power Point slide deck uploaded on the Company's website. 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, they will remain available on our website and the information they contain will be covered in both the release and our remarks.

Let me begin with a quick snap shot of our third quarter performance. The highlights of which are summarized on slide number three. I'm pleased to report that consolidated sales were quite strong coming in at just over $271 million versus $258.9 million for the third quarter of 2009. An increase of 4.8% in actually or 8.7% excluding the effects of currency. The strong increase in sales is particularly note worthy due to the fact that in the third quarter of 2009 H1N1 vaccine sales were $9.7 million, which did not recur in 2010 and we also benefited from a more favorable Eurodollar exchange rate. In effect, we had to grow other sales at a 12% rate to overcome these two issues and achieve the 5% reported gain.

Our consolidated gross margin showed a slight decline with 0.2% percentage points to 27.5% which is not unusual given the seasonal impact of planned shutdowns and the cost we incur for preventive maintenance and the re-start of production. Adjusted operating profit grew 7.7% and adjusted diluted earning per share grew just over 2% to $046 per share. Excluding currency effects, adjusted diluted earnings per share were up just under 9%. Sales grew in all geographic regions within the Pharmaceutical Packaging Systems segment increasing 5% in North America, 6% in Europe respectively and a very strong 18% in our South America and Asia operations excluding currency effects. Sales with value added products such as Westar Processing components or effective B-2 coated closures.

In addition to our newer envision and NovaPure product lines where the primary revenue drivers in Europe and North America were as strong unit growth was the driver in India, China and South America. The double digit growth in West high value closure systems continues the trend observed over the last few years. The market is moving towards zero defect particular free systems especially for high cost biologic drugs and our recent investments in clean room processing, ultra clean water for injection washing systems and vision inspection systems have been timely in meeting these requirements.

In addition demand has steadily increased in Asia and South America for our [TrimTac] and InsoCap IV bottle closures which are produced in [Stover], Germany and now in our [King Fu], China facility. We expect the China facility, which began operations in September last year to be profitable in 2011. Sales in the Delivery System segment increased over 18% excluding the effects of currency. The increase was driven by higher demand for contract manufacturing services, higher sales of proprietary safety and reconstitution systems for [Medimop and Daikyo CZ] products.

R&D spending in the Delivery Systems segment for the quarter also increased by approximately $1 million as we prepare to ramp up manufacturing of samples for customer valuation with the primary emphasis being on the one ml cc syringe, the ConfiDose auto-injector and the recently acquired micro infuser technology. Overall, I am very pleased with Company's performance during the quarter. As summarized in slide number four both the Packaging and Delivery System segments delivered sales gains in excess of our original expectations resulting in consolidated sales growth of just under 9% and over coming the absence of H1N1 revenues. Through the first nine months of the year, sales are up 9.4% on a consolidated basis excluding exchange effects and adjusted diluted earnings were $1.71 a share versus $1.45 for the comparable nine month period in 2009 on a currency neutral basis. Turning to our key programs. The third quarter was a very active period in terms of our ongoing proprietary product development effort.

Slide number five provides some highlights from the past three months. Starting with the Daikyo CZ programs we booked approximately $2.2 million worth of sales during the quarter comprised of a combination of vial and one ml syringe sales along with design and engineering services associated with customer proprietary projects. Having completed validation of the new four cavity production cell we shipped more than 90% of the one ml syringe order booked in the second quarter. Demand for samples continues to outpace our current capacity even with a new line in operation. As I noted in our Q2 call we're accelerating our Scottsdale investments to increase capacity as soon as possible. Customer interest in CZ is a platform technology remains quite strong.

As I and others have stated on numerous occasions CZ's unique combination of attributes make it an excellence option over the packaging of high value biologic drugs. Recent FDA recalls have highlighted not only the issue of glass breakage in auto injectors, but also more recently the flaking of glass vials producing particulates in the drug solution. The inherent break resistance of CZ and its potential stability performance give it advantages over traditional glass systems in many applications. Recently, West invited potential CZ customers to an open house at our Scottsdale facility in order to provide an update on the status of our development programs and to allow them to see first hand the cellular manufacturing system.

Included in the event were presentations on billing considerations in addition to system sterilization. The sessions were very well attended with a great deal of interactive discussion on the potential of CZ to address the emerging breakage and contamination issues being experienced with primary glass containers. I came away from the event strongly convinced that CZ is the right solution at the right time, not only for biologics but for other aggressive, difficult to package drugs. Our innovation team also signed the first major development agreement for ConfiDose during the quarter. This agreement calls for small modifications to the existing design to make it suitable for the customer's application and the delivery of samples for patient use trials in 2011. This is a key milestone for the program which we hope to go commercial production in 2013. Market interest in the micro infusion system we discussed in the last quarter's call, also continues to be extraordinarily strong.

This unique patch pump adheres to the patient much like a band-aid and can deliver a one to 3ml dose subcutaneously over a period of up to three hours. The technology is simple and reliable and gives the formulation time within our customer base more options for their active molecule. Our goal is to have samples suitable for clinical use in the hands of key customers by the fourth quarter of 2011. Turning to our outlook. As I mentioned in the Q2 call comparison for the second half of 2010 was a comparable period of 2009 would be more challenging due to exchange rate volatility in the absence of H1N1 sales. Our backlog, however, has remained strong and is slightly ahead of the comparable period last year of $231 million. Taking this into account we are anticipating Q4 earnings to be in the range of $0.45 to $0.52 per diluted share. Based on exchange rate of $1.40 to the Euro. This would yield full year earnings in the range of $2.13 to $2.20 .

The full year effective currency, assuming dollar Euro conversion rate of $1.40 is expected to impact earnings on the order of $0.03 per share versus earlier guidance and increased R&D spending, primarily on CZ and ConfiDose will absorb another $0.03 per share in the fourth quarter versus the prior year quarter. Looking ahead to 2011 our expectation is that consolidated sales growth with be in the range of 3% to 5% at a constant exchange rates. We expect modest unit growth in our traditional western market with revenue growth being driven by the continued penetration of our value-added products. Unit growth will be more robust albeit on a lower margin for standard products in Asia, India and South America.

We expect capital expenditures to fall in the range of $120 million to $140 million as we invest in capacity in China and India to serve those rapidly-growing markets in addition to continuing our investments, envision, inspection and post processing systems in Europe and North America. Also, with CZ and our other platform technologies near commercialization we plan to increase R&D spending where prudent to speed these products to the commercial stage.

We're currently in the year-end price negotiations for many of our customers and over the next six weeks we'll have a much clearer picture for 2011 and as we have done historically we'll provide more detailed guidance including earnings projections in our February year-end call. I would now like to turn the call over to Bill

Thank you, Don and good morning, everyone. Before I get into my comment we've understand that there was a technical problem with the slide presentation. It is now fixed. The slides are up on the website. So if you had trouble getting in, please try again. We issued our third quarter results this morning reporting net income of $17.8 million or $0.51 per diluted share versus the $0.50 per diluted share we reported in the third quarter of 2009.

As explained in the release, results in both periods included restructuring charges and several discrete tax items excluding the effect of these items in both periods, third quarter 2010 earnings were $0.46 per diluted share versus the $0.45 per diluted share we earned in Q3, 2009. That earnings growth was achieved despite last year's quarter having about $10 million of non-recurring H1N1 sales with an approximate $0.07 earning contribution and the current quarter's results being negatively effected by $0.03 of currency translation.

Turning to consolidated sales, slide six shows the components of our consolidated sales increase. Consolidated sales grew by $12.5 million to $271.4 million an 8.7% increase over Q3, 2009 sales excluding exchange. Volume and mix contributed $20.5 million or 7.9 percentage points of the increase. Price increases contributed $1.3 million or half a percentage point and acquisition in 2010 contributed to $700,000 or 3/10 of a percentage point of the increase. Slide seven details the third quarter's increase in packaging system sales. On an ex currency basis sales increased 5.1% driven by a favorable product mix and modest price and volume increases. Sales increases were strong in all of our geographic regions when excluding exchange impact.

Sales were higher despite the nearly $10 million of Q3 2009 H1N1 component sales, which were not repeated in the current quarter. High value product sales increased 14% to $75 million versus Q3 2009 with the most significant increases this quarter in FluroTec coated and Envision inspected components. Standard product sales were about 1% higher than the prior year at $100 million excluding currency and sales of disposable medical device components were relatively flat at approximately $25 million. Slide eight shows the factors driving the $10.8 million or 15.4% increase in Delivery System sales.

Our proprietary product sales increased to almost $16 million in the quarter, an increase of nearly 33% over prior year's same quarter sales, excluding currency effects and included about $2 million of CZ product sales and about $10 million of reconstitution product sales. Contract manufacturing sales increased by approximately 15% to $67 million due to increased sales and devices used in Health Care applications such as auto-injection pens and increased demand for disposable healthcare products including those used in inflation and diagnostic applications.

Excluding acquisitions made since the third quarter of '09, and currency effects, Delivery System sales increased by 17.2% over Q3 2009 sales. Slide nine shows our consolidated gross profit, adjusted operating profit, currency impact and FX neutral growth rates. Our gross profit, excluding exchange, increased 7.5% driven mostly by favorable volume and product mix, improved planned efficiencies and modest price increases. The increases were partially offset by increased raw materials costs, labor, planned over heads and higher depreciation expense. Adjusted operating profit which eliminates non-recurring items from each quarter, increased by 15% excluding exchange effects, reflecting the increase gross profit offset by increased R&D spending on critical development programs and an increase in SG&A expense.

Slide ten shows the detail of our consolidated third quarter 20 basis point gross margin decline. Packaging systems gross profit margin declined by 70 basis points to 35.5% due primarily to material price increases, labor increases and higher planned overhead cost. These increased costs were largely offset by improved efficiencies due to higher plant loads modest price increases and a favorable volume in mix. Packaging systems current third quarter results reflecting a more typical summer operating quarter than Q3 2009. Delivery System's gross profit margin increased by 230 basis points to 20% driven by increased volumes and improved sales mix and improved planned efficiencies that more than offset the increases of raw materials and other manufacturing costs. We continue to expect that both segments, full year 2010 gross margins will increase versus 2009 due to continued favorable volume and mix, continued modest pricing and lean savings.

Slide 11 shows the changes in consolidated SG&A expenses. The overall increase in the current quarter over the prior year quarter was due to increased compensation expense, higher outside services expense much of which related to increased sales commission and increased depreciation. Largely offsetting the increases were the effect of the decline in stock-based compensation expense and a decrease in pension expense versus the prior year quarter. As a percentage of sales, SG&A expenses declined from 17.1% in the third quarter of '09 to 16.5% in Q3 2010. R&D expenses increased by $800,000 versus the prior year quarter due to increased spending on our development projects, including Crystal Zenith prefilled syringe system, our micro infusion system and ConfiDose, our auto-injector.

Slide 12 shows our summary balance sheet information. Our balance sheet remains strong and we're confident that our business will continue to provide necessary liquidity. On a year-to-date basis our debt declined by $9 million due to debt repayments of $4.7 million and with currency providing the remainder of the decrease. Working capital increased by $57 million from the prior year-end, due mostly to increased cash, accounts receivable, inventories and reduction in accounts payable. AR increased by $4 million as a result of increased sales. Our day sales outstanding improved slightly versus the prior year's end to 47.1 days. Inventories increased by $19 million due to higher levels of strategic stocks of certain raw materials. The $8 million decrease in accounts payable reflects reduced levels of capital spending resulting in lower accounts payable at the end of the third quarter compared to the prior year end.

Slides 13 shows our key cash flow metrics. Weve generated year-to-date operating cash flows of $91 million, $6 million better than prior year, reflecting our higher net earnings. Capital spending has been almost $30 million less year-to-date in 2010 due to the relatively high 2009 spending on our China facility and our European expansion, both of which were essentially completed in the third quarter of 2009. Of the $49.8 million of year-to-date CapEx, about half was focused on maintenance capital with the remainder focused on IT system upgrades and new product and expansion efforts. We are updating our full year guidance, which is summarized on slide 14.

We have based our revised guidance on an exchange rate of $1.40 per Euro for the remainder of 2010 reflecting current rates and representing a relative weakening of the dollar versus the $1.30 per Euro used in our previous guidance. This revised currency outlook has an favorable effect on our EPS of $0.03 per share versus the previous guidance. In addition to the currency effect we have revised our fourth quarter and full year guidance to reflect our actual third quarter results and our revised outlook for sales and product mix in the fourth quarter. Comparisons of Q4 2010 versus the Q4 2009 period will be less favorable due to adverse currency comps and the substantial non-recurring H1N1 sales, which contributed about $0.09 of EPS in the fourth quarter of 2009.

The aggregate adverse currency impact on EPS for Q4 2010 versus Q4 2009, is expected to be $0.03 per share at actual exchange rates. R&D expenses are expected to be $0.03 higher in this year's fourth quarter due to increased spending on our Critical Development program. Our backlog remains strong at $231 million which is $6 million higher than our year-end backlog and September 2009 backlog levels excluding exchange. The fourth quarter order book is relatively full but visibility remains limited as a result of shorter lead time and still more frequent but smaller orders. We expect full year CapEx to be in the range of $80 million to $90 million at the assumed exchange rates. I would now like to turn the call back over to Don Morel. Don?

Thanks very much, Bill. That winds up our commentary. The Company delivered a stronger than anticipated third quarter. And overall the first nine months of 2010 have been very strong. Sales have increased over 9% and earnings 18% on a currency neutral, fully diluted adjusted basis.

We have carefully managed our capital expenditures and discretionary SG&A while increasing R&D where appropriate. Our innovation team has achieved several significant milestones on key development programs, setting the stage for the Company to deliver sustainable growth over the next five years. This concludes our commentary for this morning and we would now to be pleased to answer any questions you might have. Operator?

(Operator Instructions) Our first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed. Mr. Ursaner?

Sorry, I had it on mute. Good morning.

Good morning.

My question relates to your margin guidance in the Pharma segment, Packaging segment. You obviously, have a lot more of the value-added products. In fact, you didn't even mention Westar RU which is just beginning to roll out with some customers and yet despite that you highlighted the fact that some operating costs are impacting your margin. Could you expand a little bit on the mix you have going into Q4 and what some -- what actions you're taking to reduce some of the operating expenses?

Thanks, Arnie, and one thing we need to remember, again and we called it out, Don called it out is that the comps to the final two quarters of 2009 are much more difficult. If you remember we had kind of a backwards, atypical view of the quarters in 2009 versus what we normally see. And this year 2010 is more normal. All that said, we do continue to see an increase in the high-value products. We continue to see that strategy of selling higher margins and higher revenues on the same number of units, which fits in nicely to the biologic space and the high-end vaccine space, is continuing. And we do expect them to continue to grow.

However, when you look at the cost side of the equation and compare it to 2009, there are some challenges there. One, obviously, is currency and we talked about that already. Another is raw material prices. And we have in 2009, in the back half, we were still benefiting from raw material prices, which were actually running favorable to what they had been to the prior year. That has changed now and we're seeing the negative impact.

We saw it in the third quarter of 2010 and we will continue to see it in the fourth quarter of 2010 versus the comparable period. That is normal increases in wage rates and overhead, increased depreciation, which is driving off of our capital expenditures over the last few years. Those are all items that are having an impact on the gross margin.

And on the Westar RU side, Arnie that's a situation where the conversions are probably going to mirror the uptake of Westar RS. You may recall, the slide we showed at the Investor Day back in May where you have an introductory period of a couple years. People start to use it and then the ramp up starts to take off. In this particular, case going to the RU, the customers have to do a regulatory filing.

The FDA evaluates the filing for the change. They have to respond within a certain period of time and then the customer can go forward. We haven't heard anything to indicate that they've asked for additional information. And our expectation is that RU, given the cleanliness demands of the industry will slowly ramp up over the next couple of years.

To the extent that occurs, I assume that will have a noticeable impact on your margin.

It will have an impact on our margin again offset, as Bill indicated, by some of the other things. But yes it should have a positive impact on our margin.

It's better than the average margins in packaging systems.

From modeling purposes, can you give us a little more specific information on what you expect to spend R&D this year. And what you're now expecting to spend next year for R&D?

We won't talk about next year, as we discussed, until the February call. This year we're expecting to spend $25 million on all of our R&D programs and that's up roughly $5 million from the $20 million we spent last year.

My final question, relates to your general guidance regarding 2011 and there are a couple of moving parts within that. In the 3% to 5% revenue growth, could you comment specifically about what -- I know you're in pricing negotiations and mention modest volume improvement in the mature markets. Perhaps, you can tell us what growth you expect in the emerging markets and do you expect positive pricing generally in the negotiations, given your higher costs?

I don't know where the pricing negotiation is going to come out, quite honestly. We will review it in about six weeks. It effects about half of our business between Europe and North America. Then, given the pressures in the market, I think we're in a good position but we'll have to see where it comes out. I think the unit growth will be stronger in Asia, as I commented.

Historically, over the last couple of years in China and India we've seen close to 20% to 25% growth in each one of those markets independently, albeit it off of a slow base. The fortunate thing is we have seen stronger growth in South America which is a larger base overall. We do about $35 million down there. Those are the markets that are growing in terms of unifying. Again, in the western markets we think it's going to be driven by the continued update to the value-added products, not so much by unit growth.

I'll jump back in the queue, thank you.

Thanks, Arnie.

Our next question comes from the line of Dave Windley with Jeffries & Company. Please proceed.

Hi. Thanks. Good morning. It sounds like your CZ uptake or interest level sound higher, continue to proceed somewhat ahead of expectations, uptake sounds good. I'm wondering if you are, or if you did and I missed it -- updating your revenue expectations for CZ for 2010. And are you making any comment about how that's going to roll out in 2010?

No change for 2010. Revenues probably in the $5.5 million to $6 million for CZ overall. And we will give you an update on 2011 when we get to February. I think the positive things are that, out of this open house, it's very clear that interest and an alternative the glass is out for the bio guys. The recalls have highlighted the issues with glass in terms of breakage and, in some cases, the flaking that has been seen inside the vials.

So we think CZ's ideally suited to meet both of those problems and, obviously, the comments we're receiving back from our customers are still very positive. No change in the sampling activity so that's been very strong, as well. So all in all, very pleased with where we're at. We just need first uptake in the market.

Can you comment on the breadth of customer sampling that you're seeing? I know you said you're working with a lot. Can you put a number on it?

If you take the list of the top 20 biologics that are currently sold in the market and look at who is producing those, all of them are currently in some stage of evaluating CZ. There are some that are a little bit further behind. There are some that are running line trials and informal stability. If you're a producer of biologics the odds are very strong that you're evaluating CZ opportunity.

Okay. And then finally, from a cycle time standpoint from the sampling activities to moving forward to some commercial product. You mentioned briefly just a second ago, need first uptake -- give me some insight into the cycle time there. What's the selling cycle?

It mirrors our packaging component really because CZ is the primary container. And so, the customer is required to do performance stability and submit that data as part of their supplement or part of their application. And that period is two years. So, for customers that are informal stability now, ideally, they would receive a favorable response sometime in the late 2012 time frame. And I think we have commented publicly that, our expectation is that we'll see moderate volume increases in 2012 towards the end depending on timing. And then the ramp up, with real commercial production would occur in 2013 and that's still the time line we're looking to.

And then just one other question on the ConfiDose, in your prepared remarks you mentioned an opportunity to commercialize in 2013. I don't think I understood if that was a broad statement about ConfiDose and the timing of meaningful revenue there, or if that was a particular opportunity targeted for ConfiDose?

No, it was a broad statement relative to ConfiDose.

So, you're thinking you don't really see uptake there until 2013?

I would say, we'll see uptake in terms of opportunities broadly through 2011 and 2012. I think we're being a bit conservative but 2013, for us, is the most likely point in which we'll see high volume production.

Okay, thank you.

Thank you.

Our next question comes from the line of Derik De Bruin with UBS. Please go ahead.

Hi, good morning,.

Good morning, Derik.

Bill, so the pension costs were down this quarter and I guess you expected the pension costs to continue to fall since the market's been a little bit better than expected?

Yes, comment on 2010, those costs are basically locked in at this point. So, we will continue to see in the fourth quarter of 2010 a decrease versus the fourth quarter of 2009. In 2011, that will depend if you recognize -- we all recognize how the pension expense works. It is driven off of the acutary's valuation as of December 31, 2010. Yes, the asset values have increased but interest rates are lower.

So, when you take a look at the liability, the present value of that liability stream on the pension. It may actually increase versus -- in fact, we expect it to increase versus 2010, resulting in some increase in the expense for 2011. Now, all that said, we're not giving guidance right now but it just gives you directionally if you're trying to understand where the pension expense is going to go for 2011. And, if interest rates change between now and the end of the year if they rise that may abate a little bit.

Great. I know you're not going to give specific numbers on R&D spend but is it safe to assume it's going to be, at least, flat to up in 2011?

Absolutely.

Yes.

Your tax rate was a little lower this quarter than I thought. What are you looking for the full year tax number?

Right now, we're looking at about 24%. 24.2% I think is where we are for the full year. That could change. If there is a -- if the R&D extender bill gets passed, but at this point we are expecting 24.2%.

I guess, 24%, 25% range pretty safe number going forward?

Yes, other than the one thing that's a wildcard there is the change in geographic mix of the earnings. If it's higher in our low tax jurisdiction, it helps us. If it's higher in our high tax jurisdiction it hurts us. But we will be looking at that closely as we get towards the end of the year.

Talking in emerging markets, you mentioned that some of the margins are lower, and some of the EMs. What's the dealt on that. And where, ultimately, do you see your share in emerging markets go, as a percentage of revenues. Where do you think you're going to go?

Our margins are pretty solid both in India and China. They're a little bit better than our average gross margin for the Pharmaceutical Packaging system. Because the competitive landscaping there is much more intense with the local producers. Our goal is to basically build our share in the high-value added part of the segment. Not to compete in the lower margin bulk drugs . And our expectation is that we will get to a fairly substantial part of that market. We do have some fairly unique technologies that gives us an advantage.

Overall, I would say the growth expectations are going to be mirroring what we've seen over the last couple of years there. The big issue is getting right capacity in place because we will be out of capacity in Singapore sometime in the 2012, 2013 time frame. Hence, the investments in China and the rubber facility which we hope to break ground on next year and looking at India equation. We have high expectations for the

Again, Derik, just a reminder it's an awfully small base-- about $25 million in sales this year, 2010 for India and China.

Great. That's the number I was looking for. Thanks a lot guys.

Our next question comes from the line of Ross Taylor, with CL King. Please proceed.

I had a couple of questions.

Hey, good morning, Ross.

Hi, how are you all doing.

Good.

Couple of questions about 2011, to the extent you can respond. In terms of your revenue outlook, can you give any color on which segment you would expect to grow faster or slower. Or just any color on the organic growth you would expect from farm packaging versus farm delivery?

Yes, I think we'll see, in that kind of low to mid single digit overall on the Pharmaceutical Packaging side of the business. The contract part is very hard to project. We've seen good growth there this year during the quarter. We haven't seen growth like this, I don't think, in the last couple of quarters out of the contract side of the business.

We've got a lot of ups and downs that we're going to be dealing with due to the FDA and their actions relative to some new products coming to market, as well as some other products on the market. So, we'll have a much clearer picture when we get to February. We've got an awful lot going on through November and through December in both Europe and North America, in that regard. I'll be able to give you a more definitive answer when we get to the February call.

Also regards to gross margin next year, generally speaking, would you expect product mix to be some benefit there? So, we might see some expansion in gross margin next year?

Absolutely, Ross.

Final question. Did I hear you say that CapEx next year would be in the range of $120 million to $140 million and I think, as part that, you said the increased investments in China and India. And I don't know if you could give any color on what some of those investments might be in terms of size and opportunity.

Again, it's the matter of getting the right footprint in the right location. I think Bill highlighted that, this year CapEx would probably fall in the $80 million to $90 million range versus our original guidance. The large delta there is due to our delay in executing the China rubber project and beginning our preparatory work for India.

So expectation in 2011, is that we will break ground in the China rubber facility and begin that work. And progress our efforts in India with regard to planning and site selection. And the key drivers there, again, are that we are seeing robust unit growth in both of those markets. We've historically supplied them out of Singapore. We completed that expansion, which was started back in 2007 and 2008 last year-- early part of last year. And if demand continues in those markets on the same trajectory then we'll be out of capacity by 2013. And again,

if you think about the time line for getting equipment in, running the validation trials on that equipment, sampling the customer and getting the customer's approval. If we break ground next year, we hope to be in a position to supply in 2013 but we have to deal with that regulatory lag between when the capital goes in and when we're actually allowed to do commercial sales.

Okay, that's very helpful. Thank you.

Thank you.

(Operator Instructions) And our next question comes from the line of James And our next question comes from the line of James Sidoti with Sidoti & Company. Please proceed.

Can you hear me. Just a follow-up on the R&D. I think you said you were going to-- you expected to ramp up to about $25 million this year which means it will be up $2 million in the fourth quarter. Is that primarily the CZ project or is that spread across multiple projects?

It's spread across multiple projects and the three main ones are CZ, obviously, ConfiDose and the micro infusion systems.

And out of those three projects, do you expect any of them to give you any material sales in 2011 or are those longer term?

ConfiDose and the micro infuser are longer term. You'll see smaller revenues off of those through the development agreements we signed with our customers where they risk share the R&D part of it. CZ sales we believe will increase. We don't have a firm handle on that yet. But certainly those revenues will begin to ramp up, 2011 and 2012 going forward but the real commercial ramp again-- The ramp in 2011 will be continued sampling activity and vial activity. The real ramp comes when we get first commercial production of the one ml CZ syringe.

And if you missed it, Jim, the CZ sales numbers somewhere between $5 million and $6 million.

Right, I saw that. But so, you'll ramp up for the $5.5 million to $6 million but still probably not real material based on your revenue?

Absolutely correct.

Okay, so of those three projects, CZ is the nearest term one, though?

Absolutely.

Okay. Thank you.

You're welcome.

Thank you.

That does conclude today's question and answer session. I would now like to turn the call back to Mr. Don Morel for closing comments.

Thank you very much, operator. This concludes our commentary for today. Thank you very much for your time.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.