西式醫藥服務 (WST) 2011 Q4 法說會逐字稿

Welcome to the West Pharmaceutical Services fourth quarter and full year 2011 conference call. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session toward the end of today's call. (Operator Instructions) This call is being recorded on behalf of West and is copyrighted material. It cannot be recorded or rebroadcast without the Company's expressed permission. Your participation in this call implies your consent to our taping. If you have any objections, 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 fourth quarter and full year 2011 results conference call. We issued our financial results this morning and the release has been posted in the investor section in 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. Posted on the Company's website is a slide presentation that Management will refer to in their remarks today. The presentation is in PDF format. Should you require a link to a free download of software that will enable users to view the presentation is also available on the website.

I remind you that statements made by Management on this call and in the presentation will contain forward-looking statements within the meaning of 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 statement that are preceded by, followed by or that includes words such as estimate, expect, intend, believe, plan, anticipate and other words and 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 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 Securities law, 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 and their component parts 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. At this time, I'd like to turn the call over to Don Morel, West's Chairman and CEO. Don?

Thank you very much John, and good morning, everyone. Welcome to this morning's call to review West's fourth quarter and full year results for 2011. Joining me today are Bill Federici, our Chief Financial Officer, and Mike Anderson, our Treasurer and primary Investor Relations contact. Bill and I will refer to slides throughout our prepared remarks this morning which can be found on our website. The content of those slides is covered both in this morning's release and our commentary.

The fourth-quarter results are summarized on slide 3 and I'll begin with the highlights shown on slide 4. We finished the year on a very strong note, with revenues increasing 6.8% to $295.4 million on a consolidated basis even with the unfavorable effects of currency. Revenue growth was driven primarily by gains in the Packaging Systems segment which grew 8.6%, with strong demand in Europe for our high-value products such as Westar and Envision which rose over 12%. Our gross margin improved 0.7 percentage points compared with the fourth quarter of 2010. The improvement in gross margin was driven in large part by improved operating results on our contract packaging operations within the Delivery systems division. Although helped by an improved sales mix and pricing actions to offset escalating raw material costs, the gross margin in the Packaging Systems segment declined slightly.

Our consolidated adjusted operating margin improved substantially by 2.4 percentage points resulting in adjusted diluted earnings per share of $0.59 an improvement of 40% versus the comparable period in 2010. For the full year, revenues totaled $1.19 billion, representing overall sales growth of 5.2% excluding currency effects. And adjusted diluted earnings per share increased approximately 11% to $2.33 per share versus $2.10 for the prior year. ¶

In the Packaging Systems segment, growth was strongest in Europe, South America and Asia and benefited from increased sales for diabetes products, value added components and growth in emerging markets. From an earnings viewpoint, the combination of pricing actions and improving product mix, spending controls and lean programs in our operations were able to mitigate to a large extent increases in raw material and overhead costs. More importantly, the strong demand in our backlog and strengthening of committed orders we experienced in the second half of 2011 has carried forward into 2012. Within Pharmaceutical Packaging globally, the current backlog stands at $282 million, up 16% from the same period last year.

We are optimistic about 2012 as many of the core business drivers we have previously discussed remain intact. Namely, we expect continued growth in systems for diabetes treatment, oncology, autoimmune disease and vaccines. In addition, several key customers have received marketing approval for new molecules which incorporate West components and reconstitution systems. As we begin the year, order patterns in the packaging segment remain strong and we expect to bring several new production lines into operation in our contract manufacturing segment during the second half of the year. We believe consolidated sales will grow between 4% to 7% at constant exchange rates to between $1.215 billion and $1.245 billion with improvement in our gross margin to 29.6% versus the 28.5% reported for the full year 2011.

R&D expense will increase by approximately $3 million as the CZ 1 mL syringe and SmartDose systems move toward commercialization and clinical trials respectively. Our guidance does include $10 million to $15 million of new sales that we anticipate generating for these proprietary products under development. However the timing of these revenues is largely up to customer decision points in their internal product development plans. As a result, adjusted earnings at current exchange rates should fall between $2.37 and $2.55 per share.

Slide 5 provides some quick highlights of our ongoing expansion and product development programs. The China rubber facility remains on schedule for completion at the end of 2012 and the start of operations in early 2013. Construction of the India facility is slated to begin in the second quarter. And expansion of our Kinston, North Carolina facility to accommodate growing demand for Westar and planned additions to our high-value product line is well underway and should be completed by the end of the year. Demand for Envision has been particularly strong as customers and regulators continue to push for lower and lower levels of particulate matter in finished dosage forms.

In the second quarter, West will initiate the global launch of NovaPure, the next generation closure system developed completely in accordance with the principles of quality by design as outlined in the FDA's guidance on quality systems for good current manufacturing practice regulations. Products developed in accordance with these principles are based on more focused science-based decision making with rigid pre-defined quality and performance specifications which are then designed into the manufacturing processes for production. Initially the NovaPure line will encompass small volume vial closures in addition to plunger components for pre-filled syringes.

CZ sales for the year totaled $7.6 million, slightly short of our goal for the year and principally due to a delay in the availability of validated filling capacity to perform stability and line trials. In November, West announced its collaboration with Vetter Pharma and the installation of a dedicated CZ filling line which was fully validated and thus capable of producing units for formal stability testing. Our expectation is that several customers will begin the process of filling stability samples over the coming weeks and months.

We continue to see strong customer interest in the SmartDose system for large volume self injections. And our efforts are now focused on validation of the CZ cartridge container so that those customers can begin the requisite stability studies as soon as possible. We currently anticipate this will be in the second quarter. We also continue to feel the significant number of inquiries for custom CZ systems for delivered volumes in excess of 1 mL. We believe those capabilities will help to eliminate the 1 mL upper limit for biologic drug formulations in current pre-filled formats.

In our safety systems product line, we executed a new three-year supply agreement with a key customer for our Eris System and expect to launch a new passive safety system in the second quarter. We have also secured two new programs through the Medimop vial adapter representing 12 million to 14 million new units for 2012. Overall, we finished 2011 on a strong note with demand carrying into the new year and remain focused on generating profitable growth from our strategic expansion and product development programs. I'd now like to turn the call over to Bill Federici for a more detailed look at both our fourth quarter and full year results along with our revenue and earnings guidance for 2012. Bill?

Thank you, Don, and good morning, everyone. We issued our fourth-quarter results this morning reporting net income of $18.9 million, or $0.54 per diluted share, versus the $0.18 per diluted share we reported in the fourth quarter of 2010. Our fourth-quarter results are summarized on slide 3 of the accompanying PowerPoint presentation and in the release. As explained in the release, results in both periods included restructuring charges, adjustments to our liabilities for the continued consideration from recent acquisitions and discrete tax items. Excluding the effect of these items in both periods and a Q4 2011 separation benefit cost, fourth quarter 2011 earnings were $0.59 per diluted share versus the $0.42 we earned in Q4 2010, a net increase of 40%.

Turning to sales, slide 6 shows the components of our consolidated sales increase. Consolidated fourth-quarter sales were $295.4 million, an increase of 7.2% over fourth quarter 2010 sales excluding exchange effects. Packaging Systems sales increased 9.1% over same quarter 2010 sales excluding favorable exchange effects. Sales price increases in Packaging Systems contributed approximately 3.6 percentage points of the increase. Favorable sales mix and volume accounted for the remainder of the increase.

Geographically, we were again strongest in Europe and Asia. North America sales grew modestly during the quarter as compared to the prior-year quarter, due to customer regulatory issues that limited customer production levels and thus demand for our products.

For the Packaging Systems segment as a whole, sales growth in our high-value products, specifically Envision and Westar process packaging components, more than offset the customer specific sales issues. High-value product sales increased 12% versus the prior-year quarter.

Delivery Systems sales increased by approximately 2% over sales in the prior-year quarter excluding exchange. Higher demand for various contract manufactured healthcare devices drove the sales increase. Sales of proprietary products were $18 million or 21% of that segments revenues in the quarter, slightly down from the prior-year quarters' 22%.

CZ sales and development activity were approximately $1.7 million in Q4, about the same as in the prior-year quarter. Full year 2011 CZ sales were approximately $8 million and total proprietary product sales, including CZ, were $67 million for the year.

As provided on slide 7, our consolidated gross profit margin for the quarter was 28.9% versus the 28.2% margin we achieved in the fourth quarter of 2010. Packing Systems fourth-quarter gross margin of 32.4% declined slightly from the 32.5% achieved in the fourth quarter of 2010. High raw material prices continue to put pressure on margins, but the impact was mitigated through a sales price surcharge and other contractually scheduled price increases that went into effect over the past few quarters.

Delivery Systems fourth-quarter gross margin improved 2 full percentage points to 20.1% compared to the prior-year quarter. The improvement in margins was mostly from the increased volume and mix of revenues generated from the contract manufacturing side of the business. Raw material price increases were largely passed through to customers with the exception of a net decrease in selling price to a contract manufacturing customer in Europe. Our restructuring efforts also helped improve the overall margins in this division.

As reflected on slide 8, Q4 2011 consolidated SG&A expense decreased by $2.1 million versus the prior-year quarter. Lower information systems costs, restructuring savings and lower stock-based compensation costs account for the majority of the decrease. As a percentage of sales, fourth quarter 2011 SG&A expense was 16.4% versus the 18.2% in the fourth quarter of 2010.

Slide 9 shows our key cash flow metrics. Operating cash flow was $41.8 million for the quarter ended December 31, 2011, our strongest quarter for the year, but still $5.4 million below the prior-year quarter with most of the difference attributed to the settlement of deferred comp and pension obligations. Capital additions of $47.8 million remain in the quarter including $14.4 million in accrued capital, most of which is for the new corporate office facility. $15.4 million of the capital was spent on new products and expansion efforts. Our full year CapEx was $122 million in 2011, including the accrual of $25 million of cost mostly associated with our new corporate office and research facility. We expect to spend approximately $135 million to $155 million in capital in 2012 including approximately $20 million-- $40 million of costs associated with our new corporate office and research facility. The buildings costs will be funded upon its completion and we expect to-- which we expect to occur at the end of 2012 or early '13.

Slide 10 provides some summary balance sheet information. Our balance sheet continues to be strong and we're confident that our business will provide necessary future liquidity. Our cash balance at December 31 was $91.8 million, $18.4 million below our December 2010 balance. However, not included in that cash balance is $26.5 million of short-term investments purchase primarily in '11 with maturities of less than one year. About 80% of our cash is invested overseas, two thirds of which is not available to be repatriated to the US without incurring significant tax consequence. Debt at December 31 was $349.4 million, $9 million lower than at year end due primarily to repayments on our revolving debt facility. Our net debt to total invested capital ratio at quarter end was 28.2%, slightly lower than the prior year end ratio.

Working capital totaled $228.8 million at December 31, $80 million lower than at the prior year end with $11 million of the decrease due to foreign exchange. Main reason for the decrease in working capital is due to the reclassification of $50 million of our private placement notes to current liabilities reflecting their stated maturity date of July 2012. The increase in our accounts receivable balance is due to higher sales level in the current quarter versus the fourth quarter of 2010. Accounts payable balances also increased due to higher year-end purchases from Daikyo and accrued capital spending.

We issued our full year 2012 guidance in this morning's release. That guidance is summarized on slide 11. We have based our guidance on an exchange rate of $1.32 per euro. By contrast, our 2011 actual results are translated at a $1.39 per euro rate. This strengthening of the dollar creates adverse earnings comparisons to the prior year. Each $0.01 strengthening of the dollar versus the euro results in just over $0.01 reduction of full year EPS as a result of translation. We believe revenue growth will be in the 4% to 7% range at constant exchange rates. Our consolidated sales for 2012 should be in the range of $1.215 billion to $1.245 billion at current exchange rates. Both operating segments should generate margin expansion.

As stated in the earnings release, our guidance for 2012 includes an estimated $10 million to $15 million of growth in CZ and other proprietary products. R&D funding for these programs is expected to be about $3 million more than in 2011. Using these assumptions, our full year earnings per diluted share should fall in the range of $2.37 to $2.55 excluding restructuring costs and including adverse currency effects without which our 2012 EPS guidance would be $0.09 to $0.11 higher.

Slide 12 shows the significant factors that are expected to impact our margins in 2012. We expect higher than average price increases, a continued favorable mix shift towards high-value products and a strong lean savings program to more than offset higher raw material costs and normal inflationary pressure on costs. We expect these net effects will produce expanded margins in 2012. I'd now like to turn the call back over to Don Morel. Don?

Thanks very much, Bill. This concludes our prepared remarks for this morning, and we'd now be pleased to answer any questions you might have. Operator?

(Operator Instructions) Arnie Ursaner with CJS Securities.

My first question relates to the guidance you provided, which increased a little bit from what you have given in November from 4% to 6% to 4% to 7%. At the time in November I think you had talked about price being 2%. When you think about the 4% to 7% now, how much is mix and how much of it is price?

The price is just a little bit higher than that, Arnie, somewhere in the-- approaching 2.5%, not quite there. And mix is also expected to be favorable as well.

Okay, and the new production lines that you highlighted in your prepared remarks, can you just remind me what they're going to be used for and--?

They're actually contract manufacturing lines for two products that we expect to receive approval -- our customers to receive approval. One should be in the second quarter and one should be late in the third.

And will the customer help in the funding of these facilities, or are you-- are you hopefully have contracts where they'll take the output from these?

A little bit of both. I mean it's a mix depending on the specific customer, but there are cost offsets through the tooling and some of the assembly equipment that's customer specific.

Okay. The final question is on your backlog which continues to be a very positive surprise, very strong. Last year when you were talking at this time, you were highlighting that your customer orders were shrinking in terms of when they would give them to you, the size, it became much more just in time, and you've been running very strong backlogs all year. Can you give us a little more color about what is behind the backlog growth? Is there a lengthening of the delivery schedules? Are people willing to give you more of the order up front? What's changing there?

I think there's a whole host of factors. Part of it is timing. So we've got a number of large med device customers whose fiscal year ends September 30. So clearly what they were doing was managing down inventories in our third quarter and then what we received was several large bolus orders into the backlog to begin their new fiscal year which started October 1. But we've also seen general demand increasing in areas like diabetes, which we think is a very positive as well as some of the exports that we do out of Europe into the North Africa and Middle Eastern and Eastern European countries, so strong growth there. A little bit of it is an extension of lead times. When our factories get to the point where we're running them now, which is at kind of that mid-80s utilization level, you will see lead times extend a little bit, but so far manageable.

Thank you, I'll jump back in queue.

Thank you, Arnie.

Thank you, Arnie.

(Operator Instructions) With no further questions, I like to turn the call over back to Mr. Don Morel for any closing remarks. Please go ahead, sir.

Thank you very much for your time this morning. This concludes our call for today. If you have any further questions, please do not hesitate to call Mike, Bill or myself. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect.