西式醫藥服務 (WST) 2012 Q3 法說會逐字稿

Welcome to the West Pharmaceutical Services third quarter 2012 conference call. At this time all participants are in a listen-only mode. My name is [Belil] and I will be your operator today. We will conduct a question and answer session towards the end of this conference. (Operator Instructions).

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. If you have any objections 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 third quarter 2012 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. 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 to 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 statements that are preceded by, followed by, or that include words such as estimate, expect, intend, believe, plan, anticipate and other words and terms of similar meaning of 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 statements. 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 in 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?

It thank you, John. And good morning, everyone. Welcome to West's third quarter 2012 conference call. Joining me today are bill Federici, West's Chief Financial Officer and Mike Anderson our Treasurer and primary Investor Relations contact.

Also as a reminder, to support our prepared remarks this morning Bill and I will refer to a power point slide deck that can be accessed via our website under investors. If you cannot access the file, the information in the slides is covered in both this morning's release and our commentary.

Beginning with slide numberthree, sales during the quarter totaled $303.8 million an increase of 3.5% or 9.2% excluding the impact of currency.

As summarized on slide numberfour, pharmaceutical packaging sales were again driven by higher sales of value-added product, where sales in the delivery systems group benefited from higher demand for a range of proprietary products and health care related contract manufacturing services. Versus the third quarter of 2011, our consolidated gross margin improved 2.1 percentage points to 29.8%. Very strong performance given the broad plant shutdowns that occur in the quarter for preventive maintenance and the European vacation period.

Adjusted operating profit was $27.9 million and adjusted earnings per share were $0.52. Unfavorable currency exchange lowered operating profit by approximately $0.04 per share and earnings were also negatively impacted by an increase in variable incentive compensation costs and a slightly higher effective tax rate.

Excluding currency, revenues in the packaging system segment increased just over 10% versus the third quarter of 2011 with the bulk of the increase again being driven by sales of high value products which were up 17%. Delivery system sales rose 6.7% excluding currency as a result of strong demand for contract manufacturing services and proprietary devices for reconstitution and safety. Bill will provide additional detail on our segment performance in just a few minutes. Demand remains robust and order flows in line with expectations.

Our backlog remains healthy at approximately $310 million, slightly ahead of the prior quarter and up significantly when compared with the start of the fourth quarter in 2011. The Euro strengthened a bit against the dollar in the quarter which creates a slight tail wind through the end of the year. Looking at our current production plan and order book, we expect a solid fourth quarter and are raising our full year guidance to $2.67 to $2.72per adjusted fully diluted share.

I'm pleased to report that our facilities within the path of hurricane Sandy experienced no substantial damage with only minor disruptions in production. At this point we fully expect to make up lost shift hours by mid-December when we close for the holiday period.

Slide numberfive provides a high level summary of our major expansion and new product development programs. Our investments in washing and vision systems are bearing fruit as we continue to see high double digit growth in our high value product line in the packaging system segment. We expect market demand for clean products to continue to drive future growth in product categories such as Westar, FluroTec, Envision, and NovaPure.

The new plant projects in China and India are on schedule and will provide much needed capacity in 2013 and 2015 respectively to support forecasted growth in this region through 2017.

Recent orders booked for the CZ 1-ml syringe system have sold out our current capacity in Scottsdale for the remainder of the year. We believe this is a strong indication that customers are beginning to plan for engineering line trials and formal stability fills required for regulatory filing.

Development work continues on the SmartDose system with demonstration units scheduled for delivery by the close of 2012 and the first clinical units by mid-second quarter 2013. On the safety and administration systems front we continue to see increasing demand for the Eris safety device and we have formally launched the B.Safe system during the quarter.

We also announced our development agreement with Janssen Biotech to collaborate on the design optimization of an innovative self injection device that West will market under the trade name SelfDose This technology compliments the current West portfolio of self-administration systems and West will also be responsible for commercial manufacturing if and when the device is approved.

Turning to our long-range outlook as announced in this morning's release we completed our annual review and update of our five-year operating plan. Slide number six provides some highlights from the conclusions of our review. At this point we see no change to the primary growth drivers for our business segments through the planned period which ends in 2017. For the first year of the plan we believe we will generate sales growth in the 5% to 7% range at constant exchange rates.

Growth in packaging systems will continue to be driven by changing demographics, geographic expansion, and increasing demand for biologics use in oncology, diabetes, autoimmune disease, and vaccination which in turn drives uptake of our high value product portfolio. In the delivery systems segment we expect solid growth from our health care contract manufacturing services group in addition to expanded sales of our proprietary product lines including Medimop, safety systems, CZ and SmartDose.

In the out years of the plan the shift to a higher percentage of proprietary products begins to ramp up and drive revenue growth and market expansion. Focusing on these growth drivers should allow to us generate revenues between $1.8 billion and $2 billion by 2017 with substantially improved consolidated operating margin in the high teens consistent with the plan update we provided a year ago.

In short, we believe our strategy is strong and builds on our proven ability to develop technologies and products to address key needs for the safe accurate and simple administration of injectable drugs. Our investments in both new product development and our manufacturing footprint over the last few years put us in an excellent position to deliver organic growth in the range previously discussed.

I will now turn the call over to Bill Federici for a more detailed discussion of our financial results. Bill?

Thank you, Don and good morning, everyone. We issued our third quarter results this morning reporting net income of $14.8 million or $0.43 per diluted share versus the $0.49 per diluted share we reported in the third quarter of 2011.

Excluding the effects of restructuring costs discrete tax items and acquisition-related earn out adjustments, third quarter 2012 earnings $0.52 per diluted share versus the $0.53 we earned in Q3 2011. A reconciliation of these non-GAAP measures is provided on slides 14 through 17.

Keep in mind as you review our results that foreign currency translation rates most notably the decline in the Euro's value compared to the US dollar resulted in a $0.04 per share reduction in Q3 2012 earnings per share in comparison to the same period in 2011. On a year-to-date basis, through September 2012, foreign currency translation is $0.13 per share unfavorable to the prior year period.

Turning to sales. Slide seven shows the components of our consolidated sales increase. Consolidated third quarter sales were $303.8 million an increase of 9.2% over third quarter 2011 sales excluding exchange.

The increase was driven by favorable mix, modest unit volume gains and sales price increases which in the aggregate added sales of $27 million in the current quarter at constant exchange rates. Packaging system sales increased by $21.6 million or 10.4% over the same quarter 2011 sales excluding exchange.

A favorable sales mix and modest volume growth accounted for 7.1 percentage points of the increase. Higher selling prices in packaging systems contributed the remainder of the increase. High value product sales increased 17% versus the prior year quarter excluding exchange. Our Q3 2012 sales comparisons to the prior year period continue to benefit from customer inventory management actions and supportive customer product launch activities the impact of which is declining versus the first half of 2012.

Excluding the positive effects of customer inventory builds and product launch activity and our higher than normal sales price increases to recover historical material cost increases we estimate our normalized 2012 sales growth to be in the range of 5% to 7%. Delivery systems sales increased by $5.7 million or 6.7% over sales in the prior year quarter excluding exchange. The sales increase was equally divided between a good performance in our contract manufacturing operations and our proprietary businesses. Sales of proprietary products were $19 million or 21% of the segment's revenue in the quarter. Two percentage points above the prior year quarter. CZ sales and development activity were approximately $2.2 million in Q3 about $300,000 above the prior year quarter level. Total proprietary product sales are expected to grow at a double digit rate for 2012.

As provided on slide eight, our consolidated gross profit margin for Q3, 2012 was 29.8% versus the 27.7% margin we he achieved in the third quarter of 2011. Packaging systems third quarter gross margin of 33.3% is 1.7 margin points higher than the 31.6% achieved in the third quarter of 2011.

High raw material prices and general inflationary increases in cost continue to put pressure on margins but the impact was more than overcome by the favorable mix of products sold, the sales price actions that took effect over the past several quarters and continued lean savings and efficiencies in our plants. Delivery systems third quarter gross margin was 21% a 2.8 margin point improvement over the prior year quarter. Although overall price increases in sales mix were mildly positive the biggest factor in the margin improvement is due to production efficiencies from automated assembly, reduced labor costs and restructuring savings, and recovering of costs under tooling arrangements.

As reflected on slide nine, Q3 2012 consolidated SG&A expense increased by $8 million compared to the prior year quarter. The largest share of the increase comes from $4.6 million of stock-based compensation expense equally caused by the rise in our stock price and higher estimated achievement levels on longer term performance share -- based share plans. In addition, sales bonus and other annual incentive payment programs are $2.3 million above Q3 2011 levels due to our favorable sales and operating results versus planned targets.

Slide ten shows our key cash flow metrics. Operating cash flow was $117.6 million for the first nine months of 2012. $28.7 million more than the comparable period in the prior year due primarily to our strong operating results.

Capital additions of roughly $100 million remain in the first nine months of 2012 including $28.4 million for the new corporate office facility. Roughly half of the remaining capital spend was on new product expansion efforts including significant progress on our rubber plant in China. We expect capital additions of between $145 million and $155 million in 2012 including approximately $40 million of costs associated with our planned new corporate office and research facility.

Slide 11 provides some summary balance sheet information. Our balance sheet continues to be strong and we are confident that our businesses will provide necessary future liquidity. Our cash balance at September was $143 million, $51 million higher than our December 2011 balance. Additionally, not included in that cash balance is $21.9 million of short-term investments with maturities of less than one year. The significant majority of our cash is invested overseas and generally not available.

Debt at September 30 was $401 million, $52 million higher than at year end due primarily to increased borrowing on our revolving debt facility. Our net debt to total invested capital ratio at quarter end was 26.5% a 1.7 point improvement from the 2011 year end ratio.

Working capital totaled $281.7 million at September 30. $52.9 million higher than in the prior year end. The main reason for the increase is due to the higher cash balances mentioned previously as well as higher accounts receivable balances.

We have seen an increase in our days sales outstanding ratio partially due to increased proportion of receivables from international locations where payment cycles are typically longer than in the US. Despite the increase in DSO, we have not experienced any material collectability issues. Our backlog of committed orders remains strong at $310 million as of September 2012, significantly higher than September 2011 balances and modestly ahead of prior year end levels. Our expanding lead times and customer inventory management actions continue to impact our backlog and our results. Amounts included in our current backlog for the following year are approximately $20 million higher than the backlog at the same point in 2011.

We updated our full year 2012 guidance in this morning's release. That guidance is summarized on slide 12. We based our revised guidance on an exchange rate of $1.29 per Euro. Our previous guidance was based on $1.22 per Euro rate.

The favorable exchange rate environment provides about $0.05 per share upside to our prior forecast. However, that favorable development is largely offset by the increase in our full year effective tax rate reflecting our current estimate of an unfavorable mix of earnings towards jurisdictions with relatively higher tax rates including the US and Europe. Consistent with prior guidance we expect 2012 revenue growth to be 9% to 11% above prior year levels excluding exchange with substantial margin improvement in both operating segments.

Using these assumptions our full year 2012 earnings per diluted share should fall in the range of $2.67 to $2.72 compared to $2.33 per share earned in 2011. A 15% to 17% improvement in EPS excluding restructuring costs and other one-time items.

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

Thank you very much, Bill. This concludes our prepared remarks for this morning and we now look forward to answering your questions. Operator?

(Operator Instructions). The first question he comes from the line of Arnie Ursaner of CJS Securities. Please go ahead, sir.

Hi, good morning Don, Bill and...

Hi, Arnie.

Good morning, Arnie.

I have a broad question. In your prepared remarks you mentioned the moderation of the growth in pharmaceutical and other sales. I assume that is related to the new bookings you had earlier in the year for a customer fill out of inventory because it is inconsistent with the very positive trends you have in booking. Is that the right way to think of this?

Yes, that is the right way. (multiple speakers)It was positive to the quarter, but not nearly as positive as it was for the first two quarters and that was both inventory builds by the customer and launch activities by customers.

Okay. And the other inconsistency in your remarks is you mentioned Eris doing very well but yet you had a write down of the value and then in CZ you mentioned Scottsdale sold out capacity and yet in your longer term view the multi-year view you mentioned a slower than previously expected commercialization of CZ. Maybe you could help us understand how they hang together?

Yes, if you take a look at the commentary relative to the near term, we haven't filled those orders yet. Obviously we are producing and they are in the queue, but I don't think we changed our long-term outlook at all. We expect that ramp up to occur in the 2014-2015 time frame as the first approvals start to roll through. But there's no change in the long term outlook.

On FX, Arnie, we were negative both in the quarter and year-to-date, $0.04 in the quarter and $0.13 year-to-date. But when you look at the last guidance we gave it was at $1.22,the Euro is hanging in at about $1.29 now. That differential in terms of our -- of looking at guidance causes an increase in EPS of about $0.05 for the fourth quarter versus the prior guidance.

Okay. And following your normal pattern you gave preliminary sales guidance for next year. But to the extent you are going to have a lot more of your higher margin products working through some proprietary ones would your assumptions be that we should expect a fairly meaningful margin improvement next year?

We should see an improvement overall. We are still rolling out the final figures. We will know a little more in our call in February. But in general, we should see that.

On the $310 million in backlog and the $20 million increase that you had, how far out are orders stretching and are you continuing to see customers perhaps pre-order in anticipation of an inability to get what they need?

We think the lead time issue is stretching things a bit. Right now we do have orders for the first quarter rolling in but it is very light beyond that.

As you said, it is about $20 million more that we see now for 2013 than we had seen last year for 2012.

I will jump back in queue. Thanks.

Thanks, Arnie.

Thank you.

Thank you, and the next question is from the line of Ross Taylor of CL King. Please, go ahead, sir.

Hi, my first question.

Good morning, Ross.

Hi. I was wondering if you could clarify your comments about resin CZ again. In response to the last question it sounds like your expectations haven't changed at all but the press release does just mention "somewhat slower than previously expected commercialization" I was trying to square up the two comments.

I think that refers back to the commentary that we had at the end of last year where we talked about this extension in terms of our customers getting approval. What we see right now is no change to what we had guided to then. We think that it is a very positive sign that we have got the strong orders on the books with the syringes that we have that's filled up at capacity. But in the long-term really nothing has changed relative to our commentary at the end of 2011.

Okay, that helps. And another question is your business has very good momentum right now and I'm just trying to figure out what some of the higher value products whether that is just due to increased end customer demand and that your own customers are seeing or whether it is just driven by more of your customers adopting some of the high value products that you sell?

When we look at it Ross and we tried to capture that are for you but certainly clearly there is an impact from inventory building and the launch was also the launch -- the product that it uses our products that it uses are our are high value products. So yes, absolutely there is some of that in there. But there still is above and beyond -- we still had 17% growth in the high value products in the quarter on the packaging system side. A portion of that is due to the inventory build and launch activities. It is not an exact science.

We don't -- we can't pick out exactly how much it is but when we step back from it, and try to analyze it looking at that plus the price increases above what we normally see, which were due to the material prices last year the spike that we saw, we think it is something like 5% to 7% increase in total so as you can imagine on the high value products side it is probably closer to high singles to low doubles.

Okay. That helps. And last two questions relate to 2013. I just wondered first if you expect this higher tax rate to really continue next year and I just wondered if there are any easily identifiable factors that could make your range -- make your growth vary from the low end of that 4% to 7% range that you provided for next year versus the high end?

I think the answer to the first question is we will have to see where the sales fall. Certainly if the momentum we have seen in North America and Europe continues it will have a negative impact on our tax rate, it will be higher. Could you repeat the second question, please?

Second question is for 2013 you provided a [new] organic revenue guidance of 4% to 7% and I just wondered what factors could make you come in at the low end versus the high end of that?

I think the primary factors would be either a delay in some of the launches we are looking at or more likely a slowdown in terms of the inventory rebuild we have seen through this year. It is most likely that the inventory rebuild would have more of an effect than the product launch.

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

Thanks Ross.

Thank you. (Operator Instructions). Okay, sirs, we have no further questions in the queue. I would now like to turn the call over to Mr. Don Morel for closing remarks.

Thank you very much for your time this morning. We look forward to our year-end call in February of 2013 when we will provide full year guidance in terms of revenues and earnings. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day. Thank you.