西式醫藥服務 (WST) 2014 Q2 法說會逐字稿

Welcome to the West Pharmaceutical Services second quarter 2014 results conference call. At this time, all participants are in a listen-only mode. The call is being recorded on behalf of West and is copyrighted material. It cannot be rerecorded or rebroadcast without the Company's expressed permission. Your participation in this call implies your consent to our taping. If you have any objection, you may disconnect at this time.

And now, I'd like to turn today's meeting over to Mr. John Woolford from Westwicke Partners. Sir, you may begin.

Thank you, operator. Good morning, everyone, and welcome to West's second quarter 2014 results conference call. We issued our financial results this morning and the release has been posted in the Investors section on the Company's website located at www.westpharma.com. If you've 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 under Investors on the Presentations Material tab 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. 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. For a non-exclusive list of factors which could cause actual results to differ from expectations, please refer to today's press release as well as any further disclosures the Company makes on related subjects in the Company's 10-K, 10-Q, and 8-K reports.

In addition, during today's call, management may make reference to non-GAAP financial measures, including adjusted operating profit and adjusted diluted EPS. Reconciliations and limitations 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. Thank you for taking time to join us for West's second quarter 2014 earnings call. In our commentary today, Bill and I will review our results for the quarter, provide an update on several key development programs and discuss our outlook for the remainder of the year. As John mentioned, the slides we will use to support our remarks can be accessed through our website www.westpharma.com by clicking on the Investors tab at the bottom of the homepage and selecting Presentation Materials from the menu. If for some reason you cannot access the presentation, our discussion will cover the information both in this morning's release and the slides.

Let me start with some high-level financials for the quarter which are summarized on slide 3. As forecasted in our May 1 call, sales strengthened considerably during the second quarter, increasing 5.3% on a consolidated basis to just under $369 million. Our consolidated gross margin improved from 32.2% to 33%, reflecting a richer product mix in both businesses and our operating margin improved to 14.7% versus 12.3% during the second quarter of 2013. The increased sales of high-value products and packaging systems and higher percentage of sales from proprietary products and delivery systems coupled with disciplined spending resulted in an $11.6 million increase in operating income.

Earnings for the quarter were $0.52 per fully diluted share compared with $0.43 reported in the second quarter of 2013, an increase of approximately 21%. Overall, It was a very good quarter for the Company. Slide 4 summarizes some operating highlights from the two business segments. Please note that the sales growth numbers I will refer to exclude the slightly positive effect of currency during the quarter. In the Packaging Systems segment, revenues grew 4.5% compared with the second quarter in 2013, driven primarily by an 8.5% increase in the high-value product or HVP categories. The growth in sales was a result of demand for Daikyo products, especially Daikyo RSV and for Westar RS and RU packaging components. We also experienced nice growth in standard systems, which more than offset a slight decline in disposable medical device component sales.

On a geographic basis, packaging grew in most of our major markets, with the Americas and Asia Pacific contributing the most to our sales increase. In the Delivery Systems segment, sales were up 7.2% versus the prior-year quarter, as continued demand for contract manufacturing services was bolstered by nice growth in several proprietary product categories, including SmartDose units for clinical trials and CZ vials and cartridges. CZ sales increased by $1 million versus the second quarter of 2013 and by $2.8 million when compared with the first quarter. A relative decline in SG&A and R&D costs combined with a richer sales mix produced a strong improvement in diluted EPS.

Turning to slide 5, we provide an update for several of our key ongoing development programs. As previously reported, we've completed the new elastomer facility in China and the new seal facility in India, which was formally dedicated earlier this month. Both have begun commercial operations. CZ sales for the quarter were up nicely on vial and cartridge volumes. We also booked a $1 million order for the 1 ml long Insert needle syringe. The insert needle program is at a stage where orders will continue to fluctuate quarter-to-quarter as our lead customers have completed much of their qualification work. For those customers with formulations undergoing formal stability testing using the syringe, there is no change in our expectations that the lead candidates for commercialization will finish testing in the late 2015 or early 2016 timeframe. Feedback from key customers indicates the testing continues to go well and the system shows excellent compatibility with a range of complex biologics. On a positive note, we now believe the first regulatory filing for our custom CZ container will take place before the end of 2014 for a drug product currently on the market. Regulatory approval is anticipated to fall in the first half of 2015 which should lead to commercial sales sometime in the late second quarter or early third quarter of 2015.

In our release, we noted that SmartDose clinical trial volumes contributed to the Delivery System segment's quarterly growth. The development programs we've referenced on recent calls continue to go well, which are reaffirming and it's increasing to over 10,000 units per month at the end of the quarter. We anticipate that output will further increase during the second half of the year to support multiple development programs that are underway. We are prohibited from discussing the particulars of those programs today due to confidentiality obligations to all of those customers.

As summarized on slide 6, we are reaffirming our guidance for the full year. We believe sales growth will be in the range of 4% to 6% on a consolidated basis, yielding revenues between $1.43 million and $1.46 billion. Looking at customer order patterns early in the third quarter, we would not be surprised to see some seasonal lumpiness in sales between the third and fourth quarter. While we're confident in our full-year guidance range, our quarterly visibility is not as strong as we would like it, as lead times have shortened due to additional capacity coming online within West and our customers' inventory management efforts at the end of the year coupled with traditional seasonality. In PDS, we expect good growth on the small proprietary products base as a result of clinical work in SmartDose, renewed growth in reconstitution devices due to a customer's new product introduction, and ongoing growth in contract manufacturing services.

Based on the composition of our backlog and input from customers, we currently believe the product mix will be favorable through the end of the year which should translate into stronger consolidated gross and operating margins, yielding full-year adjusted earnings in the range of $1.77 to $1.89 at our assumed current exchange rates.

Our strategic goals remain unchanged, delivering value to our shareholders through expansion of our high-value product offerings, lean operations, and selective organic growth in emerging markets for the Packaging segment while shifting our sales mix to West's proprietary products in the Delivery Systems group. In our key therapeutic markets, diabetes, oncology, autoimmune disease, and vaccines, we are very well positioned to grow with a number of new product launches forecasted for the next three years. New product offerings such as NovaPure closures coupled with CZ primary containers in the SmartDose automated dosing device are the right solutions at the right time for a range of unmet market needs. As has been our past practice, our strategic plan review and updated long-term financial objectives will be completed in October; and we will provide a review of our plan for the 2015 to 2019 period during our Q3 call.

In sum, I think the key takeaways from today's call are as follows. A very good quarter based on high-value product and proprietary product growth. Second-half demand is unfolding, but we expect some quarter-to-quarter lumpiness due to seasonality and customer inventory management. We've made excellent progress on CZ and SmartDose, including the initial CZ filing, which we expect to take place later this year. There are no changes to our fundamental long-term growth drivers and it includes a strong and growing pipeline of biologics within our customer base.

I would now like to 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 second quarter results this morning, reporting net income of $37.6 million or $0.52 per diluted share versus the $0.43 per diluted share we reported in the second quarter of 2013. There were no non-GAAP adjustments to either this quarter or the comparable prior-year quarter. Turning to sales, slide 7 shows the components of our consolidated sales increase. Consolidated second quarter sales

were $368.9 million, an increase of 5.3% over second quarter 2013 sales excluding exchange. Packaging Systems sales were $268 million, 4.5% above same quarter 2013 sales excluding favorable exchange. Our mix of products sold was favorable in the quarter, with high-value products increasing 8.5% above Q2 2013 levels. Delivery Systems sales were $101 million this quarter, an increase of 7.2% over the prior-year quarter excluding exchange. Crystal Zenith product sales were $5.8 million in the current quarter, approximately $1 million above Q2 2013 levels; much of the CZ sales were comprised of vial and cartridge samples. SmartDose sales were $2.6 million for the quarter, up nicely from the prior-year quarter's sales of $400,000. Sales of proprietary products were $27.2 million or 27.1% of the segment's revenues in the quarter versus the prior-year quarter's 25.6%. As provided on slide 8, our consolidated second quarter gross profit margin of 33% was 0.8 of a margin points higher than we achieved in the second quarter of 2013. Packaging Systems' second quarter gross margin of 37.8% was 0.9 margin point higher than we achieved in the second quarter of 2013. The increased margin reflects the favorable mix of products sold and stable raw material costs.

Delivery Systems' second quarter gross margin of 20.3% was 0.8 margin point higher than Q2 2013, benefiting from increased plant utilization and a better mix of products sold. As reflected on slide 9, Q2 2014 consolidated SG&A expense decreased by $2.2 million versus the prior-year quarter. As a percentage of sales, second quarter 2014 SG&A expense was 15.6% versus 17.3% in the second quarter of 2013. Lower retirement benefit costs, incentive compensation, and employee medical benefit costs accounted for the majority of the decrease in SG&A costs.

Slide 10 shows our key cash flow metrics. Operating cash flow was $73 million for the current year-to-date period, $25 million less than the comparable prior-year period, mostly due to the $20 million licensing payment for SmartDose received in June 2013. Our capital spending was $56.2 million for the first half of 2014. We expect to spend approximately $125 million to $145 million in capital in 2014. Approximately half of our planned capital spending is dedicated to new products and expansion activities, including approximately $13 million for the new packaging systems facilities in China and India.

Slide 11 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 June 30 was $226.7 million, down $3.3 million from the December 2013 balance. A large majority of our cash is invested overseas and is generally not available to be repatriated to the US without incurring net tax consequences. However, during this quarter, we repatriated approximately $28 million of offshore cash, which we used to pay down debt and advance fund a $3 million pension payment at June 30.

Debt at June 30 was $361.5 million, approximately $12 million lower than at year-end. Our net debt to total invested capital ratio at quarter end was 12.2%. Working capital totaled $464.2 million at June 30, $50 million higher than at year-end. The majority of the increase is due to higher inventory and accounts receivable balances. Our backlog of committed Packaging Systems orders stands at $314 million at June 30, equal to year-end levels, but about 9% lower than the June 2013 backlog. We attribute the decrease in the backlog to our success at reducing production lead times, alleviating customers' needs to place orders earlier to assure delivery. While lower, the composition of our backlog remains strong with high-value products representing 51% of the orders, compared to 47% as of June 2013. The decrease in backlog does reduce our short-term visibility, but discussions with our customers show no loss of business and no change in longer-term expectations.

Based on our year-to-date 2014 results and our analysis of our orders on hand, we have confirmed our full-year 2014 diluted EPS guidance in this morning's release. We've reduced our sales growth expectations for 2014 based on less near-term visibility and continuing customer inventory management, including global movements of customer product sourcing. The sales reductions are expected to be offset by a strong mix of products sold as evidenced by the strengthening high-value product mix within the current backlog and continued lean savings. That guidance is summarized on slide 12. We have based our guidance on an exchange rate of $1.37 per euro, the same ratio used in our prior guidance. Our Q3 results will have tough comps to the prior-year quarter when a surge in high-value products sales and strong price increases drove a 10.9% increase in consolidated sales and a 50% increase in adjusted diluted EPS. Nonetheless, we expect modest EPS gains for Q3 versus the record 2013 quarter, while Q4 comps will be less challenging.

I'd 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. We look forward to answering any of your questions, Operator?

Thank you. (Operator Instructions) Arnie Ursaner, CJS.

Hi, good morning.

Good morning, Arnie.

Don, I think you want to add your weight three times or four times to highlight customer order patterns, lumpiness, and various other terms that lack of visibility or less visibility for Q3. And obviously, you always have this issue. Could you expand a little bit more on what you're really seeing there, and because again the $314 million backlog is far from a negative number? So, maybe talk a little more about what you're seeing in backlog and why you are a little more uncomfortable about visibility?

Well, I think it's a combination of things, as I outlined in my remarks, first of which is that, in the third quarter, as you know, we get our historic seasonality. Europe shuts down, we do [PM&A] in the plants. So, that certainly is part of it. The fact that we've got many of our med device customers actually end their fiscal year on September 30. So, they are pulling back on some of their orders based on what they're seeing in the marketplace. And then we have the issue at the beginning of the year where we have these two or three one-off items and we want certain how those patterns went unfold when that business started to come back. So, as I said, we're very optimistic about the full year. We'll deliver a good year. But those things combined give us a little bit less visibility and backlog than we would ordinarily have. The other issue of course is that, we bought additional capacity online, whereas last year in the third quarter when we saw this tremendous demand on the HVP side because our customers were under the impression at the time constrain capacity. We don't have that issue, and lead times for those products are shunt. In some cases, 20 weeks to 24 weeks down into our more traditional 12 weeks to 14 weeks. So they're getting more comfortable placing orders and had timeframe as opposed to the longer lead times. So overall, no real change from what we've seen historically. But those things has been tribute to a little less visibility than we would ordinarily have.

Okay, thank you. My second question relates more generally to one of your customers, Amgen, an announcement they made recently about restructuring and capacity. Could you comment on how you envision that impacting a company like yours on a go-forward basis?

It's a broader question for the industry and that has to do with manufacturing footprint and capacity off of the given line. So, one of the things we see anecdotally is a subtle but increasing shift away from massive clean rooms and massive infrastructure that can handle very high volume-filling requirements to shorter, lower-volume runs that can be done in smaller contained environments such as barrier isolators. Our customers had massive infrastructure, they are looking at their own production needs. I think they're also looking at what their future products are going to look like in terms of yearly demand. They would rather deal with 2 million unit run on a system that has 2 million to 3 million unit capacity for growth than they would on a 20 million unit line run for a couple of weeks, shutdown for a couple of months, and then go through all of the requirements to start up again. So, I would not be surprised. There is a general rule to see many of our customers begin to look at this kind of the option. For us, it doesn't really change anything, because the inventories will be kept the same and our volumes won't change unless there is organic growth in any specific drug.

Thank you. I'll jump back in queue. I have a few more, but I'll jump back. Thanks.

Thank you.

Ross Taylor, CL King.

Hi. I missed a couple of your comments.

Hey, good morning, Ross.

Hi, how's everybody? Yes, just a couple of your comments related to the CZ filing you expect in 2014. What was the timing you would expect for your approval of that and when could your sales maybe start to ramp up related to that product?

Yes, I think, assuming that it follows the timeline that we've been given by the customer, approval would take place sometime early next year. And we would expect commercial volumes to begin ramping up sometime in the second or third quarter based on the time of the regulatory cycle. Just to be clear, this is a custom container that is different from the syringe, okay. And it's a very unique product that is being done with a supplement for an existing product, not a new drug.

Okay, yes, that's very helpful. And also, you mentioned as part of the reason for bringing down your organic revenue growth forecasts. I think you mentioned something like global changes in your product sourcing and what were you referring to there exactly or maybe you could just give some color?

Yes, there's a couple of things, I'll let Bill handle the sourcing question, but just to be clear, we think it's a timing issue. So you'll remember in the February call, we talked about these process changes within our plants and we expected to see those volumes begin to develop further in the year as customers worked down the inventory they had ordered in 2013. That is happening but a little bit slower than we thought. So some of the orders that would have taken place in Q3-Q4 we believe are going to come in late Q4 but not be delivered until the early part of 2015. So I'll let Bill address the geographic question.

I think, Ross, what we're seeing is based on some of the difficulties that some of our customers were having regulatory wise, especially in the generic space, you saw a lot of movement of those product sourcing around the globe. It was moving from -- in one customer's sense, it moved from Europe and United States over into Asia. So there's a lot of move and a lot of different players that are picking up the slack from the regulators slowing down the ability of some of those contract manufacturers to produce. And by having all of those things, all those moving parts and different players coming in and out of the story, it makes it very difficult to track actual needs and what we saw last year and we've talked about it already in Q3 last year, we had a big surge in high-value product orders, some of that was due to this phenomenon where you had multiple different players going after these to fill the blanks left by these other customers who are having regulatory problems.

So, when we look at it this year and we look at the reduced backlog from the perspective of shorter lead times and some of these pieces that are moving around, it makes this less visibility issue a little tougher for us to predict exactly when it's going to come out, as Don said.

We know that all of the underlying favorable trends that we've seen in our business, especially as it relates to biologics, remain unchanged. We know that we've got no loss of business from our customers' perspective. It's just a function of timing and when will those orders come back into the order book. So it's just the global nature of those products are then moving around, just makes it a little more complicated for us to be able to identify exactly when it's going to come back.

Okay, all right, that's good. That's all my questions. Thank you very much.

Thanks, Ross.

Rafael Tejada, Bank of America Merrill Lynch.

Hi, good morning and thank you for the questions.

Hi, good morning, Rafael.

Good morning, Rafael.

So, just wanted to home in a bit more on the change to the top line guidance, I know that it's specific to packaging. So as you mentioned backlog contains more high-value products, so, can you give us specific examples of sort of products, I guess you're that are coming out of it and I would presume that it's more standard products and you talked about what's going on in terms--sort of (inaudible) what sort of products are being impacted?

Yes, there is a couple of things in there. The first one of which is you have to do some standard product that is some disposable med device where we have seen much shorter lead times. You may recall from the February call we spoke specifically about Teflon coated plungers for a prefilled syringes. (inaudible) customers that had ordered larger quantities in the 3rd quarter of last year. Those two combined make up the bulk of the shortfall and again it's a timing issue if the shipment going to happen where those come back in 2013.

Okay, that's helpful and just, again just to be clear, the M&A in sort of asset transfer changes that we saw earlier this year, that's not having any sort of impact on, I guess the timing of orders in packaging?

Not that we can put our finger on, no.

Okay. And with regards to the CZ filing, any sort of color that you could give us on the type of drug that it is, volumes or a therapeutic area for this filing?

Not that I'd be comfortable with. That's customer proprietary.

Okay. I had a try. And my last one just on -- I guess as this filing occurs, I mean what sort of preparation do you need to do on your end to be able to need some of the anticipated demand.

Yes, on this particular product, we've already started. The primary capacity is more mobbed to go into the injection press. So, we are ready for volumes as they unfold. There will be no additional capital investment that we can see right now to meet those volumes.

And lastly, do you think that this sort of expedites any conversations that you have with the existing customers, those that are kind of on the brink and whether they want to use this product or not?

I think it's just case by case. It depends on what's driving the need of the new product and a compatibility issue, which one think in an existing product, with delamination of glass as the primary driver. Now, it's going to be another issue. The conversations have been ongoing at a high level for several years now. It's just the fact of the matter that it's working its way through the approval process, much like a new drug within the timeline, that is somewhat comparable. Now the good news is, we are seeing noble deduction levels of interest. And in some cases, especially as it relates to developmetal interest in SmartDose, where we use a CZ cartridge gets increased interest.

Okay, thank you. I will jump back into the queue.

Thanks. Rafael.

(Operator Instructions) Arnie Ursaner, CJS.

A couple of follow-ups, starting with a follow-up on Rafael's question. Obviously, two figures I think are impacting people's view of the industry customer consolidation which would lead to dramatic changes and research in a short-term basis and also more concern over pricing of new orphan type drugs that would be more likely delivered by biologics or through injection. Are you seeing any of these impacts yet and how would you react to it, this fear or uncertainty investors are raising?

No, we haven't seen any impact yet and we ordinarily wouldn't until the closing happened and then usually not until anywhere from six months to a year later as they start to prioritize their R&D programs. Usually, by that time, they've made decisions and are fully aware of who they're going to put on stability, especially for the drugs that are entering Phase III or are in Phase III. So there's quite a lag between when it's announced and when we actually see an impact. On the biologics side, we usually don't see one because of the strength of the position of the Westar non-coated closure within that particular segment. I haven't seen any impact yet. It usually happens when the product transfers start of that usually is not for a lengthy period of time after the actual merger takes place.

But you're not hearing your customers indicate to you, be careful, we could see a dramatic change in the way we spend R&D or otherwise at this point?

No

And then, going back to the initial rollout or testing quantities of both CZ and SmartDose, could you comment on the types of margin you're getting now, but more importantly, what you think you'll get when they do reach commercial volumes?

Yes, I mean at the traditional manufacturing run, we're nearly going where you're doing small sample runs and then (inaudible) volumes and the margins are lower. We expect our efficiencies will improve dramatically as we ramp up volume. I think you'll see fairly traditional device volumes out of both of those, as we go through commercial sales and that would be north of 45% or 50% on the gross margin.

Okay. And then, just -- so a quick follow-up on SmartDose, I know you manufactured in Israel. Clearly, there is uncertainty related to Israel and I know you're building a facility. Have you seen any impact yet at all in your facility there and are you seeing customers change their order patterns to try to allow for that uncertainty?

No, our facilities are secure, our folks are working, there has been no disruption to this point. Obviously, we encourage them to take all measures to stay safe. We have contingency plans that we've put into place for manufacturing for the products that come out of Israel that we could put into place should the situation dictate it.

Okay, thank you.

Thanks, Arnie.

Rafael Tejada, Bank of America Merrill Lynch.

Just one quick follow-up. I just want to make sure I heard you correctly on EPS for Q3, I guess you're expecting just a couple -- did you say a couple of cents of growth year-over-year and also just wondering if you can just talk I guess about, I know there's seasonality in Q3 typically just to the degree that it might just differ from what we've seen in the past. Thanks.

Yes, I think we've talked about a modest increase in Q3 versus prior year, Rafael. This is why we don't guide to quarters. We're more comfortable with the guidance for the full year and as we've talked about in the call, we reaffirm that guidance. I don't think we've seen anything different out of the seasonality, we're certainly not through August yet which is the primary period for the Europeans to do their plant shutdowns and PM&A. The key is always, and we've talked about this in before, is how efficient we are in the startup coming out of that shut-down period, so September tends to be the driver. If we do have some orders flip to go fall into the quarter, they'll go into the fourth quarter and will pick up it then.

The only thing I would add is that in Q3, 2013, we had that big surge in high-value product orders, as Don mentioned earlier. So seasonality last year was a little skewed; this year, it's more back to what we see as a normal. I would also mention that the high-value products, we continue to see the growth in the range that we've talked about in the past, but the volatility from quarter-to-quarter is increasing. So you saw in the first quarter, high-value products actually decreased versus the first quarter of the prior year. In this quarter, they were up nicely 8.5%. So, you have this effect of Q3 2013 having been very, very high percentage growth. It was over 23% growth in high-value products last year in the third quarter, driving that good results. And it was a more modest growth in high-value products in Q4 of 2013. So, while we're seeing no change in the overall trajectory or the fact of the macro drivers of the business, we are seeing a lot more volatility quarter-to-quarter, especially in high-value products.

Okay, thank you very much. Appreciate it.

Thanks.

Thanks, Rafael.

Dave Windley, Jefferies.

Hi. Good morning, gentlemen. How are you?

Hi, Dave. Good, how are you?

Good, thank you and I joined late, I apologize. So, we had a couple that came to mind. One, around a kind of follow-on to Rafael's question there. Coming out of 1Q where backlog had been down a little bit at year-end and improved significantly by March with high-value products being kind of a big driver of that improvement. I guess I would have expected high-value products to outpace overall packaging in 2Q and I think if I read this right that your constant dollar packaging was like 11% and high-value was 8.5%. Am I looking at that right and why is that dynamic?

Yes, growth in PPS was about 4.5% adjusted for currency, and [agency] growth was about 8.5%. So, it's roughly 2x on the HVP.

Yes.

Got you. I read the 4.5% higher as meaning higher than 6.6%. So, I apologize.

And then, to answer the other part of your question about the volume, the dollar volume of that backlog, remember that our lead times have come down. So we would expect that volume of orders, the sheer dollars of orders to have contracted a little bit which it did, at same level as year-end, but lower than the June 2013 number. But the percentage of high-value products in the backlog has increased, which is what we would expect.

Okay. And on that, Bill, so the -- we were, again, joined late; and I was looking to show and we didn't hear a backlog number. Did you give a backlog number for the June 30?

Yes, 314 which is equal to 20 day, the December 2013 balance and 9% lower than Q2 of 2013.

Okay. How about kind of penetration statistics on high-value products? Are they still quite low?

[They're in the mid-40s], so we talked about before.

For the mature high-value products like Westar and Teflon coating, you still have some that are very small basis in growing like Envision. And like our noble peer lines, which we see great promise into the future. We still -- as I mentioned earlier, we don't see a change in the trajectory of our growth in high-value products. It's growing double-digits over the last five years. We continue that. We think that it will still be in that same 8% to 12% as we go forward with the caveat that we're seeing a lot more volatility in the quarter-to-quarter comparison.

Okay. And I will ask one more at the risk of repeating, but you highlight that this quarter's margin did benefit quite nicely from an actual decline in SG&A costs related to a list of things that you name. How should I think about the transient or non-transient nature of that?

Yes. The -- well, I taken the five numbers that the decline in the retirement benefit costs is something that will continue for the rest of the year. And obviously, each year you have the actuary give you evaluation and that dictates what the following year's pension expense would be. If rates rise, as we all expect them to do, the timing of which we don't know, but if we do believe they will rise, we believe that we will see a further contraction in the expense. We're also putting some money into that plant, that will also help reduce the expense going forward.

We have other things that impacted in the quarter. We had incentive compensation costs that were less. That's purely a function of the results. Our incentive compensation is driven by the performance of the Company. And if you look at last year at this time, the Company was performing -- as we just said, it came off some very high performance. So we looked at our bonus calculations and our incentive comp calculations, and that drove them up in the prior year. This year, they are not nearly as robust, so you actually have a quarter-to-quarter comparison. You had less of an expense from the incentive comp. And employee medical benefit costs were also down. We look at the actual claims that have been made against our policies and adjust accordingly; and our experience has been better than we expected. And so therefore, we ended up with less employee medical benefit costs in the quarter.

Okay, thank you very much. Appreciate you taking the question.

No problem.

Thanks, Dave.

Thank you. Thank you for your questions, ladies and gentlemen. That now concludes the question-and-answer session. I would now like to turn the conference over to Don Morel for closing remarks. Thank you.

Thank you very much, operator, and thank you everyone for your time this morning. Terrific second quarter for the Company. We look forward to reporting back to you at the end of October in our Q3 call; then, we'll update our long-term plans. Thank you very much. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Enjoy the rest of your day. Thank you.