西式醫藥服務 (WST) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the West Pharmaceutical Services second quarter 2015 results conference call. (Operator Instructions).

As a reminder, 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 objection, you may disconnect at this time.

And now I'd like (technical difficulty) 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 2015 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 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 under Investors on the Presentation Materials tab is a slide presentation that Management will refer to in their remarks today. The presentation is in PDF format. Should you require it, a link to a free download of software that will enable users to view that 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 (technical difficulty) 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 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 would like to turn the call over to Eric Green, West's Chief Executive Officer.

Thank you, John, and good morning, everyone. Welcome to West's second quarter 2015 earnings call. I am joined on the call this morning by Bill Federici, our copy of the, and Mike Anderson, our Treasurer and primary investor relations contact.

Today, I will review our second quarter results, full-year outlook, and share my reflections about business after 3 months with West. Bill will then provide a deeper review into the financial performance and full-year guidance. Then we will open up the call for your questions.

Starting with the results on slide 3, we had a strong second quarter with reported revenues of $359.7 million, excluding a 9.9% currency headwind. Sales increased 7.4%, driven by demand for our high-value packaging components and proprietary delivery systems.

Adjusted EPS of $0.47 includes $0.09 adverse currency versus last year, and would have grown by nearly 8% over the second quarter prior year on a constant currency basis. As a reminder, second quarter of 2014 EPS set a record for West.

Turning to business segment highlights for the quarter on slide 4, revenue in the pharmaceutical packaging systems segment grew 8.5% on a constant currency basis, with double-digit growth in Europe, Asia Pacific and South America.

We continue to experience strong customer demand for the high-value packaging components, with sales growth of over 12%, led by newer Envision and NovaPure product lines.

In our pharmaceutical delivery systems business, revenue grew 6%, excluding currency and taking into account the disposition of a small tooling business [in] 2014. The segment was led by 9.3% growth in the proprietary delivery systems portfolio. We are justifiably excited about the prospects for the SmartDose and CZ products, but the majority of the growth in this quarter came from the more mature proprietary products, drug reconstitution devices and the [air] safety system.

The second quarter and year-to-date results, together with our packaging systems backlog of firm orders and improving visibility into the second half, adds to our confidence for the remainder of the year.

We estimate constant currency sales growth in the range of 7% to 8%, and are therefore raising the lower end of our adjusted EPS guidance range for the full year by $0.05, to between $1.74 and $1.84. Bill will take you through some of the additional detail behind these numbers in a few minutes.

To update you on the leadership transition, the past 100 days have gone extremely well. As I mentioned in our April call, I was excited to come to West, and I can tell you that my experience thus has had exceeded my expectations.

I spent a significant amount of time with Don Morel and the leadership team, visiting several West locations, meeting with key customers and partners, and engaging with many of you in the investor community. It was time well spent, and I was fortunate to have had the opportunity to work alongside Don up to his retirement date on July 1.

I want to again acknowledge and thank Don for many contributions he had made to West during his long tenure as the CEO. Our current successes and future prospects are rooted in the strategies, culture and goodwill created under his leadership.

Looking forward, on slide 5, we are making investments in West's future growth initiatives around high-value products for biologics and proprietary delivery devices utilizing CZ and SmartDose.

To support the increasing demand for ultra-clean, particulate-free components in the near term, we added to our high-value product capacity with new dedicated clean room manufacturing in Kinston, North Carolina. We have begun receiving customer approvals for additional high-value products from this plant, and expect to ship commercial product in the third quarter.

In June we officially broke ground for our new plant in Waterford, Ireland. This investment is designated to service our key customers in the global diabetes market, which will address the increasing demand for these critical components and provide a second source within the West network to produce insulin packaging.

In addition, we have -- plan to add world-class finishing operations for elastomer packaging components to support expected high-value product growth in the longer term. The first phase is scheduled to be operational in early 2018.

Last week, we announced our expansion of the Scottsdale, Arizona facility to meet exe growth in customer demand for the SmartDose electronic wearable injector. The expansion in Scottsdale will enable continuing development and production of SmartDose and CZ cartridges to accommodate rising interest in the product. This expansion further demonstrates our ability to support customer launch plans and to provide supply chain security.

As we previously communicated, we have eight active development programs for SmartDose at various stages of pre-commercial development, and including one program in a Phase 3 development.

Having had the pleasure of visiting many of our manufacturing sites, it's been gratifying to see first-hand the work of our global operations team to harmonize and optimize our network. Anticipating the future needs of our customers in investing in industry-leading processes, capacity and dual source to deliver the highest-quality products and services, is core to our strategy.

As a reminder, in 2014, of the 41 new molecules approved by the FDA, 10 of them were injectable biologics, designed to treat cancer, autoimmune disease, diabetes and infectious diseases. All 10 of these injectable biologics use West or Daikyo components. We fully expect this trend to continue and we are confident in West's role in meeting our customers' needs in this still growing area of medicine.

Looking forward, our 5-year strategic plan is currently a work in progress that, as in prior years, we will discuss with you on the third quarter call. The core of the strategy the Company has in place to deliver high-value, quality product packaging components, as well as differentiated proprietary devices to our customers, is solid. We are currently reviewing how to build upon this core in a way to fulfill our customers' needs now and in the future.

Before I turn the call over to Bill, I want to call out two recent events to the attention of those who might have missed them. We were certainly pleased to have been added to the S&P's MidCap 400 earlier this month, and we believe this has already increased investor interest in West.

In addition, we recently announced an increase in our quarterly dividend, beginning in November of this year. We were pleased to continue a longstanding practice, and this was the 23rd consecutive annual increase.

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

Thank you, Eric, and good morning, everyone. We issued our second-quarter results this morning, including net income of $27.8 million, or $0.38 per diluted share. Our reported results this quarter include a $0.09 per diluted share one-time charge associated with executive retirement. Excluding this charge, our adjusted earnings per diluted share are $0.48 this quarter, $0.05 below the $0.53 per diluted share earned in the second quarter of 2014.

Our 2015 earnings have been adversely impacted by the continued decline in the value of the euro and most other foreign currencies in relation to the US dollar. The translation of our international results into US dollars for reporting purposes has reduced our reported earnings by approximately $0.09 per share as compared to the prior year second quarter, and by $0.18 per share for the year-to-date June comparison.

We manage our foreign currency (technical difficulty) exposures and generally our local operations are naturally hedged.

Turning to sales, slide 6 shows the components of our consolidated sales increase. Excluding exchange effects, our consolidated second quarter sales of $359.7 million increased by 7.4% versus our second-quarter 2014 sales.

Packaging systems sales increased 8.5% versus the same quarter 2014, excluding exchange.

Sales price increases accounted for 1.2 percentage points in the sales increase, and the favorable mix of products sold and volume increases contributed the remainder of the increase.

Sales of our high-value products rose 12% versus the prior-year second quarter. High-value products represented 45.9% of packaging systems' Q2 2015 sales, versus 44.4% a year ago. We continue to see strong customer demand for our product offerings that meet our customers' high-quality specifications.

Delivery systems sales increased by 6% versus the prior year quarter, ex currency, and excluding the 2014 divestiture of a contract tooling and services business.

Sales of our proprietary products were $29 million, or 28.3% of the segment's revenue in the quarter, versus $27 million, or 27.1%the prior-year quarter. The combined Q2 revenues from CZ and SmartDose of $8 million were roughly equal to the combined 2014 Q2 sales.

Contract manufacturing sales increased by 4.9% at constant rates, excluding the impact of the tool shop divestiture.

As provided on slide 7, our consolidated gross profit margin for Q2 2015 was 32.8%, versus the 33% margin we achieved in the second quarter of 2014. Packaging systems' second-quarter gross margin of 38.1% was 3/10 of a margin point higher than the 37.8% achieved in the second quarter of 2014.

The increase in gross margin is due to price increases, the favorable mix of sales, and lower raw material costs, offset by normal inflationary increases in labor and overhead costs.

Delivery systems' second-quarter gross margin declined by one margin point to 19.3%, primarily due to the 2014 divestiture of the tooling operation, and higher labor and increased overhead costs associated with new capabilities supporting both proprietary and contract manufacturing customer programs.

As reflected on slide 8, Q2 2015 consolidated SG&A expense increased by $3.3 million versus the prior-year quarter. A favorable exchange effect partially offset increased sales and marketing expense related to our global sales meeting held in Q2 2015, which was last held in 2013, as well as increases in regulatory personnel, costs of standardized processes, and information services costs in our packaging systems division as compared to Q2 2014.

General corporate costs are $3.2 million above the prior-year quarter due to higher incentive compensation costs, a 2014 medical insurance cost reduction, and higher stock-based compensation costs, offset by a decrease in US pension costs. As a percentage of sales, second-quarter 2015 SG&A expense was 16.9% versus 15.6% in the second quarter of 2014.

Slide 9 shows our key cash flow and balance sheet metrics. Our year-to-date operating cash flow is $2.6 million above what we generated in the first 6 months of 2014, despite the negative impact of exchange rates and the higher level of pension funding in 2015. The majority of the $10.9 million executive retirement charge will be settled in stock, and is not expected to impact our cash flow.

Our capital spending was $57 million for the first 6 months of 2015, approximately the same as at this time in 2014. We expect to spend approximately $145 million to $155 million in capital in 2015.

Approximately 60% of our planned capital spending is dedicated to new products and expansion initiatives, including approximately $28 million for the construction of our new Waterford facility.

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 $252 million, $3.3 million less than our December 14 balance. Foreign exchange reduced our June 2015 overseas cash balances by approximately $13 million. Debt at June 30 was $326.7 million, $10 million less than at year end. Our net debt to total invested capital ratio at quarter end was 7%.

Working capital totaled $366 million at June 30, $40 million lower than at year end. The majority of the decrease is due to the reclassification to current liabilities of our Series B euro notes, which mature in February of 2016.

Looking ahead, our backlog of committed packaging systems orders stands at $350 million at June 2015, 8% higher than at year end, excluding exchange. At June 2015, the percentage of high-value products in the total backlog is approximately the same as in the 2014 June backlog.

Based on our year-to-date 2015 results, our analysis of the orders on hand, and the continuing unfavorable currency effects, we have increased the lower end of our full-year 2015 earnings guidance in this morning's release. That guidance is summarized on slide 10.

We have based our guidance on an exchange rate of $1.10 per euro versus the $1.08 per euro rate used in our prior guidance. As a reminder, each $0.01 strengthening of the dollar versus the euro results in approximately a $0.01 decrease in full-year forecasted EPS as a result of translation.

Going forward, we expect a $0.05 to $0.06 currency translation headwind in Q3, and another $0.03 to $0.04 headwind in Q4. In addition, our 2015 guidance excludes any impact from a devaluation of the Venezuelan bolivar, as we continue to operate primarily under the official exchange rate; and it excludes the charge associated with our executives' retirement and related costs.

I'd now like to turn the call back over to Eric Green.

Thank you, Bill. In summary, our 7,000 colleagues around the world delivered a solid quarter and a strong first half of 2015. After my first 100 days, I am more firmly convinced that West is well-positioned to benefit from the positive market trends, with increased demand for our high-value packaging components and proprietary delivery systems. In addition, we are investing appropriately to meet the future needs of our customers and deliver increased shareholder value.

Thank you. We now look forward to answering your questions.

(Operator Instructions). Larry Solow, CJS Securities.

Wondering if you guys could -- just on the strong higher-value -- [HPV] sales -- I realize it's one quarter, and that doesn't necessarily make a trend, and I know that some of the newer products are coming off of much smaller bases; but I guess -- nice to see Envision and NovaPure are sort of carrying some of the growth load this quarter. How does that -- how do you -- any color on that?

Yes. We're very pleased with the results of our high-value products portfolio. It continues to gain traction and acceptance in the market as more and more of our customers are requiring the higher quality of the end -- of the components for their end products.

So, we're seeing that demand. It continues to play well with how West is positioned and also how our operations are being optimized to really support these customers in all geographies.

Okay. And then CZ vials -- any update on -- you sort of -- I think you've cited the two recent approvals -- two products, I think, that -- we've heard that. Any sort of update? Is the development pipeline -- it's expanding? Any thoughts on that?

Yes, Larry. The pipeline of our CZ programs still remain very robust. We have -- right now, we have 13 CZ programs in formal stability studies, and the outlook continues to be positive.

Okay. In light -- just back to, on the gross margin, in light of some improved visibility, and it sounds like packaging systems -- or -- and -- is doing well -- thoughts on -- you have -- your targeted gross margin for the year sort of implies a bit of contraction in the back half of the year. Is that due to maybe a little bit of a slowdown, or timing-related, on some of the higher-value products, or any other reason for that?

Yes. Larry, that -- basically, it's seasonality, as if you look historically, that's been the case. We have the summer shutdowns for preventive maintenance from both our shops and our factories in Europe, as well as our customers, and the start of that we see -- generally we see the second-half margins being slightly less than the first half. For the full year, I just want to remind you that we are guiding up for margins both at the gross line and the operating profit line.

Got you. And then, just lastly, on SG&A, pretty decent rise, if you take out the currency, as about 12%. I know you cited that the global timing of the sales meeting, I guess this year versus last year -- is that -- if you take that out, would that -- would SG&A look somewhat better, or -- ?

Yes. You've got -- there's a number of things, and you hit on the one, the timing of that global sales meeting, which didn't happen in 2014 at all. And then there's also -- in the second quarter of 2014 we actually had a slight reduction in our medical cost premiums due to some experience of adjustments made by the carrier. So, we actually got a benefit in the 2014 second quarter that's not there this year.

And then, also, on incentive compensation, we're tracking a little ahead of our goals, so we are taking those (technical difficulty) comp adjustments -- the provisions up. So, those are the three big ones.

We're also adding some heads where we believe it makes a lot of sense in the regulatory space. Our customers -- as the regulators and customers continue to drive towards cleaner product, we have the need for more and more regulatory expertise, which is a key differentiator for West in the marketplace. So, we will continue to invest in those types of expenses.

Got it. Great. Thanks. I appreciate it.

Derik de Bruin, Bank of America.

Could you talk a little bit about capacity utilization and, sort of, how should we think about CapEx going into 2016?

Okay. So, capacity utilization is a complicated story, but let me try to simplify it -- boil it down. On the PPS side of the business, we are -- we try to aim for a 85% or so utilization of our plant.

However, that's not a perfect science, and certain of our aspects of the capacity, especially in the high-value products, especially around Envision and especially around washing for Westar, we are very, very taxed at the capacity line. We are pushing up against 100%. And that's why you see our lead times have been expanding.

We are -- as we've talked about, we're putting -- we continue to invest very prudently in additional water capacity for Westar as well as vision systems for Envision, and will continue to -- as well as clean rooms for high-value products. But those are the key investments we're making, which we hope in the long term, along with our network optimization programs that we're working on for the plants, will help alleviate some of that strain in the plants.

On the PDS side, it's more on the contract manufacturing specifically. The utilization percentages are not nearly as high. They're in the kind of high 60s, low 70s. And that's appropriate for that kind of business and we feel very comfortable with that right now.

Great. I think we've been surprised to sort of see just how strong the packaging systems stuff -- business has remained, going forward. And look -- over the last few quarters. So, I guess, when you sort of look at that, is this sort of growth levels you're seeing sustainable in the next year? And then, sort of, talking about it on the delivery systems side, is -- are you expecting to see that business accelerate?

Derik, it's a very good point, is that in our packaging systems business we continue to see the outlook of the high-value products to continue to be very robust. We believe we can continue to perform at similar levels that we have been performing. And that's the reason why we're continuing to add capacities, really in our -- in the three main geographies of Asia, Europe and the US.

Your point is valid in that our -- on our delivery devices business, we're looking at future investments that -- payback's over a longer term. But we're very optimistic with -- when we start looking at the level of engagement we have with our customers, with the eight active programs, with SmartDose. And I mentioned one of them's in Phase 3; and then also with the 13 programs in the formal stability with our CZ product portfolio.

So, it is -- you're going to see a little bit longer-term with the delivery device -- delivery systems business unit down the road.

So, I mean -- we've -- I've been watching the stock and following it for a number of years, and certainly CZ always seems to be on the come. I mean, is that -- are you less enthusiastic about CZ now than you were in the past, on it, or -- and -- I'm just curious in terms of your thought on that. I mean, it -- on that business.

Well, let me start with -- by saying that the outlook of CZ still remains very strong. And there is a timeline for adoption by customers. But what we're seeing with conversations with our clients is that the attributes of CZ allows them to be more effective in the end markets. So, we believe that we have the right formula. The customers -- the uptakes are visible. There's more in the formal stability trials at this point. So, we're pretty optimistic that we'll continue to see demand of the CZ portfolio.

And could you talk a little bit just about, sort of, your longer-term vision on terms of international expansion, and sort of market shares internationally? And what do you sort of see the opportunity to add growth?

Yes. Derik, as you know, this is an area that I've focused on in the past quite a bit. And I believe West is well-positioned to take advantage of the market opportunities in some of the more -- in Asia, and also in Latin America.

I think our position today, while we do have presence with the multinationals in China and India and other geographies in Asia, we do have the opportunity to see more of an expansion. Now, we have had -- we've put investments in China, India, Singapore; but I believe that our opportunity to grow even faster -- it presents itself very nicely for West. So, that is an area that we'll continue to focus on and put a little more energy and resources around that as we go forward.

Can -- just remind me in terms of the geographic split of the business. I'm blanking.

Okay. It's -- Derik, it's -- rough numbers. In Asia it's a little under 10%. It's about $120 million of sales in Asia.

And who's your -- who are your major Asian competitors?

Well, it depends. Obviously, if you're talking about in China, there are a number of companies that manufacture elastomers for drug product. They -- if you're talking about the local markets, those are -- there's a wide number -- a large number.

Our -- from a -- people that work with the multinationals, we are the primary. We have market shares that are in -- similar to our western markets for the multinationals. So, in that kind of 60% to 70% range.

In India it is a mixed bag as well; but again, we have very solid market shares with the multinationals in India as well.

And so, I guess, on your expansion plans, is it -- do you have to come in the market with a lower-priced option to [very seriously compete]?

No. I -- Derik, I'm sorry. Derik, I believe that there's a great opportunity to bring the West quality to the market where it's not as prevalent. And if you look at the cost of our product in the entire -- and drug delivery is a small percentage. Therefore, to increase the level of quality and the acceptance of their drugs into, whether it's in the local market or the global markets, there is a need to pull more West quality into the system.

Great. Thank you very much for your time.

(Operator Instructions). No further questions at this time. I'd like to turn the conference over to Eric Green for any closing remarks.

Thank you, Operator, and thank you, everyone, for your time this morning. We look forward to speaking with you again on our third quarter call in October. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.