西式醫藥服務 (WST) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 West Pharmaceutical Services Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded for replay purposes.

It is now my pleasure to turn the conference over to Mr. Quintin Lai, Vice President of Investor Relations. Sir, you may begin.

Thank you, Brian. Good morning, and welcome to West's First Quarter 2018 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. This morning, CEO, Eric Green; and CFO, Bill Federici, will review our results, give you an update on our business and provide an updated financial outlook for the full year 2018. There is a slide presentation that accompanies today's conference call, and a copy of that presentation is also available on the Investors section of our website.

On Slide 2 is the safe harbor statement. Statements made by management on this call and in the presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on management's belief and assumptions, current expectations, estimates and forecasts. There are many factors that can influence the company's future results that are beyond the ability of the company to control or predict. Because of these known or unknown risks and uncertainties, actual results could differ materially from past results and those expressed or implied in any forward-looking statement. For a nonexclusive list of factors which could cause actual results to differ from our expectations, please refer to today's press release as well as any further disclosures the company makes regarding the risks to which it is subject in the company's 10-K, 10-Q and 8-K reports.

In addition, during today's call, management will make reference to non-GAAP financial measures, including sales at constant currency, organic sales growth, adjusted operating profit, adjusted operating profit margin 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 this morning's earnings release.

I'd now turn the call over to West's CEO and President, Eric Green.

Great. Thank you, Quintin, and good morning, everyone. Thank you for joining us today. This morning, we reported our first quarter performance, and you have seen in our press release, we grew overall sales despite the headwinds and the tough first quarter comparison that we forecasted at the beginning of the year. Our generics market unit posted another quarter of accelerating growth, and our Contract Manufacturing segment also saw impressive growth in the quarter. There are positive signs of future growth across all market units, and we are confident in the underlying strength of our business as we look to the remainder of 2018.

Let's now turn to the detail of our market unit performances for the first quarter. On Slide 4, we show the organic sales growth performance of each of the 3 market units in our Proprietary Products segment and our Contract Manufacturing segment. As we have done on previous calls, we show the trailing 4 quarters along with the current quarterly performance. When we adjust for last year's sales associated with both the deconsolidation of the Venezuela business and lower consumer Contract Manufacturing sales due to a customer moving their business in-house, our organic sales growth would have been 4.1%.

I'll start with generics, which represents an excellent example of the resilience of our business. Looking back, we saw the first signs of a slowdown due to customer inventory management beginning in late 2016. By Q3 of 2017, we started to see early indications that returned to normal growth. Since then, we have reported accelerating growth for the past 3 quarters. Order patterns from our largest customers give us confidence for the rest of the year. Another encouraging sign is the strong rebound in sales growth we are seeing in India. On the new product front, we are encouraged to see numerous sampling requests for our AccelTRA component program, a high quality product offering that is built around the most critical and fundamental customer needs for quality, speed and simplicity. We're also seeing increased customer activity around our patient-controlled, self-injection platform SelfDose, as companies seek technologies that make it easier for patients to self-inject. These and other initiatives are [seizing] the market for future growth. For the full year 2018, we expect generics organic sales growth in the high single digits.

Turning to pharma. The sales growth pattern is similar to what we saw with generics over the past 2 years. Pharma saw customer inventory management issues impacting results beginning in 2017. But our order book has stabilized now, and we expect to see sales growth acceleration for the remainder of the year. Within the pharma market unit, there is increase in demand for our universal vial transfer system. To address this, we're adding manufacturing capacity for our Vial2Bag administration system, and this capacity comes online throughout the year. It will contribute to the anticipated growth we expect. We're also encouraged with the outlook of HVP adoption of FluroTec, Westar RS, Envision and NovaPure components. For pharma, we're planning for mid-single-digit organic sales growth for the full year, with a balanced revenue stream throughout the year.

Looking at biologics. The past 2 quarters illustrate the quarterly variability, primarily driven by loss plans as well as active stock adjustment programs at large customers. Our strong double-digit growth in Q4 was aided by commercial launch activities that did not occur in Q1. To address the challenges we have experienced with inventory management activities of our customers, we have been working closer with the supply chains of our larger customers to better anticipate the timing of demand. Understanding the complexities of these supply chains is leading to better transparency and, in fact, helped us forecast last quarter that Q1 would be soft for biologics. Using the same methodology, we see a more stable outlook for Q2 in biologics and accelerating growth for the remainder of the year. We are making good progress with the supply chain partnership program. Given the start in biologics, full year growth will likely be in the mid-single to high single-digit growth range. However, as we look to the future, we remain confident in the strength of this business. We continue to maintain our strong market position, with excellent participation on FDA new molecular entity approvals. Our high value components are the go-to standard for biologics and biosimilar customers, and demand is building and forecast to grow throughout the year. High value product adoption remains the key focus for biologics and for all our market units. We're seeing good adoption rates for NovaPure components, Envision inspected components and our administration systems. These projects are key to addressing the challenges our customers are facing across all market units. They represent our highest-quality offerings and therefore yield better margins for the business. We expect high single to low double-digit growth for our HVP portfolio for the full year.

Turning to Contract Manufacturing. We had another strong quarter of sales growth. Our CM team is doing a great job of providing our customers with expertise in high precision, high volume injection molding and assembly. A great example is our recently expanded Dublin, Ireland facility. Just a few weeks ago, I toured the facility and was impressed with the level of activity. It was less than 2 years ago when we expanded to a second building. Now that building is running on all cylinders, and we're looking to meet growing demand with further expansion within our current footprint. At the same time, our businesses continue to evolve to meet the needs of our customers we serve. As an example, we have recently added new capabilities such as cold-storage drug handling in Arizona and will soon be installing the same technology in Ireland. These new capabilities accelerate our strategy to provide strategic and high value products and services for our CM customers. We expect continued progress in 2018 with high single-digit growth for the year.

While our commercial team continues to engage customers on what is most important to them in terms of products and services, as noted on Slide 5, our operations team is also focused on improving the customer experience across all segments and units. Our unified global manufacturing team is working across all our sites to improve safety, quality and service to our customers while reducing overall costs. We have seen good progress on each of our key performance metrics, and our previously announced restructuring program is on track. We're looking forward to delivering the first commercial sales in our newly constructed Waterford site in Ireland later this year. We're also working to transfer high value product technology to Waterford, so we can serve customers even more fully from the state-of-the-art site in the future. Waterford is now part of our unmatched global manufacturing footprint, through which we are delivering industry-leading lead times, with the highest level of quality. I'm especially pleased to see how our teams are working to continuously improve our performance in the future to exceed our customers' expectations.

With Q1 behind us, we're well positioned for the remainder of 2018. We are reaffirming our full year 2018 organic sales growth guidance of 6% to 8%, and we are reaffirming our overall sales and adjusted EPS guidance.

Now I'll turn it over to our CFO, Bill Federici, who will provide more color on our financial performance and to provide details on our long-term outlook. Bill?

Thank you, Eric, and good morning, everyone. We issued our results this morning, reporting first quarter 2018 earnings of $43.6 million or $0.58 per diluted share versus the $0.81 per diluted share we reported in the first quarter of '17. Our Q1 '18 reported results included $3.3 million or $0.04 per diluted share of restructuring and other charges, resulting in adjusted diluted earnings per share of $0.62. Our financial results are summarized on Slide 6, and the reconciliation of non-GAAP measures are described in Slides 12 to 14.

Our Q1 2018 reported results also include $2.1 million or $0.03 of EPS tax benefit associated with share-based payments, whereas Q1 2017 included $15.9 million or $0.21 EPS tax benefit. Our results for Q1 2018 were impacted by the new revenue recognition rules and the new pension expense classification rules. While the new pension rules had no net impact on EPS, the new revenue recognition rules accelerated the recognition of certain of our revenues. The adverse impact to our Q1 2018 sales was $3 million, and we expect the full year adverse sales impact will be approximately $6 million. Our working capital has been and will continue to be adversely impacted by the acceleration of revenue recognition. The adverse impact on Q1 working capital was approximately $3 million or 2 days.

Turning to sales. Slide 7 shows the components of our consolidated sales increase. Consolidated first quarter sales were $415.7 million. Excluding the currency translation effects and the effects of the deconsolidation of our Venezuelan subsidiary and the loss consumer products Contract Manufacturing customer, our consolidated Q1 2018 sales would have increased by 4.1% versus the prior year quarter. Proprietary Products sales increased 1.3% versus the same quarter in 2017, excluding exchange effects and the effects of the deconsolidation of our Venezuelan subsidiary. Sales price increases accounted for just over 1% of the sales increase in the current quarter. Our high value product components and systems sales decreased 2.2% versus the prior year quarter. While our Generics market unit business saw a return to high single digits in the current quarter as expected, the current quarter's HVP sales were adversely impacted by customer inventory management, especially in our Pharma and Biologics market units. The current quarter's HVP sales as a percentage of total proprietary sales were essentially flat versus the prior year quarter and represented more than 55% of our total proprietary product Q1 2018 sales. For the full year of 2018, we expect high single to low double-digit sales growth in high value products. CZ and SmartDose sales were $9 million in the current quarter versus $8 million in the prior year quarter. Contract-Manufactured Product net sales increased by 7.9%, ex currency, versus the prior year quarter despite the loss of a consumer product business customer. A favorable mix of products sold, volume increases and pricing drove the increase in Q1 2018 sales. This quarter's growth was favorably impacted by continued strong demand for some customer projects in our Dublin facility. We expect high single-digit sales growth in Contract Manufacturing for the full year 2018.

As provided on Slide 8, our consolidated gross profit margin for Q1 2018 was 32.3% versus the 34.6% margin we achieved in the first quarter of '17. Excluding the adverse effect of the deconsolidation of our Venezuelan's hub, the loss consumer products contract manufacturing customer and the underabsorbed overhead in Waterford, our Q1 2018 gross profit margin would have increased 20 basis points versus the prior year quarter. Proprietary Products first quarter gross margin of 37.1% was 220 basis points lower than the 39.3% achieved in the first quarter of '17. The decrease in gross margin is due to the unfavorable mix of products sold, the underabsorbed overheads in Waterford, the Venezuelan deconsolidation, partially offset by increased prices and operational efficiencies in other facilities. Contract-Manufactured Products first quarter gross margin decreased by 150 basis points to 14.8% compared to the prior year quarter. The current quarter's lower gross margin is primarily due to the adverse effect of the loss consumer product customer, partially offset by the favorable mix of products sold and the operational efficiencies in our Dublin facility.

As reflected on Slide 9, Q1 2018 consolidated SG&A expense increased by $5.9 million versus the prior year quarter. As a percentage of sales, first quarter 2018 SG&A expense was 16.4% versus 16.1% in the first quarter of '17. Foreign currency exchange increased SG&A expenses by $2.3 million. We also experienced higher compensation expense, including merit increases and increased outside service costs, offset by less SG&A associated with the deconsolidation of our Venezuelan operations in Q2 2017.

Slide 10 shows our key cash flow metrics. Operating cash flow was $45 million for the current quarter, $24 million more than the prior year quarter, primarily reflecting a $20 million voluntary pension contribution made in the prior year quarter. Our capital spending was $28 million in the current quarter. We expect to spend less than $150 million in capital in 2018. More than half of our planned capital spending is dedicated to new products and expansion initiatives.

Slide 10 also 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 March 31 of $200 million was $36 million less than our December 2017 balance. Approximately, $48 million of our cash was used to buy back 540,000 shares of our common stock under the board-authorized share buyback plan. Debt at March 31 of $198 million is roughly the same level as at the year-end, and on our net debt-to-total invested capital ratio basis, we are essentially delevered. Working capital of $480 million at March 31 was $16 million higher than at year-end. The majority of the increase is due to the decrease in our cash balances being more than offset by increases in our receivables related to the growth of our business and the impact of the new revenue recognition accounting rules as well as less accounts payable and accrued expenses at this quarter's end. Our committed Proprietary Product orders of $428 million at March 2018 were 11% higher than at year-end but 3% lower than the March 2017 orders, excluding exchange due to the current reduced order lead times.

Turning to Slide 11. We are reaffirming our full year 2018 sales and EPS guidance range, reflecting the favorable Q1 2018 foreign currency exchange rate, offset by less Q1 2018 excess tax benefit on stock transactions than we had previously anticipated. We expect our 2018 full year effective tax rate to be approximately 26%, excluding the impact of the tax benefit from option exercised. Despite the euro exchange stock rate increase to $1.22 per euro, we have conservatively based our guidance on an exchange rate of $1.20 per euro, the same rate used in our prior guidance. Our 2018 guidance excludes any expected additional expense associated with our restructuring program.

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

Thank you, Bill. Before we close, I want to share some customer feedback. We recently hosted a panel of global customers representing all our business segments and market units. We asked these customers to provide feedback on our performance and what makes for an ideal industry partner. They talked about the criticality of high quality, security of supply and scientific excellence. And we're pleased that West rated highly in all those fronts. Importantly, they talked about wanting a partner who can help them differentiate their products to offer more value for patients. They want flexible dosing, wearable devices, connectivity, digitization and innovation. They're also looking for suppliers that understand both the long drug development cycle and the need for speed and flexibility and how best to partner along the way. At last, we are proud of our long-standing partnership with the injectable drug industry that these customers represent. In fact, earlier this month, we celebrated our 95th year in business. And while we have celebrated that milestone, our focus is on what the next 95 years will bring and how we can continue to grow our business into the future.

As we look to the rest of 2018, our focus is on execution. We are working with our customers across all the markets to deliver products and services that meet their unique needs. Our global operations team is working to improve safety, quality and service for our customers while reducing our overall cost, and we're anticipating the future and what our customers and their patients will need as we develop new products and new capabilities to service them. Our market-led approach is resonating with our customers, and we're confident we will continue to see future growth for the remainder of the year.

Brian, we're ready to take questions. Thank you.

(Operator Instructions) And our first question will come from the line of David Windley with Jefferies.

I wanted to try to understand a little bit better on sales growth, as you might imagine. Follow your -- as you're looking at this slide around your tracking of growth by end market segment and thinking about how you get from the 0.2% in the first quarter to the 6% to 8% for the full year. And if you could just kind of walk me through that, perhaps particularly focusing on biologics, but walk me through that by client segment would be very helpful.

Yes, David. Thanks for the question. The only -- start with the biologics area, as we comment on, is that this particular part of the business we're seeing some variability because of when they -- when customers are buying high value products, certainly our clinical phase for evaluation such as line trials or parallel delivery system, are being developed specific (inaudible) in advanced of anticipated approvals, so when the launches occur there is a buildup, and then there is somewhat a delay until a replenishment of the inventory. So we're seeing a little bit of variability in the biologics. Saying that, we are pretty confident when we start looking at the order book and future projects we're currently working on in Q2, 3 and 4 that gives us confidence that we're going to be able to drive a organic performance of mid-single to high single digit for the full year. In the Pharma sector, that particular market unit, if you strip out the headwind they have in Q1, specifically around Venezuela, which not all but a good portion of that Venezuela operations was under Pharma, and as you know, when that shut down, with minimal revenue coming back to West going into that market with those operations not working. So we started thinking about the pharma uptake on the high valued products. We also see the administration system business where we're capacity constraint today will be additional capacity online starting this quarter, and we'll be able to push that through to our customers who are pulling the demand today from us. So the Pharma, we're feeling much more comfortable that we'll be back to our typical growth rates. And when we look at the revenues, it's more stabilized each quarter versus that fluctuation. Just to finalize on the generics. The generics has come back as we anticipated but actually a little bit stronger than originally, but the outlook is even greater. The reason why I would say it's a little stronger than we anticipated, we didn't anticipate India to come back as fast as it did in Q1. That was a very strong performance. In fact, all of Asia was well -- very, very strong growth across all of Asia Pacific for us. So we believe the generics space will continue to deliver as we've seen this quarter and going forward. So if you bring that altogether, that gives us a little bit higher than that 6% to 8% quarter for Proprietary, so the full average for the full year is 6% to 8%. I'm not going to say much about Contract Manufacturing. That's pretty much isolated. You can see it. But Dave, last comment, high value products is the key driver of that growth. So we're -- as we look at -- into the next 3 quarters, looking at growth rates of high single, low double digits with the high value product portfolio.

So just to clarify, I mean, from -- numerically, from a basically 0 starting point in the first quarter, a lot of your guidance is talking -- kind of it hovers around high single to low double. Don't you need solidly double digits to drag the average up to 6% for the year?

Yes, you do, Dave. So that's what we're looking at is -- if you look at -- to the pacing of the quarters building up towards that. But the back half of 2018, it's going to be much stronger than we had in the first half. And there's a little bit of a comp issue too when you start thinking about the back half of last year...

And then, maybe one last one, and then I'll yield to others. On the qualitative side, I was thinking about -- and you've had this impact to lead times and inventory. We talked for several quarters about how there were bottlenecks that you addressed. But during the bottlenecks, clients overbought and built inventory. And then once you addressed them, there's kind of a tough comp as they're lapping those activities. And I think those are more generic biased, but we've also kind of used those same types of descriptions in biologics. And I think qualitatively, the issues are different, right? Because in biologics, it sounds like your issues are clients launching product or not, is that delayed, do you have visibility on that. And I guess, help me to understand, am I right that kind of the nature of the 2 issues is different such that like our confidence that we're going to lap the issues in biologics is different and maybe not as high as the simple lapping of the generic issue?

Yes, David, that's a very good observation. That's a good -- so when you think about the generics, you're right, a lot of the bottlenecks that occurred 1.5 years, 2 years ago, was around our high value product portfolio and conversion of generic customers to that part of our portfolio. And because of the fact that we weren't able to produce, the lead times escalated significantly. I would say we have lapped that clearly and -- in the generics space. We're actually delivering at new record cycle times that is faster than anybody in the industry today. So when you think about the biologics, you're absolutely correct when you said it's a little bit different than the generics. It's still the high value product portfolio, but there is a large component of that is the build-up for launches and then the drug acceptance into the marketplace. That's what we're seeing. I can assure you what we've learned with the generic customers, especially our top customers, where we put a supply -- our supply chains together, we're now mapping out demand curves required for their largest launches. It gives us better anticipation not just in the generics but now in the biologics space. So there is some of that confidence that we're seeing in the biologics space. Yes, the cycle times are much less. You don't need to order as much in advance. But the larger portion of that is really around drug launches, the cyclicality of that.

And our next question will come from the line of Larry Solow with CJS Securities.

A follow-up on the backlog question. You guys have done a great job, obviously, reducing lead times. And historically, backlog was sort a -- somewhat of an indicator of future growth, with some nuances obviously, especially more lately. Does the fact that you're basically flat year-over-year, does your forecast entail more -- even more and greater customer conversations. And in other words, how do you sort of see yourself growing eventually low double digit this year when your backlog is kind of flattish? And then the second question would be, now that you have more capacity, have discussions sort of opened up around sort of changing some customer -- some of the existing products, older products getting more into the HVP and the high value stuff on that -- on those ends?

Yes, Larry, those are good questions. Thank you. So the first one talked about backlog. You're absolutely correct. What you see -- what we see today is a different profile of the backlog. And what I mean by that is historically we'd have pretty much visibility as pretty evenly dispersed over the next 3 or 4 quarters. What we're seeing now, even though it's flat, a higher proportion of that backlog number is more near term, i.e., if I look at today, it's going to be Q2 and Q3. And it goes to the fact that the cycle times are less. There's less -- customers are less prone to put orders in long term. It doesn't mean that they're looking at alternative sources. We are on those molecules. We are the supplier of choice for their products that have been launched. It's just we are able to perform at a much higher level than we had in the past. And again, that is due to lean initiatives. It's due to capacity expansion that we have in place today, and it gives us that platform. So I'm confident when you start thinking about the backlog it's more near term than long term. That's the changing dynamic. The capacity conversation, you're right, Larry. We are having active conversations with our customers, moving them from standard products to high value products. And while some customers are taking a platform approach and we're moving more of their molecules towards that, some are looking at it from one -- one at a time. We are adding -- when you think about Waterford as an example, while we're -- we have a facility that's been validated by our customers. We're looking at commercial ramp-up. We're continuing to add new technologies like RU -- Westar RU in Waterford. We have a more complete solution to drive the quality. And so that -- these are the initiatives that we put in place to convert our customers from standard to high value products.

Okay. Just question on sort of cadence of growth. You can go out through the year. I know you guys don't guide quarterly, but it sounds like maybe a little bit of improvement in Q2, but most of the sequential improvement will really occur in 3 and then into 4. Is that sort of a good assessment?

Yes, Larry, I think you'll find consistent growth around the generics. Pharma, as I mentioned, it'll be more consistent from a revenue perspective. But on comp perspective, you'll see it accelerate as a percentage because the comp is less than 2017. And biologics will see a continued acceleration throughout the year.

And our next question will come from the line of Dana Flanders with Goldman Sachs.

I guess my first one and just following up on just the cadence throughout the year. Can you just talk a little bit about just the gross and operating margin progression that we should expect? I mean, will that generally follow revenue growth? Or is there any lumpiness that we should be thinking about in terms of just margin improvement throughout the year?

Yes, Dana, thank you. Yes, it will be more progressive as the year goes. It was, as we said, a very tough comp in the first quarter. As we go through the year with both high value product expansion and the growth in sales expansion, as we talked about, we believe that margins will get better as the year progresses. So yes, definitely back half-ended and progressing as the year goes. That's both for gross margin and for operating margin.

Okay. Great. And just my second quick follow-up. Just on the bigger picture on competition. I believe a few of your larger competitors have announced investment in expanding capacity. Just how are you thinking about the supply-demand equilibrium in the medium term across standard product, across high value products? And just, I guess, the potential for competition on new business?

Yes, Dana. We're aware of our competition. We're continuously -- of their investing in certain parts of their business. We're looking at -- again, just putting into perspective, the volumes that we produce today, a little over 40 billion components a year. And to get a site up and running, you've seeing this with us at Waterford. And we started that project in 2014, right. And so here we are talking about customers just validated the lines, and we're starting to flip into commercial revenues for the balance of '18. Our process is pretty consistent to other companies that would have to -- as the building and validation doesn't really change. Said that, we are aware that they are building capacity. We are having active discussions with our customers to continue to move them up the high value product curve so that as you start thinking about differentiation it really is around the quality. It's around availability of the service, which we believe that we just in the last 12 to 18 months has significantly raised the bar. So we're not complacent. We understand the situation, but we do believe that we will continue to be in a very favorable position because of those levers.

And our next question will come from the line of Paul Knight with Janney Montgomery.

When is Waterford coming online?

Yes, well, Paul, we have -- right now, we're validating product with customers. They're actually with samples. And we're working through the changes that will occur from manufacturing other locations to our Waterford facility on existing products but also new products. There's obviously a validation process. In Q3, we're looking at revenues -- commercial revenues, and that will be really the official -- and it'll launch and grow as we proceed throughout the quarters. We've got -- I have to tell you I've been there a few times. The site is really, really well positioned. Our customers are very complimentary on what we've done not just to replicate current processes but to really move them into the next generation. So I think there's a lot of interest, and we have a lot of visitors on-site for future business. So Q3 and forward.

And then the burn -- your -- how -- what is this burning up on SG&A for the interim here per quarter?

Okay, Bill.

So Paul, it really impacts more COGS. The underabsorbed overhead was $3.6 million in the quarter. We'll see a similar amount in the second quarter. But as you remember, we discussed last year, we started depreciating the plan in the second quarter. So you'll start to see that underabsorbed overhead as it's comparable to last year will start to abate. And as we start to get some of the commercial activities in Q3 and beyond, that number -- the unabsorbed overhead will lessen as we go through the year.

And lastly, CapEx, you're saying down this year, below $150 million. What's it look like after this year?

Yes, Paul, that's -- we are -- I have to tell you, one of the changes we made about 1.5 years ago was -- and we've always thought about our operations globally, but we really formalized the global operations, and we have 28 manufacturing sites. And by formalizing the global approach, we're able to allocate our resources, I would say, probably more effectively on where we want to invest in Centers of Excellence. And also when you look at capacity, we've built out Kinston. We have Waterford on the ground. We've expanded in Dublin. We have bricks and mortar. And so this year, we're looking at below $150 million. We believe going forward, we'll be hovering around that corridor and as a percentage of sales will continue to drop. Right now, just to put it into dimension, right now, we're looking at about $50 million to $60 million of our CapEx is around maintenance. And if you want to maintain the high level of quality and the productivity of our facility, that's the investments we have to make. We're putting about $20 million into IT is a combination of some maintenance but also future growth, and the balance is really around new products and new innovations, new HVP portfolios that are coming into the market. That's how you would look at the split.

And our next question will come from the line of Drew Jones with Stephens Inc.

Looking at the core Proprietary Product revenue, down about 2% year-over-year, is it -- can you parse out how much of that was volume versus how much was mix? And is it safe to assume that the volumes are going to rebound in the back half of the year? I know you talked a lot about HVP being a key driver from here, but just want to get a feel for the volumes bouncing back other than just easier comps coming up.

Yes, we do obviously believe that the volumes will continue to grow from all the things that Eric described earlier. We don't parse out volume and mix other than where we talked about high value products was also down in the quarter. But as Eric commented, we believe for the full year we will see high single to low double-digit growth of high value products. So therefore, as you can assume, we're going to continue to accelerate not only volume-wise but also mix-wise. And remember, our construct is only -- it's about 1% price, 2% to 3% market volume, and then the rest is mix. So while we didn't see a whole lot of growth in the first quarter, Eric mentioned, we don't see any loss business, and we're going to continue to grow this business in the way that we believe that construct makes sense for us. So more growth coming in the back half of the year, obviously, but both volume, mix and a little bit of price.

Perfect. And then on the contract manufacturing side, you talked about losing the consumer -- customer filling that with the health care line. What's your line of sight for when that's going to stop being a drag on margins?

Well, just grow quickly. The consumer business that we lost and they brought in-house themselves that is for the -- will be in the full year of 2018. So we ended that relationship at the end of '17 -- literally at the end of '17, and it'll have an impact, somewhat an even impact, throughout '18. I have to say though that when you start talking about high single-digit performance, even with that particular loss, it's pretty impressive because of the focus -- strategic focus around the health care space that's driving that performance. Bill, do you want...

Yes, I just want -- actually an extra thought on there. There's 2 components to the piece that impacted Q1. The one is the, obviously, the margin on the products sold, but then there is the underabsorbed overhead that it leaves in its place when you take the product out. As part of the restructuring plan that we talked about, we are going to be combining those 2 contract manufacturing facilities in the U.S. into one. And so -- and that'll happen in the latter part of 2018, the second half. And therefore, you'll see that under absorbed overhead piece of that issue go away, so less of a drag in the back half of the year. But as Eric said, the strong growth in health care is definitely a net positive for that business going forward.

And our next question will come from the line of Derik De Bruin with Bank of America.

Bill, just a question, I mean, when you sort of look at second quarter and where exchange rates are, what's sort of embedded in your model for FX on 2Q and then also for the balance of the year? I mean, 7% was well above -- in Q1 was well above what we had modeled.

Yes. Yes, so you're right. Q1 was EUR 1.23 per dollar or $1.23 per euro for the first quarter. The rest of the year we've scheduled in at $1.20. Even though the spot rate today is $1.22, we took a conservative stance on the FX growth. So if you remember the paradigm, it's $0.01 change in the ratio for the full year would yield about a $0.01 of EPS. So our previous guidance had been at the -- at $1.20. We left it there for now. There is some benefit in the first quarter, and we're being conservative by just saying that we'll be at $1.20 for the rest of the year. So in the second quarter, using the $1.20, you should expect about $0.04 of EPS expansion versus the prior year.

Okay. And so that was about the same rate then in the first quarter, about $0.04 benefit?

No, it was little higher than that, Derik, because it was at $1.23, not $1.20. So in the first quarter it would be $0.07.

$0.07 FX, got you. And I'm just sort of curious on your -- basically, your -- you've got this very clean balance sheet. And sort of like how are you guys thinking about utilizing that going forward? I mean, is there more indication to sort of lever up just a touch to maybe be a little more aggressive on buybacks? I'm just curious in terms of what is -- I mean, it doesn't sound like you -- I mean, you don't really need to acquire any things sort of given the growth profile of the company. I'm just wondering what sort of your plan is on the balance sheet.

Yes, Derik, I would like to talk about a couple of aspects of that and use of cash. And number one is, as you know, we want to continue to fuel the high value product portfolio with internal organic investments but in addition to that is continuously looking at potential bolt-on technologies or broaden the product portfolio. And I would argue in the last 2.5 years of my tenure here, we've been not very acquisitive in that space. But I think we have a good position. We have a good line of sight where our customers are asking us to look at or to broaden the portfolio, and we'll take that under consideration as we move forward. But we, obviously, are giving the dividends. We are doing share buyback this year. And the board authorized about 800,000 shares really to keep the share count somewhat neutral for the balance of the year. So that's generally how we look at use of cash today, and we are looking at that on a regular basis. We don't say that's static. If dynamics do change and there's more opportunities in one lever or the other to make sure we'd balance it between our customers and our shareholders, we'll do that.

Okay. And then so one final thing. I just noticed you -- on the -- on Slide 4, you called out some reclassifications, some sales in your pharma segment. Can you sort of talk about what that is? And I think it had sort of the impact of maybe making the 2Q comp a little bit tougher.

It doesn't have anything to do with 2Q comp, but it is as you suggest, Derik, we've looked at the way that we record those sales by the market units, and there needs to be tweaking from time to time based on customers' order, things in the biologics space, the pharma space and the generics space. So it is difficult to parse it out between the various market units. We've gone through and we periodically go through and look at it. These are very, very small changes. They are not significant. In fact, for the full year, it's less than 1 percentage point. So we just want to be absolutely transparent. But the real impact is -- that was very, very small.

So it's just a matter of just like how your customers are sort of being defined or what it is. It's just that -- I mean, in that sense, that's how you're looking at it?

Yes, it's just how -- not how we define them. So if you have a customer that we sell both bio, pharma and generics, all 3 of them, into which, we do have customers that are that way, parsing it out between those 3 buckets is not a perfect science. And we look at it periodically and make sure that we're getting it right. And again, just to reiterate, there is no change in the overall portfolio on Proprietary Products. None of these changes are outside of that. It's all within those 3 buckets.

And I'm showing no further questions in the queue at this time. So now it is my pleasure to hand the conference back over to Mr. Quintin Lai, Vice President of Investor Relations, for some closing comments or remarks. Sir?

Thanks, Brian. And thank you all, everyone, for joining us on today's conference call. An online archive of the broadcast will be available on our website in the Investors section. Additionally, you may access the telephone replay through Thursday, May 3 by dialing the numbers and conference ID provided at today -- at the end of today's earnings release. This concludes today's call. Have a nice day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we can all disconnect. Everybody, have a wonderful day.