Quintin Lai - VP, IR Eric Green - CEO Bill Federici - CFO.

Dave Windley - Jefferies Tim Evans - Wells Fargo Paul Knight - Janney Montgomery Scott Dana Flanders - Goldman Sachs Larry Solow - CJS Securities Derik De Bruin - Bank of America.

Good day, ladies and gentlemen, and welcome to the Q4 2017 West Pharmaceutical Services Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Quintin Lai, Vice President of Investor Relations. Please go ahead..

sales in constant currency, 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 now turn the call over to West's CEO and President Eric Green.

Eric?.

Great. Thank you, Quintin. Good morning everyone and thank you for joining us this morning. As you've seen the press release issued this morning our Q4 performance returned to more typical growth patterns for our Biologics and Generics market units.

While we saw a decline in our Pharma business this was balanced by very strong quarter from our contract manufacturing team. If we exclude impacts from the de-consolidation of operations in Venezuela and hurricane related shutdowns, we estimate that organic sales growth would have been 6% for the quarter.

Fourth quarter 2017 was also impacted by a discrete tax charge related to the US tax reform legislation that reduced EPS by $0.64; excluding this impact, fourth quarter 2017 adjusted diluted EPS grew by 19%. As we turn to 2018, we expect to see another year of above market sales growth and operating profit margin expansion.

The underlying markets we serve have been growing at 2% to 3% in unit growth. Our annual revenue growth rate has consistently outperformed the market. We continue to leverage the demand for our high-value products and contract manufacturing services. Along with the technical and scientific leadership that differentiates West and the industry.

This remains our focus for growing our business organically. Let's now turn to the detail of our market unit performances for Q4 and the full year on Slide 4. As noted earlier, we saw a return to double-digit growth in our Biologics market unit in Q4.

Biologic customers continue to demand West high-quality product offerings and our growth was led by the adoption of NovaPure products as well as Westar components. We are encouraged that West maintain participation on 100% of the Biologic new molecular entity FDA approvals in 2017.

Both large and small biologics customers rely on West and our partner Daikyo for high-quality product and wrap around service offerings such as our regulatory and technical expertise to contain and deliver these exciting new molecules. While West participation in the Biologics market space is strong.

Our experience shows that growth is not always linear and quarterly fluctuations occur. Customers often build up stock for launches and follow this with destocking periods, which we saw in 2017. Our commercial teams have been working with our customers to get a better understanding of their needs and timing, which in turn helps our demand planning.

For example, we know that Biologics will have a tough comp in the first quarter of 2018. Meanwhile the full year trends continue to look positive and we'll see a meaningful ramp up in growth as the year progress. We expect to see full year 2018 growth in our biologics market unit of high single to double-digit growth.

Our generics market unit had a good finish to the year. Posting high single digits growth in Q4. Full year 2017 sales were flat versus prior year due to previously discussed inventory destocking by several customers. You might also recall the software sales we've experienced in some markets last year due to customer regulatory issues.

I'm pleased to say that we feel that most of these issues are behind us and we anticipate a return to a more sustained and consistent growth pattern in 2018. Generics customers continue to communicate their need for speed and simplicity and our AccelTRA program meets both of these needs. In addition to the high-quality that West is known for.

This program was launched in 2017 and more than 80 customers were sampled over the course of the year. We now have customers testing for drug compatibility. With several of the largest generic companies moving forward with this unique product offering.

We expect to see full year growth in our generics market unit return to mid-to-high single-digit growth rates in 2018. Following the very strong first half of 2017 for our pharma market unit. Sales in the back half of the year moderated. With Q4 sales below the prior year period.

For the full year 2017 pharma organically grew mid-single digits which is in line with our expectations on a long-term basis. Looking to 2018, we expect our pharma unit to continue to grow faster than the underlying drug market it serves. With Q1 growth somewhat muted due to a tough comp from the deconsolidation of our former Venezuela operations.

Bill will go into more detail in his discussion. And finally, our contract manufacturing business has impressive results throughout 2017 including Q4 where we saw double-digit growth. I'll come back to talk in detail about this market unit in a moment.

But first I want to revisit our strategy around high-value product adoption which as I stated earlier is key to our long-term growth. On Slide 5, we show total sales for our proprietary products business over the past five years. In this timeframe we've seen our high-value products grow by 11% annually.

In addition, we experienced 100 basis points of volume growth in 2017. The most important thing to take away from this slide is that there is still a great deal of room for us to continue to grow our best-in-class high-value products.

With the demanded regulatory backdrop for the packaging and delivery of injectable medicines customers are seeking high-value products now more than ever across all market units. In 2017, we expanded SmartDose portfolio with the introduction of next generation devices. And had good success with the SelfDose Injector.

In fact, SelfDose was awarded the Exhibitor Innovation Award at the Annual PharmaPack Meeting in Paris just last week. As we worked and improved adoption of high-value products, growth in this area will also come from volume and price and in the future new product launches. On Slide 6, we highlight three areas of R&D focus for 2018.

Advancing our core, delivery devices and administration system products. Our innovation and technology team advanced our core offerings in 2017. While introduced into the market new products like the LyoSeal cap. West Rigid Needle Shields and the NovaGuard SA Pro safety system.

All designed to broaden our product offerings in response to unmet customer needs. Together with our partners at Daikyo, we expect to introduce additional high-value products in 2018 that will directly meet our customers demand for high quality.

In addition to expand our drug delivery business with the next generation of SmartDose platform and SelfDose we're also working to expand offerings within our drug administration and reconstitution business. With our helping double-digit growth in this product portfolio in 2017 especially in the United States.

We expect to expand this offering into new geographic markets, invest in additional capacity for increased production and launch improved products in 2018 and beyond.

Together the new products launched over the past five years in these focused areas contributed more than 100 basis points of organic sales growth in 2017 and expect this trend to continue in 2018. Let's turn back to the contract manufacturing side of our business now on Slide 7.

Just as we're working to transition our business from standard to high-value product offerings in the proprietary segment in the contract manufacturing business. Our team has been on a journey to transition the focus of our business away from consumer products towards an increase in healthcare products.

As you see on the slide, we've grown the healthcare business by 9% annually over the past five years. This growth has come primarily from our drug delivery and diagnostic customers. Resulting in five consecutive quarters of double-digit growth. While we have been growing the healthcare business, we have also been deemphasizing our consumer business.

As you see in the chart consumer sales have decreased by 2% annually over the last five years. In late 2017, one of our longstanding consumer customers moved production in-house. As a result, we reduced a number of our consumer production lines and will use the resulting capacity to supply the increase in demand from our healthcare customers.

Even with this impact, we expect our contract manufacturing business to grow mid-single digits in 2018. On Slide 8, we have highlighted some of the areas of expertise for which customers engage West. Our deep technical insight enables us to support a wide variety of complex products.

We are unique and that we also have market leading expertise on the impact of elastomers within the drug delivery devices. Our plant in Dublin, Ireland is a great example of this focus on strategic alignment. We nearly doubled the manufacturing space of our facility in December 2016 to meet increase in demand.

The expansion has been operational for one year and is already profitable. The core offering in Dublin includes manufacturing expertise and continuous glucose monitoring devices and is a nice complement to the new insulin sheeting production at our Waterford, Ireland plant which will be initiate commercial operations later this year.

Before I turn things over to Bill. I want to spend some time discussing the strong progress we have made in global operations. On Slide 9, we're highlighting some of the teams accomplishments in the first year operating under our unified global operations and supply chain strategy. With 28 sites the team's drive better service to customers.

Improve levels of quality and a safer working environment for our team members. In 2017, the team worked through reduced lead times by more than 40% leading to better service for our customers. We continue to improve upon this important metric and plan to reduce times even further in 2018.

In addition, we're seeing better quality results, delivering less than 80 out-of-spec parts per billion. In line with our commitment to delivering the highest quality in the industry. We have also accelerated process excellent improvements across the global plant network.

So we can deliver value back to our customers and run operations more efficiently.

In conjunction with the ongoing global operations strategy, our Board of Directors has approved a restricting program that will streamline the plant network and enable us to make investments to drive growth in high-value proprietary products and healthcare related contract manufacturing business and expand margin.

These changes together with executing the commercial and R&D strategies will ensure our business continues to grow within 6% to 8% long-term organic sales growth range. Now I'll turn 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 fourth quarter results this morning. Our Q4 results include the effects of US tax reform which resulted in a discrete charge to reflect the Repatriation Tax on unremitted offshore earnings and the reduction of our US deferred tax assets.

Excluding the effects of special items from both this quarter and the prior year. Fourth quarter 2017 earnings were $0.64 per diluted share versus $0.54 we earned in Q4, 2016. A reconciliation of these non-GAAP measures is provided on Slide 16 through 20. Turning to sales, Slide 11 shows the components of our consolidated sales increase.

All references to sales announcement to constant currency. Consolidated fourth quarter sales were $415.6 million, an increase of 4.5% over fourth quarter 2016 sales. Proprietary product sales were $306.4 million, a 1.4% increase over same quarter 2016. Sales price increases and the volume mix increase contributed equally to the Q4 sales growth.

High-value product sales increased 5.1% versus the prior year quarter. For the full year 2017 high-value product sales increased approximately 4% versus 2016. Our Biologics segment sales increased by double-digit and our generics market unit saw high single-digit growth. But our pharma market unit sales decline low single-digit in the quarter.

Combined CZ and SmartDose sales and development activity were $40 million for the full year 2017, a 47% increases versus the prior year 2016. Contract manufactured product sales were $109.2 million, a 14% increase over sales in the prior year quarter as customers ramped up activity in our recently expanded government contract facility.

As provided on Slide 12, our Q4, 2017 consolidated gross profit margin was 30.9% versus 32.3% margin we achieved in the fourth quarter, 2016. Proprietary products fourth quarter gross margin of 34.8% is 2.1 margin points lower than the 36.9% achieved in the fourth quarter of 2016.

The mid-single-digit growth of high-value products sold, modest sales price increases and continued lead savings and planned efficiencies were more than offset by the impact of higher labor, material and overhead costs including under observed overheads in our newer facilities like Waterford, Kinston and Scottsdale which created headwinds for our margin.

Contract Manufacturing Product fourth quarter gross margin of 20.1% was 2.5 margin points higher than the prior year quarter due to a favorable sales mix, lean and planned efficiencies and the ramp up of activity in our newly expanded Dublin facility.

As reflected on Slide 13, Q4, 2017 consolidated SG&A expense decreased by $2 million compared to the prior year quarter. The decrease is due primarily to lower pension expense, lower achievement levels on incentive comp programs offset by staffing and salary increases.

As a percentage of sales Q4, 2017 SG&A expense was 1.7 percentage points less than the prior year period. Slide 14 shows our key cash flow metrics. Our operating cash flow was $263 million for the full year 2017, $44 million more than 2016 due primarily to our improved operating results.

Capital additions of roughly $130 million were made in 2017 roughly 60% of the capital spend was our new products and expansion efforts including approximately $26 million in our Waterford manufacturing facility. We expect capital additions of approximately $150 million in 2018. Slide 14 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 year end was $236 million, $33 million higher than our December 2016 balance. Roughly 60% of that cash is invested overseas.

The US tax reform bill signed into law late last year mandated a deemed repatriation tax on undistributed foreign earnings and a reduction of our deferred tax assets based on reduced federal income tax rate. A discrete tax charge of approximately $49 million is included in our Q4, 2017 GAAP results.

Debt at year end was $197 million, $32 million less than at the prior year end due to the repayment of our headquarters term loan. As of yearend, our cash balance exceeds our debt balance and as such we're delevered on a net debt to total invested capital basis.

Working capital totaled $464 million at year end, $63 million higher than at the prior year end. Customers continue to push extended payment terms which puts pressure on our working capital. We continue to work with our customers and suppliers as well as our internal inventory levels to manage our working capital investments.

We've issued our full year 2018 guidance in this morning's release. As guidance is summarized on Slide 15, our guidance is based on an exchange rate of $1.20 per Euro. Our actual 2017 results were translated at $1.13 per Euro rate. More than half our revenues at generating outside US.

US Dollar has weakened versus a number of international currencies most notably the Euro. If this trend holds, currency translation will be a tailwind to earnings in 2018. As a reminder every $0.01 change in the Euro-Dollar exchange rate has approximately $0.01 annual EPS effect.

We expect our effective tax rate will decrease by roughly 3 to 4 percentage points as a result in the new US tax legislation. We expect our 2018 effective tax rate will be approximately 26% excluding the effects of excess tax benefits from option exercises.

Our tax rate is highly dependent on the geographic mix of earnings which in large effect is driven by the sales of high-value products. Our 2018 guidance includes, a $0.02 EPS benefit resulting from our board approved 800,000 share repurchase program. In Q1, 2017 we recorded $0.21 of excess tax benefit from option exercises.

Whereas we expect Q1, 2018 benefit from option exercises to be about $0.04 to $0.06. We expect our 2018 results will continue to be adversely impacted by customer inventory management and under absorption of overheads in certain of our newest facilities.

In Q2, 2017 we deconsolidated our Venezuelan subsidiary which will create sales and earnings headwinds for Q1. In addition, 2018 will be adversely impacted by one large consumer contract manufactured product that the customer opted to bring in-house.

Additionally, the under absorption of overheads from newer facilities is expected to increase by approximately $3 million in Q1 versus the prior year quarter. The combined impact of these items represent an $0.11 tailwind for Q1, 2018.

We expect our Q1, 2018 growth mix and operational efficiencies will offset all of these items other than the reduction in the year-over-year stock comp tax benefit. We do not expect any 2018 income from the technology license that occurred in Q3, 2017.

During the first half of 2017, our pharma market unit had above average growth and throughout 2017 our contract manufactured market unit grew well in excess of our norms. Setting up tight comps for both of these market units.

With growth accelerating throughout 2018 in our generics and biologics market units, we expect a stronger second half of 2018 compared to the first half. All of these items have been considered in our 2018 guidance. We expect to deliver on our full year 2018 earnings guidance of $2.80 to $2.90 per diluted share.

Excluding the tax benefit from stock-based comp, this represents an increase of between 14% and 18% in diluted EPS over 2017. Our guidance excludes the restructuring charge of $8 million to $13 million or the expected fully completed annualized savings of $17 million to $22 million outlined in this morning's release.

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

Eric?.

Thank you Bill. In conclusion we're making progress in executing our long-term market lead strategy. Our commercial team has developed an even greater understanding of the underlying market dynamics of our industry and is delivering tailored product and service offerings that meet the unique needs of our discrete customer groups.

Our global operations team is driving improved quality, safety and service to our customers and is working to streamline our manufacturing network to make room for investments that will fuel future growth. In our innovation and technology team is building a strong pipeline of integrated containment and delivery products to meet customer needs.

We look forward to another year of above market growth and remain committed to our long-term outlook for West. Operator, we're ready to take questions. Thank you..

[Operator Instructions] our first question is from Dave Windley with Jefferies. Your line is now open..

I think they called on me. At least on my end of the line just FYI. And Eric your concluding remarks there the audio went pretty choppy. I'll start..

Sorry..

It sounds like the old Blackberry interference type stuff. So anyway, I wanted to start with questions around the sales performance by market unit by customer unit and just a clarifying question first, that I guess as I think about the relative size of the units.

I'm having a little bit of hard time understanding how double-digit biologics, high single-digit generics and then offset by low single-digit pharma nets to only 1.4% growth, is there something that I'm not taking into account and thinking about those net together..

Hi Dave, it's Bill. I think you're thinking about it correctly. You have to remember that the size of those business units are slightly different and the growth is relatively as you said double-digit for the biologics and high single for generics. The pharma business which is the largest of those business was actually low single-digit decline.

So when you add all of those things together you get to your 1.4% in proprietary. Now if you remember then the issue that are effecting those as Eric said on the call. There were some inventory destocking that was going by customers.

There was a product that was pulled from the market by the customer, so there are some special items that are impacting that and when you take those in the Venezuela impact on our proprietary organization the Q4 growth rate for proprietary products will be somewhere in the 5% and 5.5% range..

Dave, I think we may be losing you here. Operator, let's go to the next caller. Dave, if you can just come back in the queue and maybe the line will clear up for you..

Our next question is from Tim Evans with Wells Fargo. Your line is now open..

Bill, can you just for everyone walk through what exactly happened in Venezuela? Why did you have to deconsolidate this facility? Is it something where the volume moves somewhere else or is it something where you just don't get the volume anymore? And then lastly, exactly how much revenue did it do in Q4, 2016 and how much did it do in Q1, 2017 so we can understand the comp?.

Okay, great. So Venezuela as you know has been suffering from very, very high inflation and a lack of ability in that country of getting cash out of the country. So many, many of the companies that serve in Venezuela have deconsolidated their subsidiaries.

We hung on as long as we could, we hung on through all of 2016 when a lot of companies have bailed and through the first quarter, but at that point in time we had - been almost a year since we had received any cash payments out of the country and we deemed that point in time that our asset, our ability to control our subsidiary was no longer there.

So under GAAP rules we are required to deconsolidate, what that means, is that we took a charge it was a deconsolidation charge of about $11 million relative to our Venezuelan subsidiary and we no longer from that point forward have any income or expense associated with that.

We're serving those customers, many of them anyway from other parts of our South American operations. So we've not lost customers other than customers who have gone out of business or have diverted elsewhere. Some of these customers that asked us to sell through Brazil and others of our South American operations.

So we have not lost the business per se. In terms of the actual financial results in the fourth quarter of 2017 versus the fourth quarter of 2016 the sales differential was $3.5 million less in 2017, Q4 than 2016, Q4. In Q1, 2017 we had $9.1 million of sales in Venezuela that we will have none in 2018's first quarter..

So I guess this is where the confusion comes in, right.

So if you had $9 million of sales in Q1, 2017 and some of that business is effectively been moved to other sites in South America, why is it zero in Q1, 2018?.

It's a demand issue. So when you have - we've been selling them. We had stocked up a lot of inventory through that time period and we have been - customers are ordering a whole lot in that area and we are serving them with the existing inventory on the ground.

We don't have - there's been some of that $9 million has been will be made up in Q1, but not a tremendous amount..

And this is standard products that go mostly to large pharma customers?.

Standard products that go to large pharma customers. Yes..

Okay, you usually call out committed orders for the proprietary I didn't hear that.

Did I miss it or?.

No, it's $377 million which is roughly 1% on a currency mutual basis higher than the same period in 2016..

Okay, lastly. Can you walk through the dynamics of Q1 EPS? I think you said there was going to be $0.11 year-over-year headwind. But then you said you'd offset all of it except for the stock comp accounting.

What does that net do?.

Okay, so when you think about let's take them into two pieces. So the stock comp will go first. The stock compensation expense in Q1, 2017 was $0.21. We are projecting for two reasons a lot smaller number in 2018. The first reason is that, now that the tax rate is 21%, not 35%.

The actual benefit you'll derive from stock - we as a company will derive from those stock option exercises will be about a third less. Secondly, we had a number in 2017 of our - of large option exercises deep in the money options that have either because they're getting ready to expire, so a lot of those have already gone through the system.

So we expect a smaller pool of, we have a smaller pool of option benefits to be earned over the next several years. So our estimate is only $0.04 to $0.06 for option - the tax benefit from our production [ph] sizes in Q1, 2018. So take that and put that aside. Okay..

Yes..

Because that is the first decline. The second one is, when you look at the Venezuela impact, the impact of that consumer product customer and some of these under absorbed overheads that we talked about and their impact Q1, 2018 versus Q1, 2017 will be about $0.11.

We fully expect that our growth in operations, our favorable mix from generics and the biologics space coming back.

And our operational efficiencies will help us offset the $0.11, but that net delta between the $0.21 of excess tax benefits versus the $0.04 to $0.06 we believe will happen in the first quarter of 2018 we do not believe that we will be able to overcome that..

So just to be very clear about $0.15 to $0.17 lower than Q1, 2018..

Correct..

Okay, that's good. All right turn it over to others. Thanks..

Operator, can we go back to Dave? If he's back on the line..

Yes. Our next question is from Dave Windley with Jefferies. Your line is now open..

I call back you on my cell phone, so look - I'll get your answer to the first question off the transcript, but I wanted to continue to clarify a couple of things. So you guys said 100 basis points. I think Eric talked about 100 basis points of volume growth in high-value products in 2017.

Should I think about that in the frame work of the like 83% standard, 17% high-value that shift in mix is continuing at 100 basis points? Is that what that means?.

That's correct. It's 100 basis point shift from standard to high-value products on a per unit basis. That's correct..

Yes and so, am I because I'm thinking about with the inventory destocking some of the tougher year-over-year comps etc., that the high-value product and a kind of an isolation high vale product growth was relatively low, by comparison to prior years.

I guess I would have thought that I certainly want to see that mix shift continue, but I would have thought 2017 would have been a little bit of weak year on that front..

Yes, absolutely so when you look at the volume component, we had - when you take a look at the volume component of the standard of about 83% back in 2016 that was about 100% impact going into for high-value products for this particular year, 2017. There is a shift between the different market units which would drive some of that behavior.

So to give you [technical difficulty] biologics customers they tend to be the higher quality materials all NovaPure offering, but much smaller units and that particular part of the [indiscernible]..

Okay, that's helpful. And then maybe continuing with that as you mentioned NovaPure, I think Westar was another one.

You highlighted a couple quarters ago I believe that one of your large - a large biopharma customer with a fairly substantial injectable product portfolio had made the decision to transition the high-value products over a period of time understanding that's multi-year effort.

But I guess I'm curious on maybe high level update as to how that - what the cadence of that transition will be roughly and is it right to think that, having the customer make a big decision like that would accelerate that 100 basis points shift a year, that you could actually see that being a little bit higher for a period of time while that's happening..

That's a good point. So we're on track with that particular customer, which we won't name. But it is approximately a little over two-year process doing the transition completely. A little bit less volume in year one and you've seen year two, so this should be more in acceleration.

It requires our customer be onsite to do [indiscernible] validation and also their documentation. So we're well on track. We're seeing the conversion occurring and we're quite pleased by this particular conversion.

We do think this will help us with our discussions with other customers to transition from standard to high-value products with their existing portfolio of other large pharmas. So we're on track.

There could be a potential uptick as we talk about number of units moving from standard to high-value products as we look into 2018 and little beyond that due to the step of transition..

Okay and last one and I'll drop. Bill you emphasized that you're now basically in a net cash position small. What are the major thoughts about levels of debt that you're comfortable kind of based on recent pattern that you seem zero, net debt.

But I guess I'm wondering particularly is there an opportunity to be a little bit more aggressive and opportunistic on the share repurchase side of things. Now that you're in a position where CapEx is trended on the low end of your range or your P&L is growing, you're going to generate more cash flow and you don't have a lot of debt..

I'll start talking little bit about the use of cash because that's a very good comment in regards to - our number focus is around investing in the organic growth and you're absolutely correct, when you sort of - when you look at CapEx spend in 2017 is roughly around $130 million in prior year, so it's - was north of that.

And kind of seeing there results to we do have a couple of facilities that are state-of-the-art customers are excited transfer projects into those sites, but they're underutilized at this point and so we believe, we'll continue to invest in organic growth, but because of our global operations approach that they're taking with more of network approach we feel comfortable that.

We're looking at below the 150 that we've mentioned. The second area that is we're starting to put more emphasis around is, now that the team's aligned around our innovation, technology group. You'll see while the number is still as a percent of sales below 3% we're trying to continue to invest in that area in double-digit growth.

We're very encouraged with the pipeline and the type of payout that's happening in the next three to five years. One last comment, we will continue to look at both on technologies and tuck-in type of acquisitions that we really broaden our portfolio to really drive the vision of integrated containment and delivery devices for injectable medicines.

We don't have 100% complete portfolio as you know and we're working on ways to leverage innovation or through bolt-on opportunities to bring that in the fold. I'll let Bill talk real quickly about the debt and how we use cash also around share buyback and dividends..

Eric is absolutely right. The other two items in the mix there are, we do pay dividends, Dave as you know it's you know in the 40 million-ish range now on an annual basis and we're just 800,000 share buyback for the year 2018 that we hope for effect. In terms of debt and our thoughts about debt.

Yes, you're right we're de-levered but we're not adverse to debt if there were strategic opportunities that were out there from a bolt-on perspective as Eric mentioned or if we see opportunities to invest elsewhere in our network. We certainly will do that and as I said, we're not debt adverse. We just happen to be in a delevered state right now..

Okay, thank you. I'll drop out..

Our next question is from Paul Knight with Janney. Your line is now open..

So I guess can we say that now Puerto Rico is behind us, de-stocking is behind us.

Is that done and taken care of so to speak?.

Yes, Paul it's a good question. Puerto Rico is behind us. And I would just real quick comment about Puerto Rico, our site is operating and our customers on the island of Puerto Rico we're importing at this point. So we believe that is truly behind us.

In fact, we will continue to invest in our Puerto Rico site because it's actually one of our top producing sites per performance. In regards to de-stocking, I'm really pleased on how we've been able to come out of the situation with the generics side and as you know, there was customer inventory builds, they were de-stocking.

We do see normalized levels. We have visibility. We're pretty comfortable there. Biologics we will see a little bit up and down fluctuations based on product launches. When they're about to launch new molecule they'll come to us and we'll help them, build inventory.

But the positive part there is, you know Paul very well is that the pipeline of molecules tend to be more biologics, so we should see that to be very healthy for us. So I would say there's less de-stocking type activities. We do hear one last thing Paul I add. This 40% reduction on lead times, is significant.

And our customers have noted it, they've been very pleased. And now are head of operations, where the commercial heads have announced to customers and they continue to talk about how do they reduce their own safety stock to drive working capital improvements at their own facilities.

So we'll have some oscillations as we go for next few quarters, but it's a very good reason why that's happening and I think for long-term we're in a very good position..

Okay and then can you give us an update on Crystal Zenith.

What's the customer involvement there etc.?.

Yes as far as the number of - the interest level remains strong. We have various projects that are in either in Phase 1, 2 or 3. We have several that are really in the development early on discovery phase at this point. So the interest level remains strong.

I'll tell you though, it really is a focused niche area that we have been going after because it won't display, it's all glass.

So we're pleased especially in the biologics space we're actually seeing some of our pharma customers exploring because the size, the variability that we can provide in larger scale and so that is our option that we have at this point in time..

And then last Bill, could you give us a little color on where Q1 growth and up margins are going year-over-year?.

We expect for the full year that we will be able to increase margins. We will have those headwinds as we suggested Paul and I lined out all of those things. So we should be able to offset as I mentioned the Venezuela impact, the impact from that consumer customer and our overhead under absorption issues with mix growth and operational efficiencies.

So we feel very, very comfortable that on - for the full year that we'll be expanding margins. The first quarter because of the headwinds that we faced, that we were talking through happens to be very, very pronounced so again we feel comfortable with the full year outlook. The first quarter will be continue to be margin will continue to be soft..

Okay, thanks..

Our next question is from Dana Flanders with Goldman Sachs. Your line is now open..

My first one here and apologies if I missed it. Did you guys give just the high-value product organic growth this quarter? And then as we look at 2018 I know 2016 you guys were lapping some tough comps, should we expect that to accelerate as we head into 2018..

Yes so I'll answer first question, first. For the fourth quarter our highlighted product growth was right around 5%, as I mentioned in the script. And for 2018, we mentioned that we'll see high-value products accelerating in the back half of the year as biologics and generics come back.

So we believe that we will have more normal growth in our high-value products for the year, we expect high singles to low doubles..

Okay, great. And then just my second one quickly here. I know you announced modest restructuring program not included in EPS guidance.

How should we think about just the magnitude of savings over the course of 2018, is that more 2019 weighted?.

Yes, absolutely. So and Dana thank you for the question. In a regulated environment that we operate in, it is very, very difficult to move product around the network. There is validation protocols with the customer etc. So these things take a long time.

Historically that's why we talk in the 12 to 24 months category for when we expect to see those savings. We will see my guess and you know the way it works, is you can only take the charge and you get the savings then once those activities are actually exited which we believe will start to happen towards the back half of 2018.

So the savings they maybe a little bit in the back half of 2018, but certainly not a substantial amount and most of that will come through in 2019 and beyond. It will be an annual effect..

Okay, great. That was it from me. Thank you very much..

Our next question is from Larry Solow with CJS Securities. Your line is now open..

Most of my questions have been answered, just a few clarifications. So on just to take you back on net savings. It sounds like you're not building although you may get a little bit in the back half on Q4.

You're not building it anything in your actual guidance for 2018, right?.

Right..

Okay and then the total of $0.15 to $0.20 or so it looks like that the math. And that sounds like we'll get that full impact, some of it 19, but annualized we'll probably get that full impact by 2020..

Yes, absolutely..

Great and on the improved capacity, 40% reduction lead times. Obviously a little - success on the backlog side. Backlog sort of flat. Going forward should we, is backlog no longer as good of an indicator as it was maybe a couple years ago before you sort of had this surge of supply orders.

How should we view that now that I looks like your capacity is or your improved capacity is somewhat normalized?.

Larry it's a good question because of the lead times have been reduced significantly. I mean talking matter of each nine, ten weeks in some cases reduction. Our customers are actually not ordering as much in advance. So if I take a look at giving example. If you take a look at end of January.

The growth of the backlog for Q1 delivery again just to be clear though. The backlog isn't the entire growth of the business to sub-segment is up about 10%. So there's a good indicator from a short-term period and that's where the shift will occur.

We're not going to have larger backlogs going forward because of the fact their lead times are significantly less than the constant level from our customers that we can deliver consistently as we said we would is a very high percentage at this point in time.

So we got to be little bit careful looking at what we looked at three, four, five years of backlog is a true way to get at this point of time..

Right. Okay so it sounds it might be little, what period of shakeout until we could sort of better analyze that number, if you will but it sounds like your read outside the backlog sounds consistent and remains positive. Okay, great. Just switching gears little bit.

Obviously high-value products little bit volatility during the quarter-to-quarter but all in it sounds like, you finished the year pretty good.

Did you just - pharma obviously down, I think a little bit more than expected maybe in this quarter? Did you give an outlook for 2018? And quote the outlook on biologics and generics, but I didn't quite hear the pharma one and maybe that skewed by that as well - more to..

Yes, Larry it's a little bit, what you just commented. Let me put it into - look at pharma and the issue that we had in Q4. Some of these are predictable, some are not predictable and/or forecastable [ph] with our customers.

The one was we had a decline, with one of our clients in - drug molecules taken off in the European market which had an impact on one of our containment closures.

And we also saw in this particular area what we call tooling, so we do a lot of work with our customers and we provide tooling in our pharma business and the demand was quite noticeable difference between Q4 of 2016 versus 2017 which - it's quite a large number. We had Venezuela on top of that.

I know Bill mentioned earlier when you bring these elements back, plus the Venezuela to our base we're roughly on little over 5% growth in that pharma business. So that was - the impact was in Q4.

It wasn't clearly visible to us at the time we were talking with you in October unfortunately we continue to work on the visibility and the transparency to our investment community in regards to the future demands..

Okay, great and then on the gross margin. On quarter little bit less than expected, you offset by lower SG&A and realized it's explainable again little bit over your - success on the new capacity coming online and under absorption.

It sounds like you expect to improve upon that in 2018, but still have some drag from under absorption, is that fair to say?.

That is absolutely right way to say it, Larry..

Okay and I guess sort of hard to time, but I guess as you continue to grow and overtime hopefully that will switch to..

Absolutely and you know having excess capacity while it's a drag now is a good thing as you go into the future in a growing business where you can satisfy that demand for highest quality products in these plants that are specifically designed to give our customers the highest value of products that we can offer..

Excellent and then on the in sourcing of the plastics contract. It sounds like that business obviously has become quite sort of non-core going forward and less of a focus. This one contract it looks like little over $20 million, $23 million, $24 million.

Is that a lower margin contract? And is this something that you expect additional contracts that come off overtime. I realize this is getting small as a whole, but any color on that..

Yes, Larry I mean obviously we want to bill, service all of our customers. In this particular case, our client we've been working with for a long, long period of time [indiscernible] in sourcing. So it having impact in our consumer part of the business. But it's an area to be - we de-emphasize this area strategically as we put investments in place.

But you're correct when you said it is a lower margin business. The consumer business going forward without this, the one we're talking about is roughly around $60 million and it will be declining slightly as you've seen over the last five years. So that's your magnitude of that business as of today.

Just to remind you, as well 50% of the business was consumer will be acquired tech group about 10 years ago. So this has been a shift especially over the last several years..

Okay, great. Thank you very much guys..

Our next question is from Derik De Bruin with Bank of America. Your line is now open..

Sorry, I'm traveling and jumped on late. So my apologies if you hit this, but just to sort of follow-up on the last question. So what's the outlook for the gross margin for the different segments for 2018? Just trying to think about how the dynamics work, given all the moving pieces..

Thanks Derik for your question. On the contract manufacturing side we'll continue to see margins benefiting from the move away from consumer and towards more of our device and diagnostic businesses in pharma, so that will continue to be and operational efficiencies.

Longer term we still feel very, very comfortable with the overall ability to grow organically and expand margins as Eric mentioned in this comment Derik.

That will be for 2018 we talked about the headwinds that are impacting us in Q1, 2018 and that the fact that, both biologics and generics are building as the year goes, so as you know we will get to we believe for the full year high-value product growth in the high single to low doubles in the back half of the year, but in the front half that will be a, will continue to be challenged.

So margins in the first quarter will continue to be challenged..

Okay and I guess just from a - just some question and my apologies you already answered these. I guess how does the FX impact of the top line for the full year and what's that gain on the margin level just from FX and I know there are some changes in pension accounting rules. I'm [indiscernible] M&A effect on the margin as well..

Yes that will have an effect on the margin as well. It's a good point, the pension accounting change. For us in the - you're talking about low to mid-single millions of dollars, so it's not like it's a violent change, but it is a change and it's strictly an accounting change, you're just reclassing [ph] from one area of the P&L to another.

But it does have an impact on the margin.

On the - I'm sorry what was the first?.

FX..

So as I mentioned in my prepared remarks, the FX we are - we've budgeted the guidance we have prepared is at $1.20 per Euro. Last year's full year effect was $1.13 per Euro Derik and that's each one $0.01 is roughly a million, it's a little over, over $0.01 of EPS. So little bit more than that.

So you're talking about going from that $0.07 between $0.05 and $0.07 where is the range what you should expect from FX. If it were to hold, at a $1.20 for the whole year, which we know it won't but that's kind of the stake in the ground, you have to put..

Okay, great. Thank you very much..

And our last question is from Dave Windley. Your line is now open..

I'm coming back for three.

A couple more clarification, so am I right in thinking that after the third quarter or through the third quarter your year-over-year pattern in high-value product orders was negative that because of the reduction in wait times that you would actually see a negative year-over-year pattern and then, at the end of December you're back to kind of 1% improvement in that pattern such that the fourth quarter itself would represent quite a strong catch up.

Am I thinking about that correctly?.

The general commentary is correct. We expect over an average year Dave as you know the construct says that, we expect about 100 basis points of margin expansion due to mix shift, a little bit of price and the operational efficiencies and volume obviously.

So we see that over long periods of time we're impacted as we know in the individual quarters by the inventory de-stocking and the building. We talked about the first half of 2018 being more severely impacted by things like Venezuela than the back half.

We also talked about the fact that biologics and generics as they come back to more normal order patterns it's going to be towards the back half, the back half of the year.

So yes you're - what we're counting on and we're guiding to is a high single to low double-digit growth in high-value products for the year, but that will be challenged in the first part of the year..

Okay, next follow-up is. Coming out of 2016 we had what 22 drug approvals of which maybe 25% of those five, six something like that were injectable. 2017 we had 46 approvals of which significantly more maybe 10, 11, 12 were injectables or more maybe it was even 20.

So significant improvement in overall approvals and a commensurate increase in injectables that you care about. You already talked about how you had a 100% coverage of biologic approvals.

What's the cadence? What's the timing with regard to when approvals then drive? Order patterns and revenue uptick for you in injectable products and should we be thinking about that being a big driver of your ramp up in 2018..

Yes, so there's two areas that we look at, one is, there is a ramp up. Where they get approval and launch into the market place. So it's roughly about a year lead time you get into the marketplace, into the distribution channel.

The second thing just to be aware - we're seeing while there's a tremendous increase in number of molecules going through the approval process more recently, we have seen in some cases smaller volumes per drug molecule.

In some therapies there have been launch recently which are very exciting obviously and very effective for patient, but the volume is they're just quite small. So we have to balance it. It's not the ratio is not 1:1 with every molecule it does very - biologics tends to be smaller volumes, while the obviously the generics and pharma is larger..

Okay and then final question. On the restructuring I just want to make sure I understand because you got both a restructuring charge, you got CapEx that you were going to spend for that and then a savings amount that you expect to get.

Just operationally are we talking about having identified a facility that you're able to completely take offline and exit and shutdown and then in order to do that, you got to do some build out and some other places to absorb that productive volume, that productive capacity before you can do that? Is that in fact what you're executing?.

Yes, so the idea is exactly what you said to move certain of our products for certain customers into consolidate into some locations. A couple of those locations will actually close, but it will take some time to do that as you can imagine with regulated products, there will be some capital needed.

We mentioned in the release $9 million to $14 million that's a very modest amount that we believe will happen over the course of 2018 and 2019 and then as we migrate those products over and those customers over, then we will have the opportunity to exit those facilities and those activities.

So as you know it's - because of the regulated nature it takes a little bit of time to do these things that why we've estimated 12 to 24 months. So we don't expect a whole lot of savings in 2018, a little bit at the back and through 2019..

And is the recipient of this volume, are you able to come - is this part of moving the volume into kind of centers of excellence and kind of more call it super regional hubs like a Waterford or someplace like that?.

Yes, so what we're doing through aligning towards our global operations strategy that we outlined last year where we basically consolidated centers of excellence. So you're actually correct, we're pooling the resource and the technologies and capabilities into more discreet locations. This gives us an opportunity to run more efficiently.

So it's really moving towards more strategic sites and as you know we have 28 today on [indiscernible] so we do have some opportunities..

Okay, thanks..

And we're showing no further questions..

Thank you for joining us on today's conference call. An online archive of the broadcast will be available on our website at www.westpharma.com in the investors section. Additionally, you may access a telephone replay through Thursday, February 22, by dialing the numbers and conference ID provided at the end of today's earnings release.

We will be presenting at any Investor Conference in New York next Wednesday and as always that webcast is available on our website as well. Thank you and have a nice day..

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