Good day, and thank you for standing by. Welcome to the Q2 2022 West Pharmaceutical Services Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker for today, Quintin Lai, Vice President, Investor Relations. You may begin..

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 now turn the call over to our CEO, Eric Green..

FX and slowing COVID-19 demand. On the positive, not only has our base business been strong in the first half of the year, but we also expect the Generics and Pharma market units to perform even better in the second half of the year with additional resources to address the demand dynamics.

For guidance, we’re taking our overall sales down by $100 million for the full year. Incremental FX is going to be a $75 million headwind. In addition, we’re seeing a decline in COVID-19 demand as compared to our April outlook that assumed modest growth over 2021.

While we’re seeing some orders for stoppers for smaller vials to hold fewer doses, we do not assume a meaningful sales impact in 2022 and expect an overall decline of COVID-19 sales of 20% or $85 million from 2021 sales levels.

To sum it up, changes in FX and COVID are causing headwinds well in excess of our $100 million negative change to full year sales guidance.

On the positive side, we’re expecting even stronger base business growth in the second half of this year from all three market units of Biologics, Pharma and Generics that is helping to moderate the guidance impact. Now, I’ll turn it over our call to Bernard..

Thank you, Eric, and good morning. Let’s review the numbers in more detail. We’ll first look at Q2 2022 revenues and profits, where we saw another strong quarter of sales growth led by performance in our Biologics and Generics market units. I will take you through the profit drivers in the quarter as well as some balance sheet takeaways.

And finally, we will provide an update to our 2022 guidance. First up, Q2. Our financial results are summarized on Slide 8, and the reconciliation of non-U.S. GAAP measures are described in Slides 17 to 20. We recorded net sales of $771.3 million, representing organic sales growth of 13.1%. Looking at Slide 9.

Proprietary Products sales grew organically by 18.3% in the quarter. High-value products, which made up approximately 73% of proprietary product sales in the quarter, grew double-digits and had solid momentum across Biologics and Generics market units in Q2.

Looking at the performance of the market units, the Biologics market unit delivered strong double-digit growth. We continue to work with many biotech and biopharma customers who are using West and Daikyo high-value product offerings. The Generics market unit also experienced strong double-digit growth led by sales of FluroTec and Westar components.

Our Pharma market unit saw mid-single-digit growth with sales led by high-value products, including NovaPure components. And contract manufacturing declined 8.9% for the second quarter due to a reduction in sales of components for diagnostic devices. We recorded $321.5 million in gross profit, $6.4 million or 2% above Q2 of last year.

And our gross profit margin of 41.7% was a 180 basis point decline from the same period last year. We saw improvement in adjusted operating profit with $227 million recorded this quarter compared to $211.2 million in the same period last year for a 7.5% increase.

And our adjusted operating profit margin of 29.4% was a 20 basis point increase from the same period last year. Finally, adjusted diluted EPS grew $0.01 for Q2, excluding stock-based compensation tax benefit of $0.01 in Q2, EPS grew by approximately 4%. Let’s review the drivers in both revenue and profit.

On Slide 10, we show the contributions to sales growth in the quarter. Volume and mix contributed $71.7 million, or 9.9 percentage points of growth and sales price increases contributed $23.4 million or 3.2 percentage points of growth in the quarter. Looking at margin performance.

Slide 11 shows our consolidated gross profit margin of 41.7% for Q2 2022, down from 43.5% in Q2 2021. Proprietary Products’ second quarter gross profit margin of 46.2%, 360 basis points lower than the margin achieved in the second quarter of 2021.

The decline in Proprietary Products gross profit margin was caused by inflationary pressures impacting all plant costs, including raw materials, labor and overheads.

Partially offsetting these inflationary headwinds was improvement in our product mix, price increases and pass through surcharges and approximately 90 basis points of benefit associated with onetime fees from COVID supply agreements.

Contract Manufacturing second quarter gross profit margin of 16.3% was 40 basis points below the margin achieved in the second quarter of 2021. The decrease in margin is largely attributed to mix of products sold in the period. Now let’s look at our balance sheet and review how we’ve done in terms of generating more cash.

On Slide 12, we have listed some key cash flow metrics. Operating cash flow was $324.3 million for the six months ended June 2022, an increase of $91.2 million compared to the same period last year, a 39.1% increase.

Our operating cash flow in the period benefited from increased earnings, our working capital performance and timing of income tax payments. Our second quarter 2022 year-to-date capital spending was $131.9 million, $20.3 million higher than the same period last year.

Working capital of approximately $1.2 billion at June 30, 2022, increased by $58.1 million from December 31, 2021, primarily due to increases in accounts receivable and inventory offset by reductions in our cash. Our cash balance at June 30, $718.5 million, was $44.1 million lower than our December 2021 balance.

The decrease in cash is primarily due to our share repurchase program and higher CapEx offset by our strong operating cash flow in the period. Turning to guidance. Slide 13 provides a high-level summary.

We are updating our full year 2022 net sales guidance and expect net sales to be in a range of $2.95 billion and $2.975 billion compared to our prior guidance range of $3.05 billion to $3.075 billion. There is an estimated headwind of $190 million based on current foreign exchange rates compared to a prior estimated headwind of $115 million.

We expect organic sales growth to be approximately 11% compared to prior guidance of approximately 11% to 12%. We expect our full year 2022 adjusted diluted EPS guidance to be in a range of $9 to $9.15 compared to a prior range of $9.30 to $9.45.

This revised guidance includes our first half $0.13 EPS positive impact of tax benefits from stock-based compensation. Also, our CapEx guidance remains at $380 million for the year. There are some key elements I want to bring your attention to as you review our guidance.

Estimated FX headwind on EPS has an increased impact of approximately $0.55 based on current foreign currency exchange rates, compared to a prior estimated headwind of $0.38. We expect full year COVID-19-related sales to be approximately $85 million lower than 2021 sales. And our guidance excludes future tax benefits from stock-based compensation.

To summarize the key takeaways for the quarter, strong top line growth in proprietary, growth in operating profit, solid adjusted diluted EPS, despite FX and inflationary headwinds and growth in operating cash flow, delivering in line with our pillars of execute, innovate and grow. I would now like to turn the call back over to Eric..

Thank you, Bernard. To summarize on Slide 14, our performance in Q2 has positioned us well for the second half of the year.

We continue to have a strong base business, which is a testament to the foundation we have built over time with the right strategy and execution, leveraging the benefits of a global operating model to deliver the robust book of committed orders and continue to accelerate capital spending across our operations to meet current and anticipated future growth.

Towanda, we’re ready to take questions. Thank you..

Thank you. Our first question comes from the line of Derik de Bruin with Bank of America. Your line is open..

Hi, good morning, everyone. Thanks for taking the question..

Good morning, Derik..

Hi. So could you be a little bit more specific on the COVID headwind? I mean you called out $85 million versus prior. And you – but your prior guide have included some growth with it. And basically, I’m just trying to make sure I – trying to back into a more specific number for the organic revenue growth boost to the core business.

It looks like I’m backing to roughly a 3% increase from your prior guide, just where you use, but just like to work the math out a little bit better if you give us a little bit more guide..

Yes, Derik, let me give you a little more color on that. If we think about 2021, our revenues for COVID was approximately $460 million. What we’re seeing in 2022 based on the current visibility and discussions with customers, we’re looking at about a 20% reduction of that number, which is about $85 million.

And if we kind of look at – and that’s – again, this is based on the variability that we’re seeing in the industry right now. If you think about moving forward for 2023, we do believe it’s by another 30% or maybe up to 50% reduction of the 2022 number. So that’s kind of the glide path we see with COVID-19 demand right now.

This is – you are correct, there’s an implied base business increase. And that’s what we’re seeing with particularly around Biologics and a stronger Pharma and Generics in the second half. So the ex-COVID business, if we would look at the proprietary, it was roughly around 23% growth in proprietary for the second quarter.

And that’s robust and that we’re seeing that continue for the balance of the year..

Great. Well, thanks for pre-empting my 2023 COVID question, which is going to be the follow-up to that. So thanks for that.

And so I get the question, but then that also goes on like have you de-risked the number enough for 2022, right? Is there further downside to that $85 million?.

Well, based on the information that we have right now, we believe we have de-risked it enough. And based on the facts that we see again, COVID is there’s always this changing landscape with it, depending on what’s going to happen this year and probably into 2023. But we have taken a conservative view, I would think around COVID..

Got it. And it looks like you called out a 90 basis point margin boost to PP.

Was that related to a cancellation fee that might have come in the quarter from COVID projects?.

Yes. That’s correct..

Okay.

And any issues in terms of I mean this comes up – this is coming up frequently in terms of my incoming questions, in terms of customer inventory stocking, just sort of any signs of anything excess in the supply chain?.

Yes. No, Derik, we look at the order book today, one area that we’re focused on is the – are our lead times. As you can imagine, the last couple of years with the COVID demand, we had to pivot and prioritize in certain parts of our product portfolio. So our focus right now is reduce lead times back to where they should be.

And that’s why you hear us talk about, we have capacity that is being installed as we speak, but also into 2023, which will give us more capability to support our customers on the increasing demand we’re seeing and particularly around Biologics and in particular on the higher end of high-value products. So that’s the focus we have.

We don’t see based on the demand and discussions with customers, it’s not a large restocking concept going on right now with the underlying core business..

Great. And just a question from a client.

Can you just qualify the cancellation, how big a number would that was?.

It’s approximately $12 million..

Great. Thank you very much..

Thank you, Derik..

Thank you. Our next question comes from the line of Paul Knight with KeyBanc. Your line is open..

Hi Eric, thanks for the time. Regarding the 23% proprietary growth, obviously, we are seeing Biologics approval strong. But one area that seems to be to get numbers around is biosimilars.

How big is biosimilar benefit in the market and to West? Can you have a quantitative or qualitative read on the biosimilar tailwinds?.

Yes. No, thank you, Paul, for the question. No, we’re seeing the benefits of the biosimilar approvals and entry into the marketplaces. Although, I would say it’s relatively small in the scheme of the entire Biologics portfolio. And there’s a high-value product adoption.

So when you think about the packaging configurations with our biologic customers, it’s near identical to what we see with the biosimilars..

And is the trend to single-dose syringe up pretty dramatic or changing in your view?.

That’s one area where we’re investing heavily and specifically to give you really a specific areas on NovaPure plungers. And that is – it supports what you’re saying is that there’s a tremendous movement towards prefilled syringes. And in the Biologics space and biosimilar space we’re looking for – it’s a high adoption of NovaPure.

So that’s where our investments are going. We have installations going on in 2022, but also in 2023 to start getting ahead of the curve with our customers..

Okay. And then last, Bernard, the FX guide was $115 million for this year, and now it’s minus $190 million for the full year.

Is that the way we – what you said earlier?.

That’s correct..

Okay, thank you..

Thank you, Paul..

Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Your line is open..

Hi, good morning. Thanks for taking the questions. Just balancing through a couple of other calls, can you just review, so for the guidance, Eric, so the currency impact is $75 million? And then the net sales impact, I guess, is $25 million, did I get that right? It’s $85 million less COVID.

And then you’re adding back essentially $60 million plus from the base business, is that – am I capturing that?.

That’s correct, Larry. You have that accurate..

Okay. Great. And then on – then you just mentioned you kind of called out in terms of COVID-related sales, vaccine-related sales dropping this year, like you said, 20%. And then you think there may be another 50% drop in volume demand in 2023. I think I caught that right.

And then the offset to that, obviously, hopefully, some offset there would be move to more to the prefilled ranges or less doses per vial. It sounds like a little bit is happening in 2022.

Can you just give us a sort of an update on how you see that transforming in 2023 and as we go on? Are you still confident that we’ll see a pretty good transformation on the COVID side on the single dose?.

Yes, Larry, you summarized that well. I just want to add 1 comment though. In 2023, we do think it’s more of a range 30% to 50%. It’s – again, there’s a lot of variability. So we’re trying to be conservative on our – but your point is valid that there is a shift that is starting to occur with less doses per vial.

So that configuration is obviously, in some cases, some customers has moved from about 20-millimeter down to a 13-millimeter stopper. What we’re seeing right now is more in the vial configuration versus prefilled syringe. We see that into 2023 and beyond.

I do want to just state, you’re right, there’s less doses per vial, which is a net benefit to West. But the key variable that is very unpredictable right now is the number of patients taking the dose. And the data is widely available in the market, and you’re seeing a little uptake as we speak right now.

But yet to be determined as we get through 2022 and also into 2023..

Let me add to that, prefilled syringe uptake as Eric just mentioned when answering the other questions is really within our core business within Biologics. That’s where we’re seeing a lot of increased demand move in – move through 2022 and into 2023, layering in capacity. So that’s for core business..

Right. Right. So that’s right. So that big sort of that switch on a macro level, prefilled strings are certainly increasing across the Biologics space and not just specifically the COVID vaccine, we’re hopeful that will happen.

And there’s certainly some talk of that, I’m sure with your customers, but you’re talking in general that trend, that multiyear trend, which you talked about for a while.

And then on NovaPure itself, can you just give us like an idea, it seems like I know you don’t break out percentages and penetration, but it seems like we’re still relatively in the early stages.

Can we just – can you just like maybe qualitatively compare like the penetration of NovaPure to, say, FluroTec or Westar one of your more highly penetrated HVPs?.

I would say what’s commercial in the market right now, the NovaPure is a lower percentage than the other parts of the high-value product portfolio. When you look at the pipeline and/or newly approved drugs that are ramping up in the marketplace, there’s a higher percentage that’s utilizing the NovaPure, particularly around the plungers.

And that lines up very nicely to the investments we’re making this year and next year that we’ve committed to already to have installation and capacity expanded quite significantly. So that’s where we are in that journey.

While it’s a lower percentage, it has tremendous value proposition to our customers, and that’s why we see the pipeline is very attractive, particularly in the biologic space..

Great. And then just lastly, Eric, you spoke a lot about it sounds like you’re really enthusiastic about sort of the outlook for the self-injectables. And you mentioned, can you just give us sort of a – I know you talked a lot about the CZ and the new 2.25-milliliter insert.

Can you just give us a sort of an update on SmartDose? Where we stand with that? And how you see that unfolding over the next few years? Thanks..

Larry, this is an area that we’ve been working on for a number of years. And what we talked about more recently is our customers are looking at ways of taking new molecules, but also current molecules in the market, reformulate and move it from an IV to a subcu delivery mechanism and particularly around life cycle management.

And that is actually quite exciting. And hence, when you think about – I mentioned on the call in the prepared remarks that we now have 3 combination device approvals with Biologics. And so we’re starting to gain momentum to start moving products into the commercial environment versus still in development.

When I look at the development projects we’re working on with a number of customers, it is now more gravitating towards the larger volumes, existing molecules in the marketplace and it’s around life cycle management. So it’s exciting. I believe we are in a good point in time.

The more work investments needed to occur, and it’s going to take some time to get into really large meaningful revenues, but we’re definitely in the right direction with that part of the portfolio..

Great. Excellent. I appreciate all the color. Thanks..

Thank you, Larry..

Thank you. Our next question comes from the line of Justin Lin with William Blair. Your line is open..

Hi, good morning. Congrats on the quarter. I’ll just start off with a simple one. I guess, do you have any plans – I’ll just start off with a simple one. I guess, do you have any plans for any further price increases for the rest of the year? Just trying to get a sense of what’s assumed in your guidance..

Well, right now, it’s continuing with the pricing strategy that we’ve had as we progress through 2022, where we’ve done some specific price increases for customers, general price increases.

And then we continue to monitor if there are further surcharges that we need to implement as these inflationary costs continue to hit us as we move through the second half of the year. And it’s something we review on a monthly basis. I’ve nothing to announce to say there’s any specific increase at the moment.

Again, but we are tracking it pretty closely and offsetting as much of that cost increase as we can. And as we’ve talking about before, there’s sometimes a lag as to when we experience the cost increase itself. And then when we can pass it on and again, that’s something we’re working through. But again, it’s fluid..

Got it.

And can you remind us how we should think about margin cadence for the rest of the year? And I guess, what are the underlying assumptions around raw material costs, freight, and overall supply chain?.

Yes. So we see that margin continue to step up as we move through the remainder of the year. Again, that’s based on what we have been communicating since we gave guidance in February of this year. And we will continue to see that happening as we improve our levels of efficiency and layer in extra capacity.

Some of the things that we’re having to do right now is to replace the COVID demand that we’ve just called out as decreasing with other products and other demand within our network. And we’ve been started doing that as we progress through Q2, that will continue to Q3 and Q4. And the demand is there essentially to fill many of our facilities.

And it’s – that growth is reflected in the guidance that’s embedded..

Got it. That’s very helpful. And just one last one for me. Sort of longer term, that 100 bps of margin improvement each year.

I guess, is that predicated on inflation and supply chain pressure easing in 2023? Or can you achieve that without the situation improving? In other words, will the continued uptick in high-value products alone help drive that, obviously, along with sort of the continued increase in efficiency?.

Our expectation is that, that would be the case. Our target is to continue to expand margins by 100 basis points. And that’s based on what we can see today now some black swan event or something happens, that’s outside of our control, that’s a different story.

But based on what we have in front of us today, the intention is to continue that 100 basis point expansion..

Sounds good. Thank you..

Thank you, Justin..

Thank you. Our next question comes from the line of Jacob Johnson with Stephens. Your line is open..

Hey, good morning. Just one quick housekeeping question first. On the COVID revenue in 2Q, you talked about 23% growth ex-COVID and Proprietary Products. That seemed to imply that the COVID revenues were maybe $110 million in the quarter.

Is that in the ballpark?.

Yes, it’s pretty close..

Okay. Thank you. And then, Eric, you mentioned the potential for Pharma and Generic demand to pick up in the second half of the year, and you also mentioned adding some resources there.

Can you just talk about the resources you’re adding there? And were you somewhat capacity constrained for those end markets in the first half of this year?.

Yes. So the resource is more around the demand bill to deliver on the demand that has been given to us, specifically in Generics and Pharma. And there are discrete customer projects.

So we’re feeling good about the work that’s ahead of us, but we do need to allocate resources appropriately to deliver those demands that for the second half of this year. That was the intent of that comment, particularly with Pharma and Generics.

So if you take the first half of the year compared to the second half, those two units will be growing a lot faster than they were in the first half. So that’s – I just want to make sure that was clear. That’s going to be occurring from our plants, both in Europe and the U.S. or the United States..

Okay. That’s helpful. And then last question for Bern. Just on R&D expense, they’re kind of flattish sequentially. I think if I remember correctly, there are going to be some investments flowing through the R&D line, maybe around the Corning relationship and some other efforts.

Just how should we think about R&D expense maybe back half of this year into 2023?.

Yes, we would expect it to take up in the second half of the year and that there are going to be two drivers around that. One is the level of DAs that we’re seeing coming through our pipeline.

And then that’s really on our delivery devices and then also looking at the Corning Glass partnership that we have in place, we’ll be adding additional costs. Again, it’s all embedded in the guidance, and it’s been planned for the year, but that will happen in the second half of the year, more so in Q4 than in Q3..

Okay. Perfect. Thanks for taking the question..

Thank you, Jacob..

Thank you. Our next question comes from the line of Dave Windley with Jefferies. Your line is open..

Hi, thanks for taking my question. Good morning, gentlemen. I was hoping to try to shine a little bit more light on the comments around bias toward prefilled syringe NovaPure stoppers that – or excuse me, NovaPure plungers that you mentioned, CZ uptick and workaround syringes there.

Like how much of that is related? Like so as clients want prefilled syringe, is that still predominantly glass and you’re supplying what you traditionally have, but in NovaPure high value? Or is that also driving uptick in CZ resin syringes? Just anything you can add there would be much appreciated..

Yes. So Dave, it’s – CZ is a great application when you start thinking about silicon-free. But from what the preference is, is still glass. Hence, the investments and the work we’re doing with – partnering with Corning.

So there are certain molecules, certain applications that CZ is particularly well positioned for, and we’re able to capture some of that demand. Now when it comes to NovaPure plungers really the comment is around the glass PFS solution and also more around the biologics and biosimilars than anything else..

Okay. And then, Eric, in your comments around addressing shortening lead times. I want to make sure, I mean, it sounds like the base business is accelerating to, I think it was Larry’s bridge or maybe Paul’s bridge around the $60 million of the base that makes up for some of the weakness.

How much of that is, I’ll say, pulling forward activity because space and productive capacity is freed up by the lowering of COVID and to help to shorten lead times for your clients versus kind of underlying steady-state flow of demand.

Can you help us to understand the difference there?.

Yes, Dave, long-term construct, we still believe in the 7% to 9%. So when we started talking about 23% in the quarter for proprietary excluding COVID, that is obviously outsizing that long-term construct. There’s two elements to that.

One is we do believe the freeing up some of the capacity, which is obviously not just dedicated to COVID, it will be able to support our core business and to bring some of those lead times in line. It’s not the entire portfolio, but specific area and probably more around the high-value products.

When you think about the market units, Biologics is still really strong. What I mean by that is we think about our order – confirmed order book, it continues to increase from the end of last year. And one of the major drivers of that is biologics.

And when you dig a little bit further, it’s a combination of recently launched molecules that are having a very strong success in the marketplace. And secondly, is to preparing for the pipeline for newly approved drugs that are – will be approved or have been approved recently. There is always inventory management going on with our customers.

But I would say in the last two or three years, we were not in a position to be able to oversupply any one particular customer. So we’re trying to bring the lead times back in line.

That’s constant work that we’re focused on but I want to state that the underlying growth of the business is extremely healthy across all markets and especially in biologics..

Got it. So I guess to rephrase that last point that you just made, so you’re confident that customers are not, say, stocking because you basically couldn’t produce enough for them to overstock. Maybe to flip the question were they understocked or, I guess, a version of that would be kind of dependent on longer lead times than are comfortable.

And so you’re kind of catching up and getting them shored back up to what normal should be. It sounds like if – is what you’re saying..

Dave, you are right. Yes, Dave, you are correct.

There are in some cases, not across the whole portfolio, but there’s some cases where we – with the relationships we’ve had with our customers is to establish very robust schedules or tight schedules to make sure that we’re not creating any issues of availability of material, but there was some of that, and we’re working through those as we speak.

And that’s one of the reasons why we highlighted that some of the capital investments that we made committed to that are rolling in, in this year and also into next year, particularly on NovaPure is to really alleviate to support the growth in the Biologics space, and that’s definitely needed to get in there to stay ahead of the curve..

Yes. Got it..

The way I would frame it is to bring lead times back to where they are pre COVID and then us to be able to maintain those lead times as the business is actually growing rather than having the lead times go back out. So that’s where we have to layer in the capacity. So it’s actually managing two things at once. It’s not just one.

So we’re seeing this acceleration in growth in some areas of our business plus trying to get customers to stock levels where they feel comfortable if that’s the case. But that’s going to take a period of time. That’s not an instantaneous thing..

Sure. And Bernard, on your point on layering in the capacity, just to confirm, this change in your – or does this change in your COVID expectations change the amount of CapEx investment or the pacing of those projects at all relative to bringing on additional capacity..

The projects that we have right now, it does not change any of those. And the projects that Eric mentioned about, particularly on the plunger side, we’re continuing to layer in that capacity. And that’s specifically around growth that we’re – that’s inherent in the market right now and the changes that we’re seeing.

So there’s no change there. And if we could actually accelerate that onboarding, that would be more beneficial for us if we could do that because the demand is there today..

It seems like a strong sign. Last question for me. In regard to stoppers versus plungers and components that you supply for prefilled syringe.

I think you’ve answered in the past that you’re relatively economically agnostic to form factor, is that true? Or is there any nuance that we should think about there?.

No, that holds true. The economics aren’t that vastly different between the two..

Okay. Thanks. I appreciate you’re answering all my questions..

Thank you, Dave..

Thank you..

Thank you. I’m showing no further questions in the queue. I would now like to turn the call back over to Quintin Lai for closing remarks..

Thanks, Towanda, and thank you for joining us on today’s conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. That concludes this call. Have a nice day..

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect..