Good day, and thank you for standing by. Welcome to West Pharmaceutical Services First Quarter 2024 Earnings Conference Call. Please note that today's conference may be recorded. I will now hand the conference over to your speaker host Quintin Lai, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Olivia. Good morning, and welcome to West's First Quarter 2024 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 westpharma.com. This morning, we will review our financial results, provide an update on our business, and present an updated financial outlook for the full year 2024. There is a slide presentation that accompanies today's call, and a copy of that presentation is available on the Investors section of our website. On Slide 4 is our safe harbor statement. Statements made by management on this call and in the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on our beliefs and assumptions, current expectations, estimates, and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results as well as those expressed or implied in any forward-looking statement made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risks to which it is subject, including our 10-K, 10-Q, and 8-K reports. During today's call, management will make reference to non-GAAP financial measures, including 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.

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on Slide 5, where I'd like to cover a few topics. First, we will review Q1 performance. Second, we will provide an update on the markets that we serve as well as updates on our growth initiatives. And third, we will provide an update to our full year 2024 financial outlook. Now turning to the financial results. We delivered a solid start to the year. During the quarter, we again saw growth in our top-tier HVP component, NovaPure, and our HVP devices such as SmartDose. We also continued to see inventory management or destocking by our larger mature customers that are working down their inventory closer to pre-pandemic levels. With that said, Q1 had a solid start due to favorable order timing of customer deliveries fulfilled in the quarter. I want to address the question that many of you are asking: Are we seeing an inflection in destocking? The short answer is not quite yet. Several customers are still working through their safety stock levels, and we still expect Q2 to have an impact from customer destocking, and customer order trends continue to indicate a stronger second half of 2024 with a return to more typical order patterns in Q4. Therefore, after a solid quarter, we maintain our full year net sales guidance. Turning to Slide 6. We continue to have an active year of capital expansion projects that are increasing capacity to meet growing demand for both our Proprietary Products and Contract Manufacturing segments. In our Proprietary Products segment, we have expansion projects in several of our HVP components manufacturing sites, such as Jersey Shore, Kinston, Waterford, and Eschweiler. These projects will provide a combination of increased manufacturing capacity, especially HVP processing, washing, sterilization, and Envision, as well as bring a higher level of global standardization throughout our network. We believe that this favorably positions West to address anticipated growing demand for HVP components from volume growth of legacy drugs, from recently launched or to-be-launched drugs, and potential conversions from legacy customers to higher levels of quality in response to the global regulatory changes. Last quarter, we mentioned one such regulatory change was the European Union GMP Annex 1. We continue to emphasize that adoption. Both timing and level of HVP will vary from customer to customer and from drug to drug. What we are seeing in Q1 is an acceleration of interest from customers as Annex 1 calls for higher quality, lower particulate, and more stabilized solutions. Earlier this month at the INTERPHEX conference in New York, Annex 1 was a key topic of discussion with customers as we highlighted our innovative approach and leading products of Westar Select and NovaPure. Also, in the Proprietary Products segment, we're making progress with capacity expansion of our HVP devices including SmartDose, SelfDose, and admin systems. For the near term, we're working to layer in capacity through productivity optimization programs. And for the longer term, we are adding capacity that incorporates automation to complement our manual processes. With our Contract Manufacturing, we continue to build out capacity at our Grand Rapids site and significant expansion at our Dublin facility, which are both in support of our customer's injection device platform. These expansions are critical to the overall volume growth that we continue to experience with growing demand for certain components associated with drugs for diabetes and obesity. Shifting to Slide 7. We're maintaining our full year 2024 organic sales growth outlook of 2% to 3%. Our teams are actively engaged in working through our customers' inventory management. We expect improved growth along with stronger gross and operating margins in the second half of the year, with Q4 projected to be the strongest quarter. For the full year, we are maintaining general core cost discipline while reinvesting into new growth initiatives, as I have just outlined. Now I'd like to turn the call over to Bernard. Bernard?

Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q1 2024 revenues and profits, where, as expected, we saw a low single-digit decrease in organic sales, a decline in operating profit, and diluted EPS compared to the first quarter 2023, given the current market dynamics. I will take you through the drivers impacting sales and margin in the quarter as well as some balance sheet takeaways. First up, Q1. Our financial results are summarized on Slide 8, and the reconciliation of non-U.S. GAAP measures are described in Slides 15 to 18. We recorded net sales of $695.4 million, representing an organic sales decline of 3%. Looking at Slide 9. Proprietary Products organic net sales decreased 4% in the quarter. High-value products, which made up 72% of Proprietary Products sales in the quarter, declined by low single digits primarily due to decreased sales from our FluroTec products and Westar components. Looking at the performance of the market units, the biologics market unit delivered low single-digit growth, led primarily by sales of NovaPure. The pharma market unit saw a high single-digit decline, primarily due to a reduction in sales of Envision and standard components, while the generics market unit declined double digits, primarily due to decreased sales from our Westar and FluroTec components. Our Contract Manufacturing segment experienced low single-digit net sales growth in the first quarter, primarily driven by an increase in sales of components associated with diagnostic devices. Our adjusted operating profit margin, at 17.7%, was a 530 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 21.2% for Q1. Excluding stock-based compensation tax benefit, EPS decreased by approximately 23%. Now let's review the drivers in both our revenue and profit performance. On Slide 10, we show the contribution to organic sales decline in the quarter. Sales price increases contributed $24.1 million, a 3.4 percentage points of growth in the quarter, as did a foreign currency tailwind of approximately $3.4 million. More than offsetting price was a negative volume and mix impact of $45.5 million, primarily due to lower sales volume caused by customer inventory management decisions in the period. Looking at margin performance. Slide 11 shows our consolidated gross profit margin of 33.1% for Q1 2024, down from 37.9% in Q1 2023. Proprietary Products first quarter gross profit margin of 37% was 550 basis points lower than the margin achieved in the first quarter of 2023. The key drivers for the decline in Proprietary Products gross profit margin were lower sales volume and an unfavorable mix of products sold, partially offset by increased sales prices. Contract Manufacturing first quarter gross profit margin of 17% was 60 basis points below the margin achieved in the first quarter of 2023, primarily due to inflationary labor costs and an unfavorable mix of products sold, partially offset by increased sales prices. Now let's look at our balance sheet and review how we've done in terms of generating cash for the business. On Slide 12, we have listed some key cash flow metrics. Operating cash flow was $118.2 million for the three months ended March 2024, a decrease of $19.9 million compared to the same period last year, a 14.4% decrease primarily due to a decline in operating results. Our first quarter 2024 year-to-date capital spending was $90.6 million, $8.5 million higher than the same period last year. We continue to leverage our CapEx to increase both our high-value products and our Contract Manufacturing capacity. Working capital of approximately $1.04 billion at March 31, 2024, decreased by $220.1 million from December 31, 2023, primarily due to a reduction in our cash balance. Our cash balance at March 31, 2024, was $601.8 million, which was $252.1 million lower than our December 2023 balance. The decrease in cash is primarily due to $267 million of share repurchases and our capital expenditures offset by cash from operations. Turning to guidance. Slide 7 provides a high-level summary. We are reaffirming our full year 2024 net sales guidance in the range of $3 billion to $3.025 billion. There is an estimated full year 2024 headwind of approximately $8 million based on current foreign exchange rates. We expect organic sales growth to be approximately 2% to 3%, unchanged from prior guidance. We are raising our full year 2024 adjusted diluted EPS guidance to be in a range of $7.63 to $7.88, compared to a prior range of $7.50 to $7.75. Also, our CapEx guidance of $350 million for the year remains unchanged from prior guidance. There are some key elements I want to bring your attention to as you review our guidance. Full year 2024 adjusted diluted EPS guidance range includes an estimated FX headwind of approximately $0.04 based on current foreign currency exchange rates, which is an increase from the prior guidance of $0.02. The updated guidance also includes EPS of $0.15 associated with first quarter 2024 tax benefits from stock-based compensation. Our guidance excludes future tax benefits from stock-based compensation. I would now like to turn the call back over to Eric.

Thank you, Bernard. To summarize with Slide 13, the solid financial performance and execution in Q1 continues to reaffirm our proven growth strategy, strong base business, and the unique value of our high-quality product offerings for customers. We look forward to building on this momentum as we move through the year, and our team is steadfast in meeting the anticipated growth expectations as we make a positive impact on health care across the globe. Olivia, we're ready to take questions. Thank you.

Our first question comes from Matthew Larew with William Blair.

I wanted to ask about your comments on the expected growth in the second half of the year, specifically regarding the second quarter. In the last call, you mentioned a shift to positive growth in the second quarter. However, Eric, your comments suggest there hasn't been a change in the destocking situation. Should we still expect positive organic growth in the second quarter, or is it now leaning more towards the latter half of the year?

Matt, thanks for the question. What we're seeing is that Q2 will be sequentially stronger than Q1 but we also see that as we go into Q3 and Q4 throughout the year. We did see some demand in the first half of this year that we were able to build and fulfill through our manufacturing sites in Q1 that I would consider as timing in the first half of this year. But the buildup will be sequential quarter-over-quarter over the next four quarters.

Yes. Just as Eric said, Matt, sequentially, it will be up. There is an element of timing between Q1 and Q2. So some of those orders that we shipped out in Q1, originally, we would have earmarked in Q2. So we're seeing that, and we're also seeing the destocking continue into Q2.

Okay. Then maybe let me go from very near term to a higher level, which is that some peers have described that the supply chain disruptions and longer lead times during the pandemic created an opportunity for them perhaps to get into West's customers where they didn't have access to before. And so just curious what your assessment is of your competitive positioning and perhaps more generally, the industry's bias towards sole source or multisource arrangements moving forward and just kind of ask that in light of all the high-value capacity you're adding.

Yes, Matt. Over the pandemic, we actually worked with our customers to make sure that we were able to continue to supply and that there wasn't any stockout with any particular customer. So we were successful through the pandemic period of time. And we have been working on reducing the backlog and increasing their safety stock levels really in the backend of 2022 and 2023. The way we see it is that we continue to be on the molecules that are in the marketplace. We are working with them as they adjust their schedules for future shipments to be able to continue to supply those products in the market, and it is based on the number of scripts that are being administered. But also, more importantly, is if we look at our current win rate or participation rate last year and going into this year, it is as strong as it's ever been. So our interactions with our customers remain very strong. We have a very strong position in the marketplace. And the issue surrounding potential sole sourcing is that what customers have gained confidence in is that we have multiple sites that can support their products in the marketplace, so they're not dependent on a particular site. And in that sense, we're able to provide them with a single product from multiple sites to support their global supply chain.

And our next question coming from the line of Jacob Johnson with Stephens.

Maybe just on the quarter, if I look at revenue and EBIT kind of sequentially, they were down a similar amount. And so kind of the decremental margins were maybe a little bit greater here. I know there's probably a few moving pieces as it relates to capacity additions and mix. But can you just talk about why we didn't see maybe a little bit more leverage on the margin side of things given the revenue outperformance in the quarter?

Yes. It was primarily around gross margin, and that's impacted by mix and then the overall absorption in some of our plants impacted the margin that we saw in Q1, but it was actually ahead of where we had predicted it to be, which was a solid performance for us in the quarter.

Got it, Bernard. And then maybe a longer-term question. A couple of years ago, you've all updated your LRP to 7 to 9. Since then, GLP-1s and Annex 1 have emerged or come to the forefront. I'm just curious if you think if either or both of those trends change your thinking about your long-term or medium-term outlook?

Jacob, this is Eric. I would say, at this point, we do not want to adjust our long-term outlook. However, we are excited about working with our customers in both areas that you described. One is in the GLP-1 sector, which we would be able to support our customers both in the elastomer side, but also in our Contract Manufacturing to be able to support them on their delivery devices. And on Annex 1, we feel really good about where we are and the discussions that are ongoing right now with our customers and the trends that we're seeing aligns well with how we've positioned our portfolio all the way from the component specifications to manufacturing design, container closure integrity, and documentation services. The whole suite of requirements to make our customers successful as they transition and be ready for Annex 1. So while we're very well positioned in both areas, it is about timing, and change can take time, and adoption could take time. So we would say that the long-term outlook construct is a range. But as an organization, we don't have a ceiling. So I'll leave it like that.

And our next question coming from the line of Paul Knight with KeyBanc.

Eric, as I look at the numbers, would it be fair to say that within Contract Manufacturing and proprietary delivery systems, you need to build capacity, and there seems to be a ceiling right there for you right now?

Yes, Paul. I would agree with that. It's likely more evident in Contract Manufacturing. We currently have substantial investments happening in both Grand Rapids and Dublin, with validation expected later this year, though most commercial revenues will be seen in 2025 and beyond. In terms of proprietary high-value products, we are somewhat constrained by capacity, but we are addressing that as we go along. As the year progresses, you'll notice even greater throughput later this year.

Which leaves, I guess, standard packaging, the weakest? Is that a fair assumption? And what's in standard packaging to make that the weakest, if it is?

I think most of the destocking we've experienced this year is related to the HVP components. However, that segment of our portfolio is expected to grow nicely over the course of the year. In the first quarter, the decrease in our proprietary elastomer line is primarily due to this destocking. Nevertheless, we have a very positive outlook for the end of the year and beyond.

Yes. I think, Paul, on that, it's important to note that we don't anticipate any major mix shift. There's still growth opportunities around HVP and in the biologics space. And even in Q1, that continued to grow. And you could see the growth driven by the growth in NovaPure. So from a mix perspective, I think when you look at it in the whole, areas are growing. Our growth potential, as we look out past '24, around standard components and packaging and HVP, the trajectory is the same; they are the growth drivers.

And our next question coming from the line of Michael Ryskin with Bank of America.

I just have a couple of quick follow-ups. One, I mean you talked about the cadence and the progression of revenues through the year. I want to focus a little bit more on the margin side of things. I think we previously looked for a little bit more of a jump from Q1 to Q2 on the gross margin on Proprietary Products and on operating margin as well. Is it fair to say that given your comments on timing of revenues in Q1 and Q2, the second quarter margins will be a little bit more subdued as well and closer to the first quarter? And then I've got a follow-up.

We expect margin improvement sequentially as we move through the year, and that hasn't changed since we spoke about it in February. We would see growth in operating margins step up quarter-over-quarter.

Okay. All right. And then on the contribution of price versus volume and mix in the quarter, price was a little bit weaker than we had expected. Is that just a component of mix and some of the destocking you had talked about? Or should we expect price to be a bigger contributor as you go through the year? Or is that being at half level about right?

Yes. No, it's a great question. I mean last year was a unique situation due to inflationary pressures. This year, I think we discussed in February that we're targeting between the 3% to 4% corridor on net price contribution, absent of any HVP mix shift. And so we started the year off in line with what we expect 3% to 4%.

And our next question coming from the line of Justin Bowers with Deutsche Bank.

Eric, earlier you talked about some of your customers returning to pre-pandemic safety stock levels. Do you have a sense on when that normalizes this year? And what it means in terms of typical ordering patterns?

We are currently observing some recovery in Q2. However, as I noted in the prepared remarks, we are still experiencing some destocking in this quarter. Looking ahead at the order patterns for the second half of the year, we are a make-to-order business, which gives us a view multiple quarters out. This outlook appears stronger than it has been for several years when adjusted for COVID. We are optimistic about the sequential revenue growth for the coming quarters based on the order patterns we are seeing today.

Contract Manufacturing side, last quarter, you talked about some operational improvements, I think, maybe in Arizona. But is that somewhat of a gating factor until you implement those and get the throughput through? Or can you maintain the same productivity levels while you're making those changes?

This will be part of our high-value product devices portfolio. It represents a smaller segment of our overall business. As we implement these improvements, we face some constraints in our manufacturing, but most of those issues are currently being resolved.

Yes. I believe the productivity improvements we're currently implementing will not affect our existing production levels. In fact, we expect to see sequential improvements in throughput for that business. So, we are not anticipating any setbacks in that area.

No.

Appreciate the questions, and sorry for the background noise. I've got some guys on my roof.

No problem.

And our next question coming from the line of David Windley with Jefferies.

I was going to say, Justin, let us know if you need us to come rescue you. I was going to come back to the mix. I hope I don't confuse the situation further. But just trying to understand the original question, I guess, Jacob's question about the decremental margin and the moving parts there. I understand revenue was lower overall, and so you have absorption impacts from that. But NovaPure, you call out as strong, and we've identified that the margin contribution from that ought to be really, really high. And then it sounds like you have some other reasonably high-margin contributors that are being destocked. And so I guess I wanted to make a plea for maybe a little bit more granularity, so we could understand the moving parts there. And then how that progresses as you see the sequential improvement through the balance of the year, possibly?

Yes, David. There was a slight decline in some high-value product areas in Q1. However, we anticipate that as the year progresses, volumes in that segment will increase again. Earlier this year, we mentioned destocking occurring across our entire business. We expect high-value product growth to accelerate as the year continues, which will also positively affect our margins. Additionally, we anticipate increased throughput as we advance through the year. I believe Q1 represented our lowest throughput level, and since we operate as a high-volume business, this has an impact on absorption.

As a follow-up, in these areas of higher demand, GLP-1s being one of the previous callouts that you responded to, it's increasingly apparent that the efforts of the sponsors to get those products ultimately to market are very multifactorial, with so many different elements of the supply chain investing aggressively to bring up capacity, you all being an example of at least two different areas where you're investing. To what degree do you have dialogue with those clients or visibility to understand? You invest and you add NovaPure capacity, and you add injection device capacity, but fill-finish capacity is a challenge, for example, and that could be a rate-limiting step that you also need to anticipate relative to the order patterns. Like how are you able to do calculus around that?

Yes, David, that's a good point. We need to be mindful not only of upstream factors but also of downstream aspects. We have strong, long-term relationships with our customers in this area, built on established communication regarding their demand profiles, which involves discussions about volume ranges for various products. While we do not disclose specific customer volumes, we recognize that if there are bottlenecks elsewhere in the value chain affecting market access, it’s important for us to be aware and collaborate with our customers accordingly. Our priority is to ensure we are not the bottleneck. Regarding the elastomer segment, many of our assets are interchangeable, allowing us to produce high-value products across multiple facilities, enabling customer improvements at different sites. In contrast, Contract Manufacturing has fixed capacity with a theoretical limit, and it follows a specialized business model serving one or multiple clients. As we consider investments in the elastomer area, we are confident in our capacity, which we have been expanding. We are well-positioned. For Contract Manufacturing, if we secure additional contracts, we will scale up operations and reach peak production levels within one to two years, which aligns with our current operational model.

That's very helpful. If I could just sneak in one last question. Regarding the destock, can you provide any insight into whether the impact of customer inventory management in the first quarter is at its peak and if you expect it to lessen moving forward, continuing into the second quarter but diminishing throughout the year?

I believe it will diminish. Yes, it is expected to decrease over the year. This expectation is backed by our confirmed orders as we look ahead to the remainder of 2024, as well as our conversation about sequential growth quarter-over-quarter for the next four quarters.

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

I have a few follow-up questions. Can you provide any updates on Annex 1? I'm interested in any qualitative insights you might have regarding conversations with customers about the potential transition from legacy products in the future. Is there anything you can share on that?

Larry, thanks for the question. Yes, we've been having a lot of active discussions. And as I mentioned at the recent conference that we attended in New York, that was clearly the #1 discussion point. And it's interesting is that we're very well positioned to be able to support our customers as we think about how to get our customers ready for the regulations of Annex 1. Now the one comment I will make is that one of the clear indicators that the most interest is coming from the multinationals. I think originally there might have been thinking around just the European firms, but this clearly is a discussion at a multinational level to really simplify their own supply chains. And so that's encouraging. And it's not just for new drugs; it's really a heavy emphasis on the legacy portfolio. So that's about as much as I probably can give you without going too detailed, but these are active dialogue discussions that will take time. It will depend on the customer; it will depend on the drug that they like to transfer, but we're well positioned to have those discussions and then act upon them.

Great. I appreciate that color. And just a question on R&D. I think R&D increased last year, I think, 16% to 17%. What's sort of the outlook this year? I know Q1 looks like it was only up a little bit year-over-year, but I know the quarters could jump around a little bit. Just thoughts on R&D? And where is the lion's share of that increase going into? I know a lot of investments into Corning, but is it going into a lot of different areas?

Yes, Larry. As a percentage of revenue, we expect R&D to be pretty constant as we go through the year. And where is that money going? A lot of that increase is around integrated systems and how we're building that out. And again, it is our partnership with Corning and supporting that and developing that market.

Okay. Lastly regarding price, you mentioned there was just over a 3% increase this quarter. Is that likely to fluctuate a bit, or do you think that's a reasonable estimate for the full year?

Yes, that's correct. That's a good position to be in for us.

Thank you. And I see no further questions from the queue at this time. I'll turn the call back now over to Quintin Lai for any closing remarks.

Thanks, Olivia. 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. Additionally, you may access the replay for 30 days following this presentation by using the dial-in numbers and conference ID provided at the end of today's earnings release. That concludes the call. Have a nice day.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.