Good morning, and welcome to West's Second Quarter 2024 Conference Call. By way of introduction, this is John Sweeney, the new Head of Investor Relations at West. I'm delighted to be here and I look forward to working with all of you. We issued our financial results earlier this morning, and the release has been posted to the Investors section on the company's website located at westpharma.com. On the call today, 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 the presentation is available on the Investors' section of our website. On Slide 4 is our Safe-Harbor statements. Statements made by management on this call and the accompanying presentation contain forward-looking statements within the meaning of the U.S. Federal Securities Laws. 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 statements 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 our 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 comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I'll now turn the call over to our CEO, Eric Green.

Thank you, John, and welcome to West. And I would like to thank Quintin Lai for his partnership over the past eight years and for his many contributions at West. We will start on Slide 5, where I will cover three main topics: First, examine the drivers of Q2 performance; Second, discuss our revised outlook for the remainder of 2024, and; Third, provide insights on our long-term financial outlook and why we remain confident in our growth strategy. Let's begin with Q2 performance. We had a lower-than-expected second quarter impacted by continued customer destocking. That being said, we are seeing promising signs from our customers that give us confidence of a turning point in this trend. Looking ahead, we expect the second half of the year to be stronger than the first half with a return to year-over-year organic growth in the fourth quarter, led by our proprietary products segment, specifically Biologics. We have adjusted our full year 2024 guidance to reflect a more gradual recovery as compared to our previous expectations. While I'm disappointed that we are lowering our guidance, I want to reiterate my confidence in West's proven market-led strategy and attractive long-term growth potential. Turning to Slide 6. We are the market leader in containment and delivery of injectable medicines, which is one of the fastest growing areas of healthcare. We have an even stronger position in Biologics, which is the fastest growing segment with injectables. Our products are addressed in the most critical therapeutic areas, including immunology, oncology, rare diseases, and obesity. And for the past five years, West has achieved a CAGR of double-digit organic revenue growth demonstrating that we have been able to deliver our long-term financial construct of 7% to 9%. Moving to Slide 7. Our confidence in our medium to long-term trajectory is underscored by our ongoing capital expansion projects. The investments we have made to address COVID are now being repurposed to drive increased capacity to address new opportunities. In addition, we have expansion plans focused on HVP products that provide a combination of increased manufacturing capacity and a higher level of global standardization through our network. And for Biologics, GLP-1s and changing global regulatory requirements, we are seeing increased customer interest for higher quality, lower particulate, and more standardized solutions. This favorably positions West's innovations and leading products such as Westar Select and NovaPure. Another focus for our capital allocation is our HVP devices, which includes our self-injection devices. Our platforms are an integral part of our customers' drug device combination products that are making a difference to patients. These expansion projects remain on-target for the back-half of the year and 2025. And lastly, before Contract Manufacturing, we have an exciting growth contribution from our new capacity at our Grand Rapids site. A few weeks ago, I had the opportunity to join our team as we opened this new portion of the state-of-the-art facility in support of our customers' Injection Device platform and producing product in Q4. And we have the ongoing expansion in Dublin, which is already dedicated to contracted demand for components associated with drugs for diabetes and obesity. We expect it to be completed by the end of Q3. Our promising growth drivers have us positioned to drive significant value for our customers, patients, and shareholders as we move forward. Shifting to Slide 8. At the end of June, we published our 2023 Sustainability Report on the company's website. Proudly, we received several accolades, including being named as one of America's Most Responsible Companies by Newsweek. Now, I'll turn the call over to Bernard.

Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q2 2024 revenues and profits, where we saw a mid-single-digit decline in organic sales as well as declines in operating profit and diluted EPS compared to the second quarter of 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. And finally, we will provide an update to our 2024 guidance. First up, Q2. Our financial results are summarized on Slide 9, and the reconciliation of non-U.S. GAAP measures are described in Slides 17 to 22. We recorded net sales of $702.1 million, representing an organic sales decline of 5.9%. Looking at Slide 10, proprietary products' organic net sales decreased 8.4% in the quarter as customer destocking continued at a higher rate than anticipated. High value products, which made up approximately 71% of proprietary product sales in the quarter declined by double-digits, primarily due to decreased sales of our Westar, Daikyo Crystal Zenith and FluroTec products. Looking at the performance of the market units, the Biologics market experienced a mid-single-digit decline, primarily driven by lower volumes of Daikyo Crystal Zenith and Westar products. The pharma market units saw a low single-digit decline, primarily due to a reduction in sales of admin systems and Westar products, while the generics market unit declined double-digits, primarily due to lower volumes of our FluroTec and Westar products. Despite these revenue declines in the quarter, we do expect revenues in the second half of 2024 to be greater than the first half. Our Contract Manufacturing segment experienced mid-single-digit net sales growth in the second quarter, led by growth in sales of components associated with injection-related devices. Our adjusted operating profit margin of 18% was a 650 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 28% for Q2. Excluding stock-based compensation tax benefits, EPS decreased by 28.4%. Now, let's review the drivers in both our revenue and profit performance. On Slide 11, we show the contributions to organic sales decline in the quarter. Sales price increase has contributed $21 million or 2.8 percentage points of growth in the quarter. More than offsetting price was a negative volume and impact mix of $65.5 million, primarily due to lower sales volume caused by customer inventory management decisions in the period and a foreign currency headwind of approximately $6.1 million. Looking at margin performance, Slide 12 shows our consolidated gross profit margin of 32.8% for Q2 2024, down from 38.7% in Q2 2023. Proprietary products' second quarter gross profit margin of 37% was 690 basis points lower than the margin achieved in the second quarter of 2023. The key drivers for the decline in the proprietary products' gross profit margin were lower production volumes due to the reduced customer demand in the period and an unfavorable mix of products sold, partially offset by increased sales prices. Contract Manufacturing second quarter gross profit margin of 16.2% was 80 basis points greater than the margin achieved in the second quarter of 2023, primarily due to 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 13, operating cash flow was $283.2 million for the six months ended June 2024, a decrease of $24.1 million compared to the same period last year, or a 7.8% decrease, primarily due to a decline in operating results, offset by favorable working capital management. Our second quarter 2024 year-to-date capital spending was $190.8 million, $33.3 million higher than the same period last year. We continue to leverage our CapEx to increase both our high-value product and our contract manufacturing capacity. Working capital of approximately $849.3 million at June 30, 2024 decreased by $415.3 million from December 31, 2023, primarily due to a reduction in our cash balance. Our cash balance at June 30, 2024 of $446.2 million was $407.7 million lower than our December 2023 balance. The decrease in cash is primarily due to $454.1 million of share repurchases and our capital expenditures offset by cash from operations. Turning to guidance, Slide 14 provides a high-level summary. We are updating our full-year 2024 net sales guidance to a range of $2.87 billion to $2.9 billion from a prior range of $3.0 billion to $3.025 billion. There is an estimated full-year 2024 headwind of approximately $5 million based on current foreign-exchange rates. We expect organic sales to decline approximately 1% to 2% compared to our prior guidance of 2% to 3% growth. We are updating our full-year 2024 adjusted diluted EPS guidance to be in a range of $6.35 to $6.65 compared to a prior range of $7.63 to $7.88. Also, our CapEx guidance is expected to be $375 million for the year, which is an increase from the previous guidance of $350 million. The increase in CapEx is driven by additional investments in growth initiatives and the timing of spend on one of our major projects. 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 $0.03 based on current foreign currency exchange rates, which is a decrease from the prior guidance of $0.04. The updated guidance also includes EPS of $0.22 associated with first half 2024 tax benefits from stock-based compensation. Our guidance excludes future tax benefits from stock-based compensation.

Thank you, Bernard. To summarize on Slide 15, we are the market leader in injectables with an even stronger position in Biologics. We are seeing promising signs from our customers that destocking is at a turning point. We are investing significant capital in higher growth areas with expanded margins and cash flow, and I'm confident that we'll achieve our long-term financial construct with our proven market-led strategy and future growth drivers. With great pride, we will continue to live by our purpose, and make a positive impact on patient lives. Shannon, we're ready to take questions. Thank you.

Our first question comes from Paul Knight with KeyBanc Capital Markets. Your line is now open.

Hi, Eric. I have two questions. Number one, in this destocking environment, is it things related to COVID, or is it broader than that like injectable drugs, et cetera, if you could kind of give color on that. And then lastly, these new expansion specifically cited in Kinston and Grand Rapids, do they contribute to revenue here in 2024, and therefore your improved 2H?

Yes. Thank you, Paul. The destocking we are witnessing is actually a mix of factors. While we are still observing some destocking related to COVID vaccines, many of our customers had previously increased their safety stock levels significantly during the pandemic due to longer lead times. Now that we have improved our capacity and our service levels are at an all-time high, customers are reducing those safety stock levels. This is a combination of both situations, which is helping customers normalize their safety stock for our products in the market. From our discussions with customers, we believe that the end patient demand for the molecules is still in line with our expectations. The market shift is consistent and has not changed as we've discussed over the last several years. Our win rates for new molecule approvals continue to be strong, if not better in some cases compared to the past, giving me confidence in our future trajectory. Regarding our investments, we expect two particular areas in Contract Manufacturing to become operational in the second half of this year, located in Grand Rapids, Michigan, and Dublin, Ireland. Additionally, we anticipate more benefits from our Kinston facility and other expansions in our HVP plants towards the end of this year.

Thank you.

Thanks, Paul.

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

Great. Thank you, and good morning. Welcome to the company, John. Eric, I have a couple of questions. It appears the demand environment or the mid to long-term outlook hasn't changed. I'm interested in the destocking and inventory levels; how clear is your visibility on that? Are the levels back to where they were before COVID, or possibly even lower? What gives you confidence that customers are not extending this situation longer than expected? It seems like we keep pushing that timeline further out. You sound quite assured that you have a good grasp on it, so what contributes to that confidence?

Yes, Larry, there's two-fold there. One is, in the beginning of the year, after having discussions with our customers, we had an indication that the return will be a little bit sooner than we anticipate. What I mean by that is, a little more pronounced back to normalized demand curves in the second half of this year. As we progress through Q2, we started seeing the intra-quarter demand slightly less than we anticipated, and we see that persisting a little bit into Q3. So we do see sequential improvements over the next couple of quarters, and as I mentioned, returning back to growth in Q4. And that is really our customers are gradually going back to where they were pre-COVID. So, we don't see any variations below or any variation slightly above. It's just pretty much consistent when a customer tells us what they're targeting, i.e., 12 months or nine months or 16 months. I will tell you though, every customer that we're speaking to has a different algorithm that they manage to. So it's not universal from one customer to the next. And as we go through the different segments, whether it's generics, biologics, or small-molecule pharma, they're also in different stages of this destocking.

Okay. Regarding the capital expenditures, the slight increase indicates your confidence, although you mentioned some timing factors. Looking ahead over the next few years, do you anticipate maintaining an investment of $350 million to $400 million? Do you still see a multi-year period to continue this spending?

Let me begin by handing it over to Bernard because it's an important question, Larry. Recently, our investments have primarily focused on HVP, especially around the stoppers and finishing of these products to support vaccine growth during the COVID pandemic. We are currently adapting those assets to continue producing other HVP products for our customers. The additional investments we're making are aimed at three specific areas. First, our involvement in the growth of biologics is quite significant. We anticipated this trend and our investments are really focused on the finishing process. You'll see this in our facilities in Kinston, Jersey Shore, Eschweiler, and Waterford. Second, we play a major role in GLP from two perspectives: one is our longstanding strength in proprietary elastomers, which we maintain for all commercial drugs, and we have several customers developing products in this area. Additionally, in Contract Manufacturing, we are ramping up production of auto-injectors and pens, including some final filling processes for our customers. That's the second focus surrounding the GLP-1s. The third area, which connects back to biologics, is the increasing demand we’re seeing from our customers regarding regulatory changes that are prompting the push for standard materials to move up the HVP curve. These are the three key areas where we are directing our capital. Now, for the long-term perspective, I want Bernard to elaborate on that as it's an important question about how long these trends will continue.

Yes, Larry, just two things on that. One on the increase in CapEx for this year, really the major driver behind that is a business that we've been awarded from customers for our Dublin facility, and where they actually want us to put the capacity in place sooner than originally anticipated. So, we pulled some of that CapEx that we had earmarked for '25 into '24 to meet those requirements. When we look at the longer-term, we're really targeting about 6% to 8% of revenue. So getting back to pre-COVID levels of CapEx for our business. And you know, again, that's based on the demand that we're seeing today, and how we're going to meet it. If that demand increases or goes beyond that, and particularly around finishing capacity is the areas where we see that could potentially happen, then we would deploy more capital, but it will be very growth-focused if that was the case, and always predominantly around HVP.

Got it. Regarding the 6% to 8% capital expenditure of revenue, does that support your 7% to 9% targeted growth outlook? This may not apply to this year, and I'm unsure if it will begin next year, but it certainly reflects a multi-year growth perspective of around 7%. Has that 7% to 9% outlook changed at all, or should I rephrase that?

No, the 6% to 8% would support that level of growth. And as we say, if we go beyond that, and then it depends on what areas and where the growth comes from, we always have the ability to go and adjust that. But again, the CapEx remains very growth-focused. And I think we're getting to like 60% to 70% of our CapEx budget is really growth-focused at this point and predominantly around HVP and then some, as Eric said, in Contract Manufacturing but that's for very specific customers and very specific businesses.

Got it. And sitting here today, I know it's difficult and there are no guarantees, but do you feel comfortable that you can return to that 7% to 9% growth by the end of 2025?

I won't be able to pinpoint exactly which quarter over the next few quarters, but we will get back to that 7% to 9% construct. Like I said earlier, our position in the marketplace and the areas of growth that we're focused on is Biologics and across the entire portfolio, what's outsized that growth is biologics, GLP-1s, and some of the work we're doing for our customers whilst moving up the HVP curve. So yes, we feel confident we will be back to that 7% to 9% construct.

Yes. If you consider the structure, there are three key factors at play: volume, price, and mix-shift. These three factors are essential to support that structure in the long term. Looking back at the compound annual growth rate between 2019 and our current guidance, we see approximately 10% growth. This framework is supported by those three factors. Additionally, as Eric mentioned, the changes in the regulatory environment, particularly regarding GLP and the significant participation in biologics, along with demand normalization, are contributing to this. We have the infrastructure and capacity in place to meet customer lead times and support growth in the coming years.

Got it. Great. I appreciate the color. Thank you guys.

Thanks Bernard.

Thank you. Our next question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open.

Hi, good morning and thank you. So, just a couple of questions. How is the coverage ratio shaping up? And how has that changed throughout the year? And then, the other question would be, just in terms of the destocking, I think earlier in the year, you mentioned that it was skewing heavier towards standard components versus like HVPs. I'm just curious if that's still what you're seeing.

I'll take the second part and then I'll hand that over to Eric. Yes, absolutely. So, Justin, so, thanks for the questions. The coverage ratio is getting stronger. So there's two aspects we look at is firm, confirmed orders scheduled out and we're seeing that increase nicely, not just on a percent ratio perspective, but on absolute dollar for both Q4 of this year and also going into the early part of 2025. So that's one aspect. And therefore, as that kind of increases, the intra-quarter demand profile is actually less of a factor in the growth of the business. And so, we're seeing that come back a little bit slower than we originally anticipated in the middle part of this year as we were articulating back in February, I believe. And so, that's why hence why we changed the guidance. But when we look out to Q4 and into 2025, we're seeing very strong indication with confirmed orders, and our discussions where customers are lining up exactly to that conclusion when we look at their destocking programs and when they feel they'll be at a level that they feel is acceptable. So, it's lining up nice. You want to touch on the destocking?

In the second quarter, we observed significant destocking in our Biologics and Generics segments, which were also under pressure during COVID due to supply chain management challenges. This has led to a buildup of safety stock, resulting in greater destocking in these areas compared to other market units. Consequently, this situation is affecting both our gross and operating margins by altering our product mix. We're experiencing a decline in volume as a result, along with a shift in our mix. As we move toward normalized growth rates, we expect to see improvements in both gross and operating margins in line with our long-term goals and possibly even surpassing them. Therefore, we are assessing the revenue impact alongside margin effects, considering how to return to our expected margins. Once the Biologics and Generics markets stabilize, we anticipate a recovery in revenue and corresponding improvements in margins as well.

Understood. I have a quick follow-up regarding your improved throughput. From your conversations with customers, do you sense that they are now managing inventory levels in accordance with your lead times, or are you noticing any changes in ordering patterns and when that might stabilize?

Yes, Justin, exactly that's the point. We're unfortunately during the pandemic due to the demand that was put on our business, our lead times did go up to anywhere between 30 weeks to 50 weeks. And with the consistency now in the last several quarters of, call it, 8 to 12 weeks, sometimes earlier, sometimes a little bit longer depending on the processing, our customers are realigning their reordering patterns based on those lead times. And we're seeing that clearly. So, as they built inventories during the longer lead time periods and during the supply chain constraints during the pandemic, and across the whole industry, we're seeing that also coming down, but also the realigning. So what you'll see is a pattern of more frequency instead of one large bolus is more paced throughout the next three or four quarters, which, by the way, is also very effective for our operations. So it aligns real well with where we want to be long-term.

Got it. Appreciate the questions.

Thank you, Justin.

Thank you. Our next question comes from the line of Avantika Dhabaria with Bank of America. Your line is now open.

Hi, this is Mike Ryskin from Bank of America. I want to revisit the topic of destocking, as it seems to be generating the most discussion. While I appreciate your insights on the coverage ratio and your discussions with customers, you made similar remarks after the fourth quarter and first quarter earlier this year. It appears that the situation is evolving, along with the interactions with customers. Regarding the guidance for the third and fourth quarters, it seems like there's an implied increase in the third quarter and a significant boost in the fourth quarter to meet the fiscal year targets. So, why not adopt a more conservative forecast at this stage in the cycle? There still seems to be some risk that destocking could change again. I would like to hear your thoughts on this as the year progresses. Additionally, I have a follow-up question about margins and the EPS outlook. Are there any additional cost reductions expected in the third or fourth quarters to reach the EPS target? I understand that volume de-leverage significantly affects gross margins, but I'm curious about what is implied as the year moves forward. Thank you.

In Q3, we do not anticipate a significant ongoing increase. There will be some improvement, as Eric pointed out, leading into Q4. This growth in Q4 will primarily come from customer segments within biologics, along with some improvement in generics. The main focus is on the biologics market, which is reflected in the feedback from our customers and forms the foundation of our guidance. As Eric mentioned, various metrics are providing us with confidence that this growth will materialize. Regarding EPS, we are keeping a close eye on our costs, focusing on operational efficiency and managing variable costs across our plants. As we look ahead to 2024, we must ensure that we have the right resources to support growth without hindering it. We are closely managing costs without implementing significant cuts, utilizing appropriate cost management strategies to navigate this de-stocking period, which has lasted longer than we had initially expected. At the same time, we need to be ready to return to growth to adequately support our customers.

Thank you. Our next question comes from the line of Matt Larew with William Blair & Company. Your line is now open.

Good morning. I would like to revisit what occurred during your quarter concerning de-stocking. Referring back to the initial outlook from the Q4 call, you indicated that about 200 to 300 basis points of the reduction from the Q3 call last fall was due to de-stocking, with 75% of this de-stocking attributed to six customers. The first quarter results were actually better than the outlook you provided, and you maintained your guidance for the year. However, with 400 to 500 basis points removed from the organic guidance with about four to five months remaining in the year, the impact is quite significant. Could you elaborate on the discussions with the large customers? Specifically, did the situation worsen beyond your earlier assessments? Were there particular customers or product categories that stood out? I'm trying to understand the changes that occurred from mid-April to the end of June.

Yes, Matt, I'll begin and then Eric can add if needed. As we progressed through Q2, the level of intra-quarter orders didn't meet our expectations. Additionally, some customers postponed orders towards the end of the quarter, which affected us. Looking forward into Q3, we noticed that orders we had anticipated for this period, and even some for Q4, were not materializing. Upon assessment, this was largely linked to ongoing de-stocking, which has extended longer than we initially thought. That has been the primary driver of the situation. Initially, our coverage rate for Q3 and Q4 was aligned with or slightly ahead of pre-COVID levels. However, the expected acceleration between confirmed orders and our forecast hasn’t occurred as we had hoped. After our evaluations, we determined it was important to be transparent and adjust our guidance downward. We want to avoid excessive cuts, which is why the reduction in guidance is substantial. This is not what we prefer to do, but it reflects the reality we face. On a positive note, we expect growth to return in Q4, albeit with lower strength than we originally anticipated, which is why we've also adjusted that forecast.

And I'll just add to this. Thanks, Bernard. And so it became more of a gradual recovery, I believe, in what we're seeing versus a more pronounced Q3 recovery. And that's actually one of the drivers of why, based on the customer conversations, it's a still similar group of customers across multiple segments. Yes, there's some of the larger ones we highlighted earlier in the year that they're actually going through the process and then getting closer to the end of that process. But as we look through with these discussions, we look at where they are in their process, where we are with our able to produce products in a very short period of lead times, we are confident moving back to a long-term construct. And that will, it's going to take a little more time than we anticipated, but as it indicated in the guidance that we gave, we're getting closer to that in Q4. And we believe that will carry on going forward. So yes, Matt, that's a very clear statement we made earlier this year about being more acute, but it's taking a little bit longer to work out than we anticipated in the industry.

Okay, understood. And I think having observed this in the bioprocessing industry over the last 18 months, fully appreciate that it's challenging to understand customers' pace of inventory work down. And at times, maybe there is competing incentives in terms of them wanting you to have capacity available for demand that they may or may not give you in the next quarter or two. So, in light of that, you referenced now understanding that customers are managing to, you're now more normalized to reduce lead times. As part of those conversations, do you feel like you have a better understanding of how much inventory is sitting out there? And when you kind of combine those two observations, does that give you conviction specifically, not in the back half of the year, but specifically in the third quarter? And how did you incorporate perhaps the better understanding of where customers are at into the way you're just thinking about this back half guide?

Yes, Matt, the clarity from our recent conversations compared to earlier this year gives us confidence about our direction for the near term. Looking at the mid to long term, we aim to return to the growth pattern we are accustomed to, which we expect based on our market position and what we foresee. Additionally, we now have a clearer understanding of how our customers want to manage their safety stock and the confidence they have in our ability to meet their service expectations. We are currently capable of delivering on those expectations with our existing capacity. This is why we continue to invest in capital, ensuring that as growth increases in 2025 and beyond, we remain well-prepared rather than falling behind, as we did during the pandemic. We have greater visibility and clarity today, and we are committed to delivering on our promises.

Okay. Understood. Thank you.

Thank you, Matt.

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

Hi, thanks. Good morning. Maybe just to go back to the EPS guidance, you're pointing to kind of down 1% to 2% organic growth this year. And I think it would seem to apply probably like 300 bps to 400 bps of operating margin contraction, which is kind of greater decremental margins than the long-term algo would suggest. Can you just flesh that out a bit more, some of that capacity additions, et cetera? And then I think I heard Bernard mention earlier, perhaps as revenues recover, maybe we could see something better than 100 bps of margin expansion. Can you just talk about the incremental margins as we return to growth in 4Q and beyond?

Yes. So, the major impacts on margin that we've seen here in Q2 is really driven by volume and then mix. And for a high volume manufacturing operation, any decrease in volume like that is going to have a significant impact. And where we're seeing it, Jacob, is really in HVP. So, the drop is in biologics and generics. And so, we're getting this kind of outsized impact on margin, where if you look back at take the COVID years when we were getting a large amount of expansion in HVP and growth in that area, we were getting outsized margin expansion well beyond our 100 basis points. So, essentially what we're seeing now is the reverse of that. So, when things normalize and we start to see growth again and getting back into our long-term construct, that volume growth will be driven within HVP. And then also that aligns with the mixed shift as well improving where our HVP was in the kind of mid-70s as a percent of proprietary revenues. And today, we're saying it's about 71%. And that's the type of impact it has on our business. So, when we're returning to growth, we would expect to see that margin recover pretty much, pretty quickly and in line with that growth, particularly around biologics and the generic space.

Thanks for that, Bernard. Sorry.

It's all in gross margin. The OpEx was pretty tight.

Got it. Makes sense. And then maybe just on the stopper vial side of things, you guys referenced the capacity you brought on during COVID and repositioning that now for non-COVID applications. Can you, one, talk about the timeline for kind of transitioning that capacity to non-COVID demand? And I guess, two, the other concern I think a peer of yours referenced the other day is that you weren't the only one who brought on capacity during COVID and lead times are shorter and they suggested that customers are going below pre-pandemic inventory levels. And I think investors may be worried that this could be structural for some time. Can you just talk about that dynamic as well? Thanks.

Jacob, I'll take that. First of all, we have successfully repurposed our assets. We're not just focusing on NovaPure stoppers; we can also utilize the processing for plungers and other products in our HVP portfolio. The team has done an excellent job preparing these assets, and they are ready for use. As demand arises, we are prepared to respond. Regarding customer feedback about their desired safety stock levels, given the current state of the supply chain and the economic position of our product relative to the drug molecule, we do not anticipate prices going lower than pre-pandemic levels. For us, and based on discussions with our customers about the products we offer, the lead times we maintain, and the variety of SKUs available, we believe we will return to pre-pandemic levels.

Got it. Thanks for that, Eric. I'll leave it there.

Thank you.

Thank you. Our next question comes from the line of Dan Leonard with UBS. Your line is now open.

Thank you. I have another question on visibility. Can you discuss the breadth of your visibility? And I ask because I'm wondering if we're in a situation where you have close contact and visibility with those large customers, but rather it's the long tail of smaller customers that are driving the downside surprise.

Thank you for the question, Dan. The larger customers have shown more variability in their orders. While we're focused on the smaller customers, which are important for our pipeline and tend to place orders more frequently, their order volumes are lower. This means that it's harder to predict in which quarter their orders will come in, but the overall impact on our stocking levels is less significant. The smaller biotech and pharmaceutical companies play a crucial role in the innovation pipeline for injectable medicines, but they don't cause as much fluctuation in our revenues. I hope that clarifies things for you, Dan.

That's great. Thanks for that clarification, Eric. And a quick follow-up. You mentioned that the new capacity in Dublin opens in the third quarter. How important is Dublin to the fourth quarter revenue ramp?

Not really. The team will work hard to maximize that capacity, but it takes us a few quarters to fully ramp up any new site of that scale. Therefore, I don't believe that's a significant factor in the guidance we are providing for Q4.

Got it. Thanks a bunch.

Yes. Thank you. Thanks, Dan.

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

Hi. Good morning. Thanks for taking my questions. I'm going to try to ask a few in a different way. Eric, in June when we were together, you talked about 50% or maybe a little less of your revenue comes from large customers where your visibility is higher, I thought you said, because of the high volume that you do with them, the connectivity that you have with them, and then the smaller customers are much more volatile, and you kind of, to Dan's question there, commented on that. I thought you said that your visibility or your forecasting accuracy around those large customers was really accurate over time, but you also then just said that those are actually the source of the destock. And so, I wanted to make sure I understood kind of the historical accuracy and tie in with those large customers, but seemingly a disconnect on that right now. Is that the right way to think about it?

No. What I would say is that the larger customers have greater variability. When this happens, we discuss a forecast, and by the time we finalize a firm order, there can be some changes. It doesn’t take many large customers to create a significant impact compared to the smaller accounts. While it is also true for smaller accounts, I should have been clearer. When assessing accuracy, we look at quarter-over-quarter compared to the prior year. For smaller accounts, it's harder to predict the exact month or quarter in which the revenue will come in. Our business model relies heavily on repeat sales, which we have mentioned before. Most of our revenue is almost annuity-like, with repeat business every year, while the variable factor is drug demand, which fluctuates. In terms of accuracy, smaller accounts are a bit more difficult to predict quarter-over-quarter. However, when looking at the impact on revenues, larger accounts are the ones that have a more significant effect on dollar value from one quarter to the next.

Got it. Okay. And then in terms of the improving confidence, I guess I'd like to key on, on Bernard's answer about kind of the cuts to this year and order patterns. You know, earlier in the year, your coverage was encouraging relative to pre-COVID levels, but then the fill-in on top of that not coming as you expected. Can you give us some sense of what is the normal level of coverage versus the amount of go-get? Like, how much go-get do you have for the second half of the year, in absolute or relative that gives you the confidence that you can get to the levels that you're now setting?

We are not disclosing the exact number for obvious reasons, but we are more confident about our coverage rates and the effort we need to make under the new guidance. This effort is informed by discussions with customers, understanding their changing order patterns, and considering their forecasts. This insight has bolstered our confidence. The effort required from a financial standpoint is not as significant as before. Earlier in the year, we felt confident and anticipated a specific conversion rate, but that did not occur as expected. Thus, we have revised our guidance to reflect this and feel assured about meeting the new targets we have set.

Got it. Bernard, in reference to your point, management previously indicated similar concerns when six customers unexpectedly reduced their orders earlier this year, resulting in guidance changing from 7% to 9% down to 2% to 3%. We discussed these topics earlier this year and are revisiting them now mid-year. You also noted returning to pre-COVID growth rates, which we have also analyzed. You mentioned a 10% growth rate, and it appears to be slightly above that. If we consider the midpoint of your long-range plan targets, 8%, it suggests revenue will still fall a couple of hundred million dollars short of your current guidance. This implies that achieving an 8% growth rate next year would mean a flat year of growth compared to 2019. How do we gain assurance that there are factors that could positively influence growth, or conversely, that there isn't still a significant amount of overbuying in customer inventories that they need to resolve before reaching a sustainable growth level?

Yes, David, I'll begin with this. One of the main factors contributing to our compound annual growth rate over the past five years, excluding COVID, has been the growth of biologics. About five or six years ago, we had a high participation rate, but biologics accounted for less than 20% of our sales. I don’t have the precise figure, but it was around 20% of our overall business. Over the years, we have seen an increase in the number of approvals and biologics that have significantly boosted the market. There are still several that continue to exceed the demand we anticipated from our customers, which is encouraging. Currently, the foundation of that business has expanded; I believe we are now around 40%. This means it has doubled as a percentage of the entire company, which itself has also increased in size. Therefore, as we look ahead, the reason we project a financial growth rate of 7% to 9% is that we are factoring in this larger base we are operating from. Continuing to lead in the high-value products and biologics sector will support this level of growth in a business nearing $3 billion.

Got it. Okay. I'll leave it at that. I was going to ask one more, but I've probably beaten it up enough. Thank you.

Thank you.

Thanks, David.

Thank you. Our next question comes from the line of Tom DeBourcy with Nephron Research. Your line is now open.

Hi, good morning.

Good morning.

Good morning. Just had a quick question, I guess on CapEx. And, you know, so the current level of CapEx, 12% to 13% of revenue, and I just wanted to get a sense of how you're, I guess, metering the demand, or long-term capacity expansion versus maybe short-term weaker demand due to de-stocking. And then just as you look to 2025, I think consensus has maybe the number going down to $300 million of CapEx and just, I'm not asking you to endorse that number, but just, would you expect CapEx to be down year-over-year in 2025?

I'm not going to provide guidance for 2025 at this time, but I can say that the investments we're currently making and the higher level of capital expenditures compared to pre-COVID levels are focused on growth in various areas. To implement that capacity, it typically takes about 12 to 36 months, depending on equipment lead times and the technology being installed. We are analyzing which markets are expanding, the evolving regulatory environment, and the necessary finishing capacity. We are also considering our involvement in both proprietary and contract manufacturing as well as our role in biologics and the capacity required there. We have identified three significant growth drivers for the coming years. We need to have this capacity ready to meet future demand, ensuring we don't face extended lead times like we did during COVID. Looking ahead, we expect our capital expenditures to return to more typical levels of 6% to 8% of revenue over the next year or two, which aligns with our long-term growth target of 7% to 9% at the top. We are also focusing on optimizing our mix and supporting high-value product growth. I hope this provides some insight.

Thank you all for joining us today on the conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you can access a replay for 30 days following the presentation by using the dial-in numbers and conference ID provided at the end of today's earnings release. That concludes the call. Thank you very much and have a nice day.

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