West Pharmaceutical Services, Inc. (NYSE:WST) Q3 2023 Earnings Call Transcript

West Pharmaceutical Services, Inc. (NYSE:WST) Q3 2023 Earnings Call Transcript October 26, 2023

West Pharmaceutical Services, Inc. beats earnings expectations. Reported EPS is $2.16, expectations were $1.86.

Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2023 West Pharmaceutical Services Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakes’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Quintin Lai, VP of Investor Relations. Please go ahead.

Quintin Lai: Thank you, Michelle. Good morning, and welcome to West’s Third Quarter 2023 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 update on our financial outlook for the full year 2023. 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.

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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 over the call to our CEO, Eric Green.

Eric Green: Great. Thank you, Quintin and good morning everyone. Thanks for joining us today. Due to an unexpected family emergency back in Ireland, Bernard cannot participate today. I appreciate your understanding. Quintin will step in for Bernard. We’d like to begin by addressing the ongoing situation in Israel. Our top priority and focus remains on the safety and well-being of our team members and their families that live and work in the region. Now, let’s turn to Slide 5 and the Q3 performance. I am pleased to report that our team delivered a solid third quarter. Our ongoing success can be attributed to our well-established market-led growth strategy, which allows us to take full advantage of our solid base customer demand and recent capacity expansions.

And it is the strength of our One West team who I’d like to thank that make us — make a meaningful difference to ensuring our customers have reliable supply of components necessary to deliver drugs to patients. In the third quarter, we had solid organic net sales growth of 5.7% with an approximate $78 million year-over-year decrease and COVID-19-related sales. Our base organic sales growth exceeded 20% for both the Enterprise and our Proprietary Products segment. Shifting to Slide 6. In proprietary products, we had strong base demand of HVP components and devices. We continue to see certain customers experiencing strong uptake of their drugs, as they accelerate and increase their replenishment orders with us. The greater than 20% growth in our base business was again led by our Biologics market unit, which had very strong double-digit growth in the quarter excluding the impact of COVID-19-related sales.

And as we have seen through much of the year, we also had accelerated growth from restocking long lead time HVP components that we’ve been able to produce through our capacity expansions. This fueled growth in our generics and pharma market units. During September and October, we have started to see an increase in inventory management trends by certain large pharma and generic customers, especially for our standard products, as they manage their safety stocks for the remainder of the year. These issues have led us to temper our fourth quarter organic sales growth to 2% to 3%. Excluding COVID-related sales, we expect double-digit overall organic sales growth and double-digit proprietary product sales growth for the quarter. And we continue to monitor the situation in Israel and currently do not expect any impact on our ability to manufacture and ship out of the country.

As in prior years, we will provide our formal 2024 guidance on our upcoming February Q4 call. In a bit of a preview, despite the inventory management we are seeing by some of our large customers, we continue to expect to deliver our financial construct of 7% to 9% organic sales growth and 100 basis points of operating margin expansion. In addition, we anticipate that our pandemic-related sales are at a point where we will no longer have to separate our base performance in 2024. Lastly, a key aspect of our growth strategy and market leadership is West’s team of scientific thought leaders and technical experts. They continue to advance the care for patients with our customers through valuable insights to address the changing needs of more complex molecules and combination products.

For example, at the recent PDA conference and CPHI Worldwide Conference, several of our West experts delivered insightful presentations about the revised regulatory standards and emphasis on the development of sustainable products. Now, I’ll turn the call over to Quintin, who will go into more detail from the quarter. Quintin?

Quintin Lai: Thank you, Eric and good morning. Let’s review the numbers in more detail. We’ll first look at Q3 2023 revenues and profits where we saw a mid-single-digit increase in organic net sales growth, an increase in diluted EPS and a decline in operating profit compared to the third quarter of 2022. I will also take you through the drivers impacting sales and margin in the quarter as well as some balance sheet takeaways. And finally, we’ll provide an update to our 2023 guidance. First up, Q3. Our financial results are summarized on slide 7 and a reconciliation of non-U.S. GAAP measures are described in slides 16 to 20. We reported net sales of $747.4 million, representing organic sales growth of 5.7%. COVID-related net revenues are estimated to have been approximately $18 million in the quarter, a decline of $78 million compared to the same period last year.

Looking at slide 8. Q3 proprietary products organic net sales increased 3.2%. High-value products, which made up approximately 76% of Proprietary Products segment sales, grew by mid-single-digits led by customer demand for HPV components and devices. Taking a look at the performance of the market units, including the negative impact from a reduction of COVID-19-related sales, the Generics market unit delivered high single-digit growth and the Pharma market unit experienced low-single-digit growth both led by Westar components and Admin Systems. The Biologics market unit also saw low-single-digit growth driven by sales of Flurotec components and self-injection delivery devices. Our Contract Manufacturing segment experienced double-digit net sales organic sales growth led by an increase in components and sales of components related to injection-related devices and healthcare diagnostic devices.

Our adjusted operating profit margin of 24.2% was a 290 basis point decrease from the same period last year. Finally, adjusted diluted EPS increased 6.4% for Q3, excluding stock-based compensation, tax benefit, adjusted diluted EPS increased by 1% compared to last year. Now let’s review the drivers in both our revenue and profit performance. On slide 9, we show the contribution to organic sales growth in the quarter. Sales price increases contributed $46.2 million or 6.8 percentage points of growth in the quarter. Foreign currency tailwind was approximately $25.1 million or 3.7 percentage points of growth. Overall mix and volume negatively impacted sales by $7.3 million. This includes an approximate $78 million reduction in COVID-19-related net demand, partially offset by positive volume and mix contribution from our non-COVID base business.

Looking at margin performance. Slide 10 shows our consolidated gross profit margin of 38.6% for Q3, down from 39.0% in the same period last year. Proprietary Products third quarter gross profit margin of 43.4% was 20 basis points lower than margin achieved in the same period last year. The key driver for the decline in Proprietary Products gross profit margin was an unfavorable mix from a reduction in sales related to COVID-19 vaccines offset by sales price increases that offset inflationary cost pressures in our plants. Contract Manufacturing, third quarter gross profit margin of 18.6% was 130 basis points higher than the margin achieved in the third quarter of last year due to a favorable mix of products sold and increased sale prices offset by inflationary pressures on our plant labor costs.

Now let’s look at our balance sheet and review how we’ve done in terms of generating cash for the business. On slide 11, we have listed some key cash flow metrics. Operating cash flow was $537.4 million for the first nine months of 2023. An increase of $44.2 million compared to the same period last year a 9% increase, primarily due to improvement in working capital. Our third quarter 2023 year-to-date capital spending was $253.3 million, $63.6 million higher than the same period last year. We continue to leverage our CapEx to increase our high-value product manufacturing capacity. Working capital of approximately $1.44 billion at September 30, 2023 increased by $38.3 million from December 31, 2022, primarily due to growth in our current assets offset by an increase in our current portion of long-term debt.

Our cash balance at September 30, 2023 was $898.6 million, and was $4.3 million higher than our December 2022 balance. The small increase in cash is primarily driven by positive operating results offset by increased repurchases under our share repurchase program and higher CapEx. Turning to guidance. Slide 12 provides a high-level summary. We’re updating our full year 2023 net sales guidance and expect net sales to be in a range of $2.95 billion to $2.96 billion compared to a prior guidance range of $2.97 billion to $2.995 billion. There is an estimated full year 2023 tailwind of $20 million based on current FX rates unchanged from prior guidance. We expect organic sales to be approximately 2% to 3% for the full year compared to the prior guidance range of 3% to 4%.

We are raising our full year 2023 adjusted diluted EPS guidance to be in a range of $7.95 to $8 compared to a prior range of $7.65 to $7.80. Also, our CapEx guidance is $350 million for the year unchanged from prior guidance. There are some key elements I want to bring to your attention. We have lowered our revenue guidance to reflect the recent trend with certain pharma and generic customers slowing their restocking of inventory, and increased inventory management as we head into the end of the year. We expect full year COVID-19 related sales to be approximately $68 million compared to prior guide of $60 million. Net sales guidance also includes a reduction of $8 million, resulting from a divestiture of a European facility that produce standard Proprietary Products and this is unchanged from prior guidance.

Full year 2023 adjusted diluted EPS range, includes an FX tailwind of approximately $0.07 based on current FX exchange rates compared to prior guidance of a tailwind of $0.05. The updated guidance also includes EPS of $0.41 associated with year-to-date 2023 tax benefits from stock base comp. Our guidance excludes future tax benefits from stock-based compensation. I would like to highlight that over the last five years our base business growth excluding COVID-19 has been within or above our construct of annual — organic revenue growth of 7% to 9%. And over the same time period, we’ve averaged our annual operating margin expansion of over 100 basis points. As Eric mentioned earlier, we are providing a preliminary look to 2024. Based on current trends in demand we anticipate that West will again be within our long-range financial construct of organic sales growth and operating profit margin expansion.

As usual, we’ll provide more detailed guidance on 2024 in our February call. I’d like to turn the call back over to Eric.

Eric Green: Thank you, Quintin. To summarize on slide 13. We had a solid Q3 performance and are on track for double-digit base organic sales growth in Q4. Our base business remains strong which is a testament to the durability of the foundation we have built over time. We are proud to serve as a valuable trusted partner for customers to support patient health and look forward to continue to play a critical role in delivering health care well into the future. Michelle, we’re ready to take questions. Thank you.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is going to come from the line of Paul Knight with KeyBanc Capital Markets. Your line is open. Please go ahead.

Paul Knight: Hi, Eric, hi, Quintin. You mentioned this stocking issue was kind of in the standard products category which leads to the question of — in the high-value product category are you — obviously, we know you’re supplying GLP-1 products. But are you capacity constrained on that side of the business? If you could talk to that issue and how big is GLP 1 if you can or will? And then lastly, these CapEx numbers what facilities open next year? Thanks.

Eric Green: Great. Thank you for the question, Paul, and good morning. Let’s start with the GLP-1 question. If you look at — we serve that space in both areas of our business Proprietary Products with our elastomer components, specifically in that space you’ll see HVP plungers. And then in the Contract Manufacturing space, we support that our customers and the GLP-1s with auto-injectors. So I would say today from our perspective, we’re not capacity constrained. We’re able to releverage some of the assets that we had that we put in place for COVID, a lot of that technology and we also leverage our global network. And so we’ll see — we’ll be able to continue to ramp, particularly on the elastomer space HVP plungers to be able to support our customers as new drug molecules are approved and launched across the globe.

On the CM side, we have — we are currently producing auto injectors into the market and we’ve been asked to expand capacity, which we’ve actually put expansions in place and they’re ongoing. It will take several quarters to get completed and validated throughout let’s call it throughout 2024. And particularly those sites that we’re referring to Paul, is Dublin and also Grand Rapids Michigan. So, significant investments in those two areas. On the — from a market size perspective of GLP-1, we don’t — we haven’t commented. We still will not we would say that from a volume perspective, I would focus from our customers on how they communicate their expectations. But I can assure you that we’re working with them to ensure that we are not and will not be the bottleneck as we continue to grow in that space for a number of years to come.

In regards to the restocking, you’re absolutely correct. It’s not as much in the HVP area. It tends to be — it is really around our standard products. It’s in categories around disposable medical devices. This tends to be the standard elastomer components. And we’re being asked to divert some of those orders into 2024. So that’s the cadence. It’s not a loss of share and we continue to have a very healthy win ratio of new approved molecules, particularly in biologics. And so our position from a market position hasn’t changed, but it is just the timing of inventory management with a few select customers.

Operator: Thank you. And we’ll move on to our next question. One moment please. Our next question is going to come from the line of Larry Solow with CJS Securities. Your line is open. Please go ahead.

Larry Solow: Good morning. Thanks for taking the question. I guess first question Eric is just a little bit of a slowdown in Proprietary products just seasonally and I know you guys were increasing capacity. So, I’m just curious I thought we were going to kind of trend up. Is there just a little bit more of a return to some seasonality you’re seeing? I know Q3 historically pre-COVID was kind of a little bit slower. The last few years have obviously been kind of — I think that’s been throughout the window. But are we kind of getting back to some of that and maybe that kind of goes in hand with inventory management too where now supply chains are maybe somewhat normalized, so some of the larger customers have the ability to manage our inventory better as well?

Eric Green: Yes Larry, thanks for the question. First of all, I’ll pass on your remarks to Bernard a little bit later. In regards to the inventory management, what we’re seeing — it’s not really — it’s not seasonality, it’s more around timing of orders. So, if we think about the investments we’re making and I know Paul earlier asked about specific capital investments in different plants. And most of our investments, about two-thirds, let’s call it two-thirds of our CapEx is around growth orientation. Right now, there’s a heavy emphasis around HVP, particularly on plungers. And also in the CM side, it’s been a little bit larger than typical because of the supporting some of the new drug launches coming down the road. But we’re seeing some of the — and so those investments are going to be at our major HVP sites and I already commented on which sites for CM.

In regards to timing of the orders and it’s not seasonality. It also is the timing of customer production schedules. So, what I would look at is Q3 with 20% base organic growth and the comments that biologics don’t give the number, but was led that, so it’s obviously above. That is really new molecules in the market and success of those existing components — I’m sorry molecules in the market already. And so the demand continues to be layered on top. We — in Kinston site as an example, we’ve installed new capacity for NovaPure plungers. We’ve been ramping that up through Q3 and we’ll also do that through Q4 and we should be able to relieve the backorder situation by the end of this year and we’ll be in a very good position to be able to service our customers effectively throughout 2024 in the fastest area of growth.

So, hopefully that gives you some context Larry of what we’re seeing around product — standard products in the market.

Larry Solow: Got you. Great. Just shifting gears just one follow-up just on the high solution — getting a good leeway into that. Obviously that continues to be the driver and it sounds like there hasn’t been much slowdown any there. Just in terms of just I think you said it was greater than 75% in the quarter for revenue. Can you remind us approximately what it was last year? And more importantly, just I know it’s a lot lower on volume. Can you just give us a kind of a guesstimate on where it is on a volume basis and — I imagine NovaPure still remains a minority piece of that and that sounds like that’s potentially will be the fastest growing piece going forward. So, any color there would be great. Thanks.