The operator introduces the West Pharmaceutical Services Fourth Quarter 2023 Earnings Conference Call and hands the call over to Quintin Lai, Vice President of Strategy and Investor Relations. Lai reviews the company's financial results, provides an update on the business, and presents the financial outlook for the full year 2024. A slide presentation is available on the company's website and a Safe Harbor statement is presented, cautioning that the company's future results may differ from expectations. Lai also mentions non-GAAP financial measures that will be referenced during the call and provides a reconciliation to GAAP financial results.

CEO Eric Green highlights the company's 100th anniversary and thanks the team members for their hard work. He then discusses the drivers of growth in 2023, the challenges ahead in 2024, and the drivers of long-term growth in 2025. He is pleased with the strong base growth in 2023, despite a decline in COVID-19-related sales. He also mentions the expansion of their global network and successful addressing of backlog issues.

In 2024, the company is facing challenges to their growth model, resulting in lower organic sales growth compared to their preliminary outlook. The challenges include declining demand, delays in manufacturing capacity, delayed customer upgrades, and destocking. These challenges have been unexpected and are causing a negative impact on the company's quarterly pacing, with the largest impact expected in Q1. However, the company expects to see better growth in the second half of the year, with Q4 in line with their long-term financial goals.

In summary, the company is confident in their 2024 guidance and quarterly cadence due to a higher order book, expected increase in production from customers, and improvements in HVP device capacity. While they may not achieve their usual full year organic sales and margin expansion, this is due to external factors such as COVID-related demand reduction and industry-wide destocking. Looking ahead, the company plans to continue investing in capital projects to expand their industry-leading capacity and drive growth, particularly in their HVP devices which have shown strong organic sales growth and represent 10% of overall sales.

The company has experienced growth in contract manufacturing, with plans for expansion at their Dublin facility. They also anticipate continued growth in HVP components due to increasing demand for existing drugs and breakthrough growth for certain drugs treating diabetes and obesity. They expect mix shift to contribute to their growth as well, with more customers upgrading to higher quality and standardized solutions in response to new regulations.

In the next few years, the company estimates that billions of their primary containment components could benefit from a shift to their modern formulation and HVP processes. This shift will take time, but with new regulations, adoption is expected to accelerate. The company is confident that they will continue to see 7-9% annual organic sales growth and at least 100 basis points of operating margin expansion per year. In the fourth quarter of 2023, the company saw low single-digit organic sales growth and an increase in diluted EPS and operating profit. COVID-related net revenues were estimated to be around $7 million, resulting in a $48 million reduction compared to the previous year. Proprietary Products organic net sales declined by 0.3%, primarily due to the COVID decline and a destocking of inventory by certain customers. High-value products, which made up 75% of proprietary product sales, saw low single-digit growth driven by customer demand for HVP components and devices.

In the fourth quarter, the pharma market unit had low single-digit growth due to demand for certain components, while the biologics and generics market units experienced declines due to reduced sales related to COVID-19. However, the Contract Manufacturing segment showed high single-digit growth. Gross profit and gross profit margin both increased compared to the same period last year. Adjusted operating profit and adjusted diluted EPS also increased, with adjusted EPS rising 3.4% and 6.4% excluding certain factors. Sales price increases and a foreign currency tailwind contributed to sales growth, while a negative mix impact was caused by reduced COVID-19 related demand and destocking trends. Proprietary products also saw an increase in gross profit margin.

In the fourth quarter of 2022, the gross profit margin for proprietary products increased due to sales price increases and a favorable mix of products sold. This was partially offset by inflation and a decrease in COVID-related revenues. The gross profit margin for Contract Manufacturing also increased significantly, attributed to sales price increases and a favorable mix of products. The company generated $776.5 million in operating cash flow, a 7.3% increase from the previous year, primarily due to favorable working capital management. They also spent $362 million on capital expenditures, a 27.2% increase, to increase manufacturing capacity. The company's working capital decreased by $135.9 million, mainly due to an increase in current debt and a decrease in cash balance. The company expects net sales to be between $3 billion and $3.025 billion in 2024, with organic growth of 2-3%. Adjusted diluted EPS is expected to be between $7.50 and $7.75, and CapEx is projected to be $350 million for the year.

The speaker highlights key elements of their guidance, such as the estimated impact of foreign exchange and the exclusion of future tax benefits. They express confidence in their growth strategy and commitment to overcoming challenges in the sector. When asked about the cadence of recovery, the speaker clarifies that proprietary products are expected to decline in the first quarter, but overall organic sales growth is expected to improve throughout the year and reach normal levels in the fourth quarter.

In the paragraph, the speaker discusses the factors contributing to the 6-7% decline in Q1 and the expected growth in the following quarters. They mention that the majority of the decline is due to destocking, with 75% of it coming from 6 specific customers. The speaker also addresses concerns about changes in market share and patient demand, stating that their interactions with clients have not indicated any significant changes in these areas. They attribute the destocking to a combination of customers managing their inventory levels and the company's ability to reduce lead times.

The speaker agrees that there has been a decrease in demand for their products due to destocking, especially in bulk and standard areas. They have allocated $250 million in capital expenditures this year, with 70% going towards growth and 30% towards maintenance. The investments in HVP capacity and contract manufacturing will likely lead to increased revenue in 2024 and 2025. The speaker also mentions that a major project in Dublin will be validated by the end of 2024 and will help meet demand for their products.

During a conference call, Paul Knight asked about the long-term growth rate for the company, citing the emergence of GLP-1s as a significant class of therapeutic. Eric Green responded by stating that they see potential for incremental upside in this market and are confident in their participation with customers in this space. He also mentioned that they are investing in contract manufacturing, which they see as a potential source of growth within their overall growth rate.

The company's investments in specific areas are tied to specific customers and business, which supports long-term growth. The order book for the back half of the year looks stronger compared to pre-COVID levels, giving the company confidence in a rebound to normal growth rates. The company doesn't see destocking as a long-term problem and expects to get through it this year.

During a discussion about the company's margin cadence, Bernard Birkett states that they expect to see a gradual shift back to more normal rates of operating margin as the year progresses. Derik De Bruin asks about pricing, and Eric Green responds that they have enjoyed better-than-expected pricing for the last couple of years, but it is not sustainable and they are likely to see a net price contribution of around 3%. Green also mentions that 75% of the company's business is tied to 6 customers and expresses confidence in the pickup they are seeing in the second quarter and going forward.

The speaker is discussing the potential for delays in revenue due to the impact of the pandemic on the company's order book. They mention that there may be some destocking in the second quarter, but overall they have a good level of confidence that orders will convert to revenue. The company has pressure tested the orders and is confident they will convert into revenue in the expected time period.

The speaker expects their order book to continue to grow as the year progresses and they are currently ahead of where they were pre-pandemic. They are expanding their manufacturing capacity for HVP devices and expect to see commercial revenues from these products in the second half of 2024. Lead times for components are good and they are also expanding HVP processing to support future drug launches. They are positioning themselves well to support the anticipated growth in the near future.

During a conference call, John Sourbeer from UBS asked about the percentage of high-value products (HVPs) in the company's mix for 2024 and any potential shifts due to destocking and new capacity. Bernard Birkett, the operator, explained that the percentage of HVPs is expected to remain relatively the same, as the company's growth is mainly driven by these products in the injectable market, particularly biologics. Sourbeer also asked about the destocking trends in the proprietary product segments, and Eric Green, another speaker on the call, confirmed that the impact was seen in all three sectors (biologics, pharma, and generics) and not just in pharma and generics as initially thought.

During a conference call, Bernard Birkett clarifies that all three segments of the company, products, and overall performance are expected to return to positive growth in the second quarter. The growth will not be significant, as there is still some destocking to be done. The order book is measured on a 12-month basis and has a higher coverage ratio than pre-pandemic levels. When asked about margins, Birkett confirms that operating margins are expected to be flat year-over-year.

During a conference call, David Windley from Jefferies asked Eric Green about the company's participation rate and share in the market. Green clarified that participation rate refers to the percentage of customers who use West's product in their regulatory filings, and it is usually a large share of the volume of doses. Windley also asked about the company's market share and Green confirmed that it has remained consistent at around 70%. Windley mentioned a competitor's recent conference call where they discussed a new project in the GLP-1 market, but Green emphasized that West's participation rate in GLP-1s is very strong.

The company is strong in the packaging industry and has a good relationship with its customers. They are focused on an integrated approach and want to have more components in their final packaging system. They are also planning on investing in capital to improve their capacity and are considering buying back stock as a sign of confidence in their long-term growth outlook.

The company is currently investing in capital to support future growth on both the contract manufacturing and proprietary sides of their business. This includes building support for current and future commitments, new drug launches, and meeting regulatory changes. These investments will take 12-24 months to fully implement and are necessary to capture all opportunities in the market.

The company expects their capital expenditures to level off after 2024 due to disciplined capital deployment and regular reviews. They also have a deliberate approach to share repurchases. The CEO discussed the impact of a lower sales outlook and mentioned an ongoing regulatory shift towards low particulate requirements, which may affect legacy products and drive the development of new ones.

West has been successful in shifting its high-value product mix towards new molecules, particularly in the biologics segment, which has higher ASP and margins. With the enforcement of regulatory changes, there is an opportunity for West to work with its customers to transition them into more appropriate packaging configurations to meet the standards. West has a history of introducing new products and capabilities that coincide with regulatory changes, positioning them well to support their customers and patients. This will be a gradual process and will take several years.

The company is prepared to see growth over the next few years. The increase in sales will come from various sources, including administration systems, SelfDose, and SmartDose. The company is particularly focused on SmartDose and has a dedicated team and new equipment to support its growth. The call ends with a thank you from the speaker.

An online archive of the broadcast will be available on the company's website, and a replay can be accessed for 30 days using the provided dial-in numbers and conference ID. The call has now ended and participants can disconnect.

This summary was generated with AI and may contain some inaccuracies.