West Pharmaceutical Services Q1 2022 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Q1 West Pharmaceutical Services Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Quintin Lai, Vice President of Investor Relations. Please go ahead.

[Quintin Lai, Vice President of Strategy and Investor Relations at West Pharmaceutical Services]

Thank you, Didi. Good morning, and welcome to West's First Quarter 2022 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, CEO, Eric Green; and CFO, Bernard Birkett, will review our financial results, provide an update on our business and present an update on our financial outlook for the full year of 2022. There's 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 four 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. 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 risk 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 West CEO and President, Eric Green. Eric?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on slide five. I'm pleased to report that we delivered a strong first quarter. This was driven by double-digit organic sales growth with increasing demand for our high-value products. Our confirmed order book for the rest of 2022 and into 2023 remains as strong as ever, primarily driven by non-COVID-based business. And to provide you more color, over half of the order book is coming from biologics demand. These results were delivered despite several macroeconomic challenges that are impacting all companies and sectors. We have taken proactive measures to mitigate the risk of these challenges and ensure the continuity of critical components to our customers. For example, inflation. We're adjusting our pricing strategy and have enacted surcharges as a pass-through to offset increasing costs of raw materials, energy and transportation. Supply chain. Our raw material and proprietary medical device components are sourced from across the globe.

We have increased our inventory of these key raw materials to minimize any supply disruption. And we continue to execute and monitor our business continuity plans with respect to these issues, including the war in Ukraine and the recent pandemic surge in China. Turning to slide six. Our team members across the globe continue to demonstrate their passion to improve patient lives as they remain focused on our strategic initiatives of execute, innovate and grow. Starting with the first pillar of execute. We continue to deliver the key drivers of growth in Q1 with strong customer demand of HVP components, including NovaPure and Westar. There was solid demand in the quarter across all market units and a positive outlook remains for the rest of the year. And in particular, for our Biologics market segment, which is now greater than 42% of our total sales, we see both existing and new customers continue to spec our highest level of components by West or our partner Daikyo for their sensitive molecules. Our capital spending investments through expansions and optimizing productivity across the global operations remain on track.

To date, almost all of our 2020 expansion phases have been installed, validated and in production, and we're making good progress on the 2021 capital expansion plans, some of which will come online in the second half of 2022 and throughout 2023. With the accelerated biologics demand for NovaPure, we have executed additional support for NovaPure future demand as well as other HVP finishing capabilities. Expansion construction is underway and will be online towards the back half of this year with commercial production in 2023. Shifting to West team of scientific and technical experts. We continue to educate and share insights in biologics, combination products and container closure integrity, which are priority areas in pharmaceutical packaging. At the recent PDA Annual Meeting, several of our West experts were recipients of prestigious awards.

Now to innovate. We need to fuel innovation to develop future products, solutions and services that connect the dots across science and technology to create customer value. We're doing so by investing in external opportunities that complement our current business needs such as our partnership with TECHIN to create a research center of excellence in combination with West scientific expertise, the Corning collaboration as we expand our HVP value proposition to lead the industry from components to a truly integrated system of elastomer-glass and building technologies like the recent collaboration with Pneuma Systems to develop a family of fluid flow technologies for drug delivery. I'm pleased of the progress our R&D team is making around innovate. Moving to the final pillar, growth, which includes uses of cash. We're working from a position of strength as we believe we have a long horizon of continued strong organic sales growth and margin expansion. As we have demonstrated over the past two years, we have increased our capital spending for capacity expansion at existing sites across our global network to support our organic growth initiatives.

In addition, we have made inorganic investments such as partnerships with Corning. Our continued focus within these three strategic pillars, execute, innovate and grow, allows us to be more responsive, leverage our assets more effectively and support the trends that are happening in the industry today. This was most evident from our recent site visits in Dublin and Waterford, Ireland. For example, in Dublin, I saw firsthand how the digitalization of our manufacturing technologies is providing real-time data, enabling our team to raise the bar in operational performance with higher yields and efficiencies. At Waterford, the capital investments over the last 1.5 years have significantly increased capacity with additional lines producing HVP product to meet increased demand. And we're seeing early success with our next-generation fully integrated automation that we believe will scale and transfer across the network for a combined benefit of higher quality production and higher manufacturing throughput.

Lastly and proudly, the hard work of our Waterford team was acknowledged by the Ireland-U.S. Council as we received the Global Public Service Award for our commitment during the pandemic. Now I'll turn it over to our CFO, Bernard Birkett, who will provide more detail on our financial performance.

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q1 2022 revenues and profits where we saw continued strong sales and EPS growth, led by strong revenue performance in our Biologics and Pharma market units. I will take you through the profit growth we saw in the quarter as well as some balance sheet takeaways. And finally, we will provide an update to our 2022 guidance. First up, Q1. Our financial results are summarized on slide seven, and the reconciliation of non-U.S. GAAP measures are described in slides 15 to 18. We recorded net sales of $720 million, representing organic sales growth of 11%. Looking at slide eight. Proprietary Products sales grew organically by 14.4% in the quarter. High-value products, which made up approximately 73% of Proprietary Products sales in the quarter, grew double digits and had solid momentum across Biologics and Pharma market units in Q1. Looking at the performance of the market units, the Biologics market unit delivered strong double-digit growth.

We continue to work with many biotech and biopharma customers who are using West and Daikyo high-value product offerings. The Generics market unit experienced mid-single-digit growth, led by sales of FluroTec and Westar components. Our Pharma market unit saw high single-digit growth with sales, led by high-value products, including Daikyo and NovaPure components. And Contract Manufacturing declined 3.8% for the first quarter due to a reduction in sales of components for diagnostic devices. We recorded $284.6 million in gross profit, $12.7 million or 4.7% above Q1 of last year. And our gross profit margin of 39.5% was a 100 basis point decline from the same period last year. We saw improvement in adjusted operating profit with $189.9 million recorded this quarter compared to $179.2 million in the same period last year or a 6% increase. However, our adjusted operating profit margin of 26.4% was a 30 basis point decrease from the same period last year. Finally, adjusted diluted EPS grew 12% for Q1. Excluding stock-based compensation tax benefit of $0.12 in Q1, EPS grew by approximately 15%. So let's review the drivers in both revenue and profit.

On slide nine, we show the contributions to sales growth in the quarter. Volume and mix contributed $49.9 million or 7.4 percentage points of growth. And sales price increases contributed $23.6 million or 3.5 percentage points of growth in the quarter. Looking at margin performance. Slide 10 shows our consolidated gross profit margin of 39.5% for Q1 2022, slightly down from 40.5% in Q1 2021. Proprietary Products first quarter gross profit margin of 43.4% was 290 basis points lower than the margin achieved in the first quarter of 2021. The decline in Proprietary Products gross profit margin was caused by several factors, including lower levels of absorption during the early part of the quarter due to short-term labor constraints, increases in raw material and overhead costs. In addition, our 2021 gross profit margin included approximately 150 basis points of benefit in the prior year associated with onetime fees from COVID and other supply agreements, which did not reoccur in the first quarter of 2022. These fees had approximately 160 basis points of benefit on Q1 2021 operating margin. Contract Manufacturing first quarter gross profit margin of 20.1% was 440 basis points above the margin achieved in the first quarter of 2021.

The increase in margin is largely attributed to pass-through of inflationary costs and components in the quarter. Now let's look at our balance sheet and review how we've done in terms of generating more cash for the business. On slide 11, we have listed some key cash flow metrics. Operating cash flow was $151.2 million for the first quarter of 2022, an increase of $62.5 million compared to the same period last year, 70.5% increase. Our operating cash flow in the period benefited from our working capital performance. Our first quarter 2022 year-to-date capital spending was $65.8 million, $11.1 million higher than the same period last year. Working capital of approximately $1.1 billion at March 31, 2022, decreased slightly by $42.2 million from December 31, 2021, primarily due to the net reduction of our cash, offset by an increase in inventory levels. Our cash balance at March 31 of $667.7 million was $94.9 million lower than our December 2021 balance. The decrease in cash is primarily due to our share repurchase program and higher capex, offset by our strong operating results in the period. Turning to guidance. Slide 12 provides a high-level summary.

We are reaffirming our full year 2022 net sales guidance. We expect net sales to be in a range of $3.05 billion to $3.075 billion. There is an estimated FX headwind of $115 million based on current foreign exchange rates compared to a prior estimated headwind of $70 million. We expect organic sales growth to be in the range of 11% to 12% compared to our prior guidance of approximately 10%. We expect our full year 2022 adjusted diluted EPS guidance to be in a range of $9.30 to $9.45 compared to a prior range of $9.20 to $9.35. This revised guidance includes first quarter $0.12 EPS positive impact of tax benefits from stock-based compensation. Also, our capex guidance remains at $380 million for the year. There are some key elements I want to bring your attention to as you review our guidance. Estimated FX headwind on EPS has an increased impact of approximately $0.38 based on current foreign currency exchange rates compared to a prior estimated headwind of $0.21. And our guidance excludes future tax benefits from stock-based compensation. So to summarize the key takeaways for the first quarter: strong top line growth in proprietary, growth in operating profit, growth in adjusted diluted EPS and growth in operating cash flow, delivering in line with our pillars of execute, innovate and grow.

I'd now like to turn the call back over to Eric.

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Thank you, Bernard. To summarize on slide 13, our execution in Q1 has positioned us well for the year ahead. We continue to have a strong base business despite the current macro environment in which we operate. We remain well positioned with the right market-led strategy around execute, innovate and grow. We have a robust book of committed orders with momentum in 2022 and continuing into 2023. We continue to realize the benefits of our global operating model, and we're continuing to accelerate capital spending across our operations to meet current and anticipated future growth. With great pride, we realize the criticality of our products for health care across the globe, which is why our purpose to improve patient lives propels us each and every day.

Didi, we're ready to take questions. Thank you.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Larry Solow of CJS Securities.

[Lawrence Scott Solow, Analyst at CJS Securities]

Great, good morning guys. Did you give the -- real quick housekeeping question. Did you give the COVID sales -- COVID-related sales number? Did I miss that?

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

We didn't call it out, but it was approximately $110 million, which shows growth over Q1 2021.

[Lawrence Scott Solow, Analyst at CJS Securities]

Got it. So there's no change to this year's outlook for that, it sounds like. Okay. Just on the cost side, clearly, everybody is facing these varying degrees of -- from inflation and supply chain issues, and you guys have done a fabulous job offsetting a lot of them, I think. But obviously, you can only offset so much. I'm just curious what the -- the surcharges you put in today, weren't you already kind of -- is this just sort of expediting increases to keep up with the rapid -- the fluid situation with the costs coming up? I know, normally, I think, you have like kickers in there when you're selling -- in a lot of your contracts. Is this more of a broader-based, more aggressive reaction to some of these inflationary issues?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Yes. Larry, there's two elements. You're right, on the Contract Manufacturing side of our business, which is a little bit less than 20%, we do have -- with our agreements with our customers, we are passing on inflationary costs for the most part, whether it's raw materials and etc. On the proprietary side, that's more of a recent phenomenon. There's two elements of that though. One is we've mentioned before that we are revisiting our pricing strategy, and we started executing upon that last year, building up for this year. So we're seeing the element of more long-term pricing strategy around value capture that is now coming into the equation.

In addition to that, in the proprietary business, we have implemented surcharges as well. And that typically is really around transportation and increase in raw materials. So there's two levers that have occurred. But I just want to be very clear that there is an element that underlying base price increase strategy is now being rolled into the ongoing business.

[Lawrence Scott Solow, Analyst at CJS Securities]

Okay. And was this kind of just enacted at the beginning of this year, I guess? And I assume there's some kind of a lag, right? I mean margins were down a little bit. I know year-over-year, there was some more -- you had this onetime -- $12 million onetime payment. I know that's skewed the margins. But even if we look sequentially, margins are down a little bit, right? Is that mostly a function of these higher costs and maybe you can't offset all of them but hopefully maybe you get a little improvement as we look out, as you enact some of these surcharges?

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

It's partly related to the cost and the lag in passing them on, so it's not always instantaneous in the quarter. When you see the pricing or the cost increases, then we work with our customers to layer that in over time, and that's what we have been doing. And the other thing that we called out, Larry, as well, we did see some lower levels of absorption in the -- probably the first half of the quarter based on labor supply in one of our -- two of our plants, and that was a short-term blip, and we've seen the absorption levels get back to normal or where we would expect them to be in the latter half of the quarter. But again, that does impact margin in the short term.

[Lawrence Scott Solow, Analyst at CJS Securities]

Right. Yes. That was kind of my next question. Was -- other than the cost impact and the labor issue you called out as sort of temporary, are you guys having any major or increasing problems just retaining labor or supply chain issues or you've been able to sort of -- even though things are not getting any better, I know?

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

I wouldn't think there's increasing problems retaining labor. It has been challenging, I think, for everybody, but we haven't seen any spike in that. So we have a number of initiatives with our HR teams to make sure we have the labor in the right places. So it wasn't really around retention problem. So long term, that's not a big issue for us. And then if you look at the implied guidance, we are forecasting operating margin expansion. And to do that, we have to be able to do gross margin expansion at the same time to feed into it. So we believe some of these short-term impacts we saw at the really early part of the year are kind of now behind us.

[Lawrence Scott Solow, Analyst at CJS Securities]

Okay. Okay. Great. And then just last question on -- just back to the COVID. Any -- obviously, there's a lot -- it's a quickly changing situation. But it sounds like for you guys, again, we've talked about it, it's not a matter of overall volume but sort of that shift in life cycle management. Have you seen any incremental evidence that this is occurring? Or any thoughts, any update on that front?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

What we can share with you is that we are seeing more of the forecasting looking later into 2022 of a shift from larger vial configuration to a smaller vial configuration. But that hasn't flown into our operations as we speak today, but that's more forecasted. We're working with our customers throughout the year.

[Lawrence Scott Solow, Analyst at CJS Securities]

Right. Okay, thanks. Appreciate it.

[Operator]

Our next question comes from Justin Lin of William Blair.

[Justin Lin, Analyst at William Blair & Company]

Hi, good morning. Thank you fffffmy questions. I guess Repligen came out yesterday and saw COVID vaccine cancellations and orders have been pushed to 2023, at least some of them. I guess what are you seeing in your order books? And if you could share your outlook for COVID, both short term and long term, that would be great.

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Well, two ways to look at it. One is, if we think about for 2022, our confirmed order book for the balance of the year, as we mentioned earlier, it's a very -- it's much stronger than it was the same time period as last year. But if you split that out, the COVID ratio within that larger order book is relatively the same as -- is relatively steady as it was last year. Really, the expansion of that order book is really heavy around the HVP, and also due to -- over half of it is due to the success of various drug launches in our biologics space. So there are some COVID-19 customers that are adjusting their forecast, but overall, we're seeing a steady flow throughout the balance of the year.

[Justin Lin, Analyst at William Blair & Company]

Got it. So you're currently not sort of changing your outlook for 2023, it sounds like?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

No, we're not based on current conversations with customers.

[Justin Lin, Analyst at William Blair & Company]

Got it. And I think your margins, both gross and operating, came slightly below The Street. Can you help us think through how much of that is product mix versus currency versus supply chain headwinds? I think gross profit is a bit lower than you're used to seeing, but some of that is offset by a lower SG&A spend as well.

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Yes. So on the gross margin, really, what I called out earlier in response to Larry's question, part of that was on the lower levels of absorption that we did see in the first half of the quarter. Again, that was more of a onetime event. And what we're actually seeing in operating margin, if you look at our business on a normalized basis, if you back off the onetime take-or-pay that we got in Q1 2021 and compare operating results excluding that, operating margin would have expanded by about 130 basis points. So that -- it had a 160 basis point impact on operating margin. So that -- so when we look out for the balance of the year, we are forecasting continued operating margin expansion. So that comp made it very, very difficult to expand the margin in that period.

[Justin Lin, Analyst at William Blair & Company]

Got it. That's it, thank you very much.

[Operator]

Our next question comes from Paul Knight of KeyBanc.

[Paul Richard Knight, Analyst at KeyBanc Capital Markets]

Hi. Eric, your $380 million of capex obviously shows, I guess, a very strong building book for biologics ex COVID. Can you talk about 42% of biologics -- of sales are biologics this year? What was it last year? And can you talk about what you're seeing that's driving your capex levels?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Yes. So when you look at it, Paul, it's less than 40%, and we're seeing the biologics become a larger piece of the -- obviously, it's the largest unit today but with the highest growth even ex COVID in the equation. And so when you think about our investments that we're currently making, over 70% of the capital is really growth orientated, which I think historically was probably closer to the 50th percentage. And it's really focused around NovaPure and FluroTec, particularly plungers and stoppers. And what we're seeing is really a buildup -- as we talked earlier about, the capital that we're spending in the last couple of years really is -- was already built in our five-year plan, and we're just bringing it forward to support the COVID vaccines.

But now what we're seeing is that the demand on the biologics continues to increase and accelerate. And I mentioned a little bit earlier, but just to reiterate, I mean, if I look at the details of the confirmed order book, over half of it is of drug molecules in market that we're seeing a ramp-up or acceleration of adoption. And so it's not just one molecule, it's many. So we're seeing that pull effect of increasing volume out of West to support the continuation of the drug in the supply chain. So we're very, very excited to see the focus around biologics, the high penetration of successes of new BLAs or NMEs. And our participation remains very, very high, and this is the impact that we're seeing.

[Paul Richard Knight, Analyst at KeyBanc Capital Markets]

And regarding the Corning JV, what's -- I know you've indicated capex of $15 million, but what's the multiyear kind of time line in your view with that JV?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Well, the investments are more in the next couple of years. I mean it's a very long-term arrangement. We will have various launches over the next couple of years, starting this year, 2022, of new solutions to customers. But these investments will take place on the capital side over the next couple of years to increase capacity, particularly around prefilled syringe.

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Yes. So that's going to be a number of years before we see from a revenue and profitability perspective. That's not immediate. So it's going to take time to build that out. But in the interim, there are other configurations, as Eric said, that we're putting together, but they won't be overly material on our numbers in the short term.

[Paul Richard Knight, Analyst at KeyBanc Capital Markets]

Okay. Thank you.

[Operator]

Our next question comes from Jacob Johnson of Stephens.

[Jacob K. Johnson, Analyst at Stephens]

Hi, thanks. Good morning. Maybe first, just a couple of clarifying questions. First, on the COVID side, if I heard you correctly, it sounds like your expectations for 2022 on the revenues there are unchanged. But has the composition of those revenues changed? Are you assuming -- it sounds like maybe the back half of the year you're going to get maybe a little more of a benefit from a configuration change. Is it fair to say that maybe the composition of those revenues have shifted versus prior expectations?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

No, I think it's pretty consistent. I think what we're seeing is, absolutely, when you do life cycle management, different vial configuration, there will be a change, and that was really more towards the back half of the year. But when we look at the growth orientation of where we are today and look at balance of 2022, the ex-COVID or the non-COVID-related growth will outpace the COVID growth. And as you recall, last year and the year before, it was really quick acceleration because of our response in the market. But it's more steady -- can't quite say steady state. It's more of a lower end but still growth overall for West. But the higher element of growth in proprietary is definitely going to come from, right now our view is, non-COVID related.

[Jacob K. Johnson, Analyst at Stephens]

Okay. Got it. And Bernard, just on the decline in gross margin sequentially, it sounds like this was largely related to labor and absorption. And if I heard you correct, it sounds like that was the first half of the quarter, and that's been resolved. So is it fair to assume that we should see gross margins kind of bounce back now that that's over with as we think 2Q and beyond?

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Yes. And that's implied in the guidance, that, for that to happen. And we're confident that, that will take place. And as Eric has alluded, we're continuing to see very strong growth within biologics and that mix shift within our business, and that drives a lot of that margin improvement. And we're also picking up various levels of efficiencies throughout our operations. So we would expect to see margins continue to improve throughout the year.

[Jacob K. Johnson, Analyst at Stephens]

Okay. That's helpful. And then just last question, kind of getting to the point, I think, you both want to make. Eric, you mentioned a long horizon of organic growth. I guess the question there, what would be helpful? Just remind us kind of where high-value product units stand in terms of percentage of units today, what that number looks like and maybe how that could -- what that could look like maybe five years from now.

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Yes. If you think about the algorithm that we have with greater than 70% of our sales in proprietary is high-value products, the number of units that we are producing for high-value products is roughly around 22%, 23%. And the way it works is about 100 basis point expansion on units is strong double-digit growth on high-value products. If you think about how biologics is becoming a larger portion of the portfolio, again, across many different customers, so it's not really concentrated on one customer or one drug, it's across the whole portfolio of the market, that will continuously drive higher revenues, higher profits with not a lot of increase on units per se, 100, 100-plus basis points.

So that's the equation, and we expect that to continue. It's the fastest growing subsegment within injectable medicine space. The pipeline is very robust. It was very encouraging to see the number of new approvals over the last 12, 18 months in this particular space, and our participation rate is as high as ever. So all this equates to -- and it translates into our confirmed order book for future launches. So this all translates into continued growth for the next five years of HVP for West.

[Jacob K. Johnson, Analyst at Stephens]

Thanks for taking my questions.

[Operator]

Our next question comes from Derik De Bruin of Bank of America.

[Derik De Bruin, Analyst at BofA Securities]

Hi, good morning everyone. I just jumped on so my apologies if I'm going to repeat some stuff. But can you just sort of talk about the organic revenue growth guide? You're a little bit below in our numbers in the first quarter, yet you're raising it for 1% to 2% for the full year like that, which is surprising given the Q1. Can you just sort of walk through the math on your confidence as we're getting that increase given the start?

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Yes. So the -- when we look at it, and it goes back to the point I made earlier about the absorption rates that we experienced in the first half of the year due to some of our labor constraints and that was primarily around Omicron, it impacted us in a couple of different sites. Again, that was a short-term problem. That impacts our ability to produce in the short term, so then that kind of leads into some impact on our revenues in the first quarter. So it's not that we're seeing a drop or a shift in our demand downwards. It's mainly what we could actually produce in the quarter and deliver to customers. So that was a little bit light. But as Eric said, our order book is still very, very strong. And when we had spoken earlier on in the year, we were saying we were going to see more of our growth to come in the back half of the year versus the first, and that's still what we're seeing. So there's really no change.

[Derik De Bruin, Analyst at BofA Securities]

Great. Thanks for clarifying that. That's really helpful, and I didn't catch that. I've got a couple of clients asking. Can you just sort of confirm that you're looking for greater than 100 basis points of overall operating margin expansion this year?

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Yes. And again, that's implied in the guidance. So it will be greater than 100 basis points. And getting back to the point I made earlier, if you look at the fundamentals of the business, if you take that take-or-pay that we had in Q1 2021, if you back that out and then look at the comp on that basis, operating margin would have expanded about 130 basis points. So from a comp point of view, you had that level of challenge here in the first quarter. So when I look at that, it gives me confidence to be able to say yes, we are going to continue to expand that operating margin.

[Derik De Bruin, Analyst at BofA Securities]

Do you think the production constraints are largely alleviated now?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

I'll comment. I would say -- just based on the last couple of months of performance, I would say yes. I mean there's always challenges in this environment today. The couple of plants that Bernard is referring to, we were hit hard on the Omicron, and that did impact absorption. That also impacted productivity. But over the last couple of months, looking at the productivity levels, the output, we do believe we have a very good control around this and we're able to build flex to make sure that we're able to deliver going forward. But it was a short-term hit.

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Yes. So we did see improvement as we moved through the quarter. And we're forecasting that to continue based on what's in place now.

[Derik De Bruin, Analyst at BofA Securities]

Great. And I've got some people asking on your China exposure and just sort of any commentary in that region. Has that been a headwind to the business at all?

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Yes. So our operations was impacted in the sense that our Qingpu manufacturing facility is within the region of Shanghai and obviously, our offices, too. So we did have a site closure for a short period of time, and we're working through that now. As far as materiality for West, it's very low percentage for West coming out of that facility for the local market. But we're keeping an eye on it, making sure that we can pivot and potentially import where necessary versus having materials coming out of that specific site. We do expect to see a recovery in this quarter with the demand, but we need to stay tuned because that's kind of a dynamic environment right now.

[Derik De Bruin, Analyst at BofA Securities]

Thank you very much.

[Operator]

Our next question comes from Dave Windley of Jefferies.

[David Howard Windley, Analyst at Jefferies Financial Group]

Hi, good morning. Thanks for taking my questions. I wanted to follow up on Derik and several of the other line of questioning around the capacity. Wondering if your absorption commentary on productivity issues affected your ability to deliver to clients. Like should we think about revenue would have been higher in the quarter if you had been able to produce as much as you expected in those facilities? And like did the lag times to clients change at all?

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Yes. It impacted it slightly, but it didn't really impact lead times overall. We were able to kind of get that product out to customers in the early part of this quarter. So we tried to minimize any customer impact. As we said, it happened earlier in the quarter, but there's no kind of long-term impact to that. It was a once-off, and it was something we've been able to deal with. And we've been able to continue supply to our customers. It could impact revenues slightly but not overly material, I will put it that way. But there was some impact around that.

[David Howard Windley, Analyst at Jefferies Financial Group]

Okay. On the -- it seems -- as people have already highlighted the gross margin impact and somewhat offset by SG&A being a little lower, should we think about that SG&A level as durable? Is that a result of kind of some permanent productivity step-ups?

[Bernard J. Birkett, Senior Vice President and Chief Financial Officer at West Pharmaceutical Services]

Yes, it is durable. It's productivity. And again, it is looking at what is the appropriate level for SG&A of our business. And that's something that we manage very, very tightly.

[David Howard Windley, Analyst at Jefferies Financial Group]

Okay. And then just somewhat longer-term question around capacity. I apologize, I'm probably not great at keeping up with all this, but you've pulled forward quite a bit of capex, not just kind of now but over the COVID period and have a number of initiatives in place to bring more capacity online. Could you just help us understand in broad strokes when those capacity expansions are supposed to hit? And I think it's mostly FluroTec and NovaPure, as you've highlighted, Eric. And then also confirm what you said in the past that you basically expect that capacity to be taken up by order demand right away; in other words, no dilution to productivity, absorption, etc., as you're bringing on slugs of new capacity.

[Eric M. Green, President, Chief Executive Officer and Director at West Pharmaceutical Services]

Yes. I'll take the last part first and say that we don't anticipate any impact if there's very variability around the COVID piece. Because if we look at the demand that we're getting with non-COVID related, particularly in the biologics space, which overlaps 100% with the investments that we are putting in, the growth is a little bit higher than we anticipated. So therefore, we're in a position we can absorb that. But to your first point, the initial launch that we communicated back in -- early on in the pandemic, let's just call it 2020, that investment is now finalized and in place and now is producing commercial product this year. And it was kind of weaved in throughout 2021. So that's 100% installed.

The second phase that we communicated really towards the early part of 2021, we're seeing that being layered in as we speak and might leak some parts of it, not all, a portion -- a small portion might go into 2023. But the focus of the remaining HVP is exactly what you stated. It's really focused around NovaPure and FluroTec capacity, and it is across multiple plants within our network. And again, it lines up very nicely with the growth in biologics, and it also does support pharma and generics but mostly biologics. And then growth in biologics in our order book is extremely strong as we speak today. So I'm pretty confident.

Now we need to get that equipment in, installed, validated, and we've been doing a great job across the globe. We also need to add some resources to be able to run those -- the new equipment, and that is ongoing as we speak. So we're seeing a very good uptick in attracting new additional talent to our organization but also doing a good job of keeping in pace of the capital expansion.

[David Howard Windley, Analyst at Jefferies Financial Group]

Nice one. Appreciate your answers. Thank you.

[Operator]

I would now like to turn the conference back to Quintin Lai for further remarks.

[Quintin Lai, Vice President of Strategy and Investor Relations at West Pharmaceutical Services]

Thanks, Didi. 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 a replay through Thursday, May five by using the dial-in numbers and conference ID provided at the end of today's earnings release. That concludes this call. Have a nice day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Quintin Lai, Vice President of Strategy and Investor Relations
• Eric M. Green, President, Chief Executive Officer and Director
• Bernard J. Birkett, Senior Vice President and Chief Financial Officer

Analysts

• Lawrence Scott Solow, CJS Securities
• Justin Lin, William Blair & Company
• Paul Richard Knight, KeyBanc Capital Markets
• Jacob K. Johnson, Stephens
• Derik De Bruin, BofA Securities
• David Howard Windley, Jefferies Financial Group Inc.