West Pharmaceutical Services Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2023

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to West Pharmaceutical Services 4th Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Quentin Lai, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Shannon. Good morning, Welcome to WES' 4th Quarter and Full Year 2022 Conference Call. We issued our financial results this morning and the release has been posted in the Investors section This morning, Eric Green and 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 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.

Speaker 1

Statements made by management on this call and in the accompanying presentation contain forward looking statements within the meaning of U. S. Federal securities law. These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts. The company's future results are influenced by many factors beyond the control of the company.

Speaker 1

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 Regarding the risks to which it is subject, including our 10 ks, 10 Q and 8 ks 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 Actual measures to the most comparable financial results compared in conformity to GAAP are provided in this morning's earnings release. I now turn the call over to our CEO, Eric Green.

Speaker 2

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on Slide 5. For over 100 years, the West name has come to mean so much to so many people. We have grown and expanded from manufacturing primary containment components to designing and manufacturing delivery systems.

Speaker 2

This remains the same today as a global market leader who continues to define the evolution of our industry. Our 10,000 plus team members are motivated by improving patient lives. The past few years have been a reminder that the world doesn't stand still and the needs of the healthcare industry are evolving and growing in complexity, with shifting treatment options from the hospital to home setting. We remain committed to the pursuit of scientific innovation and partnerships to address the changing needs of today and into the future. Moving to Slide 6.

Speaker 2

Looking back at the year, I'm pleased to report that WES delivered Overall organic sales growth of approximately 8%. This growth was generated despite a rapidly shifting pandemic landscape. We started 2022 expecting COVID-nineteen volume growth, but instead declining orders and demand from our customers actually resulted in a 15% decline in pandemic related sales. Excluding COVID-nineteen, we estimate Their base organic sales growth was low double digit with mid teens growth in proprietary products. And driving this base growth is demand for our high value product offerings for both legacy as well as recently launched drugs.

Speaker 2

And we ended the year with a return to growth in Q4 in Contract Manufacturing. This performance is a result of the dedication and relentless focus of our team members across the globe. We are connected by a Strong responsibility and shared values that continue to help us succeed each day. I want to acknowledge these efforts and say thank you. Looking ahead, we remain well positioned with the right growth strategy around execute, innovate and grow.

Speaker 2

Our solid order book of committed orders reinforces the criticality of West components and devices to address our customers' growing injectable drug demand, and we continue to deploy capital investments to support the increase in demand driven by the attractive end markets. Turning to Slide 7. In addition to our financial momentum, there were several other notable accomplishments in 2022. We shipped close to 47,000,000,000 components touching billions of patient lives. As scientific and technical leaders in the industry, Our customers expect us to help solve their problems.

Speaker 2

We continue to broaden insights with our expertise through our webinars, published articles and technical presentations. We partnered with Corning to build the next generation of leading We launched Daikyo CZ2.25 ml insert needle syringe to support the biologics market and secure 3 additional FDA approved drugs using our SmartDose technology as we continue to bring additional value to our customers. Lastly, we donated $2,750,000 But more importantly, our team members continue to volunteer their time to help our local communities with the greatest needs. Our heartfelt thoughts are with all those impacted by the devastating earthquake in Turkey and Syria, where we have provided aid through UNICEF. Shifting to Slide 8.

Speaker 2

We continue to factor environmental considerations into every aspect of our business. Over the past 5 years, we have made tremendous strides across the 6 priority areas and newly defined performance indicators. I'm pleased that we're on target with 90% of our operational waste not being sent to landfills. Our pursuit of renewable energy alternatives has aided in a positive impact in the emission reduction. These efforts have been recognized with numerous ESG accolades in 2022.

Speaker 2

We look forward to sharing more detail and our corporate responsibility report to be published in the spring. Turning to Slide 9. We continue to address the growing market needs with today's complex and sensitive molecules. At the recent Pharma PAC meeting, we introduced Several new products for large volume delivery and complete vial containment solutions. One available product is our West ReadyPak with Corning's Valor ready to use vials.

Speaker 2

This will be the first of many products from our Corning partnership. The combination of these products eliminates the risk of delamination and reduces glass particulate in bulk filling lines. It is drug delivery innovations like this that ensures best in class performance with a value proposition to meet the increased regulatory We are introducing full year 2023 financial guidance. This guidance is based on demand trends as well as our current capacity levels is also reinforced by our strong West and Daikyo participation rate in drug approvals, especially in Biologics and Biosimilars. We expect full year overall organic sales growth of approximately 3% to 4%, which includes a $303,000,000 year over year decline and pandemic related sales.

Speaker 2

Excluding this impact, we expect mid teens overall base organic sales growth with proprietary products growth in the high teens and high single digit growth in contract manufacturing. 2023 will represent a transition year for our margin profile as we see a headwind from COVID-nineteen HVPs. That said, our expected margins for this year are significantly above pre pandemic 2019 levels. This underscores the strength of our financial construct with annual margin expansion of 100 basis points or more per year. In 2019, we posted operating margin of 16.1 percent.

Speaker 2

In 2023, we expect operating margin of 23% to 24%, which would represent an increase of approximately 800 basis points over a 4 year period. Also, today we announced that the Board of Directors has authorized a new share repurchase plan as our prior plan was completed last year. This program is authorized for up to $1,000,000,000 of share repurchase. We note that this new program does not have a specified end date. As comparison, in 2022, Our 12 month program was completed at $203,000,000 of buybacks.

Speaker 2

And in 2021, Our 12 month program was completed $137,000,000 of buybacks. This new $1,000,000,000 program will provide for a continuation of our share count neutral strategy, which is assumed in our 2023 full year financial guidance. We believe this program will also provide flexibility for incremental share repurchases depending on various factors such as Economic and market conditions. Turning to Slide 11. As you can see from our guidance, we see continued base momentum in 2023 and we're planning for further additional growth as our customers are preparing for expanded success of our current Biologics portfolio and drug launches.

Speaker 2

As such, we continue to drive forward to complete the installation of our capital expansion plans for additional HVP capacity. The picture shows the progression of our ongoing efforts. On my recent visit to Kinston, it was impressive to see the additional space added to accommodate the installation of new manufacturing equipment to address the growth of HVPs and plungers. Together with other site expansions, this will support future demand across our global manufacturing network. Now I'd like to turn the call over to Bernard.

Speaker 3

Thank you, Eric, and good morning. We'll first look at Q4 2022 revenues and profits, where we saw low single digit organic sales growth and a decline in operating profit and diluted EPS. 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 review our 2023 guidance. First up, Q4.

Speaker 3

Our financial results are summarized on Slide 12 and the reconciliation of non U. S. GAAP measures are described in Slides 20 to 23. We recorded net sales of $708,700,000 in the quarter, representing organic sales growth of 2.6%. COVID related net revenues are estimated to have been approximately $55,000,000 in the quarter and an approximate $69,000,000 reduction compared to the prior year.

Speaker 3

These net revenues include our assessment of components associated with Vaccines, treatment and diagnosis of COVID-nineteen patients offset by lower sales to customers affected by lower volumes due to the pandemic. Looking at Slide 13, proprietary product sales grew organically by 1.8% in the quarter. High value products, which made up approximately 72% of proprietary product sales in the quarter, were flat compared to the prior year due to the reduction in COVID related net revenues. Looking at the performance of the market units, the generics market unit delivered double digit growth led by Envision Components and Admin Systems, while the pharma market unit experienced high single digit growth led by NovaPure and Westar Components. And the Biologics market unit saw a mid single digit decline due to a reduction in sales related to COVID-nineteen vaccine.

Speaker 3

Our Contract Manufacturing segment experienced net sales growth of 7% in the 4th quarter, primarily driven by sales of healthcare related medical devices. Our adjusted operating profit margin of 22.4% was a 3 50 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 13.2% for Q4. Excluding stock based compensation tax benefit of $0.06 in Q4, EPS declined by approximately 13.6%. Now let's review the drivers in both our revenue and profit performance.

Speaker 3

On Slide 14, we show the contributions to sales growth in the quarter. Sales price increases contributed $28,100,000 are 3.8 percentage points of growth. Offsetting price was a foreign currency headwind of approximately 41.3 $1,000,000 and a negative mix impact of $8,900,000 primarily due to a reduction in COVID-nineteen related net demand. Looking at margin performance, Slide 15 shows our consolidated gross profit margin of 37% for Q4 2022, down from 41.1% in Q4 2021. Proprietary Products 4th quarter gross profit margin of 41.6 percent was 4 70 basis points lower than the margin achieved in the 4th Quarter of 2021.

Speaker 3

The key drivers for the decline in Proprietary Products gross profit margin were unfavorable mix from a reduction in sales related to COVID-nineteen vaccine and continued inflationary pressures on our plant costs, Contract Manufacturing 4th quarter gross profit margin of 15.4% was 110 basis points below the margin achieved The decrease in margin is largely attributed to mix of products sold. Now let's look at our balance sheet and review how we've done in terms of generating more cash. On Slide 16, we have listed some key cash flow Operating cash flow was $724,000,000 for the year, an increase of $140,000,000 compared to the same period last year, a 24% increase. Operating cash flow in the period benefited from our working capital improvement. In 2022, we spent over $284,000,000 on capital expenditures, a 12% increase over 2021.

Speaker 3

We continue to leverage our CapEx to increase our high value product manufacturing capacity within our existing facilities in the U. S, Germany, Ireland and Singapore. Working capital of approximately 1 $400,000,000 increased by $252,600,000 from 2021, primarily due to higher accounts receivable from our increased sales, higher inventory levels and an increase in our cash position. Our cash balance at December 31st of $894,300,000 was $131,700,000 higher than our December 2021 balance. The increase in cash is primarily due to our operating results in the period offset by our share repurchase program and higher CapEx.

Speaker 3

Turning to guidance, Slide 10 provides a high level summary. Full year 2023 net sales guidance will be in a range of $2,930,000,000 $2,960,000,000 There is an estimated headwind of $30,000,000 based on current foreign exchange rates. We expect organic sales growth to be approximately 3% to 4%. We expect our full year 2023 adjusted diluted EPS guidance to be in a range of $7.25 to 7.40 Also, our CapEx guidance is $350,000,000 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 impact of approximately $0.11 based on current foreign currency exchange rates.

Speaker 3

We expect full year COVID-nineteen related net sales to be approximately $85,000,000 compared to $388,000,000 in 2022 and our guidance excludes future tax benefits from stock based compensation. I'd now like to turn the call back over to Eric. Thank you, Bernard.

Speaker 2

To summarize on Slide 17, the solid financial performance shared today continues to reaffirm that our Our growth strategy is working. We have a durable base business proven by our market led approach, which is delivering unique value to our customers. Our global operations team is efficiently manufacturing and delivering products in this complex environment with a focus on service and quality. And we're continuing to progress capital spending across our operations to meet current and anticipated future growth. We realize that our products in pursuit of scientific innovations are critical to healthcare across the globe, which is why we're so committed to support patient health today and well into the future.

Speaker 2

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

Operator

Thank you. Please stand by while we compile the Q and A roster. Our first question comes from the line of Larry Solow with CJS Securities. Your line is now open.

Speaker 4

Good morning, guys. Thanks for taking the question and congrats on a good quarter better than obviously we expected. Eric, maybe could you just discuss sort of the long range outlook? HVP, I know you mentioned 72% of volume in the Revenue in the quarter, but could you speak to it more on a volume basis and particularly some of the faster growing and Much higher margin in NovaPure and as you kind of send up the HVP curve, if you will, and the opportunities over the next several years.

Speaker 2

Yes. Thanks, Larry, and good morning. No, you're right. So if you think about HVP right now, the amount of Units produced from our manufacturing sites is roughly around 23% of the total volume. But as you rightly pointed out, it was about 72 Percent of our sales in the last quarter.

Speaker 2

And the higher growth part of that high value product Spectrum, both the portfolio is coming from our Flurotech all the way up to NovaPure. So NovaPure is becoming more meaningful. Obviously, it was a major element of the COVID-nineteen response, But with the number of biologic launches, the NovaPure is becoming a very attractive solution for our customers. So I would say it's early. The investments that we're making, particularly in our HVP plants of Kinston, Jersey Shore are around NovaPure Plungers And other types of plungers to address future launches.

Speaker 2

So that's where the growth is really out portion is coming from the higher end of HVP as we Speak.

Speaker 4

Okay. And how about just Yes, go ahead. I'm sorry.

Speaker 3

Before we look at the CapEx guidance as well that Approximately 70% of that CapEx number is really to support growth initiatives and productivity improvements. And much of that is around high value products. So that ties in with the outlook that we would see for the next number of years putting that capacity in place.

Speaker 4

And what about just generally in the industry? I know the trends have been biologics are obviously growing faster than overall drugs. Has that trend like accelerated over the last few years? Sort of what's the outlook there on a general macro level?

Speaker 2

Yes. We believe the biologics and biosimilar space is going to be the fastest growing area for our new drug launches. If you think about the last year though, however, it It was interesting to see the number of ANDAs and also small molecules approved into the market. And fortunately, we have a strong position in those areas Also, I think if you kind of fast forward, you'll still see biologics and biosimilars be the fastest growth area in our space.

Speaker 4

Got it. And then just lastly, can you just give us sort of a just a brief update? I was in the other call, I'm not sure if you had talked a little bit about Corning at all, but just sort of Where we stand there, I know I think last year you had even called out how much you're spending on R and D. I'm sure it's a pretty incremental piece this year as well. But I don't know what you could speak to on the R and D side and the cost, but maybe just sort of where we stand qualitatively, the revenue outlook and How big this could

Speaker 5

be over the next few years? Thanks.

Speaker 2

Yes, Larry, it's a really strong partnership and we're really pleased that earlier this month We're able to announce our first product launch of combining our West NovaPure Stopper and Corning's Valor vials, which what we label as our ReadyPac solution. And just to remind everyone is that this is Kind of a seed program that we use in the development of new molecules. So this has Been very successful for us in the past. We're leveraging this channel to introduce this combination going forward. It's a great testament of the focus between the two firms on really bringing the products together as a complete solution.

Speaker 2

And so while this is early, we still have more work to do. We have a number of launches that we have scheduled, whether it's in 2023, 2024. Ultimately, where we want to get to is a complete solution with the 1 drug master file. So it's a complete fully characterized system. And so that will continue to require investments.

Speaker 2

And so if you look at our R and D spend in 2023, it will be slightly up And a good portion of that incremental piece will be around the West Corning partnership.

Operator

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

Speaker 6

Hey, good morning. Thank you for taking my questions. I just wanted to ask just you referenced sort of the committed order book. And I'm curious maybe if you compare the composition of that order book today versus Pre COVID, obviously, on the non COVID part, maybe just in terms of what NovaPure and Floratec demand look like. I guess the question is, out of the potential For tech customers who you start engaging with, what does the conversion look like, excuse me, on the Novo Pure side, What are the conversions look like in terms of folks who ultimately end up choosing to go with nofepur perhaps versus a few years ago?

Speaker 2

Yes. Thank you for the question, Matt. So when I look at the order book versus pre pandemic and then strip out the COVID piece, Overall, it's a net increase from where we were at that point in time. When you look at the Composite of the growth of that order book, it is really driven by our high value products, in particular the higher end HVPs. We're seeing a healthy growth in plungers, not just in the NovoPier sector, but in other categories of HVP.

Speaker 2

But so from an order committed order book perspective, that's the kind of the characteristics we're seeing right now. In regards to the adoption rate, it's actually quite high. So our participation rate, The biologics and biosimilars is very, very strong. And what we are doing is we're seeding with the NovaPure portfolio. And once that is locked in, in the development phase as they go through into commercialization, that's the end result.

Speaker 2

Better outcomes for our customers, obviously better compatibility with the drug molecule. So we're very excited to see the continuation Of that adoption of NovaPure. And that's hence the reason why we're putting these investments in place. And we're seeing more of a transition from vials to prefilled syringes, which will require our plungers. So that's where we are, but it's a very, very healthy growth profile of the higher end of HVPs.

Speaker 6

Thanks, Eric. And then just maybe a cleanup one on the equipment issues you referenced on the Q3 call. How did that end up impacting the 4th quarter results relative to expectations of where do things stand now halfway into the Q1 of 2023?

Speaker 2

Yes. So those issues are resolved. The team did a really great job to resolve the issues and get our product Manufacturing Facilities is back up online, fully validated, characterized and be able to support commercial Production. That was done in, I'd say, mid part of Q4, a little bit later in that part of the quarter. So we're full out right now in Q1.

Speaker 2

And I'm excited that we have that at this point to allow us to get some of the backlog caught up in the early parts of this year.

Speaker 6

Thank you.

Operator

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

Speaker 7

Hey, thanks. Good morning and congrats on a nice quarter. Maybe kind of following up on that last question. Just Bernard, as we think about how the year plays out, Anything you'd highlight in terms of seasonality or kind of margin progression, revenue progression throughout the year? And maybe along those same lines, can you just remind us when you have the toughest tops from COVID that you'll be lapping from 2022?

Speaker 3

Yes. So I think from a cadence perspective, going back to what we would have seen kind of pre COVID, Where Q1 is usually a little bit lighter, picks up a bit in the second quarter and then levels out in Q3 and Q4. And from a comp perspective, I think a lot of the COVID revenues we would have had would have In the first half of twenty twenty two, so that's where I won't say a challenge is, but that's where the biggest comps are going to be from that And then some in Q3 and then obviously lighter in Q4.

Speaker 7

Got it. Thanks for that. And then on contract manufacturing, nice to see a return to growth there, uptick in revenue in the quarter. I think gross margin was down sequentially. Can you just hit on what drove both and maybe related you're pointing to I think pretty robust Growth in 2023, were there some investments you're making for this year and kind of again along the same lines, what's driving the growth in that business in 2023?

Speaker 3

Yes. I think as you'll remember when we were talking through 2022, a lot of the challenges we faced within contract manufacturing was really around 1 customer mainly and a shift in their business. And so as that kind of Have tailed off towards the back end of the year. It allows us to be able to return to growth. And then we actually saw demand increase from our existing customer base, Probably a little bit ahead of where we would have anticipated going into the Q4.

Speaker 3

So that was again positive to see. And what we would expect as we move into 2023 that we will be seeing mid single digit growth for contract manufacturing On our existing business and then layering in new business at the same time. So we continue to make some investments in that area.

Speaker 7

Got it. Thanks for taking the questions.

Operator

Thank you. Our next question comes from the line of Paul Knight with KeyBanc. Your line is now open.

Speaker 8

Yes. Thanks, Eric and Bernard and Quentin. The question is, I We touched on it, I guess, is COVID probably starts slow, then they manufacture more product Q2, Q3, right? And then less than Q4. That's question 1.

Speaker 8

And then The other would be regarding this prefilled syringe market. Is that really what You're seeing as biggest opportunity right now?

Speaker 2

Yes. Good morning, Paul. That's a good question. So the first part is that when we think about the COVID, it's We're looking about right now approximately $85,000,000 for 2023. It's relatively Kind of evenly spread.

Speaker 2

We can't get any more granular than that at this point. But as you know, we were much higher than that last year. So we do have the Capabilities to manufacture accordingly. In regards to the prefilled syringe, when you think about our investments, particularly in the last Couple of years and working with some of the launches in anticipation around plungers, which obviously supports the pre filter in space, is actually we're anticipating higher growth in that area. And that is equipment is coming online as we speak.

Speaker 2

I mentioned a little bit in my prepared remarks about Kinston. A lot of the additional equipment in there is really geared around plungers. And so I'm excited to be able to support that part of the market as we see the prefilled Syringe market continue to expand with high growth. So we're going to play in that and we're prepared for it and that's where our investments are really focused on today. Thanks.

Speaker 2

Thanks Paul.

Operator

Thank you. Our next question comes from the line of Derik De Inc. America, your line is now open.

Speaker 5

Hi, good morning.

Speaker 2

Good morning, Derek.

Speaker 6

So can you talk a

Speaker 5

little bit about, sort of like pricing? You got about 4% in 4Q. How should we think about that in 2023? Are you I know you were debating taking some higher pricing or looking at your pricing dynamics, I think as you're going forward. And I guess have you done that?

Speaker 5

And have you seen any pushback from your customers?

Speaker 2

Yes. Thanks for the question. So you're right. We have implemented in the Q4 of 2022, obviously, discussions with our customers About the 2023 calendar year, our net price increase will go up in 2023, And that is obviously for all the right reasons, particularly with some of the inflationary challenges and so forth that I think all industries are So I think the team responded appropriately. I believe we took a Very well balanced approach.

Speaker 2

We do have certain customers on contracts, so we do have some limitations. However, overall, With the new pricing team and strategy we put in place a couple of years ago, we're starting to see that pay off. So that we'll be rolling out as we speak already this quarter and be rolling throughout 2023. But Bernard, do you want to provide more color on that?

Speaker 3

Yes. So I think in the Q4, we said we did about 3.8% on pricing. We're targeting 5% to 6% on price as we move through 2023. So it is a bit of a step up and part of that is to take into account the inflationary cost pressures that we're also seeing. But as Eric said, you can see The trajectory in our price increases over the last number of years and how we're approaching that, that's also been on the increase.

Speaker 6

Great. Just a little bit

Speaker 5

of an accounting question. What was the tailwind from stock based comp in 22 and your initial tax rates are never what you end up being with for the full year. So is it comparable to think is it reasonable that you get a comparable benefit in 2023?

Speaker 3

We guide without it because it's very hard for us to estimate it. If you look at Last year, it was about $0.22 I believe. So it's we guide without The reason because it is so hard for us to predict that's kind of outside of our control.

Speaker 5

Got it. And if I can squeeze one more in, if you don't mind. How should we think about the economics on the prefilled syringes? I mean, Obviously, there's a lot of new drugs coming out in for metabolic disease, for obesity. And how should we think about Your potential profitability or the revenues associated with one of those units and just give us some way to sort of like ballpark what your I mean, what your revenue contribution could be on something like that?

Speaker 2

Yes. So if you think about the prefilled syringe And the plungers, we are it depends on if it's NovoPure, it's pretty comparable to We talk about the $0.80 to over $1 a unit. But if it's not the NovaPure, other types of HVPs, You have a very large range between, let's call it $0.40 per unit. So you can see the range that we're operating in. From a margin perspective, again, it is H3P and that could range anywhere between 55% to 80%.

Speaker 2

So I'm giving you a very broad Yes. Because not all molecules have the same requirements. But what's good around our investment thesis in our Facilities, sticking around plungers, is that the equipment and the processes are somewhat fungible. So We can leverage these existing assets we're putting into the current drug launches, but also the anticipated areas of potential growth. So We're positioned well.

Speaker 5

Thank you very much.

Speaker 4

Thank you.

Operator

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

Speaker 9

Hi. Thanks for taking the questions. I guess maybe digging in a little bit more on the new capacity coming online and the CapEx, any color just on pacing there for the year? And then Just to follow-up on that equipment and the delays at 3Q, I think that was around the $30,000,000 a month headwind. Can we assume now that this is off that that's Contributing around $30,000,000 a month as well?

Speaker 3

Yes. The impact in Q3 was about $30,000,000 And that may vary depending on volume mix as we go through each quarter. So it's hard To say it's $30,000,000 each quarter, it would be difficult to commit to that at this point. But In saying that all of those problems that we had in Q3 have been resolved as Eric kind of talked about earlier and much of that happened as we progressed through Q4. On the pacing of layering in new CapEx, that will happen as we move through 2023.

Speaker 3

So it's not all at once, and we'll see some of it as we get into the back end of the second quarter, Particularly in Kinston where we are getting new parts of our facility up and running with the equipment that we've installed there. And then as we progress through the year, there will be equipment layered in, in the other HVP sites.

Speaker 9

I appreciate it. And then I guess just maybe on COVID, it looks like you lowered the guidance there slightly. I guess just Any thoughts on just where endemic levels go from here? How much more further drops do you think that you see coming down from COVID beyond 2023?

Speaker 3

It's hard to estimate that. We like we've tried to well, we've given our best estimate Based on the information that we have today, if I we thought it was going to drop any further and we would have included that In the guidance, but based on what we see today, that's where we think it's going to play out.

Speaker 9

Got it. Thanks for taking the question.

Speaker 2

Thank you.

Operator

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

Speaker 8

Hi, thanks for taking my question. I hope you can hear me. I wanted to I've got a couple of follow ups, but I wanted to start with just asking if you would level set Where the market units are with kind of generics having a strong end of the year and biologics down. Those are kind of opposite directions than is normal. What's the kind of relative sizing of your Four segments of the business, so we have a base to work off of.

Speaker 8

Thank you.

Speaker 3

Yes. So if you look at Biologics as we go into 2023, The biggest drop or the biggest impact of COVID revenues been reducing is within the Biologics segment. So we do see a reduction there. But if you back that out, we're actually seeing very strong double digit growth within the Biologics segment for our core business. And then as we progress through 2023 on generics, again, we would be looking to see High single digit, early double digit growth.

Speaker 3

Pharma, high single digits and then contract manufacturing, as we said earlier, mid single digit growth.

Speaker 8

Okay. And Bernard, so to apply those, so is it like I think Biologics 40% to 45%. I'm just looking for should I think about with the kind of COVID correction that it's closer to the 40% and Just looking for kind of the percentages to apply those growth percentages to?

Speaker 3

Yes. Biologics was mid-40s. It's going to come back a slight bit. So you're probably 40% to 45% and then Pharma, I think contract was about 17 or 18.

Speaker 8

That's fine. I can follow-up offline. On the installation of the equipment And Eric, we talked about in Kinston the washing equipment and that process. I guess, I was under the impression that, that was Specifically, NovaPure and maybe even more specifically NovaPure plunger equipment, but Bernard's Answer to the last question that it kind of varies that, that $30,000,000 a month will vary based on volume and mix. Maybe I misunderstood what how fungible that equipment is across your product lines.

Speaker 8

Perhaps you could Further elaborate on that, please?

Speaker 2

Yes. No, absolutely. So specifically the equipment that we discussed about Q3, That was ongoing operations, not specifically just NovaPure. So you have washers that Pharmaceutical washing capability that supports really the high value product portfolio, the vision that you So the Envision equipment that you were able to see, that is for NovoPure. So Some of the equipment is not fungible, but the core elements of the equipment is.

Speaker 2

But the growth that we're having based off of that equipment you looked at was really around the heavy part about this NovaPure. There's some mix effect to it. And then the future investments we're making that you saw in Kinston, That is that's again, it's a wide range of high value products, Flurotech all the way up to NovaPure.

Speaker 8

Okay. So where I wanted to go with that and I'll make this my last one is you're losing the year over year COVID $300 ish million management's made the point that, that has been very high gross margin, high incremental margin revenue. And so that Create, I think, contributes to this transition year on margin, Eric, that you mentioned in your prepared remarks. It seems like as you've put some of This equipment in place that was the holdup in 3Q, again, your last answer helps me to understand that better. But the revenue potential of that, that equipment unlocks is in the neighborhood of the revenue that you're losing From COVID, I guess I now understand that maybe the margin on that revenue that's Coming in is perhaps not quite as rich as COVID, you could confirm that for me.

Speaker 8

But just thinking about that and any other factors that we should be keeping in mind that, that influenced that margin transition that are not as rich as the COVID revenue that is coming off? Thanks.

Speaker 3

Yes. Dave, I'll take that. And just going back to your last question on the split, just to clear that up. So the bio As a percentage of proprietary sales, biologics is like mid-40s, generics mid-20s and then pharma And a low 30% range. That will get you to the split.

Speaker 3

With regard to your question on margin, It's not as simple as one product coming out and another product going in. So we're looking at it where there's a mix impact obviously with the COVID Revenue is falling off and they have been higher margin products. And we've also got The impact of inflation on our cost base, so you've got those 2 headwinds. And then as we alluded to or we talked about earlier is the increase in price We're seeing is above what we would normally see in our business. So that helps offset some of this margin pressure.

Speaker 3

And then we have very specific Cost initiatives within our business, both from an operations, manufacturing perspective and then on SG and A and R and D, Really looking at cost control and cost management, and that is delivering a number of efficiencies for us. So it helps us to overcome some of the margin challenges, But not all of them. And then that goes back to the point earlier, we're not actually margin is in stepping back to pre COVID levels. We're maintaining or holding on to a lot of the improvements that we made or the gains that we made.

Speaker 8

That's very helpful. Thank you.

Operator

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

Speaker 3

Hi, good morning, everyone. Just piggybacking on Dave's question, can you help us understand and maybe it's a range of Sort of what the margin profile is on the C-nineteen business? And then with respect to the new capacity that's Coming online in 2023, can you help us understand, how that phases in? Is it ratable or is it more second half loaded? Any color there would be helpful.

Speaker 3

So the margin on the COVID products would have been at the higher end of our margin range because a lot of that was NovaPure. So you could have been looking at a range of 60% to 70% plus. And then on the CapEx piece on that being layered in, it's a lot of it is being layered in and commissioned as we speak. But you see the impact of it will be more so in the back half of the year when it's fully operational and we're able to put a lot of volume through. Understood.

Speaker 3

And then just a quick one on China. Maybe a status update on the 2 plants over there And any thoughts on how that impacts the progression of the year?

Speaker 1

Yes. In China,

Speaker 2

the our business impact for or WES overall is quite low. A lot of the activity that manufacturing we do in China is for China. And so we have a really strong team there in our facility in Chengdu that continues to capture more share within the market. But our reliance on that On our team there to export is very low. And again, overall values or revenues and profits to the corporation is Very small.

Speaker 2

So that's our impact in China. Our supply chain, if you think about procuring materials, is not heavily dependent on that part of the world. The team has done a really good job. Many of our products are co located to our manufacturing sites. So that's how we've set up our procurement and supply chain of raw materials.

Speaker 3

That's helpful. Appreciate it.

Speaker 2

Great. Thank you.

Operator

Thank you. I would now like to turn the conference back over to Quintin Lai for closing remarks.

Speaker 1

Thanks, Shannon, and thank all of you for joining us on today's conference call. An online archive of the broadcast will be available on our website at west pharma.com in the Investors section. Additionally, you may access a replay for 30 days following this presentation by using the dial in numbers and conference ID provided at the end of today's earnings release. That concludes this call. Have a nice day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
West Pharmaceutical Services Q4 2022
00:00 / 00:00