West Pharmaceutical Services Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 12 speakers on the call.

Operator

You for standing by and welcome to the West Pharmaceutical Services Q2 2023 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 session. Please be advised today's conference call is being recorded. I would now like to turn the call over to Mr.

Operator

Quintin Lau, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Valerie. Good morning, and welcome to West's Q2 2023 conference call. We issued our financial results this morning and the release has been posted in the Investors section on the company's website located at westpharma.com. This morning, 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.

Speaker 1

On Slide 4 is our Safe Harbor statement. Statements made by management on this call and in the accompanying presentation contain forward looking statements within the meaning of U. S. Federal Securities Law. These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts.

Speaker 1

The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results as well as those expressed or implied in any forward looking statement made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risks To which it is subject, including our 10 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 financial measures to the most comparable financial results compared in conformity to GAAP I'll now turn the call over to our CEO, Eric Reed.

Speaker 2

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on Slide 5. I'm pleased to report that we delivered a solid second quarter, which has us positioned for an even stronger performance in the second half of the year. The continued success is a result of our proven growth strategy as we capitalize on the robust customer demand and ongoing capacity expansion projects.

Speaker 2

And proudly, the strength of the One West team and unwavering commitment to our purpose continues to set us apart as the trusted market leader. I want to acknowledge team members across the globe and say thank you. The 2nd quarter performance was driven by our base proprietary products business, Which grew mid teens. As expected, COVID-nineteen sales continued to drop as the Q2 last year was the peak of our pandemic related sales. With respect to our base business, the Biologics market unit again Grew double digits with stable demand.

Speaker 2

Our generics market unit continued to benefit from HBP capacity expansions As the base grew strong double digits and the pharma market unit base grew high single digits. In addition, Contract Manufacturing experienced significant momentum in the quarter with delivery of components For injection related devices. Turning to Slide 6. The key levers of growth in Q2 were primarily driven by HBP Components and Delivery Systems. Our participation rate in recently approved new molecular entities And the U.

Speaker 2

S. And Europe remain strong. The components developed by West or our partner Daikyo are addressing some of the most critical Therapeutic areas around immunology, oncology, including gene therapy applications, cardiovascular, neurology, diabetes and obesity. This is also reflected in the solid order book across our biologics, Generics and pharma customers, a clear reflection of the needs of the market. And we continue to make good progress on bringing down lead times For certain HVPs, we're seeing our order book patterns reverting to a more normal pre pandemic cadence.

Speaker 2

In addition, we continue to work closely with customers to update demand trends for the near and long term. These trends underscore the importance of our capacity investments, which are making a significant impact across West's global operations. For example, at our West Kinston plant, we have installed, validated and brought online additional HVP capacity For NovaPure Plungers, although it is early days, we are pleased with the initial output as operations ramp up. Recently, I had the opportunity to visit West site in Singapore, where we have enhanced the capabilities To meet growing HVP demand from our commercial customers in the APAC region, it was exciting to see the facility fully equipped With industry leading coating, pharmaceutical washing, sterilization and automated vision inspection capabilities for elastomers. This marks another exciting milestone on our journey towards meeting the industry's increasing emphasis on biologics.

Speaker 2

Shifting to Slide 7. At the end of June, we published our 2022 ESG report on the company website. I am proud of the progress the organization has made towards the new 5 year targets with even greater scientific rigor and quantitative focus on environmentally based targets. We know to fulfill our purpose effectively, together as OneWest, We must continue to progress the sustainability goals, diversity and inclusion and success around our charitable endeavors. These collective efforts from last year were recognized by several organizations, including being named as one of America's Climate Leaders by USA TODAY.

Speaker 2

Moving to Slide 8. Our full year 2023 organic sales growth outlook remains unchanged At approximately 3% to 4% and we're raising the 2023 financial outlook for overall net sales And adjusted diluted EPS. Now I'll turn the call over to Bernard, who will go into more detail from the quarter. Bernard?

Speaker 3

Thank you, Eric, and good morning. So let's review the numbers in more detail. We'll first look at Q2 2023 revenues and profits, where we saw a low single digit decrease in organic net sales and a decline in operating profit and diluted EPS compared to the Q2 of 2022. I will take you through the drivers impacting sales and margin in the quarter as well as some balance sheet takeaways. And finally, we will provide an update to our 2023 guidance.

Speaker 3

First up, Q2. Our financial results are summarized on Slide 9 And the reconciliation of non U. S. GAAP measures are described in Slide 17 to 21. We recorded net sales $753,800,000 representing an organic sales decline of 2.5%.

Speaker 3

COVID related net revenues are estimated to have been $20,000,000 in the quarter, an approximate 100 and $6,000,000 reduction compared to the prior year. Looking at Slide 10, Proprietary Products organic net sales declined 5 point 5 percent in the quarter. High Value products, which made up approximately 74% of proprietary product sales in the quarter, declined due to the reduction in COVID related net revenues. Looking at the performance of the market units, The generics market unit delivered high single digit growth, led by sales of Westar components and self injection related devices, While the pharma market unit experienced mid single digit growth led by Envision and Westar components as well as admin systems. And the Biologics market unit saw a double digit decline due to a reduction in sales related to COVID-nineteen vaccines.

Speaker 3

Our Contract Manufacturing segment experienced a double digit net sales growth, primarily driven by an increase in sales of components related to injection related devices. Our adjusted operating profit margin 24.5% was a 490 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 14.6% for Q2. Excluding stock based compensation tax benefits, EPS decreased by approximately 18%. Now let's review the drivers in both our revenue and profit performance.

Speaker 3

On Slide 11, we show the contributions to organic sales decline in the quarter. Sales price increases Contributed 43,100,000 dollars or 5.6 percentage points of growth in the quarter, As did a foreign currency tailwind of approximately $4,400,000 Offsetting price was a negative mix impact $61,900,000 which includes an approximate $106,000,000 reduction in COVID-nineteen related net demand. Looking at margin performance, Slide 12 shows our consolidated gross profit margin of 38.7 percent For Q2 2023, down from 41.7% in Q2 2022. Proprietary Products' 2nd quarter gross profit margin of 43.9 percent was 230 basis points lower And the margin achieved in the Q2 of 2022. The key driver for the decline in Proprietary Products gross profit margin primarily unfavorable mix from a reduction in sales related to COVID-nineteen vaccines, offset by sales price increases and production efficiencies.

Speaker 3

Contract Manufacturing 2nd quarter gross profit margin of 15.4% 90 basis points below the margin achieved in the Q2 of 2022, primarily due to inflationary pressures on our plant labor costs. Now let's look at our balance sheet and review how we've done in terms of generating cash. On Slide 13, We have listed some key cash flow metrics. Operating cash flow was $307,300,000 for the 6 months ended June 2023, a decrease of $17,000,000 compared to the same period last year, a 5.2% decrease, primarily due to a decline in operating results. Our Q2 2023 year to date capital spending It's $157,500,000 25,600,000 hires in the same period last year.

Speaker 3

We continue to leverage our CapEx to increase our high value product manufacturing capacity. Working capital of approximately 1.36 $1,000,000,000 at June 30, 2023 declined by $37,900,000 from December 31, 2022, primarily due to reductions in our cash balance. Our cash balance at June 30 of $796,300,000 $98,000,000 lower than our December 2022 balance. The decrease in cash is primarily due to our share repurchase program and higher CapEx Offset by our operating cash flow in the period. Turning to Slide 8 provides a high level summary Turning to guidance, Slide 8 provides a high level summary.

Speaker 3

We are updating our full year 2023 net sales guidance and expect net sales to be in a range of $2,970,000,000 to $2,995,000,000 compared to a prior guidance range $2,965,000,000 $2,990,000,000 There is an estimated full year 2023 tailwind, $20,000,000 based on current foreign exchange rate compared to prior guidance of a tailwind of $15,000,000 We expect organic sales growth to be approximately 3% to 4%, unchanged from prior guidance. We are raising our full year 2023 adjusted diluted EPS guidance to be in a range of $7.65 to 7.80 Compared to our prior range of $7.50 to $7.65 Also, our CapEx guidance was $350,000,000 for the year, unchanged from prior guidance. There are some key elements I want to bring your attention to as you review our guidance. We expect full year COVID-nineteen related sales to be approximately $60,000,000 unchanged from prior guidance. Net sales guidance also includes a reduction of $8,000,000 resulting from a divestiture of the European facility that produce standard proprietary product components, again, unchanged from prior guidance.

Speaker 3

Full year 2023 adjusted diluted EPS guidance range includes an estimated FX tailwind of approximately $0.05 Based on current foreign currency exchange rate compared to prior guidance of a tailwind of $0.02 The updated guidance also includes EPS of $0.26 associated with year to date 2023 tax benefits from stock based compensation. Our guidance excludes future tax benefits from stock based compensation. I would now like to turn the call back over to Eric.

Speaker 2

Thank you, Bernard. To summarize on Slide 14, the solid financial performance in Q2 has us positioned well for the second half of the year. We continue to have a strong base business, which is a testament to the foundation we have built over time. As a global leader, we recognize the critical role Our products play in healthcare across the globe, and that is why we're so dedicated to supporting patient health both now and into the future. Valerie, we're ready to take questions.

Speaker 2

Thank you.

Operator

Thank you. Our first question comes from the line of Larry Solow Of CJS, your line is open.

Speaker 4

Great. Good morning, guys. Thanks for taking the questions. Congrats on another good quarter. Eric, can you maybe just give us a little more color?

Speaker 4

You actually mentioned sort of a bunch of sort of areas where you guys are driving seeing growth on The product line, I know a lot there's been a lot of talk about the GLP-one diabetes and weight management and the growth there. But I'm just trying to get a sense. I know Historically, you guys have never said always, one that's not to get too carried away with one group of products. But in this case, it seems like there's just been a lot of Positive news and noise about the GLP-1. So can you just give us a sense of maybe color how that's represented in your Overall revenue mix today and where that could be in the future?

Speaker 2

Yes. Good morning, Larry, and thanks for the question and thanks for joining us on the call. When we look at where the pipeline is being developed and our success, what we call it, participation rate continues to remain very high. As we look at year to date as an example, and even from last year, I think We need to be clear that we are actually supporting many different therapeutic areas and not just 1 or 2, and that's what's really exciting about our portfolio as we continue to evolve our offerings That we continuously be the company to support on their primary containment, again, across many different therapeutic Categories. So some will have higher demand in the market, some less, such as in the Gene therapy, as you think about the number of doses, but our focus is to make sure that we are Continue to have that high participation rate, and all different areas have different type of growth trajectories over the next 5 plus years.

Speaker 4

Got it. That's fair enough. Question on just margins in Proprietary Products And for Bernard, nice sequential improvement, A little bit higher sales and I think a lot most of those sales look like dropped to the gross margin line there. Anything unusual in this quarter compared to last quarter? It looks like COVID Same.

Speaker 4

Cover related sales. Anything we should be aware of there that drove that sort of 150 bps sequential improvement in gross margin for Proprietary Products?

Speaker 3

It's really down to product mix. We're seeing that Continued growth in high value products ex COVID and we're seeing that positive impact that's flown into margin. We're also Improving the throughput within our facilities, getting better levels of efficiency, and we're seeing that Partly because of the capacity that we're layering in, but again improvements to our existing infrastructure And that combination is delivering to those improved margins. And again, that's part of the overall construct We've been talking about over the last number of years, so we just continue to deliver on that.

Speaker 4

Got it. While I got you, Bernard, just thoughts on CapEx and sort of this year, I think you're maintaining a $350,000,000 number. As you look out over the next few years, Do you feel like this number and I guess that would probably be a high class problem, but do you feel like this CapEx level will remain at this Is it fair or do you see it maybe coming down as you look out?

Speaker 3

We would expect to see us Normalize back to what we have been talking about pre COVID of about 6% to 7% of revenues. But again, it's dependent on if there are other spikes in demand or investments that we need to make, we're Willing to do that. We'll continue to invest in our business where it's needed. At the moment, we're investing in Capacity around plungers across our high value product network, so it's not just in one facility, it's right across the network to be able to meet the global demand from our customers. We're seeing the results of that materializing as we speak, our lead times are reducing significantly.

Speaker 3

So So we're getting back to pre COVID levels. And I think by the end of Q3, our lead times will be normalized across our business. We're also layering in some Strategic flex capacity, so we are able to respond to sudden increases in demand for customers. And then that capacity kind of feeds into our long term plan as well. So it will be utilized over the kind of 5 year strategic horizon.

Speaker 3

So with CapEx, we have made, as we said, that significant investment over the last number of years, maybe a little bit Similar as we move forward to next year, but then maybe starting to tail off.

Operator

Thank you. One moment, please. Our next question comes from the line of Jacob Johnson of Stephens. Your line is open.

Speaker 5

Hey, thanks. Good morning. Maybe following up on the last question and kind of the investments you've made in capacity recently, I think that's the number one question we're getting and I imagine you're getting as well from investors kind of around the magnitude of the revenue opportunity from the NovaPure Plunger capacity additions, is there any way to frame up or quantify the revenue potential And then Eric, you also mentioned kind of early days in the ramp up at Kinston. Just curious kind of what But the ramp there might look like as we think about the next 12 months to 24 months?

Speaker 2

Yes. I'll start with the ramp up just to address that quickly. As you know, we've been discussing how the installed capacity is coming in throughout 2020 3 in second half, we're starting to ramp up. So we expect that to it's occurring today. It will continue throughout Q3 And to the balance of the year and it usually takes about 2 or 3 quarters to get to a pretty steady state.

Speaker 2

And then as Bernard mentioned a little bit earlier is that we're always adding a little bit more capacity to build Flex. So anticipate Kinsen, particularly on the NovaPure plungers to be ramping up through the balance of the year.

Speaker 3

Yes. The way I would frame this is that when we look at the mix of our CapEx investments, I think we've said this before, pre COVID, it was like 50% of our CapEx deployment is around maintenance And then 50% on growth. But now what we're seeing is 70%, the CapEx deployment is around growth And it's specifically around growth in high value products. So the it's not just the growth in the revenue, it's also the growth in Operating margin, given the areas that we're investing. So I think that's the way we would frame it.

Speaker 3

And that ties into our Long term construct of that 7% to 9%. And if opportunities take us above that, I think we'll be in a good position to respond.

Speaker 5

Okay. Thanks for that. And then maybe just a high level question for you, Eric. You mentioned in your prepared comments kind of working closely with customers on demand trends. As I think about the biologics end market, I know you're not very exposed to early stage biotech, but there's been a lot Focus on the near term dynamics there given funding and some prioritization we've seen in the pipelines there, which I suppose could maybe impact Future commercializations at some point, but I'm just kind of curious from the seat you have and your perspective where you kind of have a longer term view and conversations with customers over the longer term.

Speaker 5

Has there been any kind of change in their long term planning given the current macro we're in?

Speaker 2

Yes. No, I don't see a long term change to plans. You're absolutely spot on when you say that our exposure From a revenue and profit perspective, in regards to biotech funding was preclinical or clinical is extremely low, Although we are active, as you know, the thesis of our growth is participating during the pipeline And then we'll work through the whole commercialization. So we don't see any change Long term, especially in the biologics, very encouraged when I look at the first half of this year of number approved New biologics and how we're positioned, as you know very well that it takes a while for those to ramp and to get more into higher patient population. But we're positioned well and our exposure in the biotech funding is very low right now.

Speaker 2

But and this whole discussion does not change our outlook For the Biologics long

Operator

term. Thank you. One moment, please. Our next question comes from the line of Paul Knight of KeyBanc. Your line is open.

Speaker 6

Yes. Thanks, Eric. The Impact, if any, is there from the Rocky Mount situation with Pfizer? Does that kind of Calls us to think about pacing on 3Q or what any impact in your view in the industry from that damage? Yes.

Speaker 2

Paul, thanks for asking the question. First of all, we're always concerned about any of our customers' sites and their employees. And I know we have A site 60 miles from there, Kinston, North Carolina. So we've obviously reached out and offered any assistance, not just from a product perspective, but for A community perspective, and so a very long standing relationship, and that's first and foremost, for months on our mind when we were Talking to them day of or day after the event. In regards to us as product and Revenue, we would not say there's any change in our Trajectory for Q3, Q4.

Speaker 2

And we're really specifically the organization West is ready to respond appropriately immediately To support them in any way. So and that will leverage our global operations if necessary. So the two answers to your question, we're ready to Support when needed and but no change to our outlook for the next two quarters.

Speaker 6

And I know Michigan was opening up in the first half of the year. What was that facility? And then the other capacity question is Waterford under expansion yet?

Speaker 2

Yes. I'll touch on the first one and I'll let Bernard touch the second one on Waterford. So in Michigan, we it's a contract manufacturing site. It's one of our 7 contract manufacturing sites throughout Europe and the United States. And it is primarily focus of the expansion has been around Auto injectors, and that is up and running as we speak.

Speaker 2

And we're doing the ramp up With our customer at this time. So I'm really pleased with the progress and the output of the product, the high quality products coming out of there. And that was kind of a transfer of knowledge from another site we have over in Europe. And so that whole global network approach in contract manufacturing It's actually another benefit for our customer. So that's where we are with Michigan.

Speaker 2

Do you want to talk about Waterford?

Speaker 3

Yes. In Waterford, we are looking at No expansions to that facility, but it's not going to be here in 2023, probably start sometime later in 2024. Right now, we're working through Jersey Shore, Kinston and Singapore, as Eric mentioned, and then we have also expansion going on in our Echewiler site. So it's coming.

Speaker 6

Okay. And then I guess vaccine is waning or is vaccine moving to 5 dose vial Seeing moving to 5 dose vials and or is it moving to syringe yet, Bernard?

Speaker 3

We haven't seen any major shift in that at this point. Okay. Thank you. Thank you, Paul.

Operator

Thank you. One moment, please. Our next question comes from the line of Derik De Bruin of Bank of America. Your line is open.

Speaker 7

Hey, good morning. Thanks for taking my questions. So I've got Several, so I'm going to pop off on. You're getting really good pricing. It looked like 5% to 6% on Quarter, that's relative to your 1% to 2% historically.

Speaker 7

How sustainable is that going forward?

Speaker 8

Well, I

Speaker 7

think, yes.

Speaker 2

Yes. Derica, it's a great question. So thanks for joining the call today. You're right. I mean historically, we were in the 1% to 2% corridor All the way up to, let's say, 2021.

Speaker 2

When you think about 2022, we were roughly between 3% 4% Net price contribution and this year we're delivering on the high end what we stated earlier this year to 5% to 6%. We do we intentionally built capabilities in the organization a couple of years ago that we were giving visibility of That believes we can be somewhere in between where we are today and where we were back in 2021. I won't give Specific guidance right now, but our belief is that we have the ability

Speaker 4

to have

Speaker 2

more of a consistent Predictable price element and we're focused on the mix also, which is a big driver of growth here at West. So While price is important, we'll continue to deploy the strategic pricing aspect. We're also very focused on mix And making sure we're bringing customers in at the higher end HPP versus the lower end. Those are the 2 levers that we're focused on, Derek.

Speaker 7

Got it. That's really helpful. Your competitor, Detweiler, called out some Stocking issues, inventory issues going on with it. I mean, I know you haven't released you've seen a little bit of this, but I'm just Wondering, does that have any impact on the business? Are you seeing any issues with that, that are sort of like popping up and unexpected?

Speaker 2

Yes, Derek, it does it's all all that's taken into consideration as we kind of set the guidance for the balance of the year. Fortunately, we have a good lens with our customers and there is some when you think about the COVID vaccine, obviously, there's a destocking Destocking has been going on for the last couple of quarters. And then we look at the base business. There's some inventory management here and there, but it's very Low in amounts when compared to our order book. Particularly last year, we have a good handle on it.

Speaker 2

But we have and we're keeping an eye on and having conversations with customers, but it's a very low impact at West right now.

Speaker 7

Got it. So we like a lot of other people have done a bunch of work on the GLP-1s. And I think one of the questions we're constantly getting from investors is like how do you sort of think about the impact of the injectables business as the oral GLP-1s Sure, Kamad. I mean, what are your customers how are your customers thinking about the impact of those in sort of like I mean, you're obviously adding a lot of HBV and Cassie for GLP-1s and other products, but how are your customers thinking about the impact of orals on that market?

Speaker 2

Well, I'm a little hesitant to go further on that conversation, Derek. I would ask you to or anyone to speak to our Customers directly, they have a good line of sight of the injectable market and capabilities versus the orals. I do know for a fact that from our position, we're working with the customers to make sure that we do have the Focus on capacity, the timing of the capacity and as we ramp, it's actually touching both sides of our business, not just The elastomers HVP elastomers proprietary side is also our contract manufacturing and we're taking a very balanced approach to this. So but again, we're really focused on that side, and I would refer you Anyone to the customers on the oral conversation.

Operator

Thank you. One moment, please. Our next question comes from the line of Matthew LaRue of William Blair. Your line is open.

Speaker 9

Hi, good morning. I wanted to ask about the expansion in Singapore and maybe just use that as a Maybe the opportunity, Eric. Could you help us frame where Asia Pac in general is from more of an HVP perspective? Are you seeing An acceleration in demand for HVP and NovoPure, in particular in Asia Pac, that's kind of driving The recent investment, just kind of curious given that you're still over there what you're hearing?

Speaker 2

Yes, great question. Thanks, Matt. I think I'm excited about What I or actually Bernard and I were able to see the progress in Singapore with our site. As you know, it's one of our 5 high value product Manufacturing sites on the globe. And so and it supports some very exciting growth areas from a geographic perspective.

Speaker 2

I'll call out South Korea as an example Korea as an example. I'd also call out in other parts of Southeast Asia. And so in fact, in some of the products are going into Japan. So I'm really excited about how We're able to leverage this site to really drive growth through Asia Pacific. What we're doing there is we're making sure that our customers, The global customers are getting the same quality product, service out of any of the 5 HVP sites And we expect Asia Pacific to continue to be a high growth area for us due to the amount of investments of our customers.

Speaker 2

And also they're not just servicing the local market. You're finding a lot of our customers in that region are supporting the global market And or working on behalf of some of the larger global drug companies. And I'll end with this. While we were in Singapore, we had to meet with several of our customers came together in Singapore throughout the region. And it was very informative And how we think about the demand of HVP in the future because customers are expecting high level quality And benefits that they can truly represent the products on a global scale.

Speaker 2

And that's where we come in to be able to support them. So hopefully, it gives you some Context of what we're trying to accomplish in Singapore.

Speaker 9

Okay. Thanks. And then I just have 2 cleanups from earlier questions. 1, if If I'm interpreting your comments correct, Derek, should we think about full utilization of the new Kensington capacity not really until 1Q 2024, just given that it takes a couple of quarters to ramp that's the first thing up. And then the second, really stocking is still But quarter over quarter, is it fair to say that it's been become a bit more of a headwind or a bit more of an unknown?

Speaker 9

And then I'll jump off. Thanks.

Speaker 2

Yes. No, on the destocking comment, really it's all majority of it is around the COVID-nineteen destocking. And so we've been pretty clear on our quarterly cadence last year and what we're seeing this year. So that's probably the majority of it. From the base perspective, We're not seeing a material difference from quarter to quarter.

Speaker 2

On the ramp up of Kinston, it is a ramp up and it's going to take Several quarters to get to a very high utilization rate, so that'll be sometime in 2024. I just want to be clear, we did add additional capacity to handle flexibility and future Demand that we anticipate, particularly with some of the new approvals are just coming through. So yes, there will be Some flex to that, but we expect it to be higher utilized throughout 2024.

Operator

Thank you. One moment please. Our next question comes from the line of David Windley of Jefferies. Your line is open.

Speaker 10

Hi. Thanks for taking my questions. Good morning. I wanted to kind of extend a couple of earlier questions. First, on the Growth CapEx, the 70% of CapEx that now represents growth, is there an algorithm we can think about As to how that how a CapEx dollar translates either to revenue or say gross profit, Do you guys think about it in that way at all?

Speaker 3

Yes. That's not something that we Share. We don't share that information. I think, David, the way we framed it is that the 70% is focused on growth. The growth is primarily in high value products and it's to drive our long term constructs either to meet it or To create capacity to go above that and then it's focused on higher margin products, so the return on investment is faster.

Speaker 3

So it's investing in it, particularly around the biologics segment. I think that's the easiest way to frame it rather than us giving specific dollars to revenue and profit. That's not something we're willing to share.

Speaker 10

Okay. I'll try it a slightly different way. So I've had some investors Recall to me or recount to me that the Kinston NovaPure plunger expansion doubles that Cassidy, would you be willing to comment on that or confirm that?

Speaker 2

The expansion that we put into Kinsons specifically is Significantly more than what we had there before, but on a global basis, it's adding More than 2x of capacity in the NovaPure portfolio, But that's about as far as we can go with giving the details there. Okay. I'll be very clear though, David, and it's a valid question. It's supporting multiple molecules, multiple customers. It's a network effect.

Speaker 2

So I got to be careful. It's not a Particular product or category, it's across multiple it's being leveraged in multiple ways.

Speaker 10

Right. Okay. Got it. In thinking kind of a similar question To Paul's, I think about the Pfizer, North Carolina Rocky Mountain facility, but thinking just more broadly about sterile fill finish, Capacity, throughput, etcetera. So generally speaking, you hear The sterile fill finish capacity is still quite tight.

Speaker 10

In the case of Some of the GLP-1s, some of those manufacturers have had some FDA related issues that have caused Shutdown of facilities or shutdown of a facility, that's certainly more in the past and I would think would have already impacted you if it was going to. But I guess I'm just wondering about how attentive we need to be to the capacity activities in the Kind of the next downstream function from you, the folks that are using your elastomers to complete their work?

Speaker 3

Yes. That's part of normal supply chain management. And I think that our approach is that we We're getting indications from our customers what their demand is across a number of different therapeutics. Our job is to make sure that we have the capacity in place to be able to deliver when they need us. Sometimes that timing conflicts, But we haven't seen no major impact on our business to this point.

Speaker 3

And our focus, as we said, is layering in capacity. And Back to Eric's point, it's not just in Kinston. We're leveraging capacity across our global network To be able to provide whatever response our customers need and we've learned a lot from the last couple of years about having that capacity at a number of different facilities And that we're able to flex faster and we can meet any spike in demand. And that's what we're doing right now and that's what we have to remain focused. And what happens in the other parts of the supply chain, we're aware of it, which some of that is outside of our control.

Speaker 10

Sure. Last question for me, would just be to get your take your temperature on, the progress For your Valor Glass partnership, ReadyPac, seating of the market and what you're seeing there? Thank you.

Speaker 2

Hey, David, good question. I'm actually quite excited. I know we just had another review with our partner And the progress we're making, as you know, this is a multi step journey. We have multiple launches. Right now, we're More focused on the vial launches, I think just a few weeks ago, we had Viridian vial technology launched through our channel.

Speaker 2

Customers are very excited about the opportunity to have a fully characterized complete system that The partnership with Corning gives us that flexibility and capability of representing a complete system with the 1DMF to our customers. And so we are still on the path to be able to continue to launch various Configurations, ultimately to get to the point of a fully characterized prefilled syringe using the best technologies of both organizations, But that's still going to take some time to get there. I won't give you exact dates, but over the next couple of years, you'll see various launches and penetration with our customers.

Operator

Thank you. One moment please. Our next question comes from the line of Jon Favre of UBS. Your line is open.

Speaker 11

Hi. Thanks for taking the question. Just maybe a modeling one here to start off. How do we think about the revenue cadence here In the second half with the different dynamics at play, you have the new capacity coming online, COVID roll off and then some seasonality. Just any additional color you could provide us there?

Speaker 4

Yes. I would say that

Speaker 3

Q2 or Q3 is like Similar to Q2, a plusminus, and then we would expect to see a pickup in Q4 based on the capacity that we're Implementing on in Kinston and at a couple of other facilities.

Speaker 11

Got it. And then just on biosimilars, I don't think you touched on that. There's a few that have been Coming online, I guess, how does this play into demand you have here on revenue? And any changes around the competitive environment you've seen on biosimilars If Brandon switching to a competitor?

Speaker 2

Yes. No issue for us actually. When we look at Biosimilars and working with those customers has a very similar primary packaging configuration of others. And so it is the higher end of our high value products and we continue to participate very high. When we talk about our participation rate for Biologics, we're also inclusive of biosimilars.

Speaker 2

So we look at that as kind of holistically and Feeling really good about where we are and where we're going.

Speaker 11

I appreciate the color there. And then just last one for me. I know you commented on APAC, but Would you be willing to say how much of your revenue is in China? And others have called out some issues there and headwinds. Have you seen anything In the China market, it's a call out.

Speaker 2

Yes, it's very little. It's a very low single digit percentage of the overall West Enterprise sales, if we look at that business, we're pleased with where it's at. But if there's any headwinds, it's all around COVID-nineteen. That's strictly where the issues are, Which we characterize basically for the whole globe for us right now, but very low exposure right now in China.

Speaker 11

Got it. Thanks for taking the questions.

Speaker 2

Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Justin Bowers of Deutsche Bank. Your line is open.

Speaker 8

Hi, good morning, everyone. Just a quick one on the margins with revenue Being flat sequentially plus or minus, is it fair to think of operating margins being around the same level? And then As we think about 4Q and the step up there in volumes, should there be some incrementals there With respect to the margins and then part 2, pardon if I missed this, but what was the C19 contribution in the quarter?

Speaker 3

So to answer the margin question, we would expect it to step down a little bit And that's typically what we see coming off Q2 from a manufacturing point of view. It's usually our strongest quarter in the year. So given the various shutdowns that we have in Q3, Q4, there's typically a little bit of step down and that will be normal for us. So it's just to bake that in and that's embedded in the guidance. COVID-nineteen, we did about 20,000,000 In Q2, from a revenue perspective.

Speaker 8

Okay, got it. That's it for me. Thank you.

Speaker 3

Okay. Thank you. Thanks.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Quintin Lau for any closing remarks.

Speaker 1

Thanks, Valerie, and 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 the 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

Thank you. Ladies and gentlemen, this does conclude the conference. You may now disconnect. Have a great day.

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Earnings Conference Call
West Pharmaceutical Services Q2 2023
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