Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 West Pharmaceutical Services Earnings Conference Call. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Quintin Lai, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Jonathan. Good morning, and welcome to West’s third quarter 2017 conference call. We issued our financial results this morning and the release has been posted in the Investor section on the company’s website located at www.westpharma.com. This morning, CEO, Eric Green; and CFO, Bill Federici, will review our results, provide an update on our business and financial outlook for the full year 2017, a preliminary look at 2018 sales guidance and our long-term financial construct. There is a slide presentation that accompanies today’s conference call, and a copy of that presentation is also available on the Investor section of our website. On Slide 2 is the safe harbor statement. Statements made by management on this call and in the presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on management’s beliefs and assumptions, current expectations, estimates and forecasts. There are many factors that can influence the company’s future results that are beyond the ability of the company to control or predict. Because of these known or unknown risks or uncertainties, actual results could differ materially from past results and those expressed or implied in any forward-looking statement. For a non-exclusive list of factors which could cause actual results to differ from our expectations, please refer to today’s press release as well as any further disclosures by the company regarding the risk to which it is subject in the company’s 10-K, 10-Q and 8-K reports. In addition, during today’s call, management will make reference to non-GAAP financial measures, including: sales in constant currency, organic sales, 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’s CEO and President Eric Green.

Thank you, Quinitn, and good morning to everyone. Our team had a solid performance during the third quarter, which was in line with our expectations and consistent to prior quarter performance. Importantly, we saw an improved to positive growth in our Generics market unit and continued strength in our Contract Manufacturing business. We believe we are on track to finish 2017 with strong organic growth led by high-value products sales in the Biologics and Generics market units. I want to start this quarterly review by addressing the impact from the hurricanes during Q3. Our highest priority is always the safety of our employees, and I’m pleased to report that all our employees and their families made it through the storms unharmed. Our team did an excellent job of pre-storm preparations and post-storm cleanups and restarts. Puerto Rico continues to be a challenge. Damage to the regional infrastructure is extensive, and is affecting our employees and customers on the island. Our facility saw minimal damage and we are now partially operational due to the use of backup on-site generators. I’m proud of our employees on how they rose to meet the challenges of these storms, and we at West are committed to helping them with ongoing relief efforts. In the third quarter, we estimate that the weather shutdowns caused a negative sales impact of $2 million, over half to Biologic customers located on the island and the balance to Contract Manufacturing customers. In the fourth quarter, we could see another $5 million of sales impact, mostly due to delays in shipments to biologic customers in Puerto Rico. This risk is reflected in our revised 2017 guidance. Bill Federici will go over the Q3 financial details in a few minutes. So let’s move to Slide 4 for a discussion on the trends…

Thank you, Eric, and good morning, everyone. We issued our third quarter results this morning reporting net income of $51 million or $0.67 per diluted share. As a reminder, 2017 earnings per share include tax benefits on stock compensation due to an accounting change effective at the beginning of 2017. Our third quarter 2017 results include a $0.06 per share tax benefit due to this change. Our Q3 results also include a $0.09 per share reimbursement of prior costs incurred in the development of a safety technology we licensed to a third-party. That amount is included as other operating income, in our Q3 results. Our adjusted diluted earnings in the third quarter of 2016, were $0.53 per share. A reconciliation of non-GAAP measures is included on Slides 14 through 17 in the presentation that accompanies this call. Turning to sales. Slide 9 shows the components of our consolidated sales increase. Our consolidated third quarter sales of 398.2 million increased by 5.7% versus our third quarter 2016 sales. Excluding the 7.7 million favorable foreign exchange effect, our Q3 2017 sales increased 3.7%. Proprietary net sales increased 1.5% versus the same quarter 2016, excluding exchange. Envision and its respective components and SmartDose devices saw the highest sales increases. Sales of our high value product offerings rose 1.1% versus the prior-year third quarter. Current quarter high value products sales as a percentage of total proprietary products sales were flat versus a year ago. Both Q3 2016 and the first nine months of 2016, saw significant growth in high-value products, up 24% and 21% respectively versus their prior year comparators due to strong customer demand, especially in our Generics and Biologics market segments, as customers ramped up the product launches and were reacting to our lengthened order lead times in our facility. Our combined…

Thank you, Bill. In conclusion, we’re seeing good progress with our market-led strategy. With quality, scientific and technical expertise, that is unmatched in our industry, we are developing deep insights into what our customers’ need and are developing unique solutions for them. We have a strong pipeline of innovative, high-value products and delivery devices that will address future market needs, and our operations team is working to apply manufacturing excellence and best practice across a global network to deliver better service to our customers and reduce costs. With strong market fundamentals driving our business, our team is focused on delivering the year-end for our customers and laying the groundwork for future success in 2018 and beyond. Jonathan, we’re ready to take questions.

[Operator Instructions] Our first question comes from the line of Dave Windley from Jefferies .

This is Jared Meggison on for Dave Windley. I just want to dive a little deeper into the backlog being down 6%. I know you talked about longer lead times, but I just wanted to touch on the efficiencies you guys are getting in your proprietary products. I know you previously discussed some increased efficiencies in your manufacturing processes. So I guess what I’m curious about is, are you guys continuing to get efficiencies or was that more of a one-time gain and now you’re just operating more efficiently and seeing lower orders? Or -- can you just expand on that?

Jared, a very good question. And what we have seen over the last 1.5 to 2 years a reduction -- significant reduction from lead times that were somewhat inflated, end of ‘15 going into 2016, due to a surge of demand really in the Biologic -- I’m sorry, in the Generics space, for our high-value products. Because of the improvements we made in Jersey Shore facility, in Pennsylvania, also the investments we made with Kinston, North Carolina, we’re able to add capacity, which as I mentioned, reduced these cycle times significantly. I would argue at this point, we’re not satisfied where we are. If we’ve mentioned -- we talked a little bit about AccelTRA, that’s a program that’s designed to take lead times that could be anywhere between 10 to 15 weeks down to less than half that. So we’re continuously -- with the continuous improvement mindset -- driving more efficiencies. And you’re right, the net result is our customers are less dependent on putting orders out three -- two or three quarters in advance to more in just-in-time mentality. So we’re making good progress but we have more work to do, and we’re seeing the benefit with more of the response from our customers.

Great. And then regarding the hurricane impact in 4Q, I know you quantified the revenue as potentially $5 million. Can you maybe quantify what that does to margin? Is that kind of a flow-through there or what are the expectations around that?

Yes, the margin impact, Jared, will be an adverse impact about $0.03 on the EPS line. So about $3 million of operating profit.

And then last...

[indiscernible]

And then last one from me. I think you guys have mentioned Generics was expected to grow double digits in 4Q. If you could just expand on that expectation? Is that a normalization of the regulatory issues we had seen in 2Q, 3Q? Or have you guys had some larger orders come in?

Yes, it’s really the work our customers, the generic customers have done on their inventory management. Again, over a year ago, they built up inventories due to the long lead times. They got really comfortable toward the tail end of 2016 -- where we were -- and with the continuous improvement. And that has really anniversaried out during the Q3 of this year. As you know, we are a make-to-order environment, so we have visibility of orders on hand that we’re currently working on delivering with expectations in Q4 with Generics. So it really is around the inventory management activities that were done by our customers.

Thank you. Our next question comes from the line of Larry Solow from CJS Securities. Your question please.

Just a couple of follow-ups. Just on the lead time question. Does -- as you guys, obviously, this is your own successes demonstrated here. Did the lead times eventually -- does there come to an inflection point when this begins to go the other way? Or is it that tight now for the customer or that much better for the customer that -- this will always be some very little lead time? And do you guys see benefit from that? Obviously, the customer could hold less inventory, you hold less raw materials on hand. Does that -- is that actually driving better profit for you?

Yes, Larry, it’s a benefit for both our customers and for ourselves. And, frankly, I think we’ve more normalized in the last couple of quarters or three quarters, I would argue, with our operations on lead times. And as we look -- as the global operations team is looking at putting in place continuous improvements with more automation, more process flow designs. It gives us the ability to continuously drive that lead time down further to continue to be the best-in-class in the industry, frankly. But you’re right, while we’re able to create more efficiencies, we drive costs of our customers working capital, higher-quality and delivery, faster to our customers, which will translate into better margins for West.

And just so -- as this the improved throughput and increased capacity, I suppose it’s a freed up, given additional capacity that allows you to grow or even look for other opportunities that maybe you couldn’t do not too long ago?

Yes, Larry, so that’s a very good point. And we had some constraints on moving customers from standard packaging components to high-value products about one and a half years ago, just due to constraints of our operations. With the lower lead times, the conversations with customers to move more of their portfolio towards high-value products is a lot easier. And that’s that -- and as you know, what comes with that, right? It’s higher revenues and higher margins per transaction. So that is -- that’s going to be a benefit as we go forward, and we know the global operations team is really focused on maintaining and in improving on those metrics, so that our commercial organization has that confidence with the conversations at our customers.

Great. And just a couple of questions on the specific end markets. On the Biologics side, obviously, it’s been held back by the aforementioned inventory issues. It sounds like you guys are pretty confident with the high single-digit growth for the year, you’ll obviously get into the double digits in Q4. As you look out, more importantly, into 2018, does that double-digit growth rate sort of incorporate into that sort of 6% to 8% overall growth next year?

Yes, on the Biologics...

Yes. You’re right on the Biologics, we’re starting to see that more normalized in Q4 actually outsized, I would say, with double-digits. It’s very strong double-digits. And as you look into 2018, what we’re seeing with our customers and conversations with our customers, we’ll be back to more normal levels. That could oscillate between quarter-to-quarter between high-single to low double, but it’s in that corridor.

Got it. And then just lastly on the Generic area, I know you guys had lot of timing and whatnot impacted you guys, but also there has been some slowdown in the production industry-wide a lot more, seems like a little tighter regulations or at least more warning letters, FDA audits and whatnot. Has that -- any change in that front, any reaction from customers?

Yes, Larry, well there’s been not a lot of change on that regard specifically around India. We are continuously working with our customers as they work through these issues. I would say though, we had a pretty strong performance not just in India but throughout Asia in Q3. So we think it’s coming back to the more normal type of performance. I just want to remind you that our business in India where it’s mostly impacted by these regulatory hurdles, is a very small piece of our Generics business, in fact, it’s less than 5% of our entire Generics business.

Our next question comes from the line of William March from Janney Montgomery. Your question please.

First question, maybe just talk about the adoption curve you’re seeing for NovaPure and Westar Envision? And maybe how does that compare to some of the legacy HVP products like Westar and RS and RU and kind of just a long-term dynamic of that shift and then the shift of standard to high value products?

Yes. No. So, Bill, when you look at the NovaPure and Envision, and if you can just kind of think about the product portfolio moving up the high-value quality curve, these are the services and product solutions that we offer our customers that are more recently launched, and what we’re seeing is a lot of interest, because Envision obviously gets into the subvisible detection of defects. And we get into NovaPure, that’s really quality by design. Both of them though are very small as an overall percentage of our high-value product portfolio, but the migration from either standard to that part of the portfolio or even from, typically, Westar RU, RS, FluroTec all the way up to NovaPure has continued to be very attractive for our customers. Give you an example: NovaPure manufacturing capability we came online about almost a year ago in Kinston, North Carolina, it’s been validated. We have worked with our customers on stability so we can move their highest level of Biologics on NovaPure. And the economics are quite attractive, obviously, for our customers who saves -- reduces their defects and improves their quality. And for us, it’s actually moving -- helps us with our gross margins, obviously. So we’re excited about it, but it is a small number, and I got to be careful when we talk about very strong growth, but it’s a long migration. But it’s exciting to see the traction we’re getting from our customers.

Got it. And then on the Pharma segment, I know in the last call you called out a major customer that’s going to be migrating from standard to high-value products beginning in 2018. Are you seeing -- are you having conversations with additional Pharma customers about that? And then maybe is that going to be a little bit of a headwind here in 3Q and 4Q as that customer works down standard inventory as they begin the migration?

No, I think what you’re going to see is -- so the answer to your question, the first part is, yes, we’re continuing to have conversations. That one particular customer -- that migration is commencing in 2018. We’re quite excited about it because it supports one of their major initiatives of driving for zero defect at their -- within their organization, but also enables us to put our highest quality product on their products. Secondly though, we’ll see a little bit of a transition you could argue, it might be a little bit of a headwind but we’re managing through that with our customer, as they migrate and we don’t see too much volatility. What you’ll see this quarter, in Q3, the volatility that we saw, it really is a follow-on of a very, very strong first half and the sales of the first half were led by packaging components for insulin delivery. Just to remind you that we have a pretty strong position in the diabetes market. And so -- and then also we’re seeing growth in the Envision administration system products also. So we don’t think Q3 is a typical concern because this is the typical normal quarterly fluctuation, and we continue to believe in mid-single-digit in Pharma’s to be expected.

Got it. And then just one quick one for Bill. Could you maybe just talk about capital deployment. And now with the net cash balance where you guys stand on your thoughts around share repurchases and maybe accelerating that?

Sure, thanks, Bill. So absolutely, as Eric mentioned in his prepared remarks, our first order of business is to invest back into the core of our business; the high-value product programs. That will continue to be our initial first pass on capital allocation. We do have a board-authorized share buyback program that runs through the end of the year. And we are -- as we mentioned, we’ve -- taken down a part of that and there is still a piece to go that’s available to us under that program. And we have affected about $26.9 million through the first nine months of the year. In terms of how we’re looking at the balance sheet, we’re very comfortable with our balance sheet the way it is. We believe that it continues to provide us with the necessary liquidity to be able to continue to grow our high-value product programs and our proprietary delivery systems as well. So no fundamental change in that in the near term.

[Operator Instructions] Our next question comes from the line of Tim Evans from Wells Fargo.

This is actually Robert on for Tim. So we’ve seen this one situation where biosimilars are taking more than expected share from innovators. Do you guys see this dynamic as disruptive to West in the short-term possibly some of these customers might adjust their inventory?

That is -- biosimilars are very new in the states at this point, and it’s obviously long-term, it’s a very attractive space, when you start looking at large molecules. And we don’t see -- we believe our position in that part of the market is actually very attractive. To give you an example, in Q3, there were, we believe there’s 14 NMEs that were approved and of which seven were Biologics, about 4 were biosimilars and 3 were small molecules. We were in all those presentations. So it shows that we’re not just in the Biologics or small molecules. We have a very good position in the biosimilar space.

Okay. Great. And really quick Contract Manufacturing was pretty strong in the quarter. And I know you mentioned you saw minimal damage and you’re back up and partially operational, but is there anything else you can comment on regarding strength?

Yes, so the team has done a really good job of Contract Manufacturing. This is a business that has -- and I’m pleased with the leadership team in that part of the organization where they have really focused intently in the diagnostics and med device space. And as you know, if you were to sit here talking about it 3 years ago, I think there was pretty robust part of the portfolio was in consumer products. While that’s a very important area, our focus has really been towards the healthcare space, and today less than 20% of our sales of that business is in the consumer products. The growth really is coming from product launches of our customers with new molecules and new delivery devices going into the market, and we are -- we, for example, in Dublin, we built a facility dedicated for a line for delivery device and that delivery device is -- we’re having troubles keeping up with the volume, frankly. And so that’s a great example on how we’re -- the focus has given us more opportunities and the pipeline looks very rich. So it is going to be tough comp in Q4, but that team is well positioned to continue to grow that business very well.

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

Couple of questions. Bill, I’m just curious, the reimbursement -- the $9.1 million or the $9.5 million reimbursement for cost, you originally guided to $0.53 flattish EPS number for the quarter and the conversation whether this was going to come in 4Q, and it was going to be the smaller amount, I think is around $8 million. I guess what changed in terms of timing given that the -- given the call was on July 27?

Nothing changed in terms of timing. I mean, these are deals that happen when they happen. So we are -- we were -- I think we’re very clear on what we expected. The number was a little different than what we had originally said, but the $9.1 million is running through other operating income, and we did say that it was going to be in Q3, not Q4, Derik, just to correct you there. And the $8 million versus $9.1 million, the 8 million was Euros. And so that $9.1 million.

Got you, okay. And I guess I’m just curious the stock-based accounting changes are, it’s -- I think it’s like a $0.40 tailwind you had this year. Was it -- I mean, how do you look at that in terms of next year in terms of comps? And what sort of headwind does that create from a timeline standpoint?

It’s a great question. This is -- it is an area where this new accounting, used to run through the equity section. Now they’re -- the accountants have decided that you go through the income statement. We had very, very high levels of activity. As you know, the excess tax benefit is based on a lot of different variables, first one being the existing stock [indiscernible] strike price of those options, time they were given. So there’s a number of variables that are involved, it’s very, very hard to predict when individuals either be it retired individuals or individuals that are still at the company are going to exercise their options. So we’ve been transparent in terms of what the actual results have been. I can tell you, if you look back in history, the amount is -- in prior years, even though it’s run through the equity section, has not nearly been as high as what we’ve seen this year. It’s run -- it was about $19 million in 2016 and about -- and smaller amounts before that. So while there are still options out there that are available to the exercised. Describing for you and how we could possibly predict that going into the future, is very difficult because of those various variables, including what happens with tax reform going forward. Those are things that make it extraordinarily difficult. We think the best thing to do is to be transparent, but if you’re -- in terms of helping you understand what should be the particular period -- but if you’re trying to think about, I wouldn’t use the $0.30 that we’ve seen, the $30 million that we’ve seen thus far the $0.40, I would think more in lines of what we’ve seen in the past, which has been kind of in that $10 million to $18 million range. So we will continue to update you as we go along, but predicting something like that is very, very difficult.

And then just one final question, I guess when you sort of look at the I think 6% to 8% long-term number and the 100 basis points with margin expansion sort of built-in, I mean that’s sort of what we were running through our models. But I guess, if you look at the -- it sort of puts the op margin number by 2020 versus your prior guidance sort of at the lower end of that range of that. I guess what’s the delta -- I guess what’s still the biggest delta in terms of potentially getting from what now looks like the $19 million -- sort of like the $19 million to $23 million which you said previously. There still must be FX and proprietary and then the new product sets that are coming is the big delta is in that margin number?

Yes, look, I think Derik what we’re saying is that construct the six. -- the 6% to 8% growth organically driven by the mix shift to high-value products and the increased optionality in terms of growth coming from our proprietary devices is going to drive along with operational efficiencies, is going to drive approximately 100 basis points on average each year to our operating margin. We still feel very, very comfortable with making those claims. And we’ve actually seen this result when high-value product growth is high, in that high-singles to low-doubles that we expected to grow over the long periods of time. That generates very, very good margin. There’s a great correlation between that and generating good margin expansion. So that construct along with our operational efficiencies gives us a lot of comfort that we’re going to continue to grow in approximately 100 basis points on average per year.

And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Quintin Lai for any further remarks.

Thanks, Jonathan. Thank you for joining us on today’s conference call. An online archive of the broadcast will be available on our website at www.westpharma.com in the investors section. Additionally, you can access a telephone replay through Thursday, November 2, by dialing the numbers and conference ID provided at the end of today’s earnings release. So that concludes today’s call. Thanks, and have a nice day.

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.