Good day, ladies and gentlemen, and welcome to the Q1 2018 West Pharmaceutical Services Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call maybe recorded for replay purposes. It is now pleasure to turn the conference over to Mr. Quintin Lai, Vice President of Investor Relations. Sir, you may begin.

Thank you, Brian. Good morning, and welcome to West's first quarter 2018 conference call. We issued our financial results this morning and the release has been posted in the Investor section on the company's Web site located at www.westpharma.com. This morning CEO, Eric Green and CFO, Bill Federici, will review our results, give you an update on our business and provide an updated financial outlook for the full year 2018. There's a slide presentation that accompanies today's conference call and a copy of that presentation is also available on the Investor's section of our Web site. 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 US 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 the company makes 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 growth, adjusted operating profit, adjusted operating profit margin and adjusted diluted EPS. Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I now turn the call over to West's CEO and President Eric Green.

Great. Thank you, Quintin, and good morning everyone. Thank you for joining us today. This morning we reported our first quarter performance. And you have seen in our press release we grew overall sales despite the headwinds and the tough first quarter comparison that we forecasted at the beginning of the year. Our generics market unit posted another quarter of accelerating growth. In our Contract Manufacturing segment also saw impressive growth in the quarter. There are positive signs of future growth across all market units and we’re confident in the underlying strength of our business as we look to the remainder of 2018. Let’s now turn to the detail of our market unit performances for the first quarter. On Slide 4, we show the organic sales growth performance of each of the three market units in our Proprietary Product segment and our Contract Manufacturing segment. As we have done on previous calls, we show the trailing four quarters along the current quarterly performance. While we adjust for last year's sales associated with both the deconsolidation of the Venezuela business and lower consumer contract manufacturing sales due to our customer moving their business in-house, our organic sales growth would have been 4.1%. I'll start with generics which represents an excellent example of the resilience of our business. Looking back, we saw the first signs of a slowdown due to customer inventory management beginning in late 2016. By Q3 of 2017, we start to see early indications of return to normal growth. Since then, we’ve reported accelerating growth for the past three quarters. Order patterns from our largest customers gave us confidence for the rest of the year. Another encouraging sign is a strong rebound in sales growth we're seeing in India. On the new product front, we are encouraged to see…

Thank you, Eric, and good morning, everyone. We issued our results this morning, reporting first quarter 2018 earnings of $43.6 million, or $0.58 per diluted share versus the $0.81 per diluted share we reported in the first quarter of '17. Our Q1 '18 reported results include $3.3 million or $0.04 per diluted share of restructuring and other charges resulting in adjusted diluted earnings per share of $0.62. Our financial results are summarized on Slide 6, and the reconciliation of non-GAAP measures are described in Slide 12 to 14. Our Q1, 2018 reported results also include $2.1 million or $0.03 of EPS tax benefit associated with share-based payments whereas Q1, 2017 included $15.9 million or $0.21 EPS tax benefit. Our results for Q1, 2018 were impacted by the new revenue recognition rules and the new pension expense classification rules. While the new pension rules had no net impact on EPS, the new revenue recognition rules accelerated the recognition of certain of our revenues. The adverse impact to our Q1, 2018 sales was $3 million and we expect the full-year adverse sales impact will be approximately $6 million. Our working capital has been and will continue to be adversely impacted by the acceleration of revenue recognition. The adverse impact on Q1 working capital was approximately $3 million or two days. Turning to sales. Slide 7 shows the components of our consolidated sales increase. Consolidated first quarter sales were $415.7 million, excluding the currency translation effects and the effects of the deconsolidation of our Venezuelan subsidiary and the lost consumer products contract manufacturing customer, our consolidated Q1, 2018 sales would have increased by 4.1% versus the prior year quarter. Proprietary product sales increased 1.3% versus the same quarter in 2017 excluding exchange effects and the effects of the deconsolidation of our Venezuelan subsidiary.…

Thank you, Bill. Before we close, I want to share some customer feedback. We recently wrote to the panel of global customers representing all our business segments and market units. We asked these customers to provide feedback on our performance and what makes for an ideal industry partner. They talked about the criticality of high-quality, security of supply and scientific excellence. And we're pleased that West rated highly in all those fronts. Importantly, they talked about wanting a partner who could help them differentiate their products to offer more value to patients. They want flexible dosing, wearable devices, connectivity, digitization and innovation. They’re also looking for suppliers that added samples of long drug development cycle and the need for speed and flexibility and how best to partner along the way. At West, we're proud of our long-standing partnership with the injectable drug industry that these customers represent. In fact, earlier this month, we celebrated our 95th year on business. And while we have celebrated that milestone, our focus is on what the next 95 years will bring, and how we can continue to grow our business into the future. As we look to the rest of 2018, our focus is on execution. We're working with our customers across all the markets to deliver products and services that meet their unique needs. Our global operations team is working to improve safety, quality and service for customers, while reducing our overall costs, and we’re anticipating the future and what our customers and their patients will need as we develop new products and new capabilities to service them. Our market led approach is resonating with our customers and we're confident we will continue to see future growth for the remainder of the year. Brian, we’re ready to take questions. Thank you.

Thank you, sir. [Operator Instructions] And our first question will come from the line of David Windley with Jefferies. Your line is now open.

Hi, guys. Thanks for taking my questions here. I wanted to try to understand a little bit better on sales growth since you might imagine. Follow your -- I was looking at the slide around your tracking of growth by end market segment and thinking about how you get from the .2% in the first quarter to this 6% to 8% for the full-year. And if you could just kind of walk me through that perhaps particularly focusing on Biologics, but walk me through that by client segment would be very helpful. Thank you.

Yes. David, good morning. Thanks for the question. I will start with the Biologics area. As we commented on is that this particular part of the business we’re seeing some variability because of when customers are buying high-value products, starting their clinical phase for evaluation such as line trials or part of the delivery system, are being developed specific [indiscernible] events of anticipated approvals. So when the launches occur there is a buildup and then there's a -- there's somewhat at the way until a replenishment of the inventory, so we’re seeing a little bit of variability in the Biologics. Saying that, we are pretty confident when we start looking at the order book and future projects we are currently working on in Q2, Q3, and Q4. That gives us confidence that we're able to drive a organic performance of mid single to high single-digits for the full-year. In the Pharma sector, that particular market unit, if you strip out the headwind they had in Q1 specifically around Venezuela which not all of that, a good portion of the Venezuela operations was under Pharma. And as you know when that shutdown with minimal revenue coming back to West going into that market with those operations not working. So we sort of thinking about the Pharma uptick and the high-value products. We also see the administration system business over capacity constraint today will be additional capacity online starting this quarter. And we will be able to push that through to our customers who are pulling the demand today for us. So the Pharma we’re feeling much more comfortable that we were back to our typical growth rates. And we will look at the revenues, it's more stabilized each quarter versus the fluctuation. Just to finalize on the generics, the generics has come -- has came back as we anticipated, but actually a little bit stronger virtually, but the outlook is even greater. The reason why I would say little stronger than we anticipated, we didn’t anticipate India to come back as fast as it did in Q1. That was a very strong performance. In fact, all of Asia was well -- very, very strong growth across all of Asia Pacific for us. So we believe the generics base will continue to deliver as we’ve seen this quarter, but going forward. So if you bring that all together, that gives us little bit higher than that 6% to 8% quarter for Proprietary. So the full average for the full-year is 6% to 8%. I’m not going to say much for contract manufacturing, that's pretty much isolated, you can see it. But Dave, last comment, high-value products is the key driver of that growth. So we're -- as we look at into the next three quarters, we’re looking at growth rates of high single low double-digits with a high-value product portfolio.

So just to clarify, I mean, from -- numerically from a -- basically zero starting point in the first quarter, a lot of your guidance you’re talking kind of hovers around high single to low double. Don’t you need solidly double-digits to drag the average up to 6% for the year?

Yes we do, Dave. That’s we’re looking at is -- if you look at through the pacing of the quarter, it’s building up towards that, but its back half of 2018. It's going to be much stronger than we had in the first half and its little bit of a comp issue too. We sort of thinking about the back half of last year.

Yes, okay. And then maybe one last one, then I will yield to others. On the qualitative side, I was thinking about -- and you have had this impact to lead times and inventory we talked for several quarters about how -- there were bottlenecks that you addressed, but during the bottlenecks clients over brought and built inventory and then once you address them there's kind of a tough comp and as they’re lapping those activities. And I think those are more generic biased, but we've also kind of use those same types of descriptions in Biologics, and I think qualitatively the issues are different, right? Because in Biologics it sounds like your issues are clients launching product or not is that delayed, do you have visibility on that? And, I guess, help me to understand am I right that kind of the nature of the two issues is different such that like our confidence that we're going to lap the issues in Biologics is different and maybe not as high as the simple lapping of the generic issue?

Yes, that is a very good observation. That’s a good -- so when we think about the generics, you are right. A lot of the bottlenecks that occurred at year and half, two years ago was around our high-value product portfolio and conversion of generics customers to that part of our portfolio. And because of the fact that we weren't able to produce the lead times escalated significantly, I would say we have lapped that clearly. And in the generics space we're actually delivering, add new record cycle times that is faster than anybody in the industry today. So when you think about the Biologics you're absolutely correct when you said there is -- it's a little different than generics. It's still the high-value product portfolio, but there is a large component of that is build up for launches and then the drug acceptance into the marketplace. That’s what we’re seeing. I can assure you what we’ve learned with the generic customers versus our top customers where we put a -- supply chains together, we’re now mapping out demand curves required for the largest launches. It gives us better anticipation, not just in the Generics, but now in the Biologics space. So there's some of that confidence that we’re seeing in the Biologics, yes, the cycle times are much less. You don’t need to order as much in advance but the larger portion of that is really around drug launches, the cyclicality of that.

All right. As promised, I will step out. Thanks.

Great. Thank you, Dave.

Thank you. And our next question will come from the line of Larry Solow with CJS Securities. Your line is now open.

Great. Thanks. Good morning, guys.

Good morning, Larry.

A follow-up on the backlog question. You guys have done a great job obviously reducing lead times. And historically backlog was sort of somewhat of an indicator of future growth with some nuances obviously especially more lately. There's a fact that you're -- you were basically flat year-over-year. Does your forecast entail more -- even more and greater customer conversations and -- in other words, how do you sort of see yourself growing eventually at low double-digit this year when your backlog is kind of flattish? And then, the second question would be not that you have more capacity, have discussion sort of opened up around sort of changing some customer -- some of the existing products, older products getting more into the HVP, high-value stuff on that -- on those end?

Yes, Larry, those are good questions. Thank you. So the first one, talk about backlog. You’re absolutely correct. What you see -- what we see today is a different profile of the backlog and what I mean by that is historically we would have pretty much visibility, it's pretty even dispersed over the next three to four quarters. What we’re seeing now, even though its flat, higher proportion of that backlog number is more near-term. I.e., if I look at today with Q2 and Q3, and it goes to the fact that the cycle times are less -- customer is less prone to put orders in long-term. It doesn't mean that they’re looking at [indiscernible] of sources. We are on those molecules. We are the supplier of choice for their products that they launch. It's just we are able to perform in a much higher level than we had in the past. And that is due to lean initiatives, that’s due to capacity expansion that we have in place today that gives us that platform. So I’m confident we sort of thinking about what the backlog is more near-term than long-term. That’s the changing dynamics. The capacity conversation, you're right. Larry, we are in active conversations with our customers moving them from standard products to high-value products. And while some customers are taking a platform approach and we’re moving more of their molecules towards that. Some are looking at from one at a time. We are adding -- when you think about Waterford as an example, while we are -- we’ve the facility been validated by our customers where we think commercial ramp up, we are continuing to add new technologies like RU -- Westar RU in Waterford. We’ve a more complete solution to drive the quality. So that -- these are the initiatives that we’ve put in place to convert our customers from standard to high-value products.

Okay. Just a question in terms of cadence of growth, you can grow after the year. I know you guys got it quarterly, but it sounds like maybe a little bit improvement in Q2, but most of the sequential improvement will really occur in three and then into four, is that sort of good assessment?

Yes, Larry. I think you will find consistent growth around the generics. Pharma as I mentioned would be more consistent from a revenue perspective, but on a comp perspective you will see it accelerate as a percentage, because the comp is less than 2017 and Biologics we will see a continued acceleration throughout the year.

Okay, great. Thanks.

Thank you, Larry.

And our next question will come from the line of Dana Flanders with Goldman Sachs. Your line is now open.

Hi. Thank you very much for the questions. I guess my first one and just following up on just the cadence throughout the year. Can you just talk a little bit about just the gross and operating margin progression that we should expect? I mean, will that generally follow revenue growth or is there any lumpiness that that we should be thinking about in terms of just margin improvement throughout the year?

Yes, Dana. Thank you. Yes, it will be more progressive as the year goes. It was as we said a very tough comp in the first quarter. As we go through the year with both high-value product expansion and the growth in sales expansion as we talked about, we believe that that margins will get better as the year progresses. So, yes, definitely back half ended and progressing as the year goes.

Okay, great.

That’s both for gross margin and for operating margin.

Okay, great. And just my second quick follow-up, just on the bigger picture on competition, I believe a few of your larger competitors have announced investment in expanding capacity. Just how are you thinking about the supply demand equilibrium in the medium-term across standard products, across high-value products and just, I guess, the potential for competition on new business? Thank you.

Yes. Dana, we are aware of our competition. We are continuously investing in certain parts of the business. What we are looking at again just putting into perspective the volumes that we produced today, lower $40 billion -- components a year. And to get a site up and running you’re seeing this with us on the Waterford when we started that project in 2014, right. And so here we are talking about customers just validated the lines and we’re starting to -- flip into commercial revenues for 2018. Our process is pretty consistent to other companies that would have to -- as the building and validation doesn't really change. Said that, we are aware that they’re building capacity. We are having active discussions to our customers that continue to move up the high-value product curve so that as you start thinking about differentiation it really is around the quality. It's around availability of the service which we believe that we just in the last 12 to 18 months as significantly raise the bar. So we're not complacent. We understand the situation, but we do believe that we will continue to be in a very favorable position because of those levers.

Thank you.

Thank you. And our next question will come from the line of Paul Knight with Janney Montgomery. Your line is now open.

Hi, Eric. When is Waterford coming online?

Yes, Paul, we have -- right now we’re validating product with customers. They are actually -- we’ve sampled. We are working through the changes that will occur from manufacture in other locations to our Waterford facility on existing products, but also new products. There's obviously a validation process. In Q3, we're looking at revenues, commercial revenues and that will be the -- really the official -- launch and grow as we proceed throughout the quarters. We got -- I have to tell you I’ve been there a few times. The site is really, really well-positioned. Our customers are very complementary of what we've done not just to replicate current processes, but to really move them into the next generation. So I think that there's a lot of interest and we’ve a lot of visitors on-site for future business. So, Q3 and forward.

And then the burn you’re -- how -- what is this burning up on SG&A for the interim here for quarter?

Okay. Go on.

So, Paul, it really impacts more cost. The under absorbed overhead was $3.6 million in the quarter. We will see a similar amount in the second quarter, but as you remember we discussed last year, we started depreciating the plant in the second quarter. So you will start to see that that under absorbed overhead as its comparable to last year. We will start to update and as we start to get from the commercial activities in Q3 and beyond, that number, the unabsorbed overhead will lessen as we go through the year.

And then lastly CapEx you're saying down this year below 150, what's it look like after this year?

Yes, Paul, that’s -- we’re -- I’ve to tell you, one of the changes we made about a year and half ago is -- and we’ve always thought about our operations globally, but we really formalized the global operations and we have 28 manufacturing sites. And by formalizing the global approach we are able to allocate our resources, I would say probably more effectively on where we want to invest in centers of excellence and also we look at capacity, we built at Kinston, we have Waterford on the ground. We’ve expanded in Dublin. We have bricks-and-mortar. And so this year we're looking at below 150. We believe going forward we will be hovering around that corridor and as a percentage of sales we will continue to drop. Right now just to put into two dimension, right now we’re looking at about $50 million to $60 million of our CapEx is around maintenance. And if you want to maintain a high level of quality and productivity of our facility, that’s the investments we have to make. We are putting about [Indiscernible] into IT. It's a combination of some maintenance, but also future growth and the balance is really around new products, new innovations and new HVP portfolios that are coming into the market. That’s how you would look at the split.

Okay. Thanks.

Thank you, Paul.

Thank you. And our next question will come from the line of Drew Jones with Stephens Inc. Your line is now open.

Thanks, guys. Looking at the core proprietary product revenue, down about 2% year-over-year, is it -- can you parse out how much of that was volume versus how much was mix? And is it safe to assume that the volumes are going to rebound in the back half of the year? I know you talked a lot about HVP being a key driver from here, but just want to get a feel for the volumes bounce and back other than just easier comps coming up?

Yes. We do obviously believe that the lines will continue to grow from all things that Eric described earlier. We don't parse out volume and mix other than where we talked about high-value products was also down in the quarter. But as Eric commented, we believe for the full-year we will see high single to low double-digit growth of high-value products. So therefore as you can assume we’re going to continue to accelerate not only volume wise, but also mix wise. And remember our construct is only -- it's about 1% price, 2% to 3% market volume, and then the rest is mix. So while we didn't see a whole lot of growth in the first quarter, Eric mentioned we don't see any lost business and we’re going to continue to grow this business in the way that we believe that construct make sense for us. So more growth coming in the back half of the year obviously, but both volume mix and a little bit of price.

Perfect. And then on the contract manufacturing side, you talked about losing the consumer, customer filling that with a healthcare line. What’s your line of sight for when that’s going to stop being a drag on margins?

Well, that’s rule quickly. The consumer business that we lost and they brought in house themselves, that is for the -- will be the full-year of 2018. So we ended that relationship at the end of '17 -- literally at the end of '17 and that will have an impact -- somewhat even impact throughout '18. I have to say though that we are talking about high single-digit performance even with that particular losses is pretty impressive because of the focus -- strategic focus around the healthcare space that’s driving that performance. Bill do you want to …?

Yes, just one extra thought on there. There's two components to the piece that impacted Q1. The one is the -- obviously the margin on the products sold. But then there's the under absorbed overhead that it leaves in its place when you take the product out. As part of the restructuring plan that we talked about, we’re going to be combining those two contract manufacturing facilities in the U.S into one and so -- and that will happen in latter part of 2018, the second half. And therefore you'll see that under absorbed overhead piece of that issue go away. So less of a drag in the back half of the year. But as Eric said the strong growth in healthcare is definitely a net positive for that business going forward.

Thanks, guys.

Thank you.

Thank you. And our next question will come from the line of Derik DeBruin with Bank of America. Your line is now open.

Hi. Good morning.

Hi, Derik.

Hi. Bill, just a question, I mean, when you sort of look at second quarter were exchange rates, what’s sort of embedded in your model for FX on 2Q and then also for the balance of the year. I mean 7% was well above -- and Q1 was well above what we had modeled.

Yes. Yes, so you’re right. Q1 was €1.23 per dollar, our dollar per euro for the first quarter. The rest of the year we've scheduled in at €1.20. Even though the spot rate today is €1.22, we took a conservative stance on the FX growth. So if you remember the paradigm it is a $0.01 change in the ratio for the full-year with yield about a penny of EPS. So our previous guidance had been at the -- at €1.20, we left it there for now. There is some benefit in the first quarter and we're being conservative by just saying that we will be at €1.20 for the rest the year. So in the second quarter using the €1.20 you should expect about 0.04 of EPS expansion versus the prior year.

Okay. And so that was about the same rate than in the first quarter about $0.04 benefit?

It is -- no, it's higher than -- a little higher than that Derik because we’ve €1.23 not $1.20. So in the first quarter …

Got you.

… it was $0.07.

$0.07 EPS -- FX, got you.

Yes.

And I’m just sort of curious on -- basically your -- you’ve got those very clean balance sheet and sort of like how are you guys thinking about utilizing that going forward? I mean, is there more indication to sort of lever up just a touch to maybe even more aggressive on buybacks. I’m just curious in terms of what I mean you don’t -- it doesn’t sound like you -- I mean, you don’t really need to acquire any things sort of given the growth profile of the company, I’m just wondering what -- what's sort of your plan is on the balance sheet?

Yes, Derik, I would like to talk about a couple aspects of that, use of cash. Number one is as you know we want to continue to fuel the high-value product portfolio with internal organic investments. But in addition to that is continuously looking at potential bolt-on technologies or broaden the product portfolio. And I would argue in the last 2.5 years, my tenure here we’ve been not very inquisitive in that space. But I think we have a good position, a good line of sight where our customers are asking us to look at part of as broaden the portfolio and we will take that into consideration as we move forward. But we, obviously, are giving the dividends, we are doing share buyback this year. And the Board authorized about [indiscernible] shares really to keep the share count somewhat neutral for the balance of the year. But that’s generally how we look at use of cash today and we are looking at that on a regular basis. We don't see that static. The dynamics do change and there's more opportunities in lever or the other to make sure we balance between our customers and our shareholders, we will do that.

Great. And just one final thing, I just noticed on the -- on slide 4, you called out some reclassification, some sales in your Pharma segment. Can you sort of talk about what that is? And I think it had sort of the impact of maybe making the 2Q comp a little bit tougher?

It doesn’t have anything to do with 2Q comp, but it is as you suggest, Derik, we’ve looked at the way that we record those sales by the market units and there needs to be tweaking from time-to-time based on customers order, things in the Biologics space, the Pharma space and the generics space, so it is difficult to parse it out between the various market units. We’ve gone through and we’ve periodically go through and look at it. These are very, very small changes, they're not significant. In fact, for the full-year its less than 1 percentage point. So we just want to be absolutely transparent, but really that was very, very small.

So it's just a matter of just like how your customers are sort of being defined or what it is. It's just that -- I mean, in that sense, that’s how you’re looking at it?

Yes, it's just how -- not how we define them. So, if we have a customer that we sell both Bio, Pharma, and Generics, all three of them into which we do have customers that are that way, parsing it out between those three buckets is not a perfect science and we look at it periodically and make sure that we're getting it right. And again just to reiterate there is no change in the overall portfolio of proprietary products. None of these changes are outside of that. It's all within those three buckets.

Great. Thank you.

Thank you, Derik.

Thank you, Derik.

Thank you. And I’m showing no further questions in the queue at this time. So now it is my pleasure to hand the conference back over to Mr. Quintin Lai, Vice President of Investor Relations for some closing comments or remarks. Sir?

Thanks, Brian, and thank you all -- everyone for joining us on today's conference call. An online archive of the broadcast will be available on our Web site in the Investor section. Additionally, you may access a telephone replay through Thursday May 3 by dialing the numbers and conference ID provided at today -- at the end of today's earnings release. This concludes today's call. Have a nice day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we can all disconnect. Everybody have a wonderful day.