Good day, ladies and gentlemen, and welcome to the Q2 2018 West Pharmaceutical Services Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. It would now like to introduce your host for today’s conference Quintin Lai, Vice President of Investor Relations. Sir, you may begin.

Thank you, Sarah. Good morning, and welcome to West’s second 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 website located at www.westpharma.com. This morning CEO, Eric Green; and CFO, Bernard Birkett, will review our results, give you an update on our business, 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 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 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.

Thank you, Quintin. And good morning, everyone, and thank you for joining us today. Before we start the review of our financial results, I am pleased to welcome to the call our newest member of the team, Bernard Birkett. Bernard joined us as CFO in late June. And you will hear more from him later today. Our outgoing CFO, Bill Federici, is actively working with Bernard in this transition period. And I want to take a moment to thank him. As many of you know, Bill has been a critical contributor to West and our Company’s success over the past 15 years. He’s also been a tremendous mentor and leader for his team as well as a great friend and colleague to his peers and to me. We thank him for his service, and we wish Bill and his family all the best as they embark on the next chapter of their lives, following his retirement from West. Turning now to the financial results. This morning we reported our second quarter performance. We have solid sales growth in our Proprietary Products segment led by double-digit growth in our high value products. We also saw a strong sales growth in our contract manufacturing segment. Because of the strong topline performance, we start consolidated growth in operating margin expansion in the quarter. In addition to adjusted EPS growth of 25% year-over-year excluding stock option tax benefits. With the first half of the year in the books, we are reaffirming our overall 2018 sales and adjusted EPS guidance. As Bernard will review in his comments, you will see that his guidance assumes a lower euro exchange rate for the second half of 2018 than previously reported. In Slide 4 shown our organic sales performance by quarter across both segments of our business. In…

Thank you, Eric, and good morning, everyone. Before I review the details of our Q2 performance, I want to first say how happy I am to be a part of West. With more than 23 years of experience working in med tech, working in healthcare has always been a passion for me. So I’m excited to be part of the company that plays such an important role in helping to improve patient lives. West is well positioned for future growth and I am looking forward to being a part of that journey. I am grateful for Bill Federici’s leadership to date and look forward to continuing the legacy of strong financial management that West is known for. So let’s get to the numbers. In continuing to deliver on the objectives we have set, we are pleased to report for the second quarter, reported net sales of $447.5 million, representing strong top line organic growth of 9% on a constant currency basis; expansion in gross margin to 31.8% versus 31.4% in Q2 of 2017, which represents a 40 basis points improvement, and adjusted EPS of $0.70 as compared to $0.66 last year. Excluding the impact of stock option exercise tax benefits, adjusted EPS grew by 25%. Our financial results are summarized on Slide 8, and the reconciliation of non-GAAP measures are described in Slide 14 to 18. Taking a deeper dive into our sales performance, we have seen sales growth in each of our business segments and market units. Slide 9 shows the components of our consolidated sales increase. Proprietary Product sales increased 7%, price increases accounted for 1.7% of the sales increase, our high value product sales increased by 11.7%. The generics market unit business saw double-digit sales growth in the current quarter as expected. Pharma market unit sales growth…

Thank you, Bernard. And once again, welcome to West. It’s great to have you on the team. As we look to the remainder of 2018, we believe our long-term growth trajectory remained strong. Through the execution of our market led strategy, we are making good progress against our goals and objectives for the year. We are growing proprietary and contract manufacturing sales by engaging our customers within the generics, biologics and pharma markets. We are developing and introducing new high-quality products and services to address unmet customer needs. And we are leveraging our global operations to operate more efficiently and effectively. These efforts are returning value to our customers and to our shareholders. Our continued progress makes us confident in our growth targets for the short and long-term, and we look forward to successful second half of 2018. Sarah, we are ready to take questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of David Windley with Jefferies. Your line is now open.

Hi, good morning. Thanks for taking my questions and welcome to Bernard. I wanted to first, I guess, focus on the revenue number on your nice acceleration there. Was – I think one of the factors that you are expecting to impact the second half was – the supply out of Puerto Rico and the contribution to Vial2Bag. And I was wondering if that is still basically proceeding on plan? Or if perhaps there were some contribution to 2Q earlier than expected? And similarly, were there other – I’ll call it accelerations in other high value products that help 2Q a little more than you might have expected and we should take into account for our second half thoughts? Thanks.

Yes. David good morning, and thank you for the question. In regards to the administration systems, specifically around Vial2Bag, we’re still on target with our capacity expansion for the second half of this year, which you rightly noted we’ll have a positive impact on our Pharma unit for the second half. What we experienced in Q2, specifically in the Pharma unit, is more around this effort around converting customers to high value products, specifically, in our elastomer – with our elastomers. And we talked about in past calls, where we have a few customers that are making that conversion from standard to high value products. And it does take time. It’s a journey. But we’re seeing good progress, good traction, and it’s a little bit stronger than we anticipated in Q2.

Okay, very interesting. So given that journey that conversion once started, I would think would have a pretty steady positive influence on high value product sales. Is that fair?

It does in the sense David that, as they convert from standard to high value products, the new basis with the HVPs, and we’ll continue to convert more up to the high value products. But I’ll be in the base and continue to have a positive growth for the balance of the year for Pharma.

If I could just ask one more on the cost side, you have a couple of things, the labor and other cost factors that you called out in Contract Manufacturing and the Waterford opening and ramp there. Are those things that that begin to alleviate very quickly? Or essentially how long does it take you to scale to alleviate the labor issues and scale into the Waterford plan? Thanks.

Yes, David, good question. Let me take into two parts, if you don’t mind. One is let’s talk about the gross margins. So we look at, we have two business of the Proprietary and Contracts. Obviously, Proprietary, we had higher gross margin in that particular business about 180 basis points expansion. It’s inclusive of about 120 basis point headwind of Waterford. And that really is driven by the high value products. So as we talked about is that the power and – of the high value products, really does drive margin expansion as we grow that business near double-digits. In the contract manufacture specifically, you absolutely right, we had the headwinds in the quarter of due to labor and operational startup. And we believe that anticipating very quickly. And the reason for that is because specifically towards ramping up in two particular areas, continuous glucose monitoring devices that we manufacture out of Arizona and out of Dublin. The demand from our customers is ramping little faster than we anticipated. And the second area is around injection device for the diabetes market, we’ve also seen very nice expansion there. If you look at the growth of those two particular areas, that’s one of the major drivers. We have 17% topline growth and Contract Manufacturing expects strong second half for this year. So we believe and as Bernard mentioned in his discussion, the gross margin for the Contract Manufacturing will become more in line in the second half of this year and you should start to see the improvement immediately in this quarter.

Super, thank you.

Yes. Thanks, David.

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

Hi [indiscernible] congratulations on winning West.

Thank you.

And the – on Proprietary Products, with your revenue recognition that you’re doing there now, what was the impact on the quarter in terms of revenue growth and margin?

Yes. I believe it was immaterial effect on the numbers in the second quarter.

Paul, most of the revenue recognition challenges that we had year-to-date has been really run our Contract Manufacturing business. But the impact of revenue recognition for the quarter is really minimal for our business.

Okay, got it. And then on high value add products Eric, is that growth rate change or has that been lower to little bit in your view?

No. The high value product growth that we’re experiencing the double-digit for Q2, we strongly believe that consistently that business over a period of time should be growing high single or double. So we believe its now in the corridor that we anticipate, not just for about this year, but going into 2019 and beyond. Just to remind ourselves on this that the volume of units for high value products still less than 20% of our total volumes that we produce annually. So we do believe that the growth trajectory for HVP still has some ways to go.

And then also on the Ireland facility, are you going to have revenue in the third quarter? Or when do you expect a meaningful amount of revenue out of Waterford?

I can – I’m pleased to tell you, we will have some revenue in Q3, however. Obviously, we need to do a ramp-up both for insulin sheeting and HVP final product – finishing of the final product out of that facility. So there will be some revenue. It won’t take – it won’t absorb that $4 million headwind that we had in Q2, 100%. We do believe this is going to take some time. We do have those orders in hand. We are processing them as we speak. And we’ll ramp up gradually over the next several quarters.

And then, I’m sorry for so many questions, but the last one is, any color on Crystal Zenith, how is the product update looking there for you Eric?

Yes. Actually it’s – we are actually pleased with the progress, and the reason for that is in the first quarter, we had participated with two customers that were approved of final product into the marketplace. The interest level continues to rise. We are seeing various from early stages to Phase I, II and III, all the way up to the recent drug filings for approval as I mentioned to in Q1. And we do have line of sight of another product was submitted for approval. So we are filling positive of Crystal Zenith, we start to thinking about the opportunities in that particular space, they’re still very pronounced especially in the Biologics area. But we are also starting to get interest in the areas of pharmaceutical. The Pharma market was small molecules. So it’s a slow journey, but we are pleased with what we’re seeing in the most recent years. That particular part of the business grew well in the double digits, but its from a small baseball, but expectations are still on track.

Okay, thank you.

Thanks. Thank you, Paul.

Thank you. Our next question comes from the line of Dana Flanders with Goldman Sachs. Your line is now open.

Hi, thank you very much for the questions and congratulations on the quarter. My first one here, can you just elaborate a little bit on the strengths in the CMO business? You saw this quarter and I know in the press release and you mentioned on the call, some benefits from just timing of tooling orders as well as some recent competitive takeaways. Can you just touch on that, how much of the performance this quarter was driven by that? And what you should expect for the second half of the year?

Yes, Dana, good morning and thanks for the question. We look at the Contract Manufacturing business. Just to give you a little dimension of that we mentioned about 88% or plus 90% of the business is healthcare. We’ve been making that transition away from consumer products and mostly focused around obviously, the healthcare, including diagnostics markets. And we are having some really good success. We believe that particular market is growing, let’s call it, mid-single digit. That’s our expectations. But we’re growing faster than that and it’s because of what you indicated, as we are having some competitive takeovers and winning new contracts. The two areas of that 90% – roughly 90%% of the business, above a little bit less than – about a half of it is really going into our Biologics customers. And give you an example, we are having ramp up I mean, injection device for the diabetes markets for one of our customers. And fortunately not just the Contract Manufacturing of the device, but we also participate with the NOVACHOICE plunger, which is a high value product for us in that particular that unit. The other part of the growth that we are seeing – that we saw in Q2, really is a continuous glucose monitoring devices, and again, both from Arizona and Dublin. Our production we have to continue to ramp up or had been asked to produce more volume, because the demand is there. And that’s very exciting. As we look forward Dana, we’re looking at areas of adding new capabilities around cold chain storage, drug handling. This is also attracting new customers and new projects. So I believe some of the volatility we are going to have. On a positive side, we’ll be to the new offerings that we’re going to be offering in the marketplace.

Okay, perfect. That’s incredibly helpful. And maybe just my second question, on Generics, again, another very nice quarter out of you guys actually accelerating from Q1. Can you just elaborate on the strength there? I mean, is that still Asia Pac? And maybe talk a little bit about kind of the high value product growth you’re seeing in Generics? What products, what customers and how you think about just the balance of that as we get into the second half? Thank you.

Yes. Thank you, Dana. It’s really – I’m really pleased with the Generics team. I mean, obviously, if you look back to 2017, we had some challenges. And I truly believe based on interactions with customers, that was driven, primarily due to our inability to have shorter lead times for our customers in 2016. So we had a tremendous volume growth in 2016, 2017 customers gain confidence of our lead times are now well below – if you talk about 8 or 10 weeks versus 20 to 30 weeks. And that’s significant. We’re getting accolades from our customers now that’s changing the order patterns. So if you look at the growth we are seeing now, we think we have normalized when it comes to that inventory management cycle. We are seeing growth across all customer types large, midsize and small. Let’s take this part a little better. One is in Asia. That business continue to grow very fast, while in the double digits that we saw in Q1. We’re also seeing high value products growth in Generics continued to ramp up, probably a little bit faster we anticipated, that’s a good sign the program like AccelTRA, and our Westar RU and Envision is gaining traction in that particular space. So it’s across multiple customer segments, it’s not just one or two customers which I am pleased about. And it is across all geographies, and it’s really hitting more of our high value products and the standard products.

Great, thank you.

Great, thanks.

Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Your line is now open.

Thank you. Good morning. Just – first half I would just like to congratulate Bill. I am not sure if he’s on the call, but his retirement and thank him for the help through the years, and certainly wish him the best of luck, and of course, also welcome Bernard to the team and I look forward to working with you.

Great. I know Bill is listening to you. So that’s great.

Excellent, excellent. You mentioned just on the – just a few global questions, most of my questions have answered, but on the high value products sort of sustainable high-single, low-double digit growth, is it historically or up until today, it’s been mostly driven by – on newly approved drugs. Are you seeing more? Or do you expect more sort of an uptick on conversion to some of the order legacy products in customer’s pipelines?

Yes, Larry, this – you’re right in regards to new product pipeline, particularly in all three market units. We’re focused on converting our customers and having focused on high value products as they go through the process for approval. But we’re actually seeing good traction and conversion from standard to high value products. And in addition to that we are seeing, I don’t use the word, upgrades to Westar and Envision upgrades than from the standard products. So it’s not just moving to the high value products, we’re also seeing our customers move up the value curve, all the way up to NovaPure, and that is one of the elements that you see with that growth. Again, every time we are able to take our customer in the journey towards the ultimately the NovaPure offering, not just the ASP increased, but it’s also the margins increased associated to that. So it’s a combination of both, Larry.

Right. And sticking sort of with the product offering. Can you maybe just give us a little more color on the new Westar Select sort of the incremental benefit it provides? I know you mentioned it has, I guess, a tighter particulate specification. But is that sort of the incremental benefit? And I guess, sort of expected cadence of growth in benefit? I imagine, it will be a slow incremental growth constant overtime like many of your other products.

Yes. That’s a good question, because the thesis behind this product portfolio is starting to look at our operations form over a process perspective than the site specifics. So one of the conversations we had historically is how do we start offering one DMF or Drug Master File for regulatory approval that crosses multiple sites. And you can imagine the benefit our customers, but also for us from an operation perspective that we can start level loading our operations. This is a journey, and it’s going to take some time to convert more customers towards that, but that was really one of the fundamental thesis around the state of the art facility built in Waterford. So you’re going to have customers looking at Kinston, Waterford and Singapore, and these approvals are made on process and not site-specific, which is a great opportunity. We also took the opportunity to improve on the formulation and the processes we put in place around the product to really drive the tighter tolerance around specifications. And you can imagine that resonates very well with our customers. So it is a journey. It’s going to take some time to adopt customers into the Westar Select, but this is a change that customers have been asking for a while, and now we have the capabilities of doing it.

Okay, great. And just lastly on the CapEx number, you – looks like you lowered numbers by $20 million to $30 million. Just a few questions around that, obviously, it sounds like it’s a positive thing and sort of relates to the successful managing of the infrastructure. A couple of questions, is this sort of sustainable number as we look out of the next few years? You would have any visibility on that? And is this – I assume, this will sort of should help it’s probably already helping your operating margin. And is it sort of tied into the whole ongoing restructuring initiative, where I think you said, you expect $8 million to $13 million savings by the end of next year.

Yes. So when we look at the capital expenditures, in the last several years, we had some significant spend on infrastructure. And while we feel really confident that we’re going to be able to leverage these new assets, i.e., the expansion in Kinston, the new facility in Waterford, we believe fundamentally with the new global operations approach that we can leverage our assets more effectively. We did reduce our guidance for this quarter and we’ll continue to assess because the traction has been very positive for the last few quarters. And will be able to be little bit more clear on our expectations going forward for the next few years probably later this year. But from my expectations is, we need to drive higher utilization of our existing assets to improve upon not just our margins, but our ROIC and other key metrics that is a clear indicator of the performance of the company.

Excellent, great. Thanks, Eric, appreciate it.

Thank you.

Thank you. Our next question comes from the line of Derik DeBruin from Bank of America. Your line is now open.

Hi, good morning and welcome Bernard.

Thank you.

I’m a better molecular biologist than I’m an accountant. So I’m need a bit of clarification on a couple of points. Specifically, with the 606 related points forward of the revenue recognition. So do I take this is that you’re now recognizing revenues when they reach a certain level of completion versus being shipped? And I guess, does that mean you can hold products for customers at your facility and still basically recognize the revenues for them. And if so, doesn’t that cause like a spike up in working capital?

Yes. That’s what we talked about as when we looked at our DSOs. We said that our receivable book balance had gone up in a part of that was down to the rev – changes in rev and rev rec. And it’s primarily we can’t recognize products when it finish that primarily relates to our contract manufacturing business.

So let me add to this, Derik. It’s a good question, because our contract manufacturing business, if you’d a chance to visit our site, you’ll realize that once we produce product, once it comes off to the line, they are transported to our customer within – immediately, whether it’s that day or day after or the day after that. We don’t hold the inventory in contract manufacturing. And that’s how we’ve established the contracts with our customers. In the proprietary business, we are really make to order concept. We have very little inventory on hand and actually, in addition to that we don’t really have any agreements that transfer titles to our customers at that point of time. So to really be clear on it, it’s really in the contract manufacturing business, but we’re not holding the inventory. We are shipping as soon as we have it produced.

Great. Thanks for the clarification. Did – unless I missed it, did you reiterate the 6% to 8% revenue growth guide for 2018? And if so, where on the spectrum are you now looking at it, given you’re running 6% for the first half of the year.

Yes. We reiterated that and we’re looking at the midpoint.

Okay. And can you talk a little bit about, I mean, I know some people asked this, I just want to little bit more clarity. Can you quantify the impact on the quarter to the initial stocking orders and the low margin tooling sales on organic revenue basis?

The tooling for Q2 was relatively consistent to the Q2 of last year, except for about $2 million. So that’s the delta. We do have tooling almost on a quarterly basis, but the delta for Q2 is about $2 million.

And the stocking orders, any – I mean, is that the pull forward from the…

No stocking orders. I mean, to be clear, there was an increase in demand from our customers to increase volume for our facilities, because their demand to their end markets are increasing. We started, to give you an example, in our – with some of the products in Dublin, we started this journey with a customer and utilization of the existing equipment, because that’s a ramp up process, we’re not at full capacity. So we do have the ability to put more product to the existing assets, which we’re currently working on, because we’re not going from 0 to 100 within the first couple of months. It’s been several months. We do believe by the end of the year will be pretty much full – full tilt on the current assets.

Great, that’s help. And just one final question. You changed your pension accounting, which is like a little bit of a net benefit to the second order versus the old way. What are the 3Q 2017 and 4Q 2017 op margins under the new method, so we can better model to year-over-year comps.

Can we give us a second here for one moment. We have it. So it’s about – the total value was about $700,000 per quarter. So that gives you a feeling of the impact of the pension accounting rules.

Great, thanks.

Okay, thank you.

Thank you. Our next question comes from the line of Christopher Hillary with Roubaix. Your line is now open.

Hi, good morning.

Good morning, Chris.

I just wanted to ask, we’re finally in a clearly inflationary environment and how do you see your business handling that?

Yes, there’s two ways to look at it. One is in our Contract Manufacturing business, we do have agreements with our customers that when raw materials increase, escalate, we are able to pass along to our customers. So when we look at net price contribution for our business, it really is from a proprietary perspective, because it’s somewhat neutral when it comes to Contract Manufacturing. In the Proprietary business, we have hedging programs put in place for our key raw materials, and we also do adjust our prices on a regular basis to accommodate inflations that we may occur, whether from raw materials or others costs that we incur. So that’s to the extent that we see at this point to our business. We have the ability to pass through in appropriate ways.

Okay. And then maybe just one other one. You talked a lot today, thank you, about the high-value products and the growth that you’re seeing there. Are there any products you highlight that you think will be either new or driving the growth in the next sort of one to three years?

No, absolutely. So within the high-value product portfolio, we are launching – it’s a journey. So if you start thinking about NovaPure, which is the highest quality, qualified – designed product portfolio within high-value products, we are seeing really good penetration there, very high growth, but again, it’s a small base, but this tends to be more in the pipeline molecules for new approvals. And we anticipate over the next several years for that to continue to grow. We also have the conversion towards Westar Select to leverage our operations that we invested in, both Kinston and Waterford. And that will also be a journey over the next couple of years. I’m very pleased on the initial response by our generics customers with AccelTRA. We launched that less than a year ago, but the number of samples and customers that are going through stability and approval processes gives us confidence that the whole value proposition is resonating with our customers, and you’ll see more conversion towards AccelTRA, again, a high-value product portfolio. And the last one I’m just thrilled to talk about is the devices side, where SelfDose, and that’s early into the marketplace, and we’ve been able to launch as a combination with one of our customers, combination device. And we are seeing positive response by other customers, and we believe in the next 12 to 18 months, we’ll have one or two more to share with you with the adoption of SelfDose. So I believe there’s multiple opportunities for West to continue to drive new innovations into the marketplace and you see a comment theme here that we’re pushing up on the value proposition, so that we continue to drive margin expansion through the mix shift.

Great. Thank you very much.

Great. Thanks for your question.

We have no further questions at this time. I would now like to turn the call back over to Quintin Lai for any further remarks.

Thank you, Sarah. And thank you, everyone, for joining us on today’s conference call. An online archive of the broadcast will be available on our website at www.westpharma.com. Additionally, you may access the telephone replay through Thursday August 2, by dialing the numbers and conference ID provided at the end of today’s earnings release. This concludes the call for today. Have a nice day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a great day.