Good day, ladies and gentlemen, and welcome to the Q3 2018 West Pharmaceutical Services Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today's conference is being recorded for replay purposes. It is now my pleasure to turn the conference over to your host, Mr. Quintin Lai, Vice President of Investor Relations. Please go ahead.

Thank you, Haily. Good morning, and welcome to West's third 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, provide 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 call and a copy of that presentation is 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 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. Good morning and thank you for joining us today. This morning we reported our third quarter performance. We had solid sales growth in our Proprietary Product segment and another quarter of strong growth for Contract Manufacturing. We generated 13% growth in adjusted EPS, despite a difficult year-over-year comparison. Bernard will go over the detail later in the call. As we look to the remainder of the year, we expect that high-value product sales will continue to drive growth in the Proprietary Products segment, and as mentioned on past calls, we should see a moderation in contract manufacturing growth due to a strong fourth quarter last year with greater than normal tooling revenues. And Slide 4 shows our organic sales performance by quarter across both segments of our business. In the third quarter we had organic sales growth of 9.6% the highest level in the past two years. We had another outstanding performance in our Contract Manufacturing segment and our Proprietary Products statement grew high-single-digits despite softness in Biologics. Let me provide greater detail of the individual proprietary market units, starting with Biologics. The performance in Biologics was driven by two factors: first, as discussed on the last call we have a couple of customers that are working off of inventories that were built in preparation for drug launches, while others have made the decision to upgrade to a higher value product and need to work off their current product inventories. These are timing issues and we expect a return to a more typical ordering pattern through 2019 and anticipate stronger high-value product sales as a result; second, our self-injection delivery devices contributed to lower than expected commercial sales. As a supplier to drug companies our success is ultimately correlated with our customer's commercial success. We have a…

Thank you, Eric, and good morning everybody. So let's review the numbers in a little more detail. Our financial results are summarized on Slide 7 and the reconciliation of non-GAAP measures are described in Slides 12 to 16. In continuing to deliver on our objectives, we are pleased to report for the third quarter, reported net sales of $431.7 million representing continued strong top-line growth of 9.6% on a constant currency basis. Gross profit of $135.6 million is $10.5 million or 8.4% above Q3 of 2017. Adjusted operating profit of $63.1 million was slightly above Q3 2017's $62.9 million. Other income in 2017 included a $9.1 million cost reimbursement of a safety technology we licensed to a third-party. This is approximately a 17% increase excluding the Q3 2017 license gain. And adjusted diluted EPS of $0.76 as compared to $0.67 last year represents an EPS growth of approximately 13%. Excluding the impact of stock option exercise tax benefits from both periods and the license income of $9.1 million included in Q3 2017, adjusted diluted EPS grew approximately 27%. Taking a deeper dive into our sales performance, we have seen sales growth in each of our business segments. Slide 8 shows the components of our consolidated sales increase. As already highlighted, consolidated third quarter sales were $431.7 million, an increase of 9.6% over Q3 2017 at constant exchange rate. Proprietary Products sales increased 6.6%, price increases accounted for 1.5% of the sales increase. Our high-value product sales increased mid-single-digits. Sales growth was led by our Pharma market units which had double-digit sales growth in the current quarter. Generic market unit sales growth was in the mid-single-digits. Sales to Biologic customers showed a mid-single-digit decline over the prior year quarter, as Eric has noted. Our high-value products represented 59% of Q3 2018…

Thank you, Bernard. With a strong Q3 completed, we have a good momentum to finish 2018 and a solid foundation to build upon for next year. We will share our guidance for 2019 at our year-end call in February. We are focused on initiatives across the company to support our vision to be the World Leader in the integrated containment and delivery of injectable drugs; focused execution of our market led plan will result in above market organic sales growth, gross and operating margin expansion, EPS to free cash flow growth, and ROIC expansion. We have a great team and we're well-positioned to deliver on our commitments to our customers, patients, and to shareholders for both the short and long-term. Haily, we will open and take questions. Thank you.

Thank you. [Operator Instructions]. Our first question comes from the Paul Knight of Janney. Your line is open.

Hi, Eric. Could you talk to the capacity utilization right now in Ireland are you at 5%, 10%, where you want to be next year and then overall new products obviously hitting your organic number, what would you highlight as some of those new products picking up this organic pace?

Great, good morning Paul and thanks for the question. We started thinking about the investments we made in Ireland is really twofold, one is in Waterford. We had our first two shipments, two different products one is high-value product finishing, the other one is products used in the diabetes care market. Those particular -- those particular products shipped at the end of Q3 and as you can imagine utilization of that plant is very low at this point. And so over the next coming quarters, we'll continue to transfer product into Waterford but also new projects, customers have asked us to take on especially on Westar Select. Up in Dublin, we've expanded, as you know, on our Contract Manufacturing sites, we have new technology put into the facility particularly focused on diagnostics and diabetes-related delivery devices. I would say at that point in time, we're built -- we're ramping up, we're clearly nowhere near a 100%, I would say more around the 50% range at this point in time and we have room for additional growth of those -- of that particular plant. So two stories really for the different locations. From a new product point of view, Paul, our growth the high-value product is the core fundamental growth of West and what we continue to see is our teams in the market units are putting together very clear value proposition. If I use AccelTRA as an example, I can tell you that the expectations of the customer uptick on sample and discussions with our customers is far exceeding our expectations at this point. I think resonate very well on the generic space. We're also having expanded our NovaPure product portfolio such as Syringe Plungers and also looking at more capacity. From a device point of view, we just started early tourney on SelfDose with the level of interest continues to climb, we're very confident that SelfDose will have another growth driver and high-value products in the near future. And I can't take -- miss the opportunity to say SmartDose is also -- the increase is really taken off. The last question on administration systems, the Vial2Bag, the capacity put in Puerto Rico where first shipments are coming up this quarter is more of a pull versus a push. So I'm very confident administration systems will drive another lever of growth in our proprietary portfolio.

And your tax rate guidance is centered around three option or three stock expense, right?

Yes.

What would you -- is there any guidance range you would provide post stock expense or is that like too difficult?

That's difficult for us to determine because it's completely outside of our control, that's people exercising options. On a ballpark, we're estimating about a $1 million potential impact again, but that's for Q4, but again that's something that's hard for us to predict.

Paul, one of the -- if you look back Paul to 2017 the impact on our EPS is about $0.44 based on the stock-based comp and if you look at year-to-date what we've produced today in our results is about $0.18. That gives you kind of the large swing that we've had over the last two years on the stock-based compensation tax benefit.

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

Hi, good morning. Thanks for taking my question. Eric, in the past the out year longer-term guidance commentary, I guess specifically for the next year on the third quarter call has been a little more specific in regard to the 6% to 8% growth range and I was curious about kind of the changing characterization of that and does that mean should we read into that that there is any say maybe not change in your outperformance of the market but a change in your view of the underlying market or something like that that prompted the kind of different characterization there?

Yes, David thanks for the call and good morning. When I look at the -- what we've historically talked about the financial construct for West, I see no change in and so I think about the overall performance of the company from the top-line and also from a margin expansion point of view. So what we've decided especially with Bernard new to the characterization is to take the opportunity to really think about let's just finish the year strong for 2018 and we will give clear guidance in the early part of 2019 and how we look at that that full-year but also well beyond that.

Okay. Got it, thanks. And then Bernard, I think you may be touched on components of CapEx in the end of your prepared remarks but if I missed some of those I apologize but can you speak to the kind of the sustainability of the lower level of spending that you're seeing in 2018. I think management has commented about kind of the major building projects being done and how should we think about CapEx demands kind of longer-term?

Yes, if we're looking at longer-term and we're not planning to do any major construction projects or anything in the short to medium-term future, so obviously that has an impact on the level of CapEx that we're going to have on the guidance that we've given and particularly for 2018, and I would -- looking to 2019, we will firm up the numbers for 2019, as Eric said, when we give overall guidance. But that, that's one of the major drivers there that we don't really foresee those large building projects and also we're really focused on focusing on utilization of the existing asset base that we have and driving more out of the investments that we've already made. So again not looking to add really large amounts of CapEx. When we look at CapEx, we divided into three areas, we're looking at maintenance which is probably just under 50% and then the balance really focused on growth and investments in our IT systems.

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

Very good quarter considering obviously the Biologics was a little bit less than expected. I think you had sort of guided towards at least we were expecting sort of high-single even low-double in that and came in sort of a mid-single-digit sales decline, you called out the obviously the slower, it sounds like one particular product on the self-injectable is that right and then obviously the continuance of the inventory destocking, I guess that's just going on longer than expected is that sort of the two variables that or the difference from what you originally expected in this?

Yes, Larry, that's correct. When you think about the self-injection is really around the SmartDose at this -- today, but when we start think about looking the out years we still remain confident and that's just the products that's in commercial phase but there's several development improvements that we have in place that we're working towards. So that gives us confidence about the future opportunity with SmartDose. And in regards to the Core Elastomer high-value products, we've worked with a few customers on transitioning from existing configuration to a future state configuration and in order to do that appropriately, we were seeing them destock and then ramp up. I can assure you that one of those customers, their entire injectable medicine portfolio is on West or West is on their entire portfolio. So we're confident of the future growth it's just the timing. I just want to put in perspective the Biologic units is significantly less than 10% of number of units we've produced in our Proprietary business units. So you can imagine a shift towards one large customer has a significant impact on the volume component. But we're close to these customers, we're confident; we're for long-term viability and success.

And you're confident that that sort of it sounds like Q4 will see similar declines and then you're -- it seems like you're confident that you'll get a rebound in 2019, is that fair to say what is your visibility on that?

We're expecting to see some improvement in the fourth quarter, so we wouldn't be looking at another decline and then weren't expecting to see growth rates ramp as we go through 2019.

Okay. And then just a follow-up on that the margins actually did okay all-in considered actually had a year-over-year decline of 100 bps gain I believe a little more than that on the proprietary side despite the slower biologics sales, as we look out assuming the biologics return sort of normalized growth and you did some better overhead of capacity absorption coming out of Waterford. It's fair to say that maybe as we look at 2019 and maybe even 2020, you can get even a larger than normal better pickup on margin on the margin side?

Yes, Larry that's a great question. When I look at where we are today and we could talk about some of the pressures we had in 2018 particularly around Contract Manufacturing. The top-line is growing extremely fast but the margin expansion was not there actually contracted and that was really due to start-up costs associated bringing on people and facilities and frankly our customers have to support forward in manufacturing more volume today than we would have few quarters down the road and that's why we've got such a high growth rate. And the demand for their products the market is exceeding what we could supply at this point in time. So it's a good situation, where we had growing pains of getting the facilities up and running the last couple of quarters and we're working through that in Q4 we will be back to more steady state going into 2018. So it's one of the pressures that we had. But I also want to comment that this One West system that we put in place over the last year, year-and-a-half through our global operations is gaining traction. And we're sort of thinking about proprietary having over 100 basis point expansion on the margin with its softness in biologic which tends to be the highest margin portfolio we have gives you a clear indication of how much traction we can gain by continuously leveraging this mindset of clearly looking global and leveraging our existing asset base. So while there might be a few headwinds we may face in the future, we will overcome them through these initiatives we have in place and continue to see the margin expansion in the broader business.

Okay, great. And then just lastly on your restructuring efforts those still -- any changes there, still sort of in line with your expectations and still expect to get, I think you had said $0.10 to $0.15 I forgot the exact number, but savings by year-end 2019?

Yes. So when we look at the programs that are put in place and the team that's leading that, they're hitting their milestones. So I'm confident that we will continue to see the consolidations take place we are working with our customers to ensure smooth transition as we move couple of plants to other locations. So we're on track.

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

Hi, thank you very much for the questions. I guess on the Pharma segment, can you quantify or just help frame the impact of Vial2Bag is having on that segment and when you might lap that impact or that impact would normalize, just trying to get a better sense of how to think about the Pharma growth in 2019?

Yes, so when you think about the growth that we had specifically in the Vial2Bag just to recall our -- the investments we made in Puerto Rico which is one of our contract manufacturing space with their expertise core competencies around injection molding, so we're able to bring that production expansion in Puerto Rico and they're just starting to ramp up as we speak at this point in time. The growth that you've seen in Pharma for Q3 in particular has mostly been around the high-value product, conversions, and a little bit of the year-over-year comparison perspective. The incremental growth in that unit, smaller portion was actually attributed to administration systems. There was growth there but it's a smaller, smaller element of growth, it's actually less than 5% of total sales is what our administration systems are in the Pharma unit.

Okay. And I know you mentioned the weakness in biologics impacting gross margin to some extent in Proprietary Products, is it fair to say that you expect that segment to expand margins into 2019 as these cost efficiencies go into place and biologics returns to growth?

Yes, Dana absolutely. The opportunity we have with biologics what's really exciting is our customers are adapting the higher portfolio within high-value products. I will give an example there's more interest in NovaPure and so the higher you go in that that spectrum a continuum that we have value continuum, the better the margins are. So it should be a natural lift that we'll see in our -- due to the biologic stronger performance in the coming quarters.

Okay, great.

Just to put that in context, there are a number of drivers that we have for gross margin expansion and leading to operating margin expansion. So biologics will affect mix and that's one of them and then obviously on the operational cost down strategies in One West Systems that we have in place, so we are not just reliant on one area for margin expansion, there are a number of things that will drive it.

Yes, okay, that makes sense. That's it from me. Thank you very much.

Great. Thank you, Dana.

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

So a couple of questions. So I guess just to make the math little easier, what's the specific sales impact from FX in Q4 that you're forecasting and I guess obviously FX is a big player for you guys and so your initial thoughts on 2019 on how you see FX moving?

Versus our original forecast we're entering we have 120 versus 115, we expect that's about a $7 million impact on the quarter.

Okay.

And that's what we called out as well on our Q2 call.

Yes, all right and for 2019 any initial thoughts?

Derik, it's a bit early what we're going through our forecast right now and as we already mentioned, we give full guidance on our Q4 call but just to again put it in context, we're looking at above market organic growth and growth in operating margin expansion into 2019.

Got it. So what was the Proprietary Product backlog this quarter and last you used to give us numbers, I'm just wondering can you completely update us on that?

Yes, I can give you the -- it's slightly above end of the year; I'm sorry December of 2017 number it's roughly $263 million. And I -- let me be clear though, there's some operating changes that we've made to better service our customers. One is our cycle times, lead times have dropped considerably over the last 12 to 18 months, I mean you're talking almost in many cases 2 to 1 ratio. And then, secondly, we have with a couple of our large customers more of a just in time model that we put in place that allows us to plan manufacturing at a very short period of time for these particular customers. So it’s more of a plan pull effect from our operations into their operations. So I can't sit here and say that is an absolute like for like number, in fact I would say that would be somewhat deflated because of the initiatives that we put in place.

Got it, that's helpful.

Okay.

And just two more quick ones on just housekeeping, I mean obviously you had a little bit more of a tax benefit this quarter than you thought, I guess by your estimate how much EPS moved from 4Q to 3Q based on the option exercise?

Probably $0.03 to $0.04.

Got it. And then one final one, I've covered the stock for 10 years and this was the first time I've not heard the company give the specific outlook for the top-line margin on the third quarter call. I'm just -- as it -- I'm just raise the story when companies sort of vary from that -- is that sort of -- is that more of new CFO being on board and you're sort of -- and your thoughts on that or anything else going on sort of a repeat to Dave's question?

Yes, it's really my perspective on really providing information to the market, I think we've given a holistic view of how we see our business growing in 2019 and it would be above market, the comp structure are the same, our focus is the same improving gross margin, operating margin and EPS and so it's -- there isn't any reason other than that.

Yes, Derik I will just add to this absolutely, I mean it is if you have seen in last 10 years, I mean the change back I can tell you from our view of the business, we still remain very confident and we don't see a change. However we've decided to give the full-guidance in greater detail and transparency in our February call going forward.

Thank you. This concludes today's question-and-answer session. I would like to turn the call back to Mr. Quintin Lai, Vice President of Investor Relations for any closing remarks.

Thanks, Haily. And thank you all for joining us on today's conference call. An online archive of the broadcast will be available on our website at westpharma.com in Investors section. Additionally, you can get a telephone replay through Thursday, November 1, by dialing the numbers and conference ID provided at the end of today's earnings release. That concludes this call. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.