Good day, and thank you for standing by. Welcome to the West Pharmaceutical Services Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Quintin Lai, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Erica. Good morning, and welcome to West's second quarter 2021 conference call. We issued our financial results this morning, and the release has been posted in the Investors section on the Company's website located at westpharma.com.

Thank you, Quintin, and good morning, everyone. Thank you for joining us today. Starting on Slide 5, I am pleased to report that we delivered another solid quarter of growth. This was driven by strong organic sales in both our base business and the accelerating demand for products associated with COVID-19. Our high-value products, coupled with productivity gains, continue to feel expanding gross and operating margins. Together, this has resulted in significant EPS growth for the second quarter. The strong performance demonstrates the criticality of our business as the market leader in primary packaging of injectable drugs and is a testament to the foundation we have built over time with our market-led strategy, globalization of our manufacturing network and our One West team approach, which is bringing meaningful benefits to our customers to support patient health. We continue to manage through the challenges of the pandemic with focus on our key priorities of team member safety and ensuring uninterrupted supply of high-quality containment and delivery devices. I am proud of our team across the globe for their dedication to customers, patients and most importantly, to each other as we have met the demands of our business.

Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q2 2021 revenues and profits where we saw continued strong sales and EPS growth, led by strong revenue performance, primarily in our biologics and pharma market units. I will take you through the margin growth we saw in the quarter as well as some balance sheet takeaways. And finally, we will provide an update to our 2021 guidance. First up, Q2. Our financial results are summarized on Slide 8, and the reconciliation of non-US GAAP measures are described in Slides 16 to 20. We recorded net sales of $723.6 million, representing organic sales growth of 30.6%. COVID net related revenues are estimated to have been approximately $117 million in the quarter. These net revenues include our assessment of components associated with vaccines, treatment and diagnosis of COVID-19 patients, offset by lower sales to customers affected by lower volumes due to the pandemic.

Thank you, Bernard. Summarized on Slide 14. Our mission to improve patient lives drives our passion to provide leading-edge, primary containment and delivery technology for our customers. Our market-led strategy is delivering as evident in our leading participation rate in new approvals and our role in support of COVID-19. Our global operations team is executing with the efficiencies and improvements in service and quality to meet increased demand, and we're continuing to accelerate capital spending across our operations to meet current and anticipated future growth. In summary, the first half of the year has been exceptional. We remain well positioned with the strength of our core business and are confident in the long-term horizon of continued organic sales growth and margin expansion. We are proud to be the trusted partner for our customers across the globe and ensure the safe delivery of treatments to patients. Erica, we're ready to take questions. Thank you.

Your first question comes from the line of Paul Knight with KeyBanc.

What's your view on COVID vaccine demand in the year 2022? And is the technical requirements on containment as high as other high-value products?

Yes, Paul, good morning, and thanks for joining. Yes, we have good visibility into 2022, and some of the recent comments regarding capital expansion is driven - a portion of that is driven by future demand. What you're seeing with our portfolio of the chosen configuration for a lot of these file configurations, sorry, is our NovaPure or FluroTec solution. So it tends to be mid to the higher end of our HVPs. There is - obviously, we're in discussion with customers as they are determining if there's going to be less dose per vial or move towards a prefilled syringe and also the conversation around potential boosters. So there is many still moving parts, but when you think about the next 12, 18, 24 months, we have a clear visibility of what we need to deliver to support the demand on hand.

And secondly, if you look in the - you, obviously, with your stability trials have a look into other biologics. Would it be fair to say, we continue to see acceleration in potential biologic approvals?

Yes. What's exciting there is that not only the pipeline is rich, if you think about the more recent approvals that have been granted around the biologics or biosimilars, our participation remains extremely high. And the other indicator that gives us great confidence is, we start thinking about our confirmed order book. If you think about the incremental, which is significantly up, it's really broken in different areas, the biologics leading the charge for the majority of that, and it's around HVP. So we're quite confident of the future growth of the pipeline.

Your next question is from Juan Avendano with Bank of America.

My first question is, given the COVID revenue that is embedded in your guidance, and we know that about more than 3.5 billion doses have been administered - vaccine doses year to date. It seems - and also knowing what the ASPs are for the packaging components, it might seem like the NovaPure mix perhaps is higher than or is greater than a majority by FluroTec. Would you agree with that notion or not? And also on the COVID therapeutics, are you seeing more NovaPure than FluroTec?

Yes. So what we're seeing - Juan, thanks for the question. So if you think about the COVID solutions that we're providing, from a unit perspective, FluroTec is actually much higher than the NovaPure, but we're seeing good growth in that area. But if you think about the new therapeutics that have been approved or in process through approval, it tends to be more towards the NovaPure. But when you translate from a revenue perspective, yes, NovaPure is becoming one of our top drivers of growth in our Proprietary business.

Thank you. Yes. That's the way the math seems to point. Okay. My second question is, can you talk about the ordering patterns that you're seeing from customers? Some biopackaging tools companies such as Sartorius have noted that they're seeing customers place orders further in advance. And so are you seeing the same dynamic? And are you concerned at all that this might create a demand gap sometime in the future when business trends normalize?

So Juan, one of the major pushes that we've had in the last couple of years is really the visibility into our customers' supply chain, and we've done a really good job leveraging some of our digital tools we deployed here within West. That gives us confidence that the demand that we are seeing is more in line with the demand of the pull within the marketplace. So said differently is, yes, we're seeing more confirmed orders that are further out, but that also - we're also seeing that the increase on the number of orders more near term is also increasing. So the confirmed order book has grown significantly, but the combination of more longer-term visibility, but also pure organic growth more near term.

Thanks. And my last one before I get back in the queue. You alluded to this in the previous questions, but I mean, would you feel at this point as customers and sponsors are evaluating, the potential migration to a COVID packaging configuration that is smaller. Fewer dose vials or even prefilled syringes, do you think that, that change is more imminent now than in the last quarter? How are those thoughts going and how feasible is that to happen?

Yes, that's still pending, but we're having these discussions with the customers. And it does require us to prepare in advance in the event that these transitions do occur. As you rightly said, if it remains within the vial configuration, we're very well positioned in that to be able to support the growth of NovaPure and FluroTec, if it transfers into a prefilled string around our plunger solutions. That's where we're also investing to make sure that we are ahead of the curve. So it is - it's ongoing discussions, Juan, and that will be yet to be determined at this time.

Your next question comes from the line of Larry Solow with CJS Securities.

Congrats on a very great quarter actually. Just a couple of questions. Can you just help us sort of parse out on the gross margin, really impressive on the Proprietary side, close to 50%. As you mentioned, I think drilled 350 basis point improvement year-over-year totally. But if we just look sequentially, I'm just trying to sort of bridge the - you did 46% in Q1, and I think that had like a $12 million benefit from some canceled orders. So just sequentially, if we adjust for that, your gross margin was up like 500 bps on a little bit - just on Proprietary side. And I know sales were a little bit higher. COVID sales - related sales were a little bit higher, but I think my math is right. And is there anything sort of unusual in there that drove that 500 basis point sequential increase?

It's not that it's unusual. What we're seeing is with product mix, we're seeing a strong pickup in gross margin. So it's just obviously the profile of the products that are being sold around FluroTec and NovaPure. And what we're also seeing is improved levels of productivity in our plants. And as you can tell that last year, we started to move to a 24/7 mode of operation within certain of our plants to increase production. And we have been able to generate a lot of efficiencies and increased levels of productivity as we went through the early part of the year, particularly into Q2 as we got more streamlined in some of the products that we were producing to support COVID. So it was really working on a couple of different elements. So it's not just one driver, it's a number of - it's the mix plus the increased levels of productivity.

Right. And I fully gather. Unusual, I meant maybe there was some like one - little one-time item, something that helped a little bit. Like last quarter, you had that $12 million supply grade credit. But it sounds like, no, right? It sounds like this is maybe not fully sustainable, but there's nothing really irregular. It's a lot of just the drivers of your growth for the last several years, right?

Well, once you start running, those larger levels of volume through as well, you're going to get efficiencies. And that's what we did see in Q2. And there was a small little increased levels of production towards the back end of Q2 as we were preparing for Q3 because we do have a level of seasonality in our business. And when we get into Q3, we have planned shutdowns and scheduled maintenance that needs to take place, and particularly, in our European plants. So we wanted to get a little bit ahead of that. So we did build up a small amount of inventory, but nothing overly material. And so as we move into Q3, people have to take that into account when you're looking at the margin for the next quarter that we do have that level of seasonality. Didn't really appear as much last year, but in previous years, we do see a little bit of drop there. But again, it's planned.

Right. Okay. And not to split hairs, but a little bit of a - and this is - basically really gets lost in the shuffle, but on the contract manufacturing side, a little bit of a step back in margin, anything there unusual? I think we had thought that was going to sort of go the other way.

Yes. And we have seen it improve as we've gone through 2021, but there were some one-time benefits that we did pick up in Q2 2020, much of it around engineering revenues that we were able to recognize last year. And I think at that time, we called it out as well. So that's the only kind of anomaly there.

Okay. How about on the CapEx outlook, it sounds like you certainly continue to pull things forward, which I think is a high-class problem and going to spend about - it sounds like close to $250 million this year. As we look out over the next couple of years, and I'm sure you still have further expansion opportunities and plans. Do you expect the CapEx, the absolute dollar number to sort of continue to grow? Or since you've pulled forward some, do you think this could sort of level off at least?

As a percentage of revenues, I would expect to see it level off and come back to close to that 6% to 7% of revenues. It may not be next year, but I think after that, we'll start to see us normalize.

Okay. Just last question on the Daikyo. Obviously, you guys made a strategic investment - increased your investment a couple of years ago, and that certainly seems like the timing has turned out really well. And I think you put up like a $9 million number this quarter, and obviously, that reflects the strength of Daikyo's business as well. I know this number is a little bit volatile from quarter-to-quarter, but is that - I think run rate year-to-date were over $20 million. Any color on that or on the outlook there?

Yes. That's - that number just isn't Daikyo there, but there's another element, too. But they did have a very strong performance in Q2. I think in the first quarter, we were probably $5 million or $6 million on income from affiliates. And I would expect it over time to come down to that level. I don't think it's going to run at what we experienced in Q2, I think it will step back a little bit.

Your next question comes from the line of Jacob Johnson with Stephens.

Good morning. Maybe first, just a follow-up on something you alluded to, Eric, on Juan's last question. If we do go to smaller dose formats, I think the product you're manufacturing is a bit smaller. Is there any downtime associated with switching over to a smaller format? Or is this something that's a pretty seamless process that it sounds like you're already preparing for?

Yes, it's a seamless process. We're just - obviously, we had to change some of the manufacturing equipment, the molds and so forth, but the process and facilities and our team members that are involved making these products are all consistent. So it's a pretty quick transition.

Got it. Thanks for that, Eric. And then just on high-value products. Obviously, a lot of mix shift towards those with the COVID-related work. But I guess if we look at that portfolio ex-COVID, are you seeing high-value product mix ex-COVID? It sounds like there's a lot of reasons you're excited about what's going on in biologics, but just curious on that.

Yes. You got my excitement, Jacob. Absolutely. So if you think about our - you go back to that confirmed order book that's one indicator for us is the mix of incremental within that portfolio is evenly distributed. When you think about between COVID new drug launches that I kind of mentioned that we're continuing to have a very high participation rate of new approvals and then the growth of the core business. And we even cut it a little bit further, over half or majority, call it, over half of it is in the biologics space. And the portfolio itself is all towards the high end of HVP. So you can see the momentum that is gaining. And when you think about the capital investments we're making because of the biologics growth and some of the small molecule new entrants, these tranches that we spoke of a reference, it is really - it is all around HVP when you think about FluroTec, NovaPure in existing facilities. So it's very high growth, I guess, in the HVP, and we expect that to continue on. I just want to preference the number of units that we are producing in HVP still is, let's call it, below 25% of our Proprietary portfolio. So we have a long runway ahead of us to continue this momentum with our HVP portfolio.

And your next question comes from the line of John Kreger with William Blair.

Eric, you said you've got a great order book and it's getting longer. Do you have a decent picture yet about whether COVID-related work will be larger for you or smaller in '23 compared to '22?

That's a little bit too far out. We have good conversations that are ongoing. And as you know, investments we need to make are six to 12, maybe sometimes 18 months, in advance. So we do have some visibility, but it's too premature to mention that as we speak.

Okay. Sounds good. And then a non-COVID demand question for you. Have you been able to satisfy all that demand at this point? Or have you had to defer any of those orders as you prioritize work relating to the pandemic?

Yes. We're meeting our customers' demands so that we may have to work with a few customers here and there to make sure that we're scheduling their orders based on the commitments, but we're meeting all our customer commitments as we speak, and we will continue to do so. One of the release files that we've been able to observe in the last several - couple of quarters is the installed validated capacity that is going online. So if you think about some of the constraints that we may have had historically around HVP, those are being relieved as we speak. So - but the bottom line is that we are meeting our customer commitments.

Sounds good. And then one last one. Could you give us an update on Crystal Zenith. I think last quarter, you talked about some new commercial lines coming online in Arizona. Just give us a sense of where that stands now? And what are the type of products that are driving demand for that newer category?

Yes. Really, it's all around the biologics space. So it's around the prefilled strange. We had - as you mentioned, we had a line that went on that's up and running this quarter. It's a CZ, one - it's insert needle, prefilled syringe line. We have another line that is starting installation later this year with the focus having delivered before the end of the year. So it's a significant step-up for us around the CZ portfolio, particularly on prefilled syringes. In addition to that, we are working with our partner Daikyo as they are continuously expanding their capacity capabilities around CZ out of Japan to support with other configurations like Luer Lock such as vials configurations. So I'm pleased with the progress we're making, but there's more to come.

Your next question comes from Dave Windley with Jefferies.

A very nice quarter and thanks for the updates and thanks for taking my questions. I wanted to start around productivity. You touched on this a time or two, Eric. The - and it seemed intuitive to me and you confirm that as your volumes in some of these higher - call it, higher tier, high-value products have gotten to some level of critical mass that you would get some scale on that. I guess I'm wondering if you'd be willing to put, say, some rough percentage numbers on - like have margins on a like-for-like basis improved by a material amount. Would you be willing to put numbers on that?

Well, let me qualify and then I'll look to Bernard to quantify that. But you're - Dave, you're right. What's happening is that we're getting meaningful volumes over the last few quarters on the higher end of the HVP. And there's a - it's been driven by the biologics and a few small molecules. So it is a lot easier for our plants to run longer lot units in our facilities, and we're seeing that translate into better margins with those parts of the portfolio. And that - we believe that will continue because we're leveraging existing footprint. We are installing additional capacity, that's correct, but the payback is much shorter and all this is translating in better outcomes of NovaPure and also parts of FluroTec. So I don't know, Bernard, if you want to add any comments to that.

Yes. I would say, it's still - the vast majority of the margin expansion that we're seeing is coming from mix, but it is being supported by improvements in productivity and efficiencies. Now we did see a big spike in Q2, a big lift there. But as I said, when we move into Q3 because there are fewer production days, that's - the level of absorption in Q3 will be a little bit less. So I don't believe you're going to see as much margin expansion in Q3, and we typically see the most margin expansion in Q2 as we're running higher levels and the quarter is actually longer for us, but it's still primarily driven by mix. And I would probably think 10%, 20% of the benefit is probably coming from efficiencies of productivity.

Helpful. And specifically on that, beyond the crush of the pandemic, would you expect to continue to run plants three shifts a day, seven days a week into the foreseeable future? Or is that a treadmill that's kind of running unsustainably fast?

Well, based on the current demand we have outside of COVID, which is higher than our typical run rates, we are going to need to continue to run our plants accordingly so we can level load them. So I would say, in many cases, we will be continuing to run the 24/7. And the demand of new molecules are being approved and also our current base business would expect that. We think about the growth of our business today, yes, COVID has been a major impact to that, but the core is still growing around the double-digit range. So it's a very strong, robust foundation that we're working off of.

And the CapEx that you've mentioned and you've talked about within existing plants, and you - I think you named a few relative to projects that are either in flight or already completed. Is - Waterford when the company built it was highlighted for its kind of flexibility and modularity. Is that a target of a lot of this expansion? Or is it not exclusively water - is it more balanced across the world than that?

It's balanced across the world, but I would tell you that Waterford - if you visited Waterford two years ago, you would not recognize it. It has significantly increased throughput. Additional capital has been put into Waterford. We increased the number of team members in that site significantly. So yes, these investments we're making because we really create this network around HVP in multiple sites. So we are not dependent on a site, but we've raised the volume level quite significant in Waterford. And we intend to continue to do so because it's been designed exactly what you've articulated. It's a modular approach, we can keep on adding to it, the infrastructure and continue to put more volume through that. But I want to be clear, though, we still have that capability in Kinston. We're expanding Singapore. We have additional capabilities in other locations like Kovin and Eschweiler. So it's not just one site of investment, it's multiple sites, but heavily weighted towards Waterford.

Got it. Okay.

We visited Waterford a couple of weeks ago, and it was my first time there in about two years, and the level of activity in that plants compared to where it was two years ago, it's just transformational as to what's happening there and how we've been able to leverage that. And that's really helped us in our response to COVID and also the core growth, but it's - it does kind of highlight to us that we have to have some of this infrastructure in place before we actually believe we need it. So - but I think, as you said that it is on a modular basis, it allows us to expand much faster in the future than we would have done in the past. And I think, as Eric said, that's the same for Kinston and Singapore sites as well.

Last one for me. Hoping to draw out a specific number again. Last couple of quarters on your high-value products, you've used the phrase or the terminology over 70%. And I'm wondering, does that mean 70.5% over or 75% over or 80% over? Like it seems like the growth is so strong that it could be moving percentage points above 70%. I just wanted to get a more specific number if you'll give it. Thanks.

No, I won't give it. Yes. I think it gives enough color and also the trend is the important thing there as we can see significant improvement in that number quarter-over-quarter. And it is forecast to continue to improve based on the demand that we're seeing, particularly around the biologics segment.

And there are no further questions at this time. I'll turn the call back over to you, Mr. Lai for closing remarks.

Thanks, Erica, and thank you for joining us on today's conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you may access a replay through Thursday, August 5, by using the dial-in numbers and the conference ID provided by the - at the end of today's earnings release. That concludes the call for today. Thank you.

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