Good day, and thank you for standing by. Welcome to West Pharmaceutical Services Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Quintin Lai, Vice President, Investor Relations. Please go ahead.

Thank you, Shannon. Good morning, and welcome to West's Fourth Quarter and Full Year 2022 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. This morning, Eric Green and Bernard Birkett will review our financial results, provide an update on our business and present an update on our financial outlook for the full year 2023. There's a slide presentation that accompanies today's call, and a copy of that presentation is available on the Investors section of our website. On Slide 4 is our safe harbor statement. Statements made by management on this call and in the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities laws. These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results as well as those expressed or implied in any forward-looking statement made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risks to which it is subject, including our 10-K, 10-Q and 8-K reports. During today's call, management will make reference to non-GAAP financial measures, including 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'll now turn the call over to our CEO, Eric Green.

Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on Slide 5. For over 100 years, the West name has come to mean so much to so many people. We have grown and expanded from manufacturing primary containment components to designing and manufacturing delivery systems. This remains the same today. As a global market leader who continues to define the evolution of our industry, our 10,000-plus team members are motivated by improving patient lives. The past few years have been a reminder that the world doesn't stand still and the needs of the health care industry are evolving and growing in complexity with shifting treatment options from the hospital to home setting. We remain committed to the pursuit of scientific innovation and partnerships to address the changing needs of today and into the future. Moving to Slide 6. Looking back at the year, I'm pleased to report that West delivered overall organic sales growth of approximately 8%. This growth was generated despite a rapidly shifting pandemic landscape. We started 2022 expecting COVID-19 volume growth, but instead decline in orders and demand from our customers actually resulted in a 15% decline in pandemic-related sales. Excluding COVID-19, we estimate that our base organic sales growth was low double digit, with mid-teens growth in proprietary products, and driving this base growth is demand for our high-value product offerings for both legacy as well as recently launched drugs, and we ended the year with a return to growth in Q4 in contract manufacturing. This performance is a result of the dedication and relentless focus of our team members across the globe. We are connected by a strong responsibility and shared values that continue to help us succeed each day. I want to acknowledge these efforts and say thank…

Thank you, Eric, and good morning. We will first look at Q4 2022 revenues and profits, where we saw low single-digit organic sales growth and a decline in operating profit and diluted EPS. I will take you through the drivers impacting sales and margin in the quarter as well as some balance sheet takeaways. And finally, we will review our 2023 guidance. First off, Q4. Our financial results are summarized on Slide 12 and the reconciliation of non-U.S. GAAP measures are described in Slides 20 to 23. We recorded net sales of $708.7 million in the quarter, representing organic sales growth of 2.6%. COVID-related net revenues are estimated to have been approximately $55 million in the quarter, an approximate $69 million reduction compared to the prior year. 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. Looking at Slide 13. Proprietary Products sales grew organically by 1.8% in the quarter. High-value products, which made up approximately 72% of Proprietary Product sales in the quarter were flat compared to the prior year due to the reduction in COVID-related net revenues. Looking at the performance of the market units, the generics market unit delivered double-digit growth led by ambition components and admin systems, while the pharma market unit experienced high single-digit growth led by NovaPure and Westar components. And the biologics market unit saw a mid-single-digit decline due to a reduction in sales related to COVID-19 vaccine. Our Contract Manufacturing segment experienced net sales growth of 7% in the fourth quarter, primarily driven by sales of health care-related medical devices. Our adjusted operating profit margin of 22.4% was a 350 basis point decrease from the same period last year. Finally,…

Great. Thank you, Bernard. To summarize on Slide 17, the solid financial performance shared today continues to reaffirm that our growth strategy is working. We have a durable base business proven by our market-led approach which is delivering unique value to our customers. Our global operations team is efficiently manufacturing and delivering products in this complex environment with a focus on service and quality. And we're continuing to progress capital spending across our operations to meet current and anticipated future growth. We realize that our products in pursuit of scientific innovations are critical to health care across the globe which is why we're so committed to support patient health today and well into the future. Shannon, we're ready to take questions. Thank you.

[Operator Instructions]. Our first question comes from the line of Larry Solow with CJS Securities.

Congrats on a good quarter, better than obviously we expected. Eric, maybe could you just discuss sort of the long-range outlook. HVP, I know you mentioned 72% of volume in the -- revenue in the quarter. But could you speak to it more on a volume basis and particularly some of the faster growing and higher margin, NovaPure and as you kind of send up the HVP curve, if you will, I mean, the opportunities over the next several years?

Yes. Thanks, Larry. No, you're right. So if you think about HVP right now, the amount of units produced from our manufacturing sites is roughly around 23% of the total volume. But as you rightly pointed out, it was about 72% of our sales in the last quarter. And the higher growth part of that high-value product spectrum of the portfolio is coming from our FluroTec all the way up to NovaPure. So NovaPure is becoming more meaningful. Obviously, it was a major element of the COVID-19 response. But with the number of biologic launches, the NovaPure is becoming a very attractive solution for our customers. So I would say it's early. The investments that we're making, particularly in our HVP plants of Kinston, Jersey Shore are around NovaPure plungers and other types of plungers to address future launches. So that's where the growth is really out portion is coming from the higher end of HVP as we speak.

Okay. And how about just -- yes, go ahead, I'm sorry.

If you look at the CapEx guidance as well that approximately 70% of that CapEx number is really to support growth initiatives and productivity improvements. And much of that is around high-value products. So that ties in with the outlook that we would see for the next number of years putting that capacity in place.

And what about just generally in the industry, I know the trends have been biologics are obviously growing faster than overall drugs. Has that trend like accelerated over the last few years? Or what's the outlook there on a general macro level?

Yes. We believe the biologics and biosimilar space is going to be the fastest-growing area for new drug launches. If you think about the last year, though, however, it was interesting to see the number of ANDAs and also small molecules approved into the market. And fortunately, we have a strong position in those areas also. But I think if you kind of fast forward, you'll still see biologics and biosimilars be the fastest growth area in our space.

Got it. And then just lastly, can you just give us sort of a -- just a brief update on the call, not sure if you had talked a little bit about Corning at all, but just sort of where we stand there? I know I think last year, you had even called out how much you're spending on R&D. I'm sure it's a pretty incremental piece this year as well. But I don't know what you could speak to on the R&D side and the cost, but maybe just sort of where we stand qualitatively, the revenue outlook and how big this could be over the next few years?

Yes, Larry, it's a really strong partnership, and we're really pleased that earlier this month, we were able to announce our first product launch of combining our West NovaPure stopper in Corning's Valor vials, which -- what we label as our Ready Pack solution. And just to remind everyone that this is kind of a seeder or a seed program that we use in the development of new molecules. So this has been very successful for us in the past. We're leveraging this channel to introduce this combination going forward. It's a great testament of the focus between the 2 firms on really bringing the product together as a complete solution. And so while this is early, we saw more work to do. We have a number of launches that we have scheduled, whether it's in 2023, 2024. Ultimately, where we want to get to is a complete solution with the 1 drug master vial. So it's a complete fully characterized system. And so that we'll continue required investments. And so if you look at our R&D spend in 2023, it will be slightly up, and a good portion of that incremental piece will be around the West-Corning partnership.

[Operator Instructions]. Our next question comes from Matt Larew with William Blair.

I just wanted to ask just you referenced sort of the committed order book. And I'm curious maybe if you compare the composition of that order book today versus pre-COVID, obviously, on the non-COVID part? Maybe just in terms of what NovaPure and FluroTec demand look like? I guess the question is, out of the potential FluroTec customers who you start engaging with, what does the conversion look like -- excuse me, on the NovaPure side, what does the conversion look like, in terms of folks who ultimately end up choosing to go with NovaPure perhaps versus a few years ago?

Yes. Thank you for the question. So when I look at the order book versus pre-pandemic and then strip out the COVID piece, overall, it's a net increase where we were at that point in time. When you look at the composite of the growth of that order book, it is really driven by our high-value products, and particularly the higher end HVPs, we're seeing a healthy growth in plungers, not just in the NovaPure sector, but in the other categories of HVP. But -- so from an order -- committed order book perspective, that's the kind of the characteristics we're seeing right now. In regards to the adoption rate, it's actually quite high. So our participation rate, particularly in the biologics and biosimilars is very, very strong. And what we are doing is we're seeding with the NovaPure portfolio. And once that is locked in, in the development phase as they go through into commercialization, that's the end result. Better outcomes for our customers, obviously, better compatibility with the drug molecule. So we're very excited to see the continuation of that adoption of NovaPure and that's hence the reason why we're putting these investments in place, and we're seeing more of a transition from vials to prefilled syringes which will require our plungers. So that's where we are, but it's a very, very healthy growth profile of the higher end of HVPs.

And then just maybe a cleanup one on the equipment issues you referenced on the third quarter call. How does that end up impacting fourth quarter results relative to expectations of where do things stand now halfway into the first quarter of '23?

Yes. So those issues are resolved. The team did a really great job to resolve the issues and get our manufacturing facilities back up online. Fully validated, characterized and be able to support commercial production. That was done in, I'd say, mid part of Q4, a little bit later in that part of the quarter. So we're full out right now in Q1. And I'm excited that we have that at this point to allow us to get some of the backlog caught up in the early parts of this year.

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

Congrats on a nice quarter. Maybe kind of following up on that last question. Just Bernard, as we think about how the year plays out, anything you'd highlight in terms of seasonality or kind of margin progression, revenue progression throughout the year? And maybe along those same lines, can you just remind us when you have the toughest comps from COVID that you'll be lapping from 2022?

Yes. So I think from a cadence perspective, going back to what we would have seen kind of pre-COVID where first quarter is usually a little bit lighter, picks up a bit in the second quarter and then levels out in Q3 and Q4. And from a comp perspective, I think a lot of the COVID revenues we would have had would have been in the first half of 2022. So that's where, I won't say challenges, but that's where the biggest comps are going to be from that perspective, and then some in Q3 and then obviously lighter in Q4.

Got it. And then on contract manufacturing, nice to see a return to growth there, uptick in revenue in the quarter. I think gross margin was down sequentially. Can you just hit on what drove both? And maybe related, you're pointing to, I think, pretty robust growth in 2023. Were there some investments you're making for this year and kind of again along the same lines, what's driving the growth in that business in 2023?

Yes. I think as you'll remember, when we were talking through 2022, a lot of the challenges we face within contract manufacturing is really around 1, 2 -- 1 customer mainly and a shift in their business. And so as that kind of have tailed off towards the back end of the year, it allows us to be able to return to growth. And then we actually saw demand increase from our existing customer base probably a little bit ahead of where we would have anticipated going into the fourth quarter. So that was again positive to see. And what we would expect as we move into 2023 that we will be seeing mid-single-digit growth for our contract manufacturing on our existing business and then layering in new business at the same time. So we continue to make some investments in that area.

Our next question comes from the line of Paul Knight with KeyBanc.

The question is, I touched on it, I guess, is COVID probably starts flow then they manufacture more product Q2, Q3, right? And then less in Q4. That's the question one. And then the other would be regarding this prefilled syringe market is that really what you're seeing as biggest opportunity right now?

Yes. Paul, that's a good question. So the first part is that when we think about the COVID, it's -- we're looking about right now, approximately $85 million for 2023 is relatively kind of evenly spread. We can't get any more granular than that at this point. But as you know, we were much higher than that last year. So we do have the capabilities to manufacture accordingly. In regards to the prefilled syringe, when you think about our investments, particularly in the last couple of years and working with some of the launches in anticipation around plungers, which obviously supports the prefilled syringe space is actually -- we're anticipating higher growth in that area. And that is -- equipment is coming online as we speak. I mentioned a little bit in my prepared remarks about Kinston, a lot of the additional equipment in there is really geared around plungers. And so I'm excited to build support that part of the market as we see the prefilled syringe market continue to expand with high growth. So we're going to play in that, and we're prepared for it, and that's where investments are really focused on today.

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

So can you talk a little bit about sort of like pricing? You got about 4% in 4Q. How should we think about that in '23? Are you -- I know you were debating taking some higher pricing. You're looking at your pricing dynamics as things are going forward. And I guess, have you done that? And are you -- have you seen any pushback from your customers?

Yes. Thanks for the question. So you're right. We have implemented in the fourth quarter of 2022, obviously, discussions with our customers about the 2023 calendar year. Our net price increase will go up in 2023, and that is obviously for all the right reasons, particularly with some of the inflationary challenges and so forth that I think all industries are being faced with. So I think the team responded appropriately. I believe we took a very -- very well-balanced approach. We do have certain customers on contracts, so we did have some limitations. However, overall, with the new pricing team and strategy we put in place a couple of years ago, we're starting to see that pay off. So that will be rolling out as we speak and already this quarter and will be rolling throughout 2023. But Bernard, do you want to provide more color on that?

Yes. So our -- I think in the fourth quarter, we said we did about 3.8% of pricing. We're targeting 5% to 6% on price as we move through 2023. So it is a bit of a step up. And part of that is to take into account the inflationary cost pressures that we're also seeing. But as Eric said, you can see the trajectory and our price increases over the last number of years and how we're approaching that. That's also been on the increase.

Great. Just a little bit of an accounting question. What was the tailwind from stock-based comp in '22? And your initial tax rates are never what you end up being with for the full year. So is it comparable to think -- is it reasonable to think you get a comparable benefit in '23?

We guide without it because it's very hard for us to estimate it. If you look at -- last year, it was about $0.22, I believe. So it's -- we guide without it for a reason because it is so hard for us to predict that's kind of outside of our control.

Got it. And if I can squeeze one more in, if you don't mind. How should we think about the economics on the prefilled syringes? I mean, obviously, there's a lot of new drugs coming out for metabolic disease, for obesity. And how should we think about your potential profitability or the revenues associated with one of those units? And just give us some way to sort of like ballpark what your -- I mean what your revenue contribution could be on something like that?

Yes. So if you think about the prefilled syringe area and the plungers, we are -- it depends on if it's NovaPure, it's pretty comparable to -- we talk about the $0.88 to over $1 a unit. But if it's not the NovaPure, other types of HVPs you have a very large range between, let's call it, $0.40 per unit. So you can see the range that we're operating in. From a margin perspective, again, if it is HVP that could range anywhere between 55% to 80%. So I'm giving you a very broad range because not all molecules have the same requirements. But what's good around our investment thesis in our facilities, particularly on plungers is that the equipment and the processes are somewhat fungible. So we can leverage the existing assets we're putting into the current drug launches, but also the anticipated areas of potential growth. So we're positioned well.

Our next question comes from the line of John Sourbeer with UBS.

I guess maybe digging in a little bit more on the new capacity coming online in the CapEx. Any color just on pacing there for the year? And then just a follow-up on the equipment and the delays in 3Q. I think that was around the $30 million a month headwind. Can we assume now that this is up, that's contributing around $30 million a month as well?

Yes. The impact in Q3 was about $30 million. And that may vary depending on volume mix as we go through each quarter. So it's hard to say, it's $30 million each quarter. It would be difficult to commit to that at this point. But in saying that all of those problems that we had in Q3 have been resolved, as Eric kind of talked about earlier, and much of that happened as we progressed through Q4. And on the pacing of layering in new CapEx, that will happen as we move through 2023. So it's not all at once. We'll see some of it as we get into the back end of the second quarter particularly in Kinston, where we are getting new parts of our facility up and running with the equipment that we've installed there. And then as we progress through the year, there will be equipment layered in in the other HVP sites.

Got it. I appreciate it. And then I guess just maybe on COVID, it looks like you lowered the guidance there slightly. I guess just any thoughts on just where endemic levels go from here? How much more further drop do you think that you see coming down from COVID beyond 2023?

It's hard to estimate that. Like we've tried to -- well, we've given our best estimate based on the information that we have today. If we thought it was going to drop any further, and we would have included that in the guidance. But based on what we see today, that's where we think it's going to play out.

Our next question comes from the line of David Windley with Jefferies.

I hope you can hear me. I wanted to -- I've got a couple of follow-ups, but I wanted to start with just asking if you would level set where the market units are with kind of generics having a strong end of the year and biologics down, those are kind of opposite directions than is normal. What's the kind of relative sizing of your 4 segments of the business so we have a base to work off of?

Yes. So if you look at biologics as we go into 2023, the biggest drop -- or the biggest impact of COVID revenues being reducing is within the biologics segment. So we do see a reduction there. But if you back that out, we're actually seeing very strong double-digit growth within the biologics segment for our core business. And then as we progress through '23 on generics, again, we would be looking to see high single-digit, early double-digit growth, pharma, high single digits and then contract manufacturing, as we said earlier, mid-single-digit growth.

Okay. And Bernard, so to apply those, so is it like I think biologics was 40% to 45%. I'm just looking for should I think about with the kind of COVID correction that it's closer to the 40%? I'm just looking for kind of the percentages to apply those growth percentages to.

Yes. It's -- biologics was mid-40s. It's going to come back a slight bit. So you're probably 40% to 45%. And then -- pharma and contract was about 17% or 18%.

That's fine. I can follow up offline. On the installation of the equipment and Eric, we talked about in Kinston, the washing equipment in that process, I guess I was under the impression that that was specifically NovaPure and maybe even more specifically NovaPure plunger equipment, but Bernard's answered the last question that it kind of varies that that $30 million a month will vary based on volume and mix, maybe I misunderstood what -- how fungible that equipment is across your product lines? So perhaps you could further elaborate on that, please?

Yes. No, absolutely. So specifically the equipment that we've discussed about Q3, that was ongoing operations, not specifically just NovaPure. So you have washers that wash -- pharmaceutical washing capability that supports really the high-value product portfolio. The vision that you -- the washing equipment that you were able to see that is for NovaPure. So some of the equipment is not fungible, but the core elements of the equipment is. But the growth that we're having, based off of that equipment you looked at was really around the heavy part about the NovaPure. There's some mix effect to it. And in the future investments we're making that you saw in Kinston, that is -- that's, again, it's a wide range of high-value products. FluroTec all the way up to NovaPure.

Okay. So where I wanted to go with that, and I'll make this my last one, is you're losing the year-over-year COVID $300-ish million. Management has made the point that that has been very high gross margin, high incremental margin revenue. And so that creates, I think, contributes to this transition year on margin, Eric, that you mentioned in your prepared remarks, it seems like as you've put some of this equipment in place that was the hold up in 3Q, again, your last answer helps me to understand that better. But the revenue potential that that equipment unlocks is in the neighborhood of the revenue that you're losing from COVID. I guess I now understand that maybe the margin on that revenue that's coming in is perhaps not quite as rich as COVID, you could confirm that for me. But just thinking about that and any other factors that we should be keeping in mind that influence that margin transition that are not as rich as the COVID revenue that is coming off?

Yes. Dave, I'll take that. And just going back to your last question on the split, just to clear that up. So the -- as a percentage of proprietary sales, biologics is like mid-40s, generics, mid-20s and then pharma in a low 30% range, and that will get you to the split. With regard to your question on margin, it's not as simple as one product coming out and another product going in. So we're looking at it where there's a mix impact, obviously, with the COVID revenues falling off and they have been higher-margin products. And we've also got the impact of inflation on our cost base. So you've got those 2 headwinds. And then as we alluded to, we talked about earlier is the increase in price that we're seeing is above what we would normally see in our business. So that helps offset some of this margin pressure. And then we have a very specific cost initiatives within our business, both from an operations manufacturing perspective and then on SG&A and R&D, really looking at cost control and cost management. That is delivering a number of efficiencies for us. So it helps us to overcome some of the margin challenges, but not all of them. And then that goes back to the point earlier, we're not actually -- margin is not stepping back to pre-COVID levels. We're maintaining or holding on to a lot of the improvements that we made or the gains that we made.

Our next question comes from the line of Justin Bowers with Deutsche Bank.

Just piggybacking on Dave's question. Can you help us understand and maybe it's a range of sort of what the margin profile is on the C-19 business? And then with respect to the new capacity that's coming online in 2023, can you help us understand how that phases in? Is it ratable? Or is it more second half loaded? Any color there would be helpful.

So the margin on the COVID products would have been at the higher end of our margin range because a lot of that was NovaPure. So you could have been looking at range of 60% to 70% plus. And then on the CapEx piece on that being layered in, it's -- a lot of it has been layered in and commissioned as we speak. But to see the impact of it will be more so in the back half of the year when it's fully operational and we're able to put a lot of volume through.

Understood. And then just a quick one on China. Maybe a status update on the 2 plants over there? And any thoughts on how that impacts the progression of the year?

Yes. In China, the -- our business impact for West overall is quite low. A lot of the activity that we're manufacturing we do in China is for China. And so we have a really strong team there in our facility in Qingpu that continues to capture more share within the market. But our reliance on that -- on our team there to export is very low. And again, overall value or revenues and profits to the corporation is very small. So that's our impact in China. Our supply chain, if you think about procuring materials, is not heavily dependent on that part of the world. The team has done a really good job. Many of our products are co-located to our manufacturing sites. So that's how we've set up our procurement and supply chain of raw materials.

I would now like to turn the conference back over to Quintin Lai for closing remarks.

Thanks, Shannon, and thank all of 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 for 30 days following this presentation by using the dial-in numbers and conference ID provided at the end of today's earnings release. That concludes this call. Have a nice day.

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