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West Pharmaceutical Services, Inc. (NYSE:WST) Q1 2024 Earnings Call Transcript

West Pharmaceutical Services, Inc. (NYSE:WST) Q1 2024 Earnings Call Transcript April 25, 2024

West Pharmaceutical Services, Inc. beats earnings expectations. Reported EPS is $1.56, expectations were $1.26. West Pharmaceutical Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to West Pharmaceutical Services First Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference may be recorded. I will now hand the conference over to your speaker host Quintin Lai, Vice President of Investor Relations. Please go ahead, sir.

Quintin Lai: Thank you, Olivia. Good morning, and welcome to West's first quarter 2024 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, we will review our financial results, provide an update on our business and present an updated financial outlook for the full year 2024. There is 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 four 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 law.

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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. The 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 our CEO, Eric Green.

Eric Green: Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on slide five, where I'd like to cover a few topics. First, we will review Q1 performance. Second, we will provide an update on the markets that we serve as well as updates on our growth initiatives. And third, we will provide an update to our full year 2024 financial outlook. Now turning to the financial results. We delivered a solid start to the year. During the quarter, we again saw growth in our top tier HVP component, NovaPure, and our HVP devices such as SmartDose. We also continued to see inventory management or destocking by our larger mature customers that are working down their inventory closer to pre-pandemic levels.

With that said, Q1 had a solid start due to favorable order timing of customer deliveries fulfilled in the quarter. I want to address the question that many of you are asking, are we seeing an inflection in destocking? The short answer is not quite yet. Several customers are still working through their safety stock levels, and we still expect Q2 to have an impact from customer destocking and customer order trends continue to indicate a stronger second half of 2024 with a return to more typical order patterns in Q4. Therefore, after a solid quarter, we maintain our full year net sales guidance. Turning to slide six. We continue to have an active year of capital expansion projects that are increasing capacity to meet growing demand for both our Proprietary Products and Contract Manufacturing segments.

In our Proprietary Products segment, we have expansion projects in several of our HVP components manufacturing sites, such as Jersey Shore, Kinston, Waterford and Eschweiler. These projects will provide a combination of increased manufacturing capacity, especially HVP processing, washing, sterilization and envision as well as bring a higher level of global standardization throughout our network. We believe that this favorably positions West to address anticipated growing demand for HVP components from volume growth of legacy drugs, from recently launched or to be launched drugs and potential conversions from legacy customers to higher levels of quality in response to the global regulatory changes. Last quarter, we mentioned one such regulatory change was the European Union GMP Annex 1.

We continue to emphasize that adoption, both timing and level of HVP will vary from customer to customer and from drug to drug. What we are seeing in Q1 is an acceleration of interest from customers as Annex 1 calls for higher quality, lower particulate and more stabilized solutions. Earlier this month at the INTERPHEX conference in New York, Annex 1was a key topic of discussion with customers as we highlighted our innovative approach and leading products of Westar Select and NovaPure. Also, in the Proprietary Products segment, we're making progress with capacity expansion of our HVP devices including SmartDose, SelfDose and admin systems. For the near term, we're working to layer in capacity through productivity optimization programs. And for the longer term, we are adding capacity that incorporates automation to complement our manual processes.

With our Contract Manufacturing, we continue to build out capacity at our Grand Rapids site and significant expansion at our Dublin facility, which are both in support of our customer's injection device platform. These expansions are critical to the overall volume growth that we continue to experience with growing demand for certain components associated with drugs for diabetes and obesity. Shifting to slide seven. We're maintaining our full year 2024 organic sales growth outlook of 2% to 3%. Our teams are actively engaged in working through our customers' inventory management. We expect improved growth along with stronger gross and operating margins in the second half of the year, with Q4 projected to be the strongest quarter. For the full year, we are maintaining general core cost discipline while reinvesting into new growth initiatives, as I have just outlined.

A closeup of multiple drug containment systems in an array of colors.
A closeup of multiple drug containment systems in an array of colors.

Now, I'd like to turn the call over to Bernard. Bernard?

Bernard Birkett: Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q1 2024 revenues and profits. Where as expected, we saw a low single digit decrease in organic sales, the decline in operating profit and diluted EPS compared to the first quarter of 2023, given the current market dynamics. 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 provide an update to our 2024 guidance. First up, Q1. Our financial results are summarized on slide eight, and the reconciliation of non-U.S. GAAP measures are described in slides 15 to 18. We recorded net sales of $695.4 million, representing an organic sales decline of 3%.

Looking at slide nine. Proprietary Products organic net sales decreased 4% in the quarter. High value products, which made up 72% of Proprietary Product sales in the quarter declined by low single digits primarily due to decreased sales from our FluroTec products and Westar components. Looking at the performance of the market units, the Biologics market unit delivered low single digit growth, led primarily by sales of NovaPure. The pharma market unit saw a high single digit decline, primarily due to a reduction in sales of Envision and standard components, while the generics market unit declined double-digits, primarily due to decreased sales from our Westar and FluroTec components. Our Contract Manufacturing segment experienced low single digit net sales growth in the first quarter, primarily driven by an increase in sales of components associated with diagnostic devices.

Our adjusted operating profit margin, 17.7% was a 530 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 21.2% for Q1. Excluding stock-based compensation tax benefit, EPS decreased by approximately 23%. Now, let's review the drivers in both our revenue and profit performance. On slide 10, we showed the contribution to organic sales decline in the quarter. Sales price increases contributed $24.1 million, a 3.4 percentage points of growth in the quarter as did a foreign currency tailwind of approximately $3.4 million. More than offsetting price was a negative volume and mix impact of $45.5 million primarily due to lower sales volume caused by customer inventory management decisions in the period. Looking at margin performance.

Slide 11 shows our consolidated gross profit margin of 33.1% of Q1 2024, down from 37.9% in Q1 2023. Proprietary Products first quarter gross profit margin of 37% was 550 basis points lower than the margin achieved in the first quarter of 2023. The key drivers for the decline in Proprietary Products gross profit margin were lower sales volume and an unfavorable mix of products sold, partially offset by increased sales prices. Contract Manufacturing first quarter gross profit margin of 17% was 60 basis points below the margin achieved in the first quarter of 2023, primarily due to inflationary labor costs and an unfavorable mix of products sold, partially offset by increased sales prices. Now, let's look at our balance sheet and review how we've done in terms of generating cash for the business.

On slide 12, we have listed some key cash flow metrics. Operating cash flow was $118.2 million for the three months ended March 2024, a decrease of $19.9 million compared to the same period last year, a 14.4% decrease primarily due to a decline in operating results. Our first quarter 2024 year-to-date capital spending was $90.6 million, $8.5 million higher than the same period last year. We continue to leverage our CapEx to increase both our high value products and/or contract manufacturing capacity. Working capital of approximately $1.04 billion at March 31, 2024, decreased by $220.1 million on December 31, 2023 primarily due to a reduction in our cash balance. Our cash balance at March 31, 2024 was $601.8 million, $252.1 million lower than our December 2023 balance.

The decrease in cash is primarily due to $267 million of share repurchases and/or capital expenditures offset by cash from operations. Turning to guidance. Slide seven provides a high level summary. We are reaffirming our full year 2024 net sales guidance in the range of $3 billion to $3.025 billion. There is an estimated full year 2024 headwind of approximately $8 million based on current foreign exchange rates. We expect organic sales growth to be approximately 2% to 3%, unchanged from prior guidance. We are raising our full year 2024 adjusted diluted EPS guidance to be in a range of $7.63 to $7.88 compared to a prior range of $7.50 to $7.75. Also, our CapEx guidance of $350 million for the year, unchanged from prior guidance. There are some key elements I want to bring your attention to as you review our guidance.

Full year 2024 adjusted diluted EPS guidance range includes an estimated FX headwind of approximately $0.04 based on current foreign currency exchange rate, which is an increase from the prior guidance of $0.02. The updated guidance also includes EPS of $0.15 associated with first quarter 2024 tax benefits from stock-based compensation. Our guidance excludes future tax benefits from stock-based compensation. I would now like to turn the call back over to Eric.

Eric Green: Thank you, Bernard. To summarize on slide 13, the solid financial performance and execution in Q1 continues to reaffirm our proven growth strategy, strong base business and the unique value of our high quality product offerings for customers. We look forward to building on this momentum as we move through the year, and our team is steadfast in meeting the anticipated growth expectations as we make a positive impact on health care across the globe. Olivia, we're ready to take questions. Thank you.

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To continue reading the Q&A session, please click here.