West Pharmaceutical Services, Inc.

Thank you for standing by, and welcome to West Pharmaceutical Services' fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the queue, press star 1-1 again. I would now like to hand the call over to Vice President, Strategy and Investor Relations, Quentin Lai. Please go ahead.

Thank you, Lateef. Good morning and welcome to West's fourth quarter and full year 2023 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 westpharma.com. This morning, we will review our financial results, provide an update on our business, and present an update on our financial outlook for the full year 2024. There's a slide presentation that accompanies today's call, and a copy of the presentation is available on the investor 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. 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 risk 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 now turn the call over to our CEO, Eric Green.

Thank you, Quentin, and good morning, everyone. Thanks for joining us today. We'll start on slide five. Last year, we celebrated West's 100th anniversary of groundbreaking healthcare innovation. which is one of many proud highlights shown on this recap slide. I also want to thank our team members who are connected by our strong responsibility and shared values that continue to help us succeed each day. Now turning to slide six, where I'll cover three main topics. First, we will examine the drivers of 2023. Second, we will discuss the challenges ahead in 2024. And third, we will talk about the drivers of growth that will return West to long-term financial construct of sales and margin expansion in 2025. Let's begin with our financial results. I am pleased with the strong base growth in 2023, which more than offset the a decline of COVID-19-related sales of approximately $320 million. Excluding pandemic-related sales, we had strong base overall organic sales growth in the mid-teens. Driving this base growth is expanding customer demand for our high-value product offerings, both components and devices, and for our contract manufacturing services. During the year, we made great strides with our capital expansion plans across our global network. For example, in Kinston, we expanded our footprint with new NovaPeer capacity, and we're in the process of a significant expansion in our HVP processing capacity. At our Grand Rapids contract manufacturing site, we brought online new capacity for a customer's injection device in late 2022, which contributed to growth in 2023. We also have been able to successfully address our backlog of long lead times for certain products. This has been a challenge since the start of the pandemic, and thanks to the hard work of our teams through both optimization and capacity expansion, we have exited the year with normalized lead times. Moving to slide seven. As we turn our attention to 2024, we are facing several challenges to our growth model as indicated in our preliminary outlook from October. With greater visibility of the changing market landscapes, we expect 2 to 3% organic sales growth for the full year, or about 5 to 6 percentage points lower than our preliminary outlook. This difference comes from four main factors. First, we had expected flat COVID-related sales this year. Instead, demand continues to decline, which resulted in about 1% point decrease in organic sales. Second, timing of HVP device manufacturing capacity coming online to satisfy customer demand has been pushed out, causing a percentage point of headwind. Third, timing of a customer's upgrade to a higher HVP tier has caused a percentage point of headwind. And finally, fourth, a more widespread destocking is causing approximately two to three percentage points of headwind. Towards the end of the year and into January, the industry inventory management trend that other life science tools companies have been experiencing has now reached our segment of the injectable drug value chain. While we thought we might see some impact in 2024, we were surprised with the breadth, magnitude, and speed at which customers changed their forecast. In several of these cases, customers expressed to us the same sentiment at the amount of forecast changes that were being handed to them. As we look to overall quarterly pacing for 2024, We expect that Q1 will have the largest negative impact due to destocking as well as timing of new HVP device capacity and customer-led HVP upgrade. We expect in Q1 that proprietary products will be down by a high single decline. We expect some effect but to a lesser degree in Q2 with positive proprietary products and consolidated organic growth. and we expect the second half of the year to have better growth with Q4 in line with our long-term financial construct. As we set our 2024 guidance and quarterly cadence, we see several areas that support our expectations. First, our February order book for the second half of the year has a higher coverage ratio than prior pre-pandemic levels. We have some customers that are expected to be able to produce more drugs as the year progresses. Third, we expect HVP device capacity to improve in the second half of the year as we implement process modifications that were designed to improve manufacturing throughput. I am disappointed that we will not achieve our usual four-year organic sales and margin expansion in 2024. As I've outlined, outside of further COVID demand reduction, some of the impact is time-related to new capacity and timing of customer upgrades. As for destocking, this is an industry-wide situation, not a change in market share or patient demand for drug volumes. Looking beyond 2024, we continue to be bullish on our growth constructs. and our teams will have another active year of capital investments in 2024. Moving to slide eight, we will be expanding our industry-leading capacity with major HVP expansion projects in Jersey Shore and Eschweiler, as well as other projects across the global network. Another driver of growth with a bright future comes from our HVP devices, which includes our injection delivery device platforms, Crystal Zenith containment solutions in the admin systems. HVP devices had very strong double-digit organic sales growth in 2023 and now represent 10% of overall sales. WES platforms are an integral part of our customers' drug device combination products that are making a difference to patients. And this year, we have had multiple capital expansion projects that will increase capacity for smart dose, self-dose, and admin systems, with some expected to come online in the second half of 2024 and fully online in 2025. As mentioned at the outset, contract manufacturing had growth contribution from new capacity at our Grand Rapids site to support a customer's injection device platform. Looking ahead, we're excited to have started a significant expansion at our Dublin facility, which is already dedicated to contracted demand for future injection device manufacturing. We expect to be completed and validated in 2024, which places us in a great position for 2025 growth. I also want to take some time to talk about the dynamics of future demand related to our growth drivers for HVP components. As you know, we have been building HVP capacity for several years and expect to continue to do so in 2024. We see a robust runway of volume growth over the next few years. As a foundation, we expect volume growth. of existing drugs with increasing aging patient populations, expanding geographical reach, and evolving treatment guidelines and market conditions. In addition to overall volume growth, we continue to experience and see certain drugs have breakthrough growth. For example, we're experiencing a similar surge in demand for components associated with drugs treating diabetes and obesity. Our responsibility as the industry leader and primary packaging is to be prepared for incremental jumps in demand. And lastly, the area with the most potential for our future growth is our HPP capacity to support and mix shift. For mix shift, we see a combination of volume from new drugs that enter the market and from legacy drugs that upgrade from either a standard component or lower to a higher HPP category. The mixed shift of legacy to HVP has historically been a smaller contributor for us compared to contribution from newly approved drugs. However, with the industry landscape changing, regulators are introducing new regulations for higher quality, lower particulate, and more standardized solutions. And therefore, customers are looking to upgrade the standard primary components. When we look at that over the next few years, we estimate that several billions of our primary containment components in standard form could benefit from a mix shift to our modern formulation and HPP processes. We recognize this mix shift will take time, but we anticipate as new regulation changes are enforced, this adoption will accelerate. By considering our combination of growth drivers from volume, price, and HVP mix shift, we can confidently assert that we'll be well-equipped to navigate the challenges and continue to fuel our long-range financial construct of 7% to 9% annual organic sales growth and at least 100 basis points of operating margin expansion per year. Now, I'll turn the call over to Bernard. Bernard?