West Pharmaceutical Services, Inc.

Good morning, and welcome to West's second quarter 2024 conference call. By way of introduction, this is John Sweeney, the new head of investor relations at West. I'm delighted to be here, and I look forward to working with all of you. We issued our financial results earlier this morning, and the release has been posted to the investor section on the company's website located at westfarmer.com. On the call today, we'll review our financial results, provide an update in our business, and present an updated 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 Investors section of our website. On slide four is our Safe Harbor Statement. Statements made by management on this call and the accompanying presentation contain forward-looking statements within the meaning of the 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 statements made here. Please refer to today's press release, as well as any other disclosures made by the company regarding the risks in this subject, including our 10-K, 10-Q, and 8-K reports. During today's call, management will make reference to our 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 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, John, and welcome to WES. And I would like to thank Quinton Live for his partnership over the past eight years and for his many contributions at WES. We will start on slide five, where I will cover three main topics. First, examine the drivers of Q2 performance. Second, discuss a revised outlook for the remainder of 2024. And third, provide insight on our long-term financial outlook and why we remain confident in our growth strategy. Let's begin with Q2 performance. We had a lower than expected second quarter impacted by continued customer stocking. That being said, we are seeing promising signs from our customers that give us confidence of a turning point in this trend. Looking ahead, we expect the second half of the year to be stronger than the first half with a return to year-over-year organic growth in the fourth quarter, led by our proprietary product segment, specifically biologics. We have adjusted our full-year 2024 guidance to reflect a more gradual recovery as compared to our previous expectations. While I'm disappointed that we're lowering our guidance, I want to reiterate my confidence in West's proven market-led strategy and attractive long-term growth potential. turning to slide six. We are the market leader in containment and delivery of injectable medicines, which is one of the fastest-growing areas of healthcare. We have an even stronger position in biologics, which is the fastest-growing segment with injectables. Our products are addressing the most critical therapeutic areas, including immunology, oncology, rare diseases, and obesity. And for the past five years, West has achieved a CAGR of double-digit organic revenue growth, demonstrating that we have been able to deliver our long-term financial construct of 7% to 9%. Moving to slide seven, our confidence in our medium to long-term trajectory is underscored by our ongoing capital expansion projects. The investments we have made to address COVID are now being repurposed to drive increased capacity to address new opportunities. In addition, we have expansion plans focused on HVP products that provide a combination of increased manufacturing capacity and higher level of global standardization through our network. Biologics, GLP-1s, and changing global regulatory requirements, we are seeing increased customer interest for higher quality, lower particulate, and more standardized solutions. This favorably positions West's innovations in leading products such as Westar Select and Novapyr. Another focus for our capital allocation is our HPP devices, which includes our self-injection devices. Our platforms are an integral part of our customer's drug device combination products that are making a difference to patients. These expansion projects remain on target for the back half of the year and 2025. And lastly, for contract manufacturing, we have an exciting growth contribution from our new capacity at our Grand Rapids site. A few weeks ago, I had the opportunity to join our team as we opened this new portion of the state-of-the-art facility in support of a customer's injection device platform and producing product in Q4. And we have the ongoing expansion in Dublin which is already dedicated to contracted demand for components associated with drugs for diabetes and obesity. We expect it to be completed by the end of Q3. Our promising growth drivers have us positioned to drive significant value for our customers, the patients, and shareholders as we move forward. Shifting to slide eight. At the end of June, we published our 2023 sustainability report on the company website. Proudly, we received several accolades, including being named as one of the America's most responsible companies by Newsweek. Now, I'll turn the call over to Bernard. Bernard?

Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q2 2024 revenues and profits. where we saw a mid-single-digit decline in organic sales, as well as declines in operating profits and diluted EPS compared to the second 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, Q2. Our financial results are summarized on slide 9, and the reconciliation of non-US GAAP measures are described in slides 17 to 22. We recorded net sales of $702.1 million, representing an organic sales decline of 5.9%. Looking at slide 10, proprietary products' organic net sales decreased 8.4% in the quarter as customers' destocking continued at a higher rate than anticipated. High value products, which made up approximately 71% of proprietary product sales in the quarter, declined by double digits, primarily due to decreased sales of our Westar, Dikyo Crystal Zenith, and Fluoritech products. Looking at the performance of the market units, the biologics market experienced a mid-single digit decline primarily driven by lower volumes of Daikyo Crystal Zenith and Weststar products. The Pharma market unit saw a low single-digit decline primarily due to a reduction in sales of admin systems and Weststar products, while the Generics market unit declined double digits primarily due to lower volumes over Floritech and Weststar products. Despite these revenue declines in the quarter, we do expect revenues in the second half of 2024 to be greater than the first half. Our contract manufacturing segment experienced mid single digit net sales growth in the second quarter, led by growth in sales of components associated with injection related devices. Our adjusted operating profit margin of 18% was a 650 basis point decrease from the same period last year. Finally, Adjusted diluted EPS declined 28% for Q2. Excluding stock-based compensation tax benefit, EPS decreased by 28.4%. Now let's review the drivers in both our revenue and profit performance. On slide 11, we show the contributions to organic sales decline in the quarter. Sales price increases contributed $21 million, or 2.8 percentage points of growth in the quarter. More than offsetting price was a negative volume and impact mix of $65.5 million, primarily due to lower sales volume caused by customer inventory management decisions in the period and a foreign currency headwind of approximately $6.1 million. Looking at margin performance, slide 12 shows our consolidated gross profit margin of 32.8% for Q2 2024. down from 38.7% in Q2 2023. Proprietary products second quarter gross profit margin of 37% was 690 basis points lower than the margin achieved in the second quarter of 2023. The key drivers for the decline in the proprietary products gross profit margin were lower production volume due to the reduced customer demand in the period and an unfavorable mix of products sold, partially offset by increased sales prices. Contract manufacturing second quarter gross profit margin of 16.2% was 80 basis points greater than the margin achieved in the second quarter of 2023, primarily due to 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 13, we'll introduce some metrics. operating cash flow was $283.2 million for the six months ended June 2024. A decrease of $24.1 million compared to the same period last year, or a 7.8% decrease primarily due to a decline in operating results offset by favorable working capital management. Our second quarter 2024 year-to-date capital spending was $190.8 million, $33.3 million higher than the same period last year. We continue to leverage our CapEx to increase both our high-value product and our contract manufacturing capacity. Working capital of approximately $849.3 million at June 30, 2024 decreased by $415.3 million from December 31, 2023, primarily due to a reduction in our cash balance. Our cash balance at June 30, 2024 of $446.2 million was $407.7 million lower than our December 2023 balance. The decrease in cash is primarily due to $454.1 million of share repurchases and our capital expenditures offset by cash from operations Turning to guidance, slide 14 provides a high-level summary. We are updating our full year 2024 net sales guidance to a range of $2.87 billion to $2.9 billion, from a prior range of $3 billion to $3.025 billion. There is an estimated full year 2024 headwind of approximately $5 million based on current foreign exchange rate. We expect organic sales to decline approximately 1% to 2% compared to our prior guidance of 2% to 3% growth. We are updating our full year 2024 adjusted diluted EPS guidance to be in a range of $6.35 to $6.65 compared to a prior range of $7.63 to $7.88. Also, our CapEx guidance is expected to be $375 million for the year, which is an increase from the previous guidance of 350 million. The increase in CapEx is driven by additional investments and growth initiatives and the timing of spend on one of our major projects. 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 $0.03 based on current foreign currency exchange rates, which is a decrease from the prior guidance of $0.04. The updated guidance also includes EPS of $0.22 associated with first half 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.

Thank you, Bernard. To summarize on slide 15, we are the market leader in injectables with an even stronger position in biologics. We are seeing promising signs from our customers that the stocking is at a turning point. We are investing significant capital in higher growth areas with expanded margins and cash flow, and I'm confident that we'll achieve our long-term financial construct with our proven market-led strategy and future growth drivers. With great pride, we will continue to live by our purpose and make a positive impact on patient lives. Shannon, we're ready to take questions. Thank you.

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Paul Knight with KeyBank Capital Markets. Your line is now open.

Hi, Erin. I've got two questions. Number one, in this de-stocking environment, is it things related to COVID or is it, you know, broader than that, like injectable drugs, et cetera, if you could kind of give color on that? And then lastly... These new expansions specifically cited in Kinston and Grand Rapids, do they contribute to revenue here in 2024 and therefore your improved 2H? Yeah, thank you, Paul.

The stocking activity that we are seeing is actually a combination of both. Obviously, we're still seeing a little bit of destocking in the COVID vaccines. But also during the pandemic, there was several of our customers, when we are having discussions with them, were increasing their safety stock levels significantly from several months because our lead times got a little bit longer. Now that we've installed the capacity, our service levels are at the all-time high for our customers, and we're able to respond quickly. they are now taking down those safety stock levels. So it is a combination of both, but it is also allowing our customers to normalize their safety stock for our products in the market. Our belief, and speaking with our customers, the inpatient demand on the molecules still remains in line as with what we expected. The market shift is not occurring. as consistent as we've been speaking for the last several years. And our win rate in new molecule approvals continues to be as good, if not in some cases better, than what we had in the past. So I feel really good where we are moving forward. In regards to our investments, two particular areas in contract manufacturing will be online in the second half of this year. That's in Grand Rapids, Michigan, and also in Dublin, Ireland. And then in regards to proprietary, yes, we have additional benefits coming from Kinston and other expansions in our HVP plans towards the end of this year. Thank you. Thanks, Bob.

Thank you. Our next question comes from the line of Larry Solo with CJS Securities. Your line is now open.

Great, thank you, and good morning, and welcome, John, to the company. I guess, Eric, just a couple questions. It sounds like the demand environment or mid- to long-term environment hasn't changed at all. I'm just curious, on the destocking and inventory levels, how's your visibility with that? Are levels back to where they were pre-COVID, or maybe even lower? What gives you confidence that customers aren't... Maybe this goes even a little bit longer than thought. We keep moving that to the right a little bit. You sound pretty confident that you have a good hold on it, but what gives you that confidence?

There is twofold there. One is in the beginning of the year, after having discussions with our customers, we had an indication that the return would be a little bit sooner than we anticipated. What I mean by that is a little more pronounced back to normalized demand curves in the second half of this year. As we progress through Q2, we started seeing the intro quarter demand slightly less than we anticipated, and we see that persisting a little bit into Q3. So we do see sequential improvements over the next couple quarters, and as I mentioned, returning back to growth in Q4. And that is really our customers are gradually going back to where they were pre-COVID. So we don't see any variations below or any variations slightly above. It's pretty much consistent when a customer tells us what they're targeting, i.e. 12 months or nine months or 16 months. I will tell you, though, every customer that we're speaking to, has a different algorithm that they manage to. So it's not universal from one customer to the next. And as we go through the different segments, whether it's generics, biologics, or small molecule pharma, they're also in different stages of the new stocking.

Okay. And in terms of the CapEx, obviously a little bit of an increase, I guess, know to me it certainly signals um your confidence although you mentioned a little bit of timing there but um as we look out over the next few years you expect to still kind of spend this you know 350 to 400 million investment you know is that something that you still have a several year runway to to continue let me start and then turn over to bernard because that's important it's a good question larry you know our investments

More recently have been, I mean, obviously during the COVID pandemic, it was focused on HPV, particularly around stoppers and finishing of those HPV products to be able to support the vaccine growth. We're able to pivot those assets as we speak right now to continue to produce other HPV products for our customers. These additional investments we've been layering in really is to really support, I would say, three specific areas, the continuation of the biologics growth and our participation in that area is extremely high. So we want to head of the curve. So these investments we've been making is really more in the finishing process. And when you go into Kinston, Jersey Shore, Eschweiler, Waterford, that's what you'll see. Secondly is we are a significant player in the GLP. And from two angles, one on the proprietary elastomer side, which we've always had a very strong foothold, and we continue to do so on all commercial drugs. And frankly, there's several that are in the pipeline or being in development by several customers, and we're participating in that arena also. But also in contract manufacturing, we are producing and will produce even more auto injectors and pens, and in some cases doing some of the filling at the end of the process for our customers. So that's the second area is around the GLP-1s. And the third area, which really kind of ties to the biologics also, is that there's more demand in the future talking to our customers about some of these regulatory changes that we're working through with them on moving all standard material more up the HBP curve. So those are the three areas that we really focused our capital. Now, the long-term, I wanted to touch on that because that's a good question. How long will this persist?

Yeah, Larry, just two things on that. One, on the increase in CapEx for this year, really the major driver behind that is business that we've been awarded from customers for our Dublin facility where they actually want us to put the capacity in place sooner than originally anticipated. So we've pulled some of that CapEx that we had earmarked for 25 into 24 to meet those requirements. When we look at the longer term, we're really targeting about 6% to 8% of revenue, so getting back to pre-COVID levels of CapEx for our business. But again, that's based on the demand that we're seeing today and how we're going to meet it. If that demand increases or goes beyond that, and particularly around finishing capacity is the areas where we see that could potentially happen, then we would deploy more capital, but it would be very growth-focused if that was the case, and always around or predominantly around HPP.

Got it. And the 6% to 8%, Bernard, capex of revenue, does that kind of support your sort of 7% to 9% targeted growth outlook? Not this year, I don't know if it begins next year, but certainly multi-year, so 7 to 9. Has that changed at all, that 7 to 9?

Let's rephrase that. No, the 6 to 8% would support that level of growth. And as we say, if we go beyond that, and then it depends on what areas and where the growth comes from, we always have the ability to go and adjust that. But again, the CapEx remains very growth-focused. And I think we're getting to like 60% to 70% of our CapEx budget is really growth-focused at this point, and predominantly around HVP. And then some, as Eric said, in contract manufacturing. But that's for very specific customers and very specific business.

Got it. And sitting here today, I know there's no guarantee that it's hard, but do you feel comfortable that you can return to sort of that 7% to 9% growth in 2015?

I won't be able to pinpoint exactly which quarter over the next few quarters, but we will get back to that 7% to 9% construct. Like I said earlier, our position in the marketplace, the areas of growth that we're focused on is biologics and some across the entire portfolio, but what's outsized that growth is biologics, GLP-1s, and some of the work we're doing with our customers about moving up the HVP curve. So yes, we feel confident we will be back to that 7% to 9%.

that construct. Yeah, and if you think of, you've got to remember, within the construct, Larry, there's three drivers in there. One is volume, the other is price, and then you've got mixed shifts. So you've got three drivers supporting that construct over the long term. And if you look back over the CAGR between 2019 and as to where we're guiding today, that's about 10% growth. Right. That construct is underpinned by those three drivers. And then if you look at the areas that Eric just called out that support that thesis, particularly around the mix shift, you're looking at the changing regulation, basically land, GLP, or high level of participation around biologics, and then demand normalization. Plus we have the infrastructure and capacity in place now to be able to respond in the required lead times by customers to be able to support that growth over the next number of years. Great. I appreciate the caller. Thank you guys.

Thank you. Our next question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open.

Hi, Justin.

Hi. Good morning and thank you. So just a couple of questions. How is the coverage ratio shaping up and how has that changed? throughout the year. And then the other question would be just in terms of the destocking. I think earlier in the year you mentioned that it was skewing heavier towards standard components versus like HVPs. And just curious if that's still what you're seeing.

I'll take the second part and then I'll hand it. Oh, yeah, I'll take the coverage ratio. Eric will take the coverage.

Yeah, absolutely. So, Justin, so thanks for the questions. The coverage ratio is getting stronger, so there's two aspects we look at is confirmed orders scheduled out, and we're seeing that increase nicely, not just on a percent ratio perspective, but on absolute dollar for both Q4 of this year and also going into the early part of 2025. that's that's one aspect and therefore as that kind of increases the intra inter quarter demand profile is actually is is less of a factor in in the growth of the of the business and so we're seeing that come back a little bit slower than we originally anticipated in the middle part of this year as we were articulating back in february i believe um and so that's why hence why we changed the guidance but When we look out to Q4 and to 2025, we're seeing very strong indication with confirmed orders and our discussions where customers are lining up exactly to that conclusion when we look at their destocking programs and when they feel they'll be at a level that they feel is acceptable. So it's lining up nice.

You want to touch on destocking? Yes, on the destocking, Justin, when we look at that, we're You know, we have been seeing that in our biologics segment and in generics. That's where we saw the biggest impact here in the second quarter. And, you know, that's really where, as we were going through COVID, that's where we saw the most pressure also around lead times where customers really had to manage their supply chains. And, you know, that's where we believe the safety stock built over time. So that's why we are seeing destocking in those areas right now, you know, to a larger extent versus comparing this to our other market units. And you can see that play through then on the impact on our gross margin and operating margin is that that's impacting our mix. So we're having one volume impact because of that, but we're also having a mix impact. And I think what we saw in COVID and what we would see when we return to normalize growth rates and seeing that gross margin and operating margin expand in line with our long-term construct and potentially beyond that. So I think that's where we're looking at it from a revenue perspective, but also looking at an impact on margin and saying, how do we get back to the margins that we're used to delivering on? And when we see those biologics and generic markets start to normalize, we'll see the revenue rebound. And also from a margin perspective, we'd see that also.

Understood. And then maybe just one quick follow-up in terms of your improved throughput. Do you have a sense from your conversation with customers, are they now trying to manage inventory levels in line with your lead times or just trying to get a sense of change in ordering patterns and where that might normalize?

Yeah, Justin, exactly that's the point. Unfortunately, during the pandemic, due to the demand that was put on our business, our lead times did go up to anywhere between 30 to 50 weeks. And with the consistency now in the last several quarters, call it 8 to 12 weeks, sometimes earlier, sometimes a little bit longer, depending on the processing, our customers are realigning they're reordering patterns based on those lead times. And we're seeing that clearly. So as they built inventories during the longer lead time periods and during the supply chain constraints during the pandemic and across the whole industry, we're seeing that also coming down, but also the realigning. So what you'll see a pattern of more frequency instead of one large bolus, it's more paced throughout the next three or four quarters which, by the way, is also very effective for our operations. So it aligns real well with where we want to be long-term.

Got it. Appreciate the questions.

Thank you, Justin.

Thank you. Our next question comes from the line of Avantika Dabaria with Bank of America. Your line is now open.

Hey, this is Mike Riskin from B of A. I just want to go back and just touch on the D-Stock one more time, because that's where we're getting the most debate. I mean, I appreciate all your comments about coverage ratio and conversations with your customers, but, you know, you also had some more comments after 4Q and 1Q earlier this year. So it just seems like the situation does evolve and the conversations with customers do evolve. You know, as well as to the guide for 3Q and 4Q, you know, it seems like there's a little bit of a step up implied in 3Q and a pretty sizable step up in 4Q just to get to the fiscal year numbers. So why not take an even more conservative guide at this point in the cycle? I mean, it just seems like there's still some risk that the D-Stock could evolve one more time. So just would love to get your thoughts on that as you progress through the year. And then tied to that, I'll throw in my second question right away. It has to do with the margins and the EPS outlook. Is there any incremental cost cuts that are assumed in 4Q, 3Q or 4Q to get to the EPS number? You know, obviously volume deal average has a big impact on gross margins, but just wondering what's implied there as you go through the year. Thanks.

Yeah, so what we are seeing is that, you know, for Q3, we don't see any major step up continuing the way we're you know, we've been going. Some sequential improvement, as Eric mentioned, and then a step up into Q4. And that step up in Q4 is really driven by the customer segments within biologics and a, you know, a reasonable improvement in generics. But the main driver is around the biologics market. And that's what we're seeing. And that's the information we're getting from our customers. And that informs the basis of our guidance. At this point, and as Eric said, then there are metrics around that which are giving us confidence that that will actually materialize. And then on the EPS, we have been managing our cost base pretty tightly as you know, we're very operationally focused and we've been managing the variable costs across our plants as we have been going through. and 2024 one thing that we have to be cognizant of with cost management is that when we're expecting to get back to growth we need to make sure that we have the right resources and capabilities in place to be able to support that growth so we don't derail it so we're managing that pretty tightly and other than that there are we're not making any significant cost cuts um but we are i would think i would say we're using appropriate cost management to manage through the destocking period, although it is extending a little bit longer than we originally anticipated. But also we have to be prepared for returning to growth to make sure that we're able to support our customers with that. Hopefully that helps.

Thank you. Our next question comes from the line of Matt LaRue with William Blair and Company. Your line is now open.

Good morning. I just want to go back again to what exactly happened in your quarter from a destocking perspective. If I go back to the initial outlook from the Q4 call where you had incorporated about 200 to 300 basis points of the cut from the Q3 call last fall from destocking, but mentioned that 75% of destocking was from six customers. obviously the first quarter results themselves actually were positive relative to the outlook you'd provided and you maintained the guide for the year. So now having 400, 500 basis points come out of the organic guide with about four months left, four or five months left in the year, the magnitude is pretty large. So just was it going back to conversations specifically with that group of big customers, was it something that you know, historically you've used the term broadened and worsened. Did things broaden and worsen further? Was there one or two pockets of customers or product categories? Just trying to understand what happened from, you know, mid-April to the end of June in terms of the big change here.

Yeah, Matt, I'll start off and then if Eric, if you want to add. Yeah, what we did see as we were progressing through Q2 and the level of intra-quarter orders that we would have anticipated to you know, materializing in that period of time, you know, it wasn't at the rate that we would have expected it to be. So, and then there was some timing with customers moving some orders out late in the quarter would have, you know, has impacted us. And then as we've looked at the balance of the year, and as we've rolled through the end of June and practically through July, what we're seeing in Q3 is that orders that we would have anticipated materializing for the period and even some for q4 they they they just weren't coming through and you know when we assessed what was happening there it's still really related to levels of destocking so it's it's gone longer than we would have originally anticipated and um you know that that is essentially the main driver and what we when we had looked at it originally our coverage rate for Q3 and Q4 was pretty much in line with or a little bit ahead of, you know, pre-COVID levels. But what hasn't happened then is filling in between the actual orders confirmed and the forecast that we had, that hasn't accelerated in the way that we would have anticipated that that would take place. And so, you know, when we did the assessments, we felt that, you know, we have to be transparent and do the right thing and take the guide down and do it with the right level. We don't want to be in the position where we're cutting and cutting and cutting, so hence the reason why the drop in the guide is pretty significant. It's not something we want to do, but it's reality that we're dealing with today. I think the good thing and the positive for us is that it's actually returning to growth in Q4, so it's really pushed it out a quarter. And again, Q4 isn't as strong as we would have originally anticipated, so we've taken that down as well.

And I'll just add to this. Thanks, Bernard. It became more of a gradual recovery, I believe, in what we're seeing versus more pronounced Q3 recovery. And that's actually one of the drivers of why, based on the customer conversations, it's still a similar group of customers across multiple segments. Yes, there's some of the larger ones we highlighted earlier in the year that they're actually going through the process and then getting closer to the end of that process. But as we look through with these discussions, we look at where they are in their process, where we are with our – able to produce the products in a very short period of lead times, we are confident moving back to long-term construct. And that will – it's going to take a little more time than we anticipated. as it indicated in the guidance that we gave, we're getting closer to that in Q4. And we believe that will carry on going forward. So, yes, Matt, that's a very clear statement we made earlier this year about being more acute, but it's taking a little bit longer to work out than we anticipated in the industry.

Okay, understood. And I think having observed this in the bioprocessing industry over the last 18 months, fully appreciate that it's challenging to understand customers' pace of inventory work down and at times maybe there's competing incentives in terms of them wanting you to have capacity available for demand that they may or may not give you in the next quarter or two. So in light of that, you referenced now understanding that customers are managing to your now more normalized or reduced lead times. As part of those conversations, do you feel like you have a better understanding of how much inventory is sitting out there? And when you kind of combine those two observations, does that give you conviction specifically, not in the back half of the year, but specifically in the third quarter? And how do you incorporate perhaps a better understanding of where customers are at into the way you're thinking about this back half guide?

Yeah, Matt, the clarity of more recent conversations than the beginning of the year gives us that conviction of where we're going in the near term and moving up to, you know, when I talk about the mid and long term, getting back to that growth algorithm we've been accustomed to and we expect based on our market position and what we see ahead of us. But yes, the clarity of where they want to land with the safety stock and the confidence they have in our ability to deliver and meet those service levels that we expect and our customers expect. And we're able to do that today with the capacity we have online. And that's the reason why we continue to fuel the capital so that as the growth continues to occur in 2025 and beyond, is that we're well positioned versus getting behind the curve, which would happen during the pandemic. We have much more visibility today and better clarity, and we're firm on making sure that we are going to be delivering what we said we were going to deliver.

Okay, understood. Thank you.

Thank you, Matt.

Thank you. Our next question comes from the line of Jacob Johnson with Stevens. Your line is now open.

Hey, thanks. Good morning. Maybe just to go back to the EPS guidance, know you're pointing to kind of down one to two organic growth this year and i think it would seem to apply probably like three to four hundred bits of operating margin contraction uh which is kind of greater decremental margins than than the long-term algo would suggest can can you just flush that out a bit more is some of that capacity additions etc and then i think i heard heard from Mentioned earlier, perhaps, as revenues recover, maybe we could see something better than 100 bps of margin expansion. Can you just talk about the incremental margins as we return to growth in 4Q and beyond?

Yeah. So the major impacts on margin that we've seen here in Q2 is really driven by volume and then mix. And for high-volume manufacturing operations, any decrease in volume like that is going to have a significant impact. And where we're seeing it, Jacob, is really in HVP. So the drop is in biologics and generics. And so we're getting this kind of outsized impact on margin, where if you look back at, take the COVID years, when we were getting a large amount of expansion in HVP and growth in that area, we were getting outsized margin expansion, you know, well beyond our 100 basis points. So essentially what we're seeing now is the reverse of that. So when things normalize and we start to see growth again and getting back into our long-term construct, that volume growth will be driven within HVP. And then also that aligns with the mix shift as well, improving where Our HVP was in the mid-70s as a percent of proprietary revenues, and today we're saying it's about 71%. That's the type of impact it has on our business. When we're returning to growth, we would expect to see that margin recover pretty quickly and in line with that growth, particularly around biologics and the generic space.

Thanks for that, Bernard. Sorry.

It's all in gross margin. The op-ex is pretty tight.

Got it. Makes sense. And then maybe just on the stopper vial side of things, you guys referenced the capacity you brought on during COVID and repositioning that now for non-COVID applications. Can you, one, talk about the timeline for kind of transitioning that capacity to non-COVID demand? And I guess, two, the other concern, I think a peer of yours referenced the other day is that, you know, you weren't the only one who brought on capacity during COVID and lead times are shorter and they suggested that customers are going below pre-pandemic inventory levels. And I think investors may be worried that this could be structural for some time. Can you just talk about that dynamic as well? Thanks.

Jacob, I'll take that. So first of all, on repurposing the assets, that's done. So we're able to leverage not just for Novapeer stoppers, but also use the processing for plungers, as an example, or other types of SKUs in the HVP portfolio. So the team has done a great job to... get those assets ready to go, and they're ready to go. And so as demand comes in, we're ready to respond accordingly. In regards to what our customers are telling us in regards to where they want to stay with their safety stock, because of where we are in the supply chain, and if you think about the economics of our product as a percentage of the drug molecule, we don't see that going any further down below pre-pandemic levels. So we believe it's going to... For us, I can't speak for others, but for us, with our customers, for the types of products we provide, the lead times that we can provide, and the number of SKUs we provide our customers, we believe, based on the conversations, we'll be back to pre-pandemic levels.

Got it. Thanks for that, Eric. I'll leave it there.

Thank you.

Thank you. Our next question comes from the line of Dan Leonard with UBS. Your line is now open. Thank you.

I have another question on visibility. Can you discuss the breadth of your visibility? And I ask because I'm wondering if we're in a situation where you have close contact and visibility with those large customers, but rather it's the long tail of smaller customers that are driving the downside surprise.

Actually, so Dan, thanks for the question, but the more variability has been with the larger customers. And the smaller customers, although obviously we're very focused on that because that's really feeding the pipeline when you think about new developments, and the volumes there are less and the frequency of orders are probably a little bit higher. The predictability of which quarter it lands in is lower, but the order of magnitude on the stocking impact is less. So I'm not sure if that helps. Obviously, a very important part of our portfolio are the smaller biotech pharma companies when you think about their innovation pipeline and how that feeds into the whole ecosystem of the injectable medicine space. But the impact that it has on our fluctuation on the revenues is not as great. I don't know if that helps, Dan.

That's great. Thanks for that clarification, Eric. And a quick follow up. You mentioned that the new capacity in Dublin opens in the third quarter. How important is Dublin to the fourth quarter revenue ramp?

Not really. I mean, the team is going to work really hard to get that capacity up and running and, you know, full utilization. But the reality is it takes us a few quarters to ramp any new site of that magnitude up to full capacity. So I would suggest that it's not a major driver to why we're calling, giving the guidance the way we are for Q4. Got it.

Thanks a bunch.

Yeah, thank you. Thanks, Tim.

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

Hi, good morning. Thanks for taking my questions. I'm going to try to ask a few in a different way. Eric, in June when we were together, you talked about 50% or maybe a little less of your revenue comes from large customers where your visibility is higher, I thought you said, because of the high volume that you do with them, the connectivity that you have with them, and then the smaller customers are much more volatile. And you kind of, to Dan's question there, commented on that. I thought you said that you're your visibility or your forecasting accuracy around those large customers was really accurate over time, but you also then just said that those are actually the source of the destock. And so I wanted to make sure I understood kind of the historical accuracy and tie-in with those large customers, but seemingly a disconnect on that right now. Is that the right way to think about it?

No, what I would say is that, so David, thanks for the question, but I would say is that the larger customers have a larger variability. When they do, we'll have a discussion about a forecast, and then they would, when we get to the point of actually firming up as a firm order, there is some movement that is occurring. And since it doesn't take many of them to have a meaningful impact compared to the smaller accounts, It is true on the smaller account, and maybe I should have been clearer. When we look at degree of accuracy, we're looking at quarter versus quarter prior year. And therefore, in the smaller accounts, that's less predictable on which exactly month, quarter it will land. We have a high repeat business model. And we mentioned this before, that majority of our revenues It's almost annuity-like. Every year there's a repeat, and then the variable would be drug demand up or down, and then that's the throttle. But in this particular case, when we talk about the degree of accuracy, the smaller counts from a quarter versus prior quarter is a little more harder to predict. But from an impact to the revenues, the larger accounts are the ones that have a more meaningful impact on the dollar value perspective from one quarter to the next.

Got it. Okay. And then in terms of the improving confidence, I guess I'd like to key on, on Bernard's answer about, you know, kind of the cuts to this year and the order patterns, you know, earlier in the year, your coverage was encouraging relative to pre COVID levels, but then the fill in, on top of that not coming as you expected. Can you give us some sense of what is the normal level of coverage versus the amount of go-get? Like how much go-get do you have for the second half of the year in absolute or relative that gives you the confidence that you can get to the levels that you're now setting?

Yeah, the exact number we're not going to give out for pretty obvious reasons, but it's our coverage rate and the go-get that we would have to do now on this new guidance is, I would say, we're more confident around that and delivering it and being able to get it. And that go-get is based on conversations with customers understanding their order patterns and changing order patterns and factoring all of that in, and then understanding what their forecasts are. So that's what's given us the confidence. So the size of what we have to go get isn't as large from a dollar perspective. And as I said, when we talked about it earlier in the year, we had a level of confidence around it and anticipate a certain conversion rate. Obviously, that hasn't materialized in the way we would have anticipated. So we have adjusted our guidance to reflect that and give us confidence about being able to deliver on the numbers now that we're guiding to.

Got it. And, Bernard, to your point, management did say similar things about when those six customers kind of arose and kind of shockingly, we're not going to be ordering as much earlier in the year. And the guidance was two to three instead of, you know, the seven to nine construct. So you had those conversations earlier in the year and, you know, we're talking about having them again here in the middle of the year. I guess I'd also invoke, you mentioned that, you know, you go back to pre-COVID levels and look at the growth rate. We've done the same. You said 10. It looks like it's even a little above 10. I guess using that construct, if we were to use the midpoint of the LRP, the 8% of your long-range targets, that would imply a revenue level that's still a couple hundred million dollars below where you're guiding today or said differently that next year would be a flat year to grow into an 8% growth rate from 2019. How do we get confidence that there are factors that you know, that bias to the upside, what that growth should be, or conversely, that there's not still a couple hundred million dollars of overbuying in your customers' inventory levels that they still need to work through before you get to that, you know, that multi-year growth support level.

Yeah, David, I'll start with this one here. One of the biggest drivers in the last five years of Kager taking out COVID was the biologic growth. If you recall back five or six years ago, our participation rate was high, but the percentage of sales of biologics was sub 20%. And I don't have the exact number for me, but it was about 20% of our overall business, if I recall. And as the years progressed over those five years, the number of approvals, the number of biologics that really accelerated the market, and there's a few that we still see continue to outpace the demands that we forecasted with our customers, which is a positive. Now, the base of that business is much larger. I believe we were up around 40%. So 2X as a percentage of the whole company, and the whole company has grown or doubled in size. So as we kind of think forward a little bit, you know, the 7 to 9 is why we say the financial construct going forward, 7 to 9, is we take that in consideration. It's a bigger base we're operating off of. continue leading with the HVP in the biologics area will give us that type of growth off of a close to $3 billion business.

Got it. Okay. I'll leave it at that. I was going to ask one more, but I've probably beaten it up enough. Thank you. Thank you.

Thank you. Our next question comes from the line of Tom DeBorsi with Nephron Research. Your line is now open.

Hi. Good morning.

Good morning.

Good morning. Just had a quick question, I guess, on CapEx. And so the current level of CapEx, 12% to 13% of revenue. And I just wanted to get a sense of how you're, I guess, metering the demand or long-term capacity expansion versus maybe short-term, weaker, demand due to destocking. And then just as you look to 2025, you know, I think consensus has maybe the number going down to 300 million of CapEx and just, I'm not asking you to endorse that number, but just would you expect CapEx to be down year over year in 2025?

Well, I'm not going to guide 2025 at this point, but what I would say is that the investments we're making and the higher level of CapEx that we're experiencing right now, you know, compared to pre-COVID levels, is really targeted at growth in a number of different areas. And for us to layer in that capacity, you're looking at 12, 24, like 36 months in some cases, depending on the lead times of the equipment and the technology that we're installing. And so when we're When we're doing that, we're looking at what markets are growing, we're looking at the regulatory landscape, what changes are requiring there, and what finishing capacity we need. We're looking at GLP from both a proprietary and a contract manufacturing perspective, and then we're also looking at our participation across biologics, and again, what sort of capacity we need there. So we've got three pretty powerful drivers for growth coming on over the next couple of years, and for us, we need to have that capacity installed to meet that demand when it actually materializes so we can respond. So we don't get into the position where our lead times get pushed out like they had during the COVID timeframe. Looking beyond, as we said earlier on the call, we would expect our CapEx over the next year or two to get back to more normalized levels of 68% of revenues. That's what we would target will be targeting, and that supports the long-term construct growth of 7% to 9% at the top, and be more focused, again, on creating that mixed shift and supporting that HVP growth. So hopefully that kind of gives you some color.

Thank you. This concludes the question and answer session. I would now like to hand the call back over to John Sweeney for closing remarks.

Thank you all for joining us today on the conference call. An online archive of the broadcast will be available on our website at westpharma.com in the investor section. Additionally, you can access a replay for 30 days following the presentation by using the dial-in numbers and conference ID provided at the end of the day's earnings release. That concludes the call. Thank you very much and have a nice day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.