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.