West Pharmaceutical Services, Inc.

and welcome to West's third quarter 2025 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask your question, please press star-1-1. To remove yourself from the queue, press star-1-1 again. We ask that you please limit yourselves to one question. As a reminder, this call may be recorded. I would like to turn the call over to John Sweeney, Vice President of Best Relations. Please go ahead.

Good morning, and welcome to West's third quarter 2025 earnings conference call, which has been webcast live. With me today on the call are West CEO Eric Green and CFO Bob McMahon. Earlier today, we issued our third quarter financial results. A copy of the press release, along with today's slide presentation, containing supplement information for your reference, has been posted in the investor section of the company's website, located at investor.westfarmer.com. Later today, a replay of the webcast will also be available in the Investors section of our website. On the call, we will review our financial results and provide an update to our business and outlook for FY25. Statements made by management on the call and 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 statements made here. Please refer to today's press release, as well as other disclosures made by the company regarding the risks to which it is subject, including our 10-K and 10-Q statements. During the call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, free cash flow, and adjusted diluted EPS. Limitations and reconciliations for 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. Eric.

Thank you, John, and good morning, everyone. Thanks for joining us today. I'm pleased to report we delivered solid third quarter results with revenues, margins, and adjusted ETFs coming in above our expectations. Revenues of $805 million were up 5% on an organic basis. The adjusted operating margins were 21.1%, and adjusted EPS of $1.96, was up 6% compared to prior year. As you will hear today, our business momentum is steadily improving, and we expect this trend to continue. As a result of the strong performance, we are increasing our guidance for 2025. I want to especially thank our West team members for their efforts and continued focus in achieving these results. Before getting into the details of our Q3 performance, I want to highlight two notable appointments which further strengthened our executive leadership team. In August, a new CFO, Bob McCann, joined West. Many of you know Bob, and he has done an exceptional job transitioning into his role, already visiting several of our websites and meeting with many of you. I'm excited to have Bob on board and partner together to lead the next phase of West's growth. I'm also extremely pleased to welcome Devesh Mathur, our new Chief Technology Officer, who also joined West in August, and is tasked with accelerating our innovation and new product introductions. Our team looks forward to benefiting from his industry experience and expertise. Now back to the Q3 financial results. Let's begin with a review of the proprietary product segment. Revenues of $648 million were up 5.1% on an organic basis. These results were driven by HVP Components, our largest and most profitable business. We have a strong market position because of our trusted reputation for high quality, scale, and reliability. This business has continued to strengthen each quarter. and revenues increased 13% organically in Q3. Several factors drove the strength of HPP components. First, elastomers for GLP-1s had strong growth and now account for 9% of total company sales. We benefit from our longstanding relationships as we partner with our customers in this market, supporting them as they expand their GLP-1 franchises. We're also collaborating closely with customers who are launching a pipeline of new GLP-1 molecules and generics. And we expect this market to continue to evolve as there are a number of new early-stage trials seeking to expand the range of indications and treatments using GLP-1s. Second is biologics. We're encouraged by their underlying market demand as ordering trends are returning to normal. West's participation rate for biologics and biosimilars is trending above our historical levels year-to-date of greater than 90%. The third driver is HPP upgrades, including Annex I. Given our strong market position with our Elastomer's portfolio, we are well-positioned to benefit from what we believe is a long-term opportunity. We are tracking ahead of our expectations. and we currently have 375 ongoing Annex 1 upgrade projects. With a robust pipeline of new projects and our ability to partner with customers to convert current projects into commercial production, we anticipate Annex 1 and related HPP upgrades to deliver 200 basis points of growth this year, up from our previous expectation of 150 basis points. We expect NX1 to drive continuing demand for higher quality products as European regulators now require pharmaceutical companies to demonstrate their culture of continuous manufacturing improvement. WES is well positioned to support our customers with HVP components and technical documentation to meet those requirements. We continue to work through our constraints at our HVP manufacturing site in Germany. During the quarter, we made good progress hiring and training employees and installing new equipment to expand capacity. These efforts, in addition to product tech transfers, will allow us to further leverage our investments made in our global HPP components infrastructure and balance production across the network, enabling us to drive future growth. Moving to the HPP delivery device business, Revenues declined compared to prior year as expected, driven mainly by the $19 million incentive payment we received last year. With respect to Smart Bill 3.5, which is less than 4% of total company revenues, we're improving profitability every quarter by driving down costs and remain on track to go live with automation in early 2026. even as we continue to evaluate options to maximize the value of this business. Lastly, our standard products business increased 3.6% on an organic basis this quarter. Converting standard products to HVP components over time serves as an important funnel for our business by generating revenue and expanding margins. Turning to contract manufacturing segments, This business performed well in the quarter, delivering revenues of $157 million, growing by 4.9% organically. Moving forward, we are now utilizing our Arizona CGM footprint to consolidate operations from less efficient locations. We continue to expect the second CGM contract to conclude at the end of Q2 2026. The future available space is an attractive location with strong operating team that is resulting in a number of promising discussions with multiple customers. Turning to our Dublin site, we continue to ramp production of delivery devices for the obesity market. We are currently validating and testing the equipment installed for the commercialization of our drug handling business in early 2026. GLP-1 is in the contract manufacturing segment, accounts for 8% of total company sales. Overall, I'm very pleased with the performance of both the proprietary products and contract manufacturing segments, along with the trends that we are seeing in our business and in the markets. Now I will turn the call over to Bob. Bob?

Thanks, Eric, and good morning, everyone. It's great to be here, and I'm pleased to be part of the West team. WEF's injectable solutions and services business is second to none, and I'm excited about the long-term growth potential of the company. Now, before getting into the details, I wanted to highlight that we have revamped our quarterly presentation to provide some supplemental segment information, which you may find useful going forward. Now, on to the quarterly results. In my remarks this morning, I'll provide some additional details on revenue, as well as take you through the income statement and some other key financial metrics. I'll then cover our updated full year and fourth quarter guidance. As Eric mentioned, third quarter revenue was $805 million, above the top end of our revenue guidance, beating our expectations. On a reported basis, total revenues increased 7.7%. currency had a positive impact of 2.7 percentage points, resulting in organic growth of 5.0%. Of note, the incentive fee reduced organic growth by 280 basis points, so a solid result overall. I'll now go through each of our businesses in more detail. Within the proprietary segment, HVB components, Our largest business, accounting for 48% of total company sales, was the standout. Revenues of $390 million increased 13.3% organically. This was driven by robust growth in GOP1s, HVP upgrades, including Annex 1, improving performance in biologics, and a normalizing demand environment. We are very pleased with the continued momentum in this business this year. In our HPP delivery devices business, which accounted for 12% of the company's net sales in the quarter, revenues were $99 million. This was down 16.7% year-on-year organically, but roughly flat sequentially as we expected. In standard products, revenues of $158 million increased 3.6% on an organic basis, even as we saw Annex 1 accelerate. Standard products accounted for 20% of total company net sales this quarter. Now looking across our end markets for proprietary, Biologics revenue was $329 million and up 8.3% on an organic basis. Growth in products using our laminated technology and strength in Westar and Envision offset the headwind from the incentive fee in the prior year. Pharma revenue rose 1.4% on an organic basis to $183 million, with growth in RU seals, stoppers, and plungers. And generics revenue increased 2.6% organically to $136 million, also driven by growth in seals and stoppers. Now, finishing up revenues, our contract manufacturing segment delivered $157 million, growing 4.9% on an organic basis. Segment performance in the quarter was driven by an increase in sales of self-injected devices for obesity and diabetes, partially offset by a decrease in sales of healthcare diagnostic devices. Contract manufacturing accounted for 20% of total company net sales in the quarter. Pricing was a positive 1.7%, and we are tracking at roughly 2.4% for the first nine months of the year. right in line with our two to three percentage point expectation. Now let's take a closer look at the rest of the P&L. Gross margin was 36.6% in the quarter, up 120 basis points as compared to the prior year. This strong result is due to the positive mix of HVP components, as well as good execution in our supply network. Adjusted operating margins of 21.1%, while down 40 basis points compared to the prior year, were ahead of our expectations. And below the line, our net interest income was $4.5 million. The tax rate came in at 19.8%, slightly better than expected, and we've had 72.6 million diluted shares outstanding in the quarter. Putting it all together, Q3 adjusted earnings per share were $1.96, up 6% versus last year and 26 cents above top end of guidance. Moving on to a few cash flow metrics. Year-to-date operating cash flow is $504 million, up 9%, while free cash flow of $294 million is 54% higher than last year as capital expenditures are down 23%. To date, we have invested $210 million in capital expenditures and remain on track for $275 million for the year. In summary, we had a very solid third quarter operationally that exceeded our expectations. As a result, we're increasing our full-year guidance on both revenue and earnings per share. For the full year, We are now anticipating our reported revenue to be in the range of $3.06 to $3.07 billion. This represents reported growth of 5.8% to 6.1% and organic growth of 3.75% to 4% for the full year. The foreign exchange environment has remained relatively stable since our last guide, and so currency is still expected to be a $59 million tailwind for the year. We are also increasing our full-year adjusted EPS range to $7.06 to $7.11, representing year-on-year growth of 4.6 to 5.3%. A few more items to help you modeling. This assumes flat other income and expense, a 21% tax rate in the fourth quarter, and 72.6 million diluted shares outstanding. In addition, We continue to anticipate $15 to $20 million in tariff-related costs this year and now expect to mitigate more than half of those costs in 2025. For 2026, we expect to fully mitigate the impact based on the current tariff landscape. Our updated full-year guidance translates to fourth quarter revenue of $790 to $800 million. This is a reported increase of 5.5% to 6.8% and an organic increase of 1% to 2.3%. As a reminder, we also had a $25 million incentive fee in Q4 of last year, which we do not expect to repeat this year and is reducing our expected Q4 organic growth by roughly 360 basis points. In fourth quarter adjusted earnings per share, are expected to be between $1.81 and $1.86. Before turning the call back over to Eric, and while we're still going through our planning process, I did want to share a few thoughts on 2026. We are exiting 2025 in a good place. We believe destocking is largely behind us, and demand will continue to improve for our key growth drivers. That said, our end markets remain dynamic, and we could see a range of outcomes, so we will be prudent with our planning. Our HPP components business will lead the way given the multi-year growth drivers of GLP-1s and HPP upgrades, driving our biologics and market. We are anticipating the remaining CGM contract will continue to run at full capacity until exiting in mid-2026. This is roughly a $40 million headwind for the second half of 2026. We are actively working on refilling that space with higher margin business with the expectation of the pacing and ramp, the pipeline coming in better view by the end of the year. Lastly, we're building out drug handling in our Dublin facility, and this is expected to add to roughly $20 million in revenue for next year, which will help offset the CGM contract. And we will get back to expanding margins. So while early, I believe 2026 is coming into better focus, and I look forward to giving specific guidance on the next earnings call. Now I'd like to turn the call over to Eric for closing comments. Eric? Great. Thanks, Bob.

To summarize, we had a solid quarter resulting in an upward adjustment to our guidance. We believe the positive trends in our business are sustainable due to strong execution, improving market conditions, and our ability to respond to the evolving needs of our customers. Our reputation for high quality and service is paramount. Let's have key competitive advantages that allow us to protect our business model long term, especially in our highest margin HPP components franchise. and we continue to make progress improving our margins. This is why I'm confident that we are well positioned for Q4 and into 2026. Operator, we're ready to take questions. Thank you.

Thank you. As a reminder, if you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1-1 again. We ask that you please limit yourselves to one question. Our first question comes from Paul Knight with KeyBank Capital Markets. Your line is open.

Hi, Eric. Hi, Bob and John. Congrats on the quarter. As you think about your long-term construct of 7% to 9% growth, are we hitting there in 2026, in your opinion, in terms of, you know, the momentum you're citing here in 3Q? No. Yeah, thanks for that, Paul.

And I'll start, and then maybe ask Bob to join us in the conversation. But if you think about key drivers to be able to deliver the long-range plan or long-term construct, the thesis is really around the HVP components and driving into double-digit growth consistently year over year. And as you know, the key drivers of that for us are biologics and biosimilars, It's also the driver on Annex 1 and also GLP-1. So we feel good that we have the foundation laid that allows us to drive in the right direction to get to LRP long-term. Bob, you want to give more cover?

Yeah. Hey, Paul. Good morning, and thanks for the question. As Eric said, you know, the biggest growth driver, we're seeing really nice momentum. As I mentioned on the call earlier, we've got some puts and takes here in 2026, but we feel good about the long-term growth of the business. We have to work through the puts and takes of, you know, some of the contracts that are coming in and out. And right now I would say, you know, the street's in a good place.

Thank you. Our next question comes from Michael Ryskin with Bank of America. Your line is open.

Hey, thanks for taking the question, guys. Maybe just to follow up on that, the HPP components, as you said, a big part of the story, really good growth in TUPE. You continued that in the third quarter. Obviously, you know, GLP-1, you know, it's not a part of that, but could you talk about a sustainability of that being over double, you know, being double digits? You know, you talked about hitting that in the fourth quarter as well, but then going beyond just confidence in that trajectory. And then if I could throw on just a quick second part around the margin counting you made, Bob, about expanding margins next year. Could you talk about the moving pieces of that between gross margin, volume leverage, or any cost actions?

Thanks. Thanks, Michael. And you're absolutely correct on the HVP components. I mean, the growth is starting to sequentially get stronger from the beginning of this year as we were looking at how the order patterns are becoming more normalized. So we're seeing the markets become more in line with what we would expect long term. We're seeing that with the order trends through our discussions with our customers. And another precursor for us we keep a close eye on is the bioprocessing space. As you know, that's a key indicator of what we should see and expect more near to midterm. We also are – so we're confident in our position in biologics and biosimilars, particularly of the products in market, but also new approvals that are in pipeline. And then Annex 1 is another key driver that has multi-year – growth algorithm conversion from standard to high value products, which is a good opportunity for long-term growth to get us to that growth algorithm we talked about, double digits for high value product components.

And, Bob, you want to? Yeah. Hey, Mike. Thanks for the question. Maybe to add on the first question about HPP components, certainly we're feeling good about the momentum here. We're actually building to our Q4 guidance is low to mid-teens. So that momentum we're expecting to continue. Obviously, as we get into next year, there's some more challenging comps in the back half of the year. But that being said, you know, the long-term growth drivers of GLP-1s and Annex 1 and the HPV upgrades are there. That actually leads to your second question around the margin expansion. One of the things that I think we saw here in the quarter was just the beauty of that business being upgraded, the power of being able to drive more efficiency through the through the factories with the investments that we've made over time here, as well as being able to provide more value-added products to our customers. I would expect that to continue next year. So when we think about opportunities, I do expect gross margin to be an area of opportunity for us to expand margins. But we're also looking at how do we ensure that we're also driving efficiencies kind of below the gross margin level as well? So I'd say it's both, but certainly as HPP drives the growth, we generate a mixed benefit as well. So very nice from that standpoint.

Thank you. Our next question comes from Patrick Donnelly with Citi. Your line is open.

Hey, guys, thanks for taking the questions. Maybe one quick one on the CDM contract. You know, it sounds like kind of the exit at mid-26. Appreciate the commentary there, Bob, on the $40 million headwind. I guess in terms of the visibility and fulfilling that with high-margin businesses, it sounds like, you know, what are the conversations there? What would the timing look like in terms of the backfill? You know, how big of a gap would there be? And then maybe secondarily, just following up on Mike's question there, Bob, I know you spent a lot of time thinking about the margin opportunity here, where there's opportunities, whether it's footprint, higher utilization. When you dug into the company here and looked at the margin opportunity, can you just talk about some of that long-term stuff that you see and what opportunity you see on the margin, not only the mix, the high value, but also just more efficient operations? Thank you, guys.

Yeah, that's a great question, and good morning, Patrick. I'll cover the first, and then Bob will address your second question. But in regards to contract manufacturing, specifically the CGM manufacturing we have in Dublin, we have a number of customers we're engaged with today that laid stage discussions to identify what would be appropriate business to replace contracts the CGM business that we be exiting or finishing the current agreement until the end of June of 2026. So we feel good about the prospects. We do know that the economics of the future business, the expectations is to be stronger. than what we currently have in that facility. And secondarily, there will be a transition period in the second half of 2026. But usually what you'll find is as we extract the equipment for our previous customer and install new equipment, there's engineering fees that we incorporate into our revenue for contract manufacturing. So there will be revenues to replace the gap. And I won't say it's going to be one-to-one, but healthy revenues and margin. And we expect to have commercial operations up towards the end of 2026 if it is a pretty straightforward process. So I'm feeling good about the prospects. I know the conversations have been ongoing and very, very attractive business that we can put into that location.

Yeah, and Patrick, on your second element of the question around our supply network, I think one of the things that I would say, first off, is as we look at the footprint, our ability to be local for local is a big opportunity and advantage for us, for our customers. That being said, I think there's an opportunity in the medium and longer term to really optimize our footprint. And we're actually going through that analysis right now, given the investments that we've made to kind of not only level load and fill those factories with check transfers across, but also the ability to actually drive more efficiency within the existing footprint. And I think that there probably is more opportunity to consolidate certain areas of to drive even more efficiency as we go forward. That's not a 2026 element timeframe. That's more of a longer term, which actually makes me feel good that there's not only some near-term opportunities to drive cost efficiencies, but also longer-term opportunities.

Thank you. Our next question comes from Daniel Markowitz with Evercore ISI. Your line is open.

Hey, guys. Congrats on the sprint, and welcome, Bob. Thanks. Good to be here. Awesome. So, Eric and Bob, I had a two-parter for you. First, I'm curious on high-level headwinds and tailwinds, the high-value components in 2026, as you see it today. As I think about it, I see a few tailwinds. One is that you're comping the D-stock, especially in the first half. Second, you have GLP-1s growing off of a larger base. Third, Annex 1 is accelerating following the uptick in project growth through 2025. And then lastly, you have this unique one-off customer situation that I think was about 150 basis points, headwind to 25, but should benefit 26. So wrapping up on this first one, is there anything else I should be thinking about as a headwind on the other side or anything I'm missing? And then the second question, zooming in on one of those, on GLP-1 elastomer growth, It was mid-single-digit percent of sales in 2024, and now it's been climbing pretty steadily to now about 9% of total revs. That implies pretty healthy growth for GLP-1s in 2025. Is it right to think it's more than, like, 50% growth? And if so, what's causing that? Should we expect sustained over 20% growth over the next few years? Thank you, and sorry for being long-winded.

Yeah, I'll verify your math, Dan. We've been very pleased with the growth in GLP-1s. I'll turn it over to Eric to actually give some of the color commentary on what's been driving that. But I think it's important to understand that, you know, we expect that GLP-1s, while they may not be growing at that level, given the law of large numbers coming into next year, we are expecting very healthy growth in GLP-1s next year, given the kind of underlying market dynamics there. Eric? Yeah, that's an excellent question. So as you think about the key driver,

that geology ones will continue to grow. We're seeing even, as you think of a long-term with a potential introduction of orals into the equation, we do think the market itself It will be a healthy blend of injectables and orals. Injectables continue to be the larger portion, but the overall market continues to grow quite nicely based on what we are hearing from our customers, but also other sources. So we're very well positioned with GLP-1. Just remember, this is leveraging our high-value product manufacturing plants. We have five across the globe. So we do have scale. We do have the portfolio that supports our customers in that area. You commented about the timing of potential headwinds. I think the one area I would say is on Annex 1, while we have really good momentum in our contamination control strategy, working with our customers is really resonating. And as you know, this is really converting our standard products that are on drug molecules in commercial today to high-value products. And the economics for us is very attractive. As you know, our averages for standard products are, you know, margins in the 20 to 30% range, while the HPP is 60 plus percent. But the timing on how these projects roll off into commercial revenues do vary from client to client. And so I wouldn't say it's a headwind. It's more of a timing from quarter to quarter. But we're really optimistic and confident. in the pipeline that we're currently working on, but also know that we're only touching a fraction of the six billion components we believe is the market opportunity here. I think the other area is just, again, timing of new drug molecules approved in market. If you kind of look last year to this year, the number of approvals by the FDA might be a little bit lower for various reasons. But as we are planning with our customers of future launches, the timing might be a little bit uncertain on certain launches. Now, saying that, the growth of the levers that you mentioned earlier about biologics, biosimilars, GLP-1s, and NX-1 are very favorable, and those are the tailwinds that we're moving to the balance for this year and into next year.

Daniel, just maybe one other thing to follow up on your initial question around GLP-1s. We watch that very closely and feel that our growth is largely in line with the growth that the end market is seeing as well.

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

Thank you very much. And Bob, you might have addressed my question right there, but I have a follow-up on GLP-1s. It does seem like from the script data for Novo and Lilly, that you're growing a lot faster than the market is growing. I wonder if there's a way to reconcile that. Could there be a compounder element here? Is it the clinical trial participation you alluded to? Any thoughts would be appreciated. Thank you.

Yeah, Dan, you're touching on exactly the area. So if you think about what's starting to be an increase in vials, so therefore our stoppers and seals are not of factors when you think about our volumes and also the pipeline of new molecules being looked at and going through clinical. So there's other factors that we're working with several customers. And also there's a couple of geographies. There's an element around generics that we're also being able to support. So overall, I would say it's a little bit broader than just the Scripps data. of our two customers.

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

Hi. Good morning, everyone. And first, appreciate the increased detail and transparency on some of the disclosures this quarter. So, a two-parter for me. One, I just wanted to follow up on Annex 1. There were some updates earlier this year, and just curious how that's impacting customer decision-making and some of the conversions and if that's been a catalyst for some of the acceleration we're seeing. And then part two earlier in the prepare remarks, you talked about liquid handling in Dublin being about a 20 million opportunity plus or minus. Is that Is that sort of the peak opportunity, or is there room for growth there in that facility beyond 2026?

Yeah, Justin, thank you for that. First of all, I'll touch on the Dublin real quick. On the $20 million that we communicated, as we ramp up a new site, it does take time to get to full utilization. So I would consider this as early stages, and as we move into – 2027 and a little bit beyond, that's when we get into our peak volumes and revenues. So the $20 million is really just kind of the ramp-up stage. And then move through efficiencies through a few quarters, you'll start seeing the utilization significantly go up. So I would not look at $20 million as the peak revenues of that site for the drug handling. On the Annex 1, there are different factors. We do know that there are more conversations with the EU regulators with our customers as they are auditing and discussing about the regulations. Therefore, there is an interest to continue these projects at an accelerated pace. But again, as I mentioned earlier, there's a tremendous amount of opportunity of drug molecule that goes into Europe that we believe this is just really early stages. Out of the 6 billion components, it's a small fraction that we are currently converted to commercial at this time.

Thank you. Our next question comes from Larry Solo with CVS Securities. Your line is open.

great uh thanks uh good morning uh i echo the appreciation on the transparency and i also uh welcome bob um i guess just trying to just follow up on that just on the gross margin you know really strong this quarter just just curious if you guys are actually seeing and i think this has been part of the themes too just a an improvement in mix within hvp and you know getting more

uh towards the you know up and to the right until the nova pure and higher margin um hvp components are you seeing that dynamic continue as well yeah hey larry i appreciate the uh the feedback and uh to your question on gross margin yeah that certainly is a an element of it when you look at our gross margin uh despite the incentive fee we were actually up year on year 120 basis points that was up almost 300 basis points if you take that out kind of on a like-for-like basis, and really the proprietary business or HVP component business drove that. So what we're seeing is not only the investments that we made over the last couple of years being able to be filled in that capacity driving, and you can imagine with the fixed installed basis, the incremental margins are quite nice from that standpoint as it goes through the factory. But then as you're having these higher value products there, you're driving, you know, higher ASP products through the facilities. And I think, you know, you see that. That's a very positive mixed standpoint. The team has also done a very good job of driving down costs and driving up efficiencies. You know, if I think about scrap and our yields, Those are also areas of focus that the teams are really driving. And I think, as we talked about earlier, I think that we've got a multi-year opportunity from that standpoint. And then also, you know, one of the areas is around also being much more focused on some of the raw material input. We're building out capabilities in our sourcing organization, working closely with our supply chain, as well as, you know, streamlining some of the production traveling of some of our products before they get to customers. So there's a number of elements, I think, that are in the next several years that I feel that we have an opportunity to continue to drive that growth margin opportunity.

Thank you. Our next question comes from Doug Shankle with Wolf Research. Your line is open.

Good morning, and thank you for taking the questions. Two quick topics I want to touch on. One is just a question on Q4 guidance, and then one is on really visibility heading into next year. So on the fourth quarter, I want to confirm that you essentially bumped up guidance by the magnitude of the revenue beat, and if so, were there any timing dynamics in the third quarter that held you back from bumping up guidance more, or was this just, you know, trying to be conservative in a period of continued uncertainty? So that's the first topic. The second is risk and visibility as a topic. So, you know, part of the attraction for a long time of West for investors has, you know, has been that this has been a great sleep at night story, a steady compounder, You know, last year, you know, with that in mind, you know, I think the company and certainly the investment community were surprised by the roll-off of the incentive payments and drug delivery and also the changes in contract manufacturing. How would you characterize, you know, anything resembling that category of risk heading into year-end? I would guess you feel pretty good about it, but I just want to give you an opportunity to you know, kind of tell us, you know, we should all feel better about this getting back to being the Old West again.

Yeah, I'll start, Doug, and on the Q4 guidance, Don't read anything into that. We don't believe that there was any material pulled forward when we look at it. Actually, if you look at it on a two-year stack basis, Q4 is actually an acceleration. But there's also an element of prudence that – given the market dynamics outside, that we want to make sure that we feel good about that, and we do. And so we've got some good momentum there, and I'll just leave it at that. Maybe I'll start with the second piece and then turn it over to Eric as well. You know, I think this is an area that, you know, I'm focused on intently, and I don't want to declare victory just yet in terms of that, that we – but we do feel good about some of the trends. I would say we're committed to improving and providing more transparency, which we'll continue to do over time. But the market is still dynamic. I think we are improving our visibility, but – You know, the market still has some variables that we're working through our business planning process right now, and that's why we wanted to provide some puts and takes to what we know today for next year. And, you know, I think the long-term trends are positive. It's the pace of when we get back there. And I'll turn it over to Eric to maybe add anything.

Yeah, no, thanks, Bob. And, Doug, it's a great question because that's critical for historically West has been consistently, from a demand profile perspective, pretty consistent of the market, the injectable market space. uh we believe based on the work that we have been doing and bob did touch on this that going deeper in the different segments with clear accountability and ownership has given us better line of sight of our markets obviously engage with our customers getting closer to them which we observed during the pandemic period we needed to do more of uh and i'm confident we're making good headway and traction uh in that direction the airline market conditions continue to improve, considering where we were a while back. But your point is we are laser-focused on making sure we are reducing those risks and increasing visibility and also providing more of that lens as we engage in these conversations.

Thank you. Our next question comes from Mac eTalk with Stevens Inc. Your line is open.

Hey, good morning. I appreciate you taking the questions. Maybe just one on delivery devices, you know, relatively flat year-over-year excluding the incentive fee. And I think you highlighted some improving economics ahead of the automated line coming on in 2026. So can you just highlight some of the various aspects driving performance during the quarter and, uh, the variables that you're seeing on the top line of margins as well.

Thank you. Yeah, no, absolutely. Thanks for the question. When we look at the direct delivery device business, the area, looking at it holistically, the entire portfolio, we have administration systems in that category. We have Crystal Zenith and obviously injectable devices. devices like SmartDOS. And I'm really pleased with the progress we're going to have throughout the year for our Crystal Zenith and also our admin systems. The area of focus has been on SmartDOS to drive two levers with urgency. One is to drive down costs and improve efficiency. And the progress the team has made is on track with our expectations for this year. We're seeing improved margin performance or profitability quarter over quarter. There's more to come with the automation that we are going to be commercializing in early 2026. We're just going through the validation process as we speak. And we're confident that we'll be able to drive even more cost out of the product itself. The second area is continue to look at alternative options to create even more value with that product. And we will communicate once we can of the final decision, but we're making progress in both areas.

Yeah, and I would just add, Mac, on that, you know, if you look at it on a quarterly basis sequentially, it hit where we expected it to. So I feel good about that and that work that Eric just talked about, you know, we're looking at both of those paths with urgency and in focus. And so I feel good that, you know, each quarter the economics have improved in delivery devices, as we said in our remarks. And there's more room to go. But we're also making sure that we're looking at this for the long term and evaluating what's the best value for shareholders.

Thank you. Our next question comes from Matt LaRue with William Blair. Your line is open.

Hi. Good morning. Kind of a two-part question around your manufacturing network. After a couple of years of pressure on free cash flow and obviously an elevated CapEx spend for you, you've had a significant improvement in free cash this year as CapEx has normalized down to around 9%. So, Bob, you referenced a couple of times the opportunity for network optimization, but there's then the balance of obviously customers thinking about regionalization of manufacturing and some of the policy dynamics. and obviously still significant investment in HPP. So just as you think about maybe that balance of network optimization versus making sure you have capacity available for customers, you know, how are you thinking about the levels of CapEx needed to support growth? That'd be the first part. The second part is there's been a number of, you know, recent headlines around pharma tariffs and MFN. And I realize your business is tied to commercial volumes, not necessarily earlier stage R&D. But how tuned in are your customers to those headlines in terms of influencing investment decisions versus, you know, sort of the train has left the station in terms of, you know, regionalization of their manufacturing? Thanks for the question.

Yeah, Matt, thanks for the question. Let me start with the CapEx that we have spent. But you're absolutely correct. Our focus really is on the high-value product components with our five centers of excellence that we have, obviously in Asia, Europe, and U.S. Fortunately, over time, we have built the capacity and the capabilities to be able to support our global customers from multiple sites. So as you think about being more regionalized, we'll support our customers in all markets. We're very well positioned from an infrastructure perspective. You're correct, as volumes increase, we will need to layer in additional capital, but we do feel comfortable that we're going to be back to the 6% to 8% of sales corridor for CapEx, but heavily weighted towards the high-value product components part of our business. And, again, the concept of the Center of Excellence giving us that network capability, but also a more of a campus site perspective versus doing more greenfield. I'll talk a little briefly on the second question you posed, and I'll turn it over to Bob to add any comments. But you're right. That conversation is active with our customers in the sense of what can we do to support our customers to drive down costs to support them. One is continue to leverage our global network. So there are a few cases where we could do tech transfers. to move from one location to another geography to be more co-located with their end market. That's one opportunity that we are working with, but those do take around 12 to 18 months to complete and then to commercialize. But I also just want to comment, the products that we provide, the elastomer components that we provide, are critical to the drug molecule, and they are less than 1% of the cogs of the drug. And so, therefore, our focus is how can we help our customers drive better yields, and efficiencies of their fill-finish process by providing more of the HPP services. So in essence, we are working with our customers to provide additional services to improve the yield output for our customers. So it's an active dialogue, but for us, we're seeing less discussion about price but more about making sure we're balanced from a global manufacturing perspective. Bob?

Matt, I'll just add a couple of things. Obviously, that's one of the areas that's pretty dynamic when we talk about kind of the MFN here in the U.S. Just recently, we haven't seen any change in our customer buying behavior. That's something that we'll continue to watch. And on the other side, I actually think that that's a potential lift of an overhang so that they can now – you know, move forward. And then the investments here that we're seeing in the U.S., we are seeing that. We believe that's real. That's a multi-year kind of investment. But as we think about where we're talking about kind of level loading, we've made a lot of investment in the U.S. for the COVID capabilities and capacity a couple of years ago. And so we're working very closely with those, you know, as those investments customers are building out additional capacity in the U.S. about this tech transfer that Eric was just talking about. So I think we've got good relationships with those customers. and I think we're well-placed to be able to continue to invest. And I'll just want to reiterate what Eric said. You know, we do think that we're going to continue to drive down our capital spend as a percent of revenue, but disproportionately invest behind our highest growth opportunities, which is in HVP.

Thank you. Our next question comes from Tucker Remmers with Jefferies. Your line is open.

Good morning. Thanks for taking my question. I had another question on Annex 1. So you talked about 2% contribution this year from Annex 1 projects. Can you break down all that splits between those projects that are in a development or validation phase versus switches that have already been put in place and sort of hitting what I would call commercial production? Thank you.

Yeah, no, great question. I would say if we look at the entire, at the end of Q3, the number of open projects that we're currently working on and the number of projects that converted to revenues are less than 40% that have been converted since the duration of this project, or this move towards the annex one. So, it kind of gives you a feel of you know, as we ramp more new projects in, they're rolling off. And we did mention earlier that some projects could be three to four quarters, and a few others could be six to eight quarters. So it does depend on the scale of the project and the speed that customers want to convert.

Thank you. And our next question comes from Luke Sergott with Barclays. Your line is open.

Great. Thanks, guys. Just wanted to ask here about the capital allocation. First one, a hat tip to the transparency on the deck is beautiful. So given that you guys have like a pristine balance sheet right now, producing a lot of cash, margins going the right way, free cash flow seems to be picking back up. So update us on your capital allocation priorities. favoritism towards maybe a repo versus a more bolt-on M&A.

Hey, Luke, I appreciate the feedback. This is Bob. And you're hitting on one of the key priorities that I've got in talking with Eric and the rest of the team and actually just spoke with our board about this. I think there's an opportunity for us to better define and establish a capital policy and And to your point, with being blessed with such a strong balance sheet and our cash flows to be more active in using those cash flows to really drive the business. And so what I would say is stay tuned, but it is high on the list of opportunities that will help continue to grow the business over time.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to John Sweeney for any further remarks.

Thank you all very much for joining us today on the call. An online archive is available at our website at bestpharma.com in the investor relations section. That concludes the call. Thank you very much, everybody, and have a great day.

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