West Pharmaceutical Services, Inc. (WST) Earnings Call Transcript & Summary

Good morning, rather good afternoon. This is Paul Knight, the analyst covering life science technology at KeyBanc. Glad to have Bernard Birkett, CFO; and John Sweeney, Investor Relations head to talk about the business and the industry.

With that, Bernard, I guess I would open it up with the destock situation in the world? How do you feel about that right now?

Yes. Paul, thanks for the invite us to talk here today. I appreciate it. Yes, on destocking, this has been a challenging one to predict over the last 12 to 18 months. What we have been seeing as we went through the back end of 2024, we continue to see destocking in our generics business and also within our biologics market units. That's something that we called out. We said it was going to take place. I think it's materialized pretty much in line with our expectations. And what we've seen in 2024 is our pharma market unit actually come out of destocking, and we're starting to see some growth there. It was the first one to experience destocking when all of this began. As we roll into 2025, we would expect to see continued destocking within our generics market units, and that's really around a couple of specific customers and some of the larger ones. And we're seeing some bleed into Q1 of biologics destocking. But again, we have to see how that plays out. I think the more experience we've got with destocking over the last 12 to 18 months, I think it's kind of making us a little bit more cautious in how we approach this from my perspective. I think we've got to see how things play out over the next couple of quarters. We got to see demand returning to normal and get a level of sustainability and consistency around that. But it is playing out, as I said, pretty close to what we have expected over the last number of quarters. But again, it has been hard to predict. So hopefully, we're getting closer to the end.

Yes. I think a vial producer in this conference has said demand dropped 15%. So it was pretty harsh setback over a 2-year period.

Yes, it was. And I think it for us, and for the sector, I think the length of it and the depth of it has been a little bit surprising. And it encourages us to go back, and we've got to figure out, okay, why is that the case and understand what are the drivers. Part of it for us was that our lead times had extended so much during COVID, but then shortly wouldn't trying to respond to that, that it caused unusual things within the supply chain and how customers were ordering the quantities and the timing of that. We are seeing that normalize now. We have greatly reduced our lead times across many different product offerings through layering in extra capacity through our HVP sites. Also with customer demand normalizing, it has allowed us to get back to pre-2020 lead times, and that will help us to respond to the market better and hopefully avoid something like this in the future, or at least manage it in a different way.

Yes. Yes. And then the positive wave coming seems to be GLP-1s. Can you talk about where you are with the opening and progression in Michigan and also in Dublin?

Yes. So there's -- GLP-1s is one of the 3 major drivers for our HVP component business. And it's also one of the main contributors to the growth around Contract Manufacturing. So what we are seeing in 2025 is a step-up in GLP on growth within our components. Our HVP components segment, which is very positive to see. And we've layered in the capacity to be able to support that over the last number of years. And now we're starting to see traction with that. On the Contract Manufacturing side, Grand Rapids is ramping as we speak, and we'll see that continue as we get through 2025. And then in Dublin, we're seeing the initial phases of the ramp of that facility that will continue through 2025, particularly around auto-injectors and pens. And then as we get later into 2025, we will start to see some impact with drug handling, and then see the full -- greater impact of that in 2026. So it is ramping those 2 facilities. Grand Rapids is a little bit more fast than Dublin in that process at this stage. And Dublin will see improve as we go through the year.

But is -- Dublin will -- is Dublin recognizing revenue yet. I think -- or is that more like starting in 2H, Bernard?

It will start. We'll see a small amount in H1. But really the greater impact, obviously, as we ramp will be in 2H. And you can see that on the growth trajectory and the cadence within Contract Manufacturing. So we would see Contract Manufacturing growing low single digits for 2025. First half of the year, we would see revenues and profitability will be down. And then that rebound in the second half of the year as those -- as that Dublin capacity starts to get utilized. And so you see an improvement in revenues and margin in H2. I think in around GLP-1 on components, probably a little bit more consistent throughout the year.

Okay. And CapEx has been running at around $370 million, $380 million. And it's fair to say maintenance is around $70 million annually?

Yes. So the CapEx in 2025, we've targeted to be around that $275 million mark. So a pretty sizable step down from the investments that were made in 2024. And that's primarily to finish off some of the larger projects that are in flow at the moment. And then as we progress past 2025, we will be targeting to get back to CapEx spend of 6% to 8% of revenues, where need is. There may be some years where we may not need to do that given the capacity that we have installed at the moment, and our utilization rates are -- given destocking are lower than what we would typically experience so we have room to grow. We have a number of growth drivers that we have to support over the next number of years. But with the CapEx investments that we've made pre-2025, we reckon we're in pretty good position to be able to support Annex 1, GLP-1 from a containment perspective and the growth within biologics.

And the Annex 1 regulations, those were really concluded what, a year ago, and it's now you're starting to see more and more impact from that...

Yes. I believe it was around mid-2023 -- '24, yes, late 2023. And we are seeing a lot more traction around Annex 1. The number of projects we're working on is greater than 200 projects at this point. That number continues to grow. We're seeing some revenue impact in 2025 projects that had started a couple of years ago. Again, it's going to be a small part of our revenue within 25%. But again, expecting that to grow over the next number of years as customers make that transition. It's predominantly affecting Europe at the moment. So we've kind of sized potentially that the number of units that could potentially be impact us by that. However, some customers will be looking at make the buy decisions, whether they do it themselves depending on scale or whether they'll come to somebody like West to provide that uptick in taking a standard product, moving into HVP, which would typically encompass pharma wash, vision inspection, sterilization, some packaging and pour bags. So there are a number of elements that play into it. And it's like picking from a suite of products, you pick the ones you need that our offerings, they may not pick everything. But yes, now we're starting to see more traction in that space. My sense is it's going to take a number of years for it to build out given that, today, there's no drop that date as to when it has to be complied with. So you have some customers who are more proactive in how they look at these things. They've been working on it for a number of years. They're making the conversions. Then there are some who probably wait until much later in the process before they convert, and then there's some in the middle. So a big opportunity for us, again, the capacity has been put in place to be able to support this. We have the right level of analytical testing, documentation and filing support to help our customers transition. And so we'll just have to see how that plays out over the next number of years. And then that feeds into the growth algorithm that we have out there for the long-term constitute.

And -- yes -- obviously, it translates to more high-value products and clearly, the margin profile is what for HVP at this time?

Yes, it could be -- like these are typically standard products and your -- the margins are like 20% plus. When they transfer to HVP, the margins could be 40%, 50%, 60%. Again, it depends on the configuration that the customer chooses and how many of those HVP processes that they add. So again, from a revenue perspective, strong growth driver feeds into the 7% to 9% over the longer term and also supports that 100 basis points operating margin expansion over the next number of years. And again, depending on where customers land, it could be stronger. But again, we have to -- again have to see how it plays out. I think it's early stages.

Okay. And then in this era of GLP-1s, our contracts different, meaning are they contracting out and Contract Manufacturing for 3 years, 1 year? Do you specify -- is there a time that you can talk to?

On the contracts regarding Contract Manufacturing, you're typically looking at 5 to 7 years. It would be very rare that somebody would enter into a contract in that business for a year, given the infrastructure that has to be put in place, both by West as a contract manufacturer and by our customer, who -- they put in a lot of automated -- all of the automation and assembly line. So it requires investment by both parties upfront. So typically, the contracts run 5 to 7 years. In reality, a lot of our contracts run 10 years-plus, and some we've had it -- run much longer than that. So it's not a short-term investment.

Yes. Yes. And the price escalators are based on what, just raw material costs, et cetera?

Yes. So if a -- it's -- from a competitive perspective, I want to be careful what I say, but there are escalators across the cost base as to what it takes to produce the product. So in build protection, if your costs are increasing within a certain parameters.

Okay. And Lilly has announced plans to invest $27 billion in 4 sites. I know you've mentioned that you've signed 1 of 2 GLP-1 players. Will you need to maybe keep that CapEx at a little higher than the $275 million run rate?

Based on the capital that we have deployed over the last number of years, and based on the level of automation we have around some of these high-running products, I would be targeting still around that 6% to 8% of revenues. However, if something did happen where we had to flex and add in more capacity based on a pretty solid growth projection, yes, we have the ability to do that. But again, based on what we have in place today, we have the capacity to support old customers. So, one, we have an agreement where we are the supplier; the second one, we're the #1 supplier, and I know they are doing a second sourcing exercise, which is ongoing, but we do provide both GLP-1 providers at this point.

Okay. What's the latest on the Corning joint venture?

Yes. So we're making a lot of progress with integrated systems. You can see from our step-up in R&D in 2025 that we -- we're continuing to develop that product, develop that offering. You have to cut -- we go to market in '26?

'26.

In '26, we'll have the first offerings. Yes. So -- we're making a lot of progress. Project is on track. What I do think is it's going to -- it will take time for it to become a material part of West. It'll be a number of years.

Yes.

[indiscernible] numbers. However, it's the next step in that HVP offering to customers providing a full solution to them.

We had a call with Samsung Biologics the other day, and we also noticed that you've, what, added to people in Korea as well. Are you able to win Samsung business? Or can you talk to that?

We don't talk specifically about specific customers. It's not our practice to call them out. But we are working with the vast majority of the major players. Our operation in Korea is more sales and distribution based. We don't have manufacturing there. So our manufacturing for that region will be in Singapore.

Okay. What other CapEx projects are going on in the world besides Dublin and Michigan?

We're finishing an expansion in Jersey Shore, and we have some work that has to be done in our French site in Le Nouvion. And they will be the major ones at this point. And once we get through these larger projects, Dublin specifically, Grand Rapids is less and then the Jersey Shore, we have to finish out some capital expansion there. Then the rest are kind of mainly more regular type capital investments. The larger projects -- what, I would expect to see those kind of slow down over the next year or 2 based on what we've already done. And I think it's important in a lot of aspects to have the capacity in place before the demand comes. Because what we don't want to find ourselves in a position like we did in COVID, where it becomes so difficult to respond. We have to start prioritizing customers and our lead times go way out, and then we have this problem with stocking, destocking. That's something that we're actively trying to avoid. So in our business, because it takes 12, 24 months plus to put the capacity in place, we've learned a lot from the past that in certain areas, we do need to have that in place before the demand comes. There may be a time lag as to when it arrives. But for us to respond in the most efficient way possible, we have to be always looking ahead of that curve and have some level of investment going on.

Do you think the -- we've seen a record number of biologic approvals in the last 2 years in '23, '24. Are you seeing that in your business?

Yes, we're still seeing very strong and participation rates around biologics, clinical Phase I and II. And that funnel remains very strong for us. And that's important because that feeds biologics over the next number of years. So we haven't seen any shift in that from a negative perspective. Again, participation rate is high, and we'll continue to support whoever comes to market with the drugs.

Yes. One of the interesting things about a visit to your facilities where you are is getting an understanding of what's being tested in stability trials like cell there -- cell and gene therapies. I think cell therapies maybe were being tested when I was there years ago. But what's -- what are you seeing new? Is it antibody-drug conjugates now that customers are starting to move more and more into?

I think on the -- in general, on cell and gene, when we look at it, it's a different type of business model for us because cell and gene is much lower volumes. So it's really looking at how do we support that market, what services do we need to have in place to be able to further develop that because if it's really low volume, it doesn't really impact our business too much. So it's look -- we're currently looking at how do we support that market in different ways.

Yes.

And I think that's where -- right now, we're looking at biologics, higher volumes, biosimilars, higher volumes. Cell and gene is different and how we approach that will be different.

Okay. I would guess that antibody drug conjugates were being more, I guess, towards, tox is probably not the right word, but it seems to be a perfect fit for your high-value products, right?

Yes. Any drug where there's a high level of complexity fits the high-value product portfolio and particularly at the higher end. So really targeting NovaPure for supporting anything like that coming to market. So that's [indiscernible] would be.

And then in Contract Manufacturing, obviously, you've got the runoff going on glucose monitoring. We've been to those factories with you. That factory, how easy or difficult is it to convert to a different type of contract manufactured product, Bernard?

Yes. So typically for Contract Manufacturing, what we supply is really the footprint, i.e. the injection molding machines and the resources to run those. And then our customer actually provides the automation lines that the products will be run through and then the packaging lines. So when a customer is exiting, they take out all of their equipment and they free up that space. Typically, the business that we're competing for were able to reuse the molding equipment that we have in-house. Now that the numbers may be slightly different, but they're fungible. We can move those around our network. So there is some work to be done given configuration and there may be some facility work, but it's relatively quickly to get -- that can be done relatively quickly. The space in Dublin, and given the track record of our Dublin facilities, is premium space within Contract Manufacturing. We're already having discussions about who would occupy that space, what we will put in there? Again, it has to meet the return criteria that we have for us to participate in that business. But I think, as you've seen that with the Building 3 that we put in place in Dublin, we had commitments for that footprint before the building was even finished.

Yes.

So there's demand there for that footprint. And so we're working through a number of different opportunities. And when we're in a position to be able to communicate what we've done in that, yes, we'll be clear on that, but there is demand for that space. And then on the exit within our Phoenix and our Arizona facilities based on the CGM exit there, that's an area where we're looking at a number of drug handling projects with a number of customers. It's not just one, and they're non -- it's not GLP-1 related. So that's an area of the business where we're looking to expand and build on, again, as we look at how do we change the economic profile of contract manufacturing and improve the returns in that business.

And the expansion in Dublin Building 3, do you -- what's the size of that in terms of square meters or feet versus what was there already?

It's probably about 160,000 square feet. It's -- it is probably the largest facility we have of the 3 that we have in Dublin. I have to go back and check and see what the other ones were exactly, but it is probably our largest contract manufacturing facility.

Okay. And then I know Waterford finished construction quite a while ago. The factory looked very busy a year ago. Do you need to put another footprint down in Waterford?

I would love to say yes on many aspects, but, as of today, I don't see us doing a major expansion there in the next, say, 12, 24 months. We are doing a lot of the activity within Waterford has increased considerably over the last number of years. What it's really utilizing the space that we have, driving more efficiencies is what we're targeting at the moment rather than adding more space. Again, if there's a specific request and the growth is there, and we have commitments around that we can do it. But, yes, nothing in the next 12 to 24 months.

Yes. Yes. Okay. And I guess the last question would be regarding the growth rate that you've had historically, you've been targeting kind of a long-term contract, I believe 7% to 8%, Bernard?

7% to 9%.

7% to 9%, sorry. With the advent of GLP-1s, why wouldn't that be going higher?

Yes. Well, you can -- well, I'll just be open with you. People ask, well, why isn't higher with GLP-1s and Annex 1 and biologics.

Yes. Yes.

And what I say on that is like we have to see these materials, these revenues materialize. And these markets are evolving. Annex 1 is evolving. We're just starting to get early traction. We believe it's going to be a strong growth driver, but I would say, hey, that feeds into the 7% to 9%, GLP-1 feeds it to 7% to 9% because you're growing on those numbers every year. It's not as if you don't count those in your growth. And then strong growth with around biologics. So what I -- how I would frame it is that there's a lot of support just for 7% to 9% construct.

Yes.

If the opportunities are greater than that, we have the capacity in place to be able to deliver on those and to support them. And I'd hope they are, but like 7% to 9% organically, and to do it over year-over-year-over-year, if you do need a number of growth drivers to support that.

Yes.

And again, I'll have to hit together, and you got to get the timing right. So that's how I would frame it. And if we do better, great, we'll take it. And...

Yes.

We have the ability to do that. But we're also growing 7% to 9% of a much bigger number.

Yes.

It's not the same as it was 5 years ago. So that's how I would frame it.

Great. Good. Well, thank you so much for your time today. Good luck with these. I know you're doing more meetings, and I appreciate that.

Thank you.

Thank you, Paul.

Okay. Talk soon.