West Pharmaceutical Services, Inc. ($WST)

Thanks for joining us for the West management presentation. My name is Matt Larew. I cover West here at William Blair. Pleased to be joined this morning by CEO -- afternoon -- by CEO, Eric Green; CFO, Bob McMahon; and John Sweeney from Investor Relations. A couple of things to mention. First, the breakout sessions and Maher upstairs, if you want to join us, second for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. Finally, as many of you may know, Eric is retiring in August. And Eric, you've been a loyal attendee at our conference over the many years. So I just want to thank you for always taking time. to come visit with us in Chicago and wish you the best in the next chapter of life. So again, very pleased to have West here, and I'll turn it over to Eric.

All right. Good afternoon, everybody. Thank you, Matt, for the introduction. And it's a pleasure being here. We had excellent one-on-one meetings all morning and afternoon and the session but also Q&A following. Before we get started, I just want to -- I'm sure you can get this to work. There we go. So I want to reference the forward-looking statements also located at our website, westpharma.com. You can find the under Investor Relations, this particular statement is published. Also, the full presentation is available. A lot to talk about West. For some of you, it's probably a new story. So I do want to talk about when you think about the markets that we serve, it's -- the health care market is an attractive market to be in, in the space that we play in is the injectable medicines. It's a very attractive, high-growth area. One of the subsegment of growth on injectable medicines is the biologics, which we have a very strong participation rate in. The 5 things I want to talk about today are listed on this chart here about the investment thesis of West. The second is around the moat of the business. As you think about the regulatory barriers, the quality, the scale, the complexity, long-term duration of relationships with customers over the decades that West has enjoyed with our customers across the globe. The third key area we'll focus on is really the thesis around high-value product components growth. It's really delivering the 7% to 9% organic growth rate long term with margin expansion, would drive the key drivers talk about one is around the biologics and biosimilars. We're going to talk about the GLP-1s that West participates on, and the third is around the regulatory change around higher-quality products to support our customers on the journey of European Annex 1. The fourth area I want to talk about is on the management team has been rebuild of the executive leadership team over the last 18 to 24 months. I know you'll notice a new faces on lines, and we'll talk further about additional changes, especially the recent announcement last night. And the last is around our strong cash flow. I'm really proud about how we have built up the cash generation engine of West and also the capital deployment under Bob's leadership that we are deploying here at West going forward. I want to start with a little bit about who we are at West. So we produce over 41 billion components a year. And it's really broken out into 3 key areas. I talked about high-value products and standard components. These are what you'll find in injectable medicines around stoppers and plungers. Secondly is around delivery devices. These are auto-injectors, wearables that you'll find with more complex drug molecules being delivered to patients across the globe. And the third is less than 20% of our business is what we call West Vantage. It's our contract manufacturing. We will produce pens and auto-injectors in that particular unit. We service the global pharmaceutical and biotech industry and all around the injectable medicines space. And we touch all therapeutic classes, and we're basically agnostic to any particular drug in the marketplace. Our current market share is roughly over 70%. In the biologics space, we're on -- we participate in about 90-plus percent of all new approvals in the marketplace with biologics and biosimilars. Why does this matter? We have a meaningful impact in health care. The purpose of our organization, the culture is make impact on patient lives an on delivering critical products for injectable medicines across the globe. We are the #1 provider of primary containment in the injectable medicine space. We have a diverse portfolio. I mean when you look at the portfolio of geography, products and markets we serve, over 55% of our business is outside the United States. Our product portfolio consists of high-value products of delivery devices and also of components is roughly around 60% of our business. And then the markets we serve, the largest market we serve is the biologics market is about 40%. And with 26 global manufacturing locations across the globe, we're touching approximately about 100 million patients a day with the products that we are using. This favorable macro trends that are supporting the growth, not just in the near term, but the long-term growth of West. Think about -- we talk about the injectable medicine space, very attractive space to play in. When you think about the subsegment within the injectable medicine space, the fastest-growing area is biologics. And the majority of the approvals are around the biologic molecules. And the third is our customers continue to invest in research and development to develop new discoveries and innovations to advance therapeutics drug molecules, which is driving towards the highest end or high-value product drug category products to build support. The regulatory changes are also a key macro trend for West, as regulatory requirements and quality and safety for our customers and the patients continue to be on the rise. And then lastly is a lot of our customers are now near-shoring onshoring their manufacturing capabilities. So it's important that our 26 manufacturing sites across the globe are co-located with our customers to be able to support their needs on a daily basis. It's a very resilient, durable business model that we have developed over the years. As you think about, there's really 5 key areas of West with our customers. Number one is when they select a product to be used in the primary containment, this is pointing towards a drug master file when they're filing. So the durability and the stickiness of the business with our customers is very long term. As our customers have more complex molecules, there's more risk around the compliance, and we're on to support our customers through risk mitigation and provide them with high-value products around the more complex therapies. The growth accelerators of the business continues to -- very long term, we talk about biologics, talking about Annex 1, GLP-1s and also our capacity expansion to be able to stay ahead of the demands of our customers. And these are very long reoccurring revenues. Once you're on the drug molecule for the most part, you're on the duration of the drug molecule in the marketplace, it could be 10 to 30 years of duration. This all drives sustainable growth with of top line but also margin expansion. I want to first talk about one of the key growth strategies of the business. It's just around the biologics and biosimilars. It's one of the fastest-growing areas of new molecules being approved in health care. Our participation rate, as mentioned earlier is greater than 90% on both biologics and biosimilars. This tends to use the highest and high-value products. FluroTec, NovaPure, those product portfolios are used in -- to support our customers for the commercial launch of new molecules in the marketplace. We continue to grow the HVP components. This drives higher ASP and natural mix shift margin expansion for the company. And this is an area -- as you think about the number of new molecules in the pipeline continues to be more around the large molecules, West is very well positioned to be able to capture that growth going forward. The second area of growth, long macro trends and growth strategy for West is around the GLP-1s injectable space. We participate on most, all the GLP-1s in the marketplace and multiple modalities, whether it's vials, prefilled syringes, auto-injectors and also pens using our elastomer components. And also in our contract manufacturing business, West Vantage, we're able to manufacture the auto-injector and also pens on behalf of our customers. Today, the business represents about 18% of the total sales of West. About 10% of that is in our elastomer components and 8% is in our West Vantage, very well positioned, fast-growing area of the market, and we're diversified across all drug molecules. What's fascinating about the GLP-1s also is that there's new biosimilars being launched. And our participation on those new biosimilars in certain geographies is very high. We also see new indications and also expansion of the GLP-1s as markets are opening up because of price reductions and also accessibility and availability for patients. And therefore, we are really depending upon the volume supporting our customers across the globe. The third area of growth is really around Annex 1 regulations, and this is fueling our HVP components. So let me frame this up from a demand perspective. As I mentioned, we produced 41 billion components a year, of which if you take the West Vantage products out of that equation, proprietary is roughly around 35 billion, 36 billion components a year. Out of that, if you take the HVD components out, you're down to about 25 billion components. Right now with the Annex 1 regulations, which is really heavily focused in the European market, as we feel there's about 6 billion of those components that we consider a product can be converted to high-value products components in the marketplace. We're in early innings with this transition. Roughly around 15% of that 6 billion we've already converted from projects into commercialized product. I think when you also think about the opportunity outside of Europe, we're seeing more demand in discussions with our customers of having similar capabilities of upgrading from standard to high-value products in the United States and other mature markets. We see this as an opportunity to continue to deliver at least 200 basis points of growth on top of the total revenue of West. And the opportunity long term, this is a multiyear opportunity for the company to support our customers. And the last area of investment growth strategy is around capacity and utilization of our HVP plants. We have 5 plants strategically placed in the U.S., Europe and Asia to be able to support our customers and be co-located to their end markets that they are looking to serve long term. These sites are able to support the growth drivers around the biologics, around the Annex 1, around GLP-1s, with capacity to continue to expand. A lot of the capacity that we put in place for COVID is fungible into these growth drivers as we see today. The additional capacity that we need to put in to support the growth is around HVP processing, leveraging the existing footprint alive additional growth around HVP. These sites, we believe, in aggregate, has about 60% capacity utilization. 1 plant that we have been working, very focused on in Eschweiler, Germany to continue to drive more efficiency and productivity. And we saw ourselves cross that line at the end of Q1, built to support the balance of supply and demand for HVP components in Europe. We break this out from a revenue and also a growth, top line growth opportunity, the HVP components is the fastest-growing opportunity for West. It's roughly 47% of our business. It's growing double digits. First quarter, we obviously grew faster than that is around 18%. And also, the HVP delivery device is about 13% of the total revenues, and that's growing at mid-single digits. The standard packaging business is the fuel or the pool of opportunity as we think about transferring from standard to HVP due to Annex 1 regulations. And therefore, that is about a low single-digit grower, but we'll see that continue to transfer into the HVP components, and the balance is 20% -- or less than 20% is our West Vantage. The runway of HVP components is very attractive. In 2025, about 47% of our business was HVP components. As you think about the number of units that we are producing is roughly 27% of proprietary products are actually HVP components. Said differently, as we convert more into HVP, we have tremendous runway of growth and double digits growth for the components. And we do believe this is a multiyear opportunity for West to continue to expand the HVP. This not only drives the top line growth but also gives us the ability to achieve our 100 basis points plus operating margin expansion year-over-year. This is the leadership team in place today. Last night, we had an exciting announcement to announce the new COO of West that will start at the end of August, August 31. Michel Lagarde will -- he is from the last role he had as COO at Thermo Fisher. Before that, he was at Patheon truly understands the space around CDMO pharma services, which fits very well with where we are headed at West and built to support our customers more of value creation. Could be excited about his ability to scale complexity as he transfers into West as the new CEO. We have several new leaders that you see here with the executive team, obviously, Bob McMahon here with me today as the CFO of the company and also a number of new additions to the organization. So as you think about how to scale for the next growth trajectory for West, this team is in place to give us the ability to achieve those aspirations. The long-term construct of our organization is 7% to 9% organic top line growth. while also expanding margins by 100 basis points per annum. The major driver of the margin expansion really is around mix shift. There are other opportunities that we're in [indiscernible] through productivity gains, utilization of our facilities and assets and also price that we're able to pass on to our customers. We believe that they will continue to generate very strong double-digit EPS growth and ultimately result in a very strong balance sheet, which I want to talk a little bit further on. The strong cash growth generation that we saw last year, strong double digits of 16%, which translated with strong free cash flow as we are looking at capital expenditures going forward between 6% to 8%. Historically, during COVID time period, we were roughly between 10% to 13%. And we believe the assets we have in place and the utilization and the ability to leverage those assets more effectively going forward with the growth that we expect, we do believe we'll be able to stay within the 6% to 8% corridor. Disproportionate of our capital investments will be around our HVP components more so than other parts of our business as higher returns, obviously, faster return of our investments and also to be able to support the key growth drivers that we just talked about in great detail. Turning our attention a little bit. Recently, the Q1 results, very strong results driven across the entire enterprise. The top line growth was roughly around 15% organic growth rate. The leader of that growth was HVP components, as both GLP-1s, roughly a little over 40% growth. And also the non-GLP-1s was high teens, about 18% growth in Q1. Again, what drove the non-GLP-1 growth was the biologics and the Annex 1 conversions and the projects we're working out with our customers. This drove very strong HVP growth drove a healthy mix shift, about 350 basis points of operating margin expansion, and obviously, roughly around 47% EPS growth. Across the board, the business continues to produce very good results in Q1. And we anticipate continued growth as we have give guidance in that, in the Q1 call. To capitalize on the key growth drivers across our business. What's exciting about the biologics is that we continue to see the win rate of greater than 90%, both in biologics and biosimilars. We do have the capacity capabilities in our HVP manufacturing sites will support that growth. The Annex 1, the number of projects we had, we're about 700 projects that good portion that were converted to commercialize revenue, and that continues to grow, and that will continue to drive about 200 basis points of top line growth across the whole organization. And then we have very strong GLP-1 growth opportunities, not just in our components business, but also in our West Vantage growth contract manufacturing across the globe. And we're levering our capacity expansion to be able to drive service, quality and scale for our customers across the globe. Our guidance for Q2 and also the full year is now a top line growth of about 7% to 9% growth, driving of healthy margin expansion implied about 150 basis of operating margin expansion and obviously, healthy EPS growth throughout 2026. So to summarize on the growth drivers and the investment theme of West, the fastest-growing part of health care in the injectable medicine space, we participate as the #1 primary containment provider for global drug companies across the globe. The moat to run the business is quite significant. It continues to get enlarged, the regulatories, the quality barriers, the scale, the complexity, able to be co-located with our customers all attribute to why the moat continues to allow us to be the key leader in the primary packaging containment for injectable medicines. The growth drivers we talked about, the biologics, the Annex 1, GLP-1s, all these macro trend, multiyear growth drivers are fuel in the higher end of our portfolio of growth, not just near term but also long term. We have a very strong management team in place and it's been fueled by the recent addition of Michel that which would be in 3 months. And more importantly, the strong balance sheet and the cash generation that this business will continue to generate for a number of years to come is very impressive. It's a very overall business that is driving every day to build impact patient lives. And what we're very proud of at West, and we're excited about the future. And I appreciate your time. We look forward to the Q&A session following this presentation. So thank you very much.

I think we're good. Guys way with a few minutes. So if anybody wants to come up and chat with Eric and before we head upstairs, we'll call conference. Welcome to come out as some questions with a management.

Great. Excellent. Thank you.

Okay. Thank you.