West Pharmaceutical Services Q1 2023 Earnings Report

West Pharmaceutical Services EPS Results

• Actual EPS: $1.98
• Consensus EPS: $1.67
• Beat/Miss: Beat by +$0.31
• One Year Ago EPS: $2.30

West Pharmaceutical Services Revenue Results

• Actual Revenue: $716.60 million
• Expected Revenue: $697.28 million
• Beat/Miss: Beat by +$19.32 million
• YoY Revenue Growth: -0.50%

West Pharmaceutical Services Announcement Details

• Quarter: Q1 2023
• Date: 4/27/2023
• Time: Before Market Opens
• Conference Call Date: Thursday, April 27, 2023
• Conference Call Time: 9:00AM ET

West Pharmaceutical Services (NYSE:WST) is a global developer and manufacturer of components, systems and services that enable the containment and delivery of injectable drugs. The company focuses on high-quality packaging and delivery solutions for the pharmaceutical and biotech industries, producing primary drug packaging components and specialized drug delivery devices used for vaccines, biologics and other injectable therapies. West is known for its elastomeric closures, seals and polymer components that maintain sterility and compatibility with sensitive drug formulations.

In addition to component manufacturing, West provides engineered delivery systems and support services across the product lifecycle. Its offerings include stoppers and seals, custom-molded polymer parts, prefillable syringe systems and a range of delivery device technologies for self-administration. The company also offers development assistance, analytical testing, regulatory support and contract manufacturing, helping customers take complex parenteral products from design through commercial production while meeting stringent quality and compliance requirements.

West serves a global customer base that includes large pharmaceutical companies, emerging biotech firms and contract development and manufacturing organizations. The company operates manufacturing, research and development, and quality centers across multiple regions to support international supply chains and regulatory markets in North America, Europe, Asia-Pacific and Latin America. With an emphasis on innovation and quality control, West positions itself as a partner for customers seeking reliable containment and delivery solutions for advanced injectable therapies.

West Pharmaceutical Services Q1 2023 Earnings Call Transcript

Key Takeaways

• In Q1, West reported organic sales growth of 2.3% (high-teens excluding COVID) and raised its full-year net sales and adjusted EPS guidance while maintaining a 3–4% organic growth outlook.
• Excluding COVID vaccine sales, the Biologics market unit grew double-digits, and both generics and pharma segments achieved strong double-digit organic growth alongside robust contract manufacturing demand.
• The company is investing in HVP capacity expansion, including a new R&D lab in Radnor, PA, and additional plunger and finishing equipment installations to come online in 2023–2024.
• Q1 gross profit margins declined on a mix shift away from COVID-related products and inflationary headwinds, leading to a 3.4-point drop in adjusted operating margin to 23% and a 13.9% EPS decrease.
• West continues bolstering its ESG profile through awards for sustainable packaging and a partnership with the Philadelphia Eagles, with more details in its upcoming Corporate Responsibility report.

Presentation

[Quintin Lai, VP of Corporate Development, Strategy, and Investor Relations at West Pharmaceutical Services]

-three conference call. We issued our financial results this morning, and the release has been posted in the investor section on the company's website located at westpharma.com. This morning, Eric Green and Bernard Birkett will review our financial results, provide an update on our business, and present an update on our financial outlook for the full year 2023. There's a slide presentation that accompanies today's call, and a copy of that presentation is available on the investor section of our website. On slide four is our safe harbor statement. Statements made by the management on the call, on this call and in 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.

[Quintin Lai, VP of Corporate Development, Strategy, and Investor Relations at West Pharmaceutical Services]

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 to which it is subject, including our 10-K, 10-Q, and 8-K reports. During today's call, management will make reference to 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 most comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I now turn the call over to our CEO, Eric Green. Eric?

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Great. Thank you, Quintin, and good morning, everyone. Thanks for joining us today. We will start on slide five. On April 14th, West turned 100 years old. This is a major milestone that we're very proud of. Over the course of our 100-year history, the West name has come to mean so much to so many people. I would like to recognize our founder, Herman O. West, and the past generations of leadership that have built West to who we are today. In addition, I want to especially thank our 10,000+ team members who are motivated by our purpose of improving patient lives and making a difference in the communities in which we work and live. Moving to slide six. I am pleased to report that we delivered a solid first quarter. This was driven by overall organic sales growth of over 2%.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Excluding COVID-19, our base organic sales grew high teens. Our end markets remain stable, even in this uncertain macroeconomic environment. As expected, we saw a drop in COVID-19-related sales compared to last year. Our biologics market unit, excluding COVID, again grew double digits, and we expect this trend to continue for the rest of the year. With a focus on reprioritization of longer lead time components, our generics and pharma market units delivered an especially strong quarter of double-digit organic growth. Our contract manufacturing had solid growth while delivering of components for injection-related devices. This overall performance is a result of our team members across the globe as they remain focused on our strategic initiative of execute, innovate, and grow. The resiliency of the business continues to be a reflection of our team members, and I want to acknowledge these efforts and say thank you.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Turning to slide seven. In addition to our financial performance, there were several other significant accomplishments in our quarter. I would like to highlight a few. In February, we opened our new R&D lab in Radnor, Pennsylvania. This investment supports our capability enhancements while meeting the growing needs of customers in the changing regulatory environment across the globe. The lab's applied research will include containment and systems for advanced therapies and biomaterials, along with advanced design and engineering for drug delivery. In addition, the lab will also test and develop elastomer-glass systems, and the work done here will support our future R&D ambitions for new containment and packaging solutions. Our product innovations have been recognized with several notable awards, including the Best Technologies Award at INTERPHEX for our West Ready Pack with Corning's Valor ready-to-use vials.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

As we continue to make tremendous stride in ESG, we have announced a sustainability partnership with the Philadelphia Eagles, who are recognized as environmental stewards across all areas of their business. We look forward to sharing more detail on our ESG efforts in our corporate responsibility report to be published shortly. Shifting to slide eight. Our robust capital investments through expansions and optimizing productivity across our global operations remain on track. We continue to drive forward the expansion of additional HVP capacity with the anticipated growth of our customers' biologic portfolios and drug launches. This includes the installation and validation of new manufacturing equipment for HVP plungers and finishing capabilities, which will continue to come online throughout 2023 and into 2024.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Moving to slide nine. We are reiterating our full year 2023 organic sales growth outlook of 3%-4% and are raising our 2023 financial outlook for overall net sales and adjusted diluted EPS. While Bernard will go over more details in his remarks, I want to make a few high-level comments. We continue to see a decline in overall COVID-19 sales and now expect $60 million for the full year 2023 instead of $85 million. Even with this change, we are reaffirming full year 2023 overall organic sales guidance. We continue to expect mid-teens proprietary products base organic sales growth for the year. Contract manufacturing is now expected to be double-digit growth compared to prior high single digit outlook, as we expect to see continued demand for certain injection devices as seen in Q1. Now I'll turn the call over to Bernard. Bernard?

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Thank you, Eric, and good morning. We'll first look at Q1 2023 revenues and profits, where we saw low single-digit organic sales growth and a decline in operating profit and diluted EPS compared to the first quarter of 2022. I will take you through the drivers impacting sales and margin in the quarter as well as some balance sheet takeaways. Finally, we will provide an update to our 2023 guidance. First up, Q1. Our financial results are summarized on slide 10, and the reconciliation of non-GAAP measures are described in slide 17-20. We recorded net sales of $716.6 million, representing organic sales growth of 2.3%. COVID-related net revenues are estimated to have been approximately $23 million in the quarter, an approximate $88 million reduction compared to the prior year.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

These net revenues in 2022 included our assessment of components associated with vaccines, treatment, and diagnosis of COVID-19 patients, offset by lower sales to customers affected by lower volumes due to the pandemic. Looking at slide 11, proprietary products organic net sales remained flat in the quarter. High-Value Products, which made up more than 70% of proprietary product sales in the quarter, declined by low single digits due to the reduction in COVID-related net revenues. Looking at the performance of the market units, the generics market unit delivered high double-digit growth led by sales of Westar components, while the pharma market unit experienced low double-digit growth led by Envision and Westar components as well as administration systems. The biologics market unit saw a double-digit decline due to a reduction in sales related to COVID-19 vaccine.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Our contract manufacturing segment experienced double-digit net sales growth in the first quarter, primarily driven by an increase in sales of components related to injection-related devices. Our adjusted operating profit margin of 23% was a 340 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 13.9% for Q1. Excluding stock-based compensation tax benefits, EPS decreased by approximately 16.1%. Let's review the drivers in both our revenue and profit performance. On slide 12, we show the contributions to organic sales growth in the quarter. Sales price increases contributed $38 million or 5.3 percentage points of growth in the quarter.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Offsetting price was a negative mix impact of $21.3 million, primarily due to a reduction in COVID-19 related net demand and a foreign currency headwind of approximately $20.1 million. Looking at margin performance, slide 13 shows our consolidated gross profit margin of 37.9% for Q1 2023, down from 39.5% in Q1 2022. Proprietary Products first quarter gross profit margin of 42.5% was 90 basis points lower than the margin achieved in the first quarter of 2022. The key drivers for the decline in Proprietary Products gross profit margin were unfavorable mix from a reduction in sales related to COVID-19 vaccines and continued inflationary pressures on our plant costs, including labor, raw materials, and overheads. These factors were partially offset by sales price increases and production efficiencies.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Contract manufacturing first quarter gross profit margin of 17.6% was 250 basis points below the margin achieved in the first quarter of 2022, primarily due to mix of products sold. Let's look at our balance sheet and review how we've done in terms of generating more cash. On slide 14, we have listed some key cash flow metrics. Operating cash flow was $138.1 million for the three months ended March 2023, a decrease of $13.1 million compared to the same period last year, a 8.7% decrease primarily due to a decline in operating results.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Our first quarter of 2023 year to date capital spending was $82.1 million, $16.3 million higher than the same period last year. We continue to leverage our CapEx to increase our High-Value Products manufacturing capacity within our existing facilities in the U.S., Germany, Ireland, and Singapore. Working capital of approximately $1.4 billion at March 31, 2023 remained consistent from December 31, 2022. Our cash balance at March 31st of $886.3 million was $8 million lower than our December 2022 balance. The decrease in cash is primarily due to our share repurchase program and higher CapEx, offset by operating cash flow for the first quarter. Turning to guidance, slide nine provides a high-level summary.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

We are updating our full year 2023 net sales guidance and expect net sales to be in a range of $2.965 billion-$2.99 billion, compared to a prior guidance range of $2.935 billion-$2.96 billion. There is an estimated full year 2023 tailwind of $15 million based on current foreign exchange rates compared to prior guidance of a 2023 headwind of $30 million. We expect organic sales growth to be approximately 3%-4% unchanged from prior guidance. We expect our full year 2023 adjusted diluted EPS guidance to be in a range of $7.50-$7.65, compared to a prior range of $7.25-$7.40.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Our CapEx guidance is $350 million for the year, unchanged from prior guidance. There are some key elements I want to bring your attention to as you review our guidance. We expect full year COVID-19 related sales to be approximately $60 million compared to prior guidance of approximately $85 million. Net sales guidance also includes a reduction of $8 million resulting from an expected divestiture of a European facility that produce standard proprietary product components. Full year 2023 adjusted diluted EPS guidance range includes an estimated FX tailwind of approximately $0.02 based on current foreign currency exchange rates compared to prior guidance of a headwind of $0.11. The updated guidance also includes EPS of $0.15 associated with first quarter 2023 tax benefits from stock-based compensation.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Our guidance does not include potential future tax benefits from stock-based compensation. I would now like to turn the call back over to Eric.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Thank you, Bernard. To summarize on slide 15, the solid financial performance and execution in Q1 continues to reaffirm we have a strong base business and are delivering unique value to our customers. While there may be instability in some small cash-dependent biotechs, these customers are not a substantial portion of our business. Our end markets remain stable, and there continues to be a promising pipeline of new drugs that could have meaningful launches and/or expansions over the next few years, which means more HVP sales opportunities for West. Our global operations team is efficiently manufacturing and delivering products in this complex environment with a focus on service and quality, and we're continuing to progress capital spending across our operations to meet current and anticipated future growth.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

With great pride, we realize this criticality of our products for healthcare across the globe, which is why our purpose to improve patient lives propels us each and every day. Norma, we're ready to take questions. Thank you.

[Operator]

Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone. To withdraw your question, please press star one one again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Larry Solow with CJS Securities. Your line is now open.

[Larry Solow, Managing Director at CJS Securities]

Great. Thanks. Good morning, guys. Congrats on another good start to the year. Eric, just a sort of, I guess, a little bit of a question on the quarter and a little more high level. Just, you know, obviously a little bit of a step up and acceleration in sort of core growth. I think you mentioned mid-teen to high-teens growth this quarter in proprietary products, and I think your guidance kind of points to sort of mid to high-teens growth for the year. Obviously it's a little bit of a shift away from COVID for you guys. Are your customers, you know, from their perspective, has that helped too in terms of, you know, less focus at some of your customers on COVID treatments and more back to their core?

[Larry Solow, Managing Director at CJS Securities]

I'm just trying to bucket, you know, sort of the drivers of the acceleration growth between COVID, perhaps a little bit waning COVID impacts and just more growth, I guess, and NovaPure and other High-Value Products. I guess the third thing is just the overall growth in biologics. I'm just trying to get a feel for how those three drivers sort of, you know, line up, if you will.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Yeah. Great. Thank you, Larry. Good morning. We're seeing the obviously, as COVID demand decreases, we've been able to through the reprioritization of the long lead time items, we've been able to bring them back in line what we expect for the market. Therefore, you're seeing us very strong growth in both the pharma and the generics market units, which is significantly higher than what you would see from a market volume demand perspective. That's where you see the benefit of specifically on generics is really due to the long lead times that are being brought in. We did see a little bit better performance in our contract manufacturing.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

As we've been making investments specifically in that area, very targeted investments, those are coming online and we're starting to see the benefit, and that's the reason why we've moved up the full year look. On the biologic side, I'm very proud on how we continue to do very well in that area, not just on current drugs in the market, but also new drug launches, and our participation rate remains very high. We're excited to carry on that growth. You're absolutely correct. The COVID reduction mutes that overall number. That's why we're trying to be very more transparent about the core itself. We're pleased across the board on the execution. Overall it's a very strong start to the year.

[Larry Solow, Managing Director at CJS Securities]

In terms of capital projects, capital, you know, expansion plans, obviously, you've guys, I think you've more than probably doubled capacity over the last couple of years or in the last three years. As you go out into 2024, do you see, you know, I suppose at some point we'll have a slowdown or a pause in the expansion? You know, do you view this or, you know, how do you sort of view your longer term plans out beyond sort of the next 12 months?

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Yeah, Larry, you're right. We had some significant capital investments over the last couple of years. One was to fuel or be able to support the vaccines during the pandemic. Fortunately, the team was very focused on helping our customers with these solutions around the higher end of High-Value Products. This equipment is fungible. We're still leveraging that existing equipment for base business growth, particularly around the biologics area. We're continuing to add layer in more capital. The capital we are layering in right now is shifting a little bit away from what I would call the vial configuration to more prefilled syringes and i.e., our plunger manufacturing capabilities, which are coming on-line this year and then in 2024.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

That is based on demand that we have in our hands today and into the next couple of years. We will continue to layer in capital when the growth profile remains as we're seeing today. You're right, Larry, if there's opportunities to continue to leverage existing assets more effectively, we, that's the first thing we look at. How do we leverage what we currently have, create efficiencies, higher automation, before we start investing more? That's, that's our daily framework as we think about capital investments. The long story short would be if we continue to invest as we are, it's because the growth of the business is greater than we anticipated.

[Larry Solow, Managing Director at CJS Securities]

Gotcha. Just lastly, a quick question for Bernard. you know, on proprietary products, gross margin down a little, I think 90 basis points year-over-year, but I think it absorbed like a $90 million or so drop in COVID sales, right? or something around. I don't think you gave the actual quarter number, but somewhere around there. you know, I'm just trying to, going forward, gross margin, it feels like most of the COVID benefit is out of there, right? Should we kind of expect proprietary products gross margin to just be maybe a good number, a good starting point, and maybe we can grow a little bit off of this gross margin base?

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Yeah, just on the COVID, you know, we did, as you kind of said there, we did $88 million, I think in Q1 2022, and there was about $23 million in this quarter. That, you know, the drop was pretty significant. You know, we have been really focused on increasing the level of efficiency through our plants, really understanding the cost base. As we were progressing through 2022, we were already lining up some of the changes. We're starting to see the impact there. Also, you know, the price that we've been able to get.

[Larry Solow, Managing Director at CJS Securities]

Mm-hmm.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

which is, you know, above what we'd normally see, that multiple %, that's also helping with that margin and to absorb some of the inflationary costs. You know, I would expect it to. You know, it is a good start for the year. There's obviously a lot of puts and takes, Larry, given what's going on within the macro environment. We're confident to deliver within our guidance.

[Larry Solow, Managing Director at CJS Securities]

Got it. Okay, great. Thanks. I appreciate the call, guys.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Paul Knight with KeyBanc Capital Markets. Your line is now open.

[Paul Knight, Managing Director and Senior Analyst at KeyBanc Capital Markets]

Eric, when on the CapEx side, is Michigan now online? When you do deploy this CapEx, when does that start to deliver revenue? Is it a one year? Is it a two year lag? My last question would be, where do you benefit from this growth in GLP-1s? Thanks.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Yeah. Thanks, Paul. Good morning. In the capital, fortunately, we're in a good position where we're layering in the capital. Once we install and then validate, revenues are coming up rather quickly. You mentioned about Grand Rapids, Michigan. It's one of our contract manufacturing sites. When the lines are ready to go, we're turning them on and to be able to meet the demand requirements. That's very consistent across proprietary and also CM in today's environment. I would say if you look back historically, while we made the right investments, sometimes we do greenfield. Those are the ones that take longer period to get the demand to fill those plants. The investments we're making today are really about more near-term demand requirements.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

In some cases, we're trying to catch up. On the GLP-1, it's an interesting dynamic that is occurring. As you can imagine, Wes, as we did with the vaccines in the pandemic, you can imagine that our participation in GLP-1 with multiple customers, multiple components, both in the proprietary area, but also in the contract manufacturing from an injectable device perspective. We are obviously participating in that area. We're seeing the demand. We don't call out specific drugs or customers, but we are investing particularly around plungers and also in the contract manufacturing area about injectors, auto-injectors. You're seeing that in both camps as we speak today.

[Paul Knight, Managing Director and Senior Analyst at KeyBanc Capital Markets]

Last question would be for Bernard. Bernard, what's your implied operating margin or guide for the year?

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Approximately 23%.

[Paul Knight, Managing Director and Senior Analyst at KeyBanc Capital Markets]

Okay, thanks.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Just on Larry's question, I just want to clarify one thing. The difference is on the COVID revenue between Q1 2023 and 2022 is $88 million. Just to clarify that, the drop was $88 million.

[Operator]

Thank you. One moment for our next question, please. This question comes from the line of Matt Larew with William Blair. Your line is now open.

[Matt Larew, Partner and Senior Equity Research Analyst at William Blair]

Hi. Good morning. For the space more broadly,

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Yeah, Matt, I think before COVID, we were continuously building the capabilities to have better visibility with our customers in the markets around demand. We have been building that, I would say, during the COVID period. It's been a little more volatile, but now we're back into that environment, have better visibility, better, as we do make to order, our customers are giving us visibility of their demands over the next several quarters. We plan accordingly in our global operations to be able to support them on existing drugs but also new launches. In regards to any movements of stocking or working capital, we do see some of that in certain parts of the business, and we take that into consideration when we think about our forecast or guidance for the full year.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

There are certain areas, I would say probably more in our, on our non-HVP area that might have more volatility. On the High-Value Product area, that is going back to our capital investments. We need to continue to fuel that to try to get ahead of the curve versus trying to maintain where we are right now. The demand is greater than we have capacity, therefore, continuously layering in as we speak. It's just blend right now, Matt, and we have better visibility, but it's not, you know, not consistent across the whole portfolio, but I think we're responding appropriately.

[Matt Larew, Partner and Senior Equity Research Analyst at William Blair]

Okay. Then, you know, decommissioning a plant in Europe making both products amidst, you know, significant investment in HVP capacity, I guess that speaks to the changing order book. Maybe could you just, again, give us a sense for as we think about order book occurring today and what's in your order pipeline over the next, you know, six months, 12 months, how that really compares to three to five years ago. Then specifically on you mentioned on the GLP-1s, you participate on the plungers side. Are those NovaPure plungers, I assume?

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Well, Matt, a couple points there. One is you're right. The decommissioning of the plant, that's a plant that is a single product, single customer. We're very pleased on how that is now.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

That was a standard product. It wasn't anything in relation to High-Value Products.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Right. It's a standard product. It's basically, we've had this discussion for a long time. It doesn't fit our growth strategy. Therefore, we've made the decision with our customer and also another party to make sure they can continue on producing those products for our customers, but in someone else's hands. I think from a order book perspective, you think about where our growth profile is, it really is around the biologics. We obviously have high growth right now in generics and pharma. We'll continue to see that over the course of 2023. Really, as you think about the future longer term, it is around the biologics, in multiple therapeutic categories, and it tend to be the higher end of our High-Value Products.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

The plungers specifically, it's a range of different types of plungers within High-Value Products, so it ranges anywhere from FluroTec all the way up to NovaPure, depending on the customer's needs. It is kind of a range. The optics of our order book continues to be strong, but this portion of that tends to be more around the High-Value Products and the higher end of that.

[Matt Larew, Partner and Senior Equity Research Analyst at William Blair]

Okay. Thanks, Eric and Bernard.

[Operator]

Thank you. One moment. For our next question. Next question comes from the line of Jacob Johnson with Stephens. Your line is now open.

[Jacob Johnson, Managing Director and Analyst at Stephens]

Hey, thanks. Good morning. Maybe first, just sticking on the GLP-1 topic, and as it relates to contract manufacturing, I think that's a business that at times, kind of the work you do with customers can vary year to year, obviously strong start to the year, you're increasing expectations there. Is this something that is kind of sustainable growth for you all? Or is there something about 2023 that maybe we shouldn't, you know, carry this forward into 2024 and beyond?

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Yeah, Jacob. We typically would see the growth rate in contract manufacturing around mid-single digits, within our longer-term construct. you know, last year we had declines in the contract manufacturing business, now we're seeing a bit of a rebound. If I'm looking out past 2023, it'll be kind of more the mid-single, high singles, which is both ways.

[Jacob Johnson, Managing Director and Analyst at Stephens]

Okay. Thanks for that. Just a couple kind of cleanups on some of the commentary around the outlook for this year. If I'm not mistaken, I think you said mid-teens ex-COVID growth in proprietary products, but I think that was high teens on the last call, and then also 23% op margins. I think that was 23%-24% last quarter. You know, is this something to do with kind of the stronger contract manufacturing growth in for the year or just anything you can kind of flush out in terms of just that commentary?

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

On the operating margin, a little bit of it is around contract manufacturing. You know, they're having less of that COVID business coming through versus what we expect is... They're the primary drivers there.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

On the revenue side, when we talk about the proprietary outlook, it's relatively, it's pretty consistent to the focus guided in February, without COVID. The all 3 units will be very strong throughout the full year and relatively consistent, as far as performance in that area.

[Jacob Johnson, Managing Director and Analyst at Stephens]

Okay. Got it. I'll leave it there. Thanks for taking the questions.

[Operator]

Thank you. One moment for our next question, please. Our next question comes from the line of Derik De Bruin with Bank of America. Your line is now open.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Hi, good morning.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Morning, Derik.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Hey, a couple of questions. Is there a good rule of thumb to think about your CapEx in terms of revenue generation? You know, for every dollar you spend in CapEx, it can generate X amount of revenues. I'm just sort of trying to think about future opportunities and just sort of thinking that all the spend and how this would build it out.

[Bernard Birkett, SVP and CFO at West Pharmaceutical Services]

Yeah. We haven't, you know, communicated that in the past. I think what we have communicated is to say that a larger portion of our CapEx spend over the last number of years has been focused on growth, and that growth is really within High-Value Products. The investment in CapEx is driving obviously both revenue improvement, but also delivering on that operating margin improvement, so it's encompassed in that.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Going that, I was going to the mix shift next, because obviously that has accelerated recently. You know, when you think about your forward model construct, does that margin sort of look more like 150 basis points, or are you still thinking about 100 basis points is where you should come out on the op margin expansion on an annual basis, just given the mix?

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Derik, I'm not gonna give you a number, but we've said that we will achieve 100+ basis point margin expansion year-over-year for a number of years. But as an organization, as a team, we're really focused on how can we continue to beat that, looking at through automation, looking at the mix shift effect that's happening, really when you think about the biologics. Just reviewing our participation in biologics more recently continues to remain extremely strong. I'm very proud of that. So we believe we're gonna commit to the 100+ basis points in operating margin, but we do believe there's opportunities to continue that and stay aggressive.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Great. Just one more. I'm thinking about some of the newer drug opportunities. I mean, obviously, there's a lot of interest in discussion on GLPs, but, you know, you've had to build capacity for a number of... I mean, this isn't like COVID, where it suddenly popped up overnight. I mean, you've been building capacity for a while. You've known there were trials coming. I'm just sort of curious, like, what do we need to see in sort of some of the GLP trends in the market, you know, prescription trends to sort of, like, think about what the upside driver of that could be to your business? Because there's clearly something already embedded in. It isn't like a virgin market where you are. I'm just curious on how you're thinking about that market as it expands.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

There's two areas. One area specifically around our product portfolio. Unlike what we've seen in other types of configurations, like vial configuration, where you get multiple doses per vial, in this particular area, it's single dose, right? As prefilled syringes continue to grow, we're gonna need to continue to invest in plungers, and that's what we're seeing, and that's where our areas of investments are going. We'll continue and we respond to our customers' forecasted demand. Again, it's more than just one customer, it's multiple customers. That's one. It's one of the conversations with our customers planning ahead, not on just existing solutions in the market, but future drug launches that they're planning. That's where our conversation is.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

If we're waiting till the commercialization of them, we're too late and they're too late.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Yeah.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

That's one area. On the contract manufacturing side is a little different, where, as you know, we've been very clear about this. In that part of our business, unlike our proprietary business, where if you're on the molecule, you're pretty much the main provider of those components. In the contract manufacturing, our customers tend to diversify with multiple companies to be able to produce those, i.e., auto-injectors. While that volume goes up, I wouldn't say it's one to one for West. It's clear in the proprietary side, but not as much on the contract manufacturing side. Hopefully it gives you a little bit of.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Yeah.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

-kind of visibility, in particular around the GLP-1, specific area.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Great. Thank you.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Thank you, sir.

[Operator]

Thank you. One moment for our next question. Question comes from the line of John Sourbeer with UBS. Your line is now open.

[John Sourbeer, Equity Research Associate at UBS]

Hi. Thanks for taking the questions. You know, I think it sounds like you that you said that contract manufacturing, that could grow from mid-single digits, I think was the previous long-term target there to mid-single to high single digits. You know, is that increased over the long term? Is that all GLP-1s or are there other drivers there that would be driving that upside?

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

I would say it's a mixture of multiple, a few different customers and a few different products. GLP would be one area, but not the only area of growth. The investments that we've been layering in, specifically in contract manufacturing, have been coming on board end of last year into this year. We'll continue to layer that in if and when necessary with our customers. Yes, there's a portion of it is due to GLP-1.

[John Sourbeer, Equity Research Associate at UBS]

Just when you look, you know, I think the company's framed the, you know, long-term revenue target in that high single-digit range. Now you're seeing, you know, strong trends throughout the portfolio, some increases in contract manufacturing. Just any thoughts on how that revenue growth could look like beyond 2023?

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

I think just staying focused on a long-term construct is, we have always said 7%-9% organic sales growth. I know we're excited that obviously we do have a role to play with the GLP-1 as that evolves. I'm excited because as an organization we can support our customers in multiple fronts, i.e., multiple different components and proprietary. That to me has a higher profile, economic profile for us, and than the contract manufacturing while we play in both higher dependency on the proprietary side. I would say that our growth, when we say the 7%-9% organic growth, outlook is not solely reliant on that category.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

We have numerous customers with different types of launches that are occurring and an uptake of current drugs in the market that we need to keep fueling. It is, it's a mixture of multiple drugs, multiple customers and multiple therapy classes. We participate in GLP-1, but I wanna make sure that the growth of this business is very diversified.

[John Sourbeer, Equity Research Associate at UBS]

Great. Appreciate the color. Thanks for taking the questions.

[Eric Green, President, CEO, and Chair of the Board at West Pharmaceutical Services]

Yeah, thank you, John.

[Operator]

Thank you. I'm currently showing no further questions at this time. I'd like to hand the conference back over to Quintin Lai for closing remarks.

[Quintin Lai, VP of Corporate Development, Strategy, and Investor Relations at West Pharmaceutical Services]

Thank you, Norma. Thank you all of us for joining us on today's conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investor section. Additionally, you may access a replay for 30 days following this presentation by using the instructions at the end of today's earnings release. In acknowledgement of our sustainability partnership with the Philadelphia Eagles, it gives me a unique opportunity to conclude the call with Fly, Eagles, Fly. Have a nice day.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Participants

Executives

• Bernard Birkett, SVP and CFO
• Eric Green, President, CEO, and Chair of the Board
• Quintin Lai, VP of Corporate Development, Strategy, and Investor Relations

Analysts

• Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America
• Jacob Johnson, Managing Director and Analyst at Stephens
• John Sourbeer, Equity Research Associate at UBS
• Larry Solow, Managing Director at CJS Securities
• Matt Larew, Partner and Senior Equity Research Analyst at William Blair
• Paul Knight, Managing Director and Senior Analyst at KeyBanc Capital Markets