Great. Good morning, everybody, and welcome back to the CJS Securities 25th Annual New Ideas for the New Year Conference. I'm Larry Solow, a Research Analyst and Partner here at CJS. I'm happy to welcome our next company, West Pharmaceutical Services, whom CJS has covered, I think, just about 20 years. Joining us this morning are Cindy Reiss-Clark, Chief Commercial Officer, Chad Winters, Chief Accounting Officer, and John Sweeney, VP of Investor Relations. Please go ahead. Take it away, guys.
Thank you so much, Larry. It's really a pleasure for us to be here today, and we're really excited to share our story with you all. So, as mentioned today, I'm joined by Cindy Reiss-Clark. She's our SVP, Chief Commercial Officer, and Chad Winters is our VP of Finance. He's our Chief Accounting Officer also, and we're all going to share the presentation and answer your questions. Before I get started, I'd like to highlight our Safe Harbor Statement, which you can see on slide two. You can also find this available on our Investor Relations website at westpharma.com. I'd like to start with our purpose. On slide three, West is more than 100 years old, but our purpose remains the same as it has been since day one. Put simply, we serve to improve our patients' lives.
And we do this by driving excellence in the areas of containment and delivery of injectable medicines. And our aspiration and our leadership, our vision, is to be the leader in the injectable space. And I think we're doing a really good job delivering on that vision. And how we work together globally is really around three core values for West. It's all about passion for the customer, leadership, and quality. That's something that's pushed down throughout the organization of our 10,000 team members. And what we call One West Team, which is leveraging the global enterprise to support our customers around the world. At West, we think about how to execute, innovate, and grow. And that's how we deliver for our shareholders and other stakeholders.
We're very thankful for the support we get from the investor community, but also from our customers, our team members, and the communities where we operate and serve. Slide four is a few company highlights. So, as we mentioned, West celebrated its 100th year not too long ago, and we're focused on the containment delivery of injectable medicines. We've got 25 manufacturing sites around the world, and we've been on a journey to build out this network to better serve our global customers. What we're really proud of is the 10,000 team members, what they've achieved, how they've engaged, and how they've given back to their local communities. Not only are we successful with our customers in helping them launch and impact patients each and every day, we're producing over 40 billion components a year, and you can imagine the outreach we have impacting patients globally.
I'd also note that we have a very strong philanthropy spirit within the organization. Giving back to local communities is a clear priority. West Pharmaceutical Services is highly diversified by geography, by product category, and by market group. Geographically, we're evenly spread between the Americas, Europe, and we're increasing our presence in Asia. We have a manufacturing footprint in all major geographies, and we're able to support our customers both on a local, regional, and global level. Our portfolio is split into three areas: high-value products, standard products, and contract manufacturing. And we've split out the high-value product components, which include elastomers and seals, and we manufacture HVP delivery devices, which are on-body wearable self-injection devices. HVP products have higher ASP, higher margins, and better economics, and they're the fastest-growing area of our business. It's almost 60% of the portfolio.
Contract manufacturing is about 20% of our business, and by end market, biologics are the largest at 38%. Pharma, which we classify as small molecule, is about 25% of our revenues and generic about 27%. But the key message on this slide is that we're very well balanced. We've got a diverse portfolio from a geographic, product, and market perspective. On our third quarter earnings call, we increased our Adjusted EPS guidance for the full year, and we discussed our confidence in West's execution capabilities as we continue to deliver our proven market-led strategy. On the call, we discussed that we're starting to see early traction with our long-term growth initiatives, particularly with GLP-1s and how we serve our longstanding customers, and we discussed the significant progress we're making in ramping up production of HVP delivery devices.
The strong increase in on-body self-injecting devices during the quarter was driven by a combination of capital investment, improved utilization, and the implementation of our new product line. And also, we discussed destocking, mentioning we're starting to see signs of stabilization within our business. In recent customer discussions, we've observed a positive shift, with some customers showing interest in increasing their near-term order levels. This gives us confidence that we're getting close to a turning point in the destocking trend. All right, and with that, I'll turn it over to Chad, who will continue the presentation. Chad.
Thanks, John. On slide seven, let me go a little deeper on our business and the markets. Our customers include the leading biologics, pharmaceutical, generic, and med device companies in the world. Our top priority is delivering quality products that meet the exact product specifications and standards that customers require and expect. This focus on quality includes a commitment to excellence in manufacturing, as well as scientific and technical expertise, which enables us to partner with our customers to deliver safe, effective drug products to patients quickly and efficiently. We mentioned earlier biologics, which includes biosimilars, because the characteristics of the molecule are pretty consistent, and our value proposition and our solutions are consistent too. As a result of the complexity of the molecule, biologics require the highest degree of quality and are generally HVP products.
In the generics market, longer-term growth is driven by bringing our customers into the high-value products within this small molecule space. And pharma includes the traditional small molecule, and this area has the lowest percentage of HVP products. And then contract manufacturing is our injection, molding, and assembly for auto injectors, pens, and other devices on behalf of our customers. If you look at the chart on slide eight, this lays out our growth thesis. You start on the bottom left-hand side, and these are our standard products. Remember earlier in the pie chart, we mentioned about 25% of our portfolio revenues are from standard products. And this is despite the fact that standard products represent 75% of the volume of components that we manufacture. Then, as you move your way to the right, the portfolio is shifting to high-value products.
These additional services include pharmaceutical washing, Envision inspection, sterilization, all the way up to the right to our integrated systems and self-injection. Again, while HVP are only 25% of total manufacturing components, they do represent 75% of our revenues. The key to our strategy is to continue to move customers up to high-value products where you have a higher average selling price and a higher margin. To give us an example, our standard product margins would generally be less than 30%. You know, if we call that 27%-28% type gross margin. When you get all the way to the right to NovaPure, you're in the 70%-80% margin. So this positive mix shift is really a key factor in driving our long-range plan of 7%-9% revenue growth and our target of 100 basis points of margin expansion.
So now let me just spend a minute now on the injectable medicine space. This is one of the fastest areas of growth in healthcare. When you think about subsegments within injectable medicine, biologics and biosimilars are key. We have a 50-year-old relationship with a company in Japan called Daikyo, where we have a 49% stake, and an exclusive relationship with them where we have technology and distribution rights. This is important because the combination of our technology and their technology allows us to be highly competitive and provide the best solutions to the biologics in the biosimilar space. This is a high-growth sector, and the way to win in biologics is to win with the pipeline. It is rare to convert existing molecules in the market from one player to the next, so you have to win the business at the beginning.
With our future growth, it's really about seeding the market. As you think about the new approvals, the innovations coming from the smaller biotechs and smaller firms, they get success either on their own commercialization or they partner with a larger firm. The packaging configuration and containment stays as it's in existence and has been filed. So this is the key area where we need to continue to win. And our participation rate with biologics and biosimilars remains extremely high. We believe that with our technology, our quality, our scale, and our capabilities, we're able to continue on a growth trajectory as we move forward. So with that, I'll hand it over to Cindy.
Thank you, Chad. As John stated earlier, we recognize the responsibility that we have in ensuring patients get the injectable medicines each and every day. And this is why we say every component has a patient's name on it. It reminds us of this responsibility, and it drives the culture of excellence in our supply chain and operations to continue to develop the right relationships with our supply base, make the right investments in our global network, and capability to continue to deliver quality products that our customers require and expect from West. Looking to the left on slide 11, you know, the bar for quality continues to be raised. You know, a recent example, the European GMP Annex 1 was revised and implemented in August of 2023. The regulation itself tripled in length and contains over 30 references to primary packaging alone.
This new regulation is requiring those companies filling sterile medicines to have a documented contamination control strategy. It's assessing the risk in their facilities and defining action plans to prevent contamination of sterile products. Looking to the right of the slide, the major cause for injectable product recalls is due to particulates and lack of sterility, and these are attributed to the container closure system. These Annex 1 revisions are being driven by the need for higher quality standards, and failure to comply has real consequences on a manufacturer's operations and business. Slide 12 demonstrates that, you know, over the course of our company history, we have an established track record of developing solutions for our customers' evolving needs. This includes science and technology around new classes of drugs being developed to offer supporting the ever-changing quality and regulatory environment.
We estimate that the European Annex 1 revision could result in the potential upgrade of several billion units of bulk and lower-tier HVP components currently sold. To summarize on slide 13, you know, we are in a growing market. Injectable drugs are the fastest-growing drug segment driven by the continued growth in biologics, where we have high participation. We have a manufacturing footprint in all major geographies, and this scale supports our customers on a local and global level. We will continue to invest in our global network to support our customers' business growth and need for higher quality products. We are leveraging our high-value product components to expand into integrated systems. By executing these focused growth strategies, we are well-positioned to deliver margin expansion fueled by that continued HVP mix shift and our culture of excellence in manufacturing.
With that, I believe we're going to take some questions, so I'm going to hand the program back to Larry. Larry?
Hello, there operator. This is John.
[Distorted audio] . I'm back. Technical difficulties there. Sorry about that. Thank you for that presentation. That was very comprehensive. We appreciate it. I guess first question, just a couple of general questions before we dive into a little more specifics of West. Just first question from a high level, what are sort of the catalysts and potential concerns or risks you guys face as you look out over the next 12-18 months?
Thanks for your question, Larry. You know, I think when we think about West, there's certainly a number of attractive long-term secular trends that we benefit from, so the one that we talked about in the presentation is our strong participation rate in biologics, where we support our customers as they launch new products, and we continue to have a high success rate of getting on the new molecules, so I think the strength of the biologics pipeline and continued strong wins in biologics is important for us, and then obviously regulation and the changing regulatory environment and the European GMP Annex 1 regulations, there's several significant changes there that could help demand for our products, so I think we're in early stages there, and you know, that's all about shifting standard components to Annex 1 higher value product, so as I said, the long-term dynamics are favorable.
When we think about some of the risks, you know, destocking phenomena has proven difficult to track, maybe lingered a little longer than anticipated. That could be a risk. And then finally, you know, any moderation of the long-term growth rate of the biologics market would be a negative for West.
Gotcha. And a lot of talk, obviously, with the new administration about, you know, potential impact of tariffs, retaliatory tariffs. Clearly, you guys are a global company. But can you just maybe discuss potential impact of tariffs or maybe more importantly, what you could control and how you're preparing given this uncertainty?
Yeah, definitely. So Larry, there are absolutely some risks on the tariff front, but we also see some opportunity on the, actually, some income tax proposals going the other way. If I start on the tax side, you know, there's discussion of a beneficial rate for domestic manufacturing, 15%. And that could provide benefit to West, could in the low tens of millions of dollars based on our U.S. manufacturing that feeds the U.S. market domestically. And then if you flip it to the tariff side, you know, ballpark similar scenario of low tens of millions. But that's really a static analysis that, you know, if something were to materialize, we'd be looking at what adjustments we'd have to make or what exemption opportunities might exist by the new administration. Maybe a little more specifically by geography. We have very little exposure to China-related tariffs.
Really, our largest, the two largest jurisdictions we'd call out, one would be Japan, which is that partnership with Daikyo, another one being Israel, where we have some of our device business. And we think those two geographies also would, you know, avail themselves to a robust exemption process under similar to what the first Trump presidency had in place. So look, overall, there's positives and negatives. It's a bit of a moving target, hypothetical. But once the administration's, you know, in and these things are, you know, being put in place, we'll be able to better comment.
Gotcha. And Chad, while I got you, could you just remind us on the currency side, your exposure? Obviously the dollar has been pretty strong the last couple of months. Can you just, you know, speak to that?
Yeah, yeah, sure. Yeah, I think, you know, it's been over 5%, I think, depreciation since the U.S. election. You heard John mention on the slides, you know, well over 40% of our revenue is in Europe. But if you, you know, there's a general rule of thumb, if you want to, you know, if you think of the euro, generally a one- cent FX movement directionally could be about a one cent of EPS. You know, there's some rounding there and, you know, your mix, your geographic mix can move around. But that's probably the general rule of thumb to think about it.
Gotcha. Great. Okay, how about some company-specific more on the product side? Maybe we can just, you know, delve a little bit into the competitive environment for drug packaging components. West obviously has enjoyed a strong share on the elastomer and seal side, especially on the high-value product side. Maybe you can just elaborate a little bit more on that. And there's been any changes in the competitive environment over the last five, 10 years?
You know, on the whole, you know, the competitive environment for the elastomer components really hasn't changed a whole lot. You know, there's three main companies in the space with some smaller players in Asia. Let's say if I look over the past five years, you know, the market share has been relatively stable for those three main elastomer companies. Even when I think of the COVID years, you know, there certainly was the mix shift due to the vaccines and the therapy treatments. And, you know, companies benefited differently across that time. Excluding COVID, you know, West maintains, you know, a great market position. And, you know, we've certainly maintained or gained a little bit over the five years.
As we think about the focus post-COVID, you know, is really on supply chain robustness, the higher need for, you know, the need for higher quality components. That's really core to our business. Our top priority continues to be the leader in quality. We continue to drive science and technology enabled by our global footprint and our scale and our culture of excellence in our manufacturing. This is really, you know, our continued value proposition to the customers.
Got it, and Cindy or Chad, maybe you can just elaborate a little bit more. You target the 7%-9% sort of CAGR and corporate proprietary sales, sort of that high single-digit target. Could you just sort of elaborate a little bit more? Obviously, there's some moving parts there with the mix and to high-value products. So maybe a little bit more on pricing as you get more of that mix. What is the actual volume versus price? Can you just kind of give us a little bit more of a dumbed-down breakdown of your targeted growth rates?
Yeah, absolutely, so I break it down as, you know, that 7%-9% is basically 1%-2% of volume from volume, 2%-3% from price, and then the balance would be mix shift, and so then if you break that down by market unit, we generally would say in that model, biologics would be high single- to double-digit growth. The generics business would grow mid-single to high single. And pharma would generally be in the low- to mid-single range, and then the contract manufacturing segment also in that mid-single digit range is kind of how underpins that 7%-9%, and then, you know, so then how do we kind of support that rate of growth in the long term? It's really a few things we look at. You know, first, you've heard us mention biologics a couple of times now, right?
That strong traction and win rate in biologics contributes to that. Next, we would, you know, look to GLP-1s. We obviously play in that space on the elastomer side and on the contract manufacturing side. And, you know, you've heard us talk about the capacity the last couple of years that we've put in place around that. And then lastly, on the regulatory landscape, you know, Annex 1 would also contribute, you know, towards that mix shift and that long-range growth target. So, you know, a lot of different elements, you know, contributing, but we think it's a pretty robust model. And that in and of itself is what that leads to then the 100 basis points of operating margin expansion, particularly coming from that mix shift within and to HVP.
Gotcha, and John had mentioned a little bit, you know, sort of a lingering concern just on the more of the macro level, the inventory destocking. Can you just maybe discuss that a little bit more? Obviously, it led to a considerable slowdown in revenue growth in 2024, so give us just sort of what kind of caused this excess inventory and where do we think we stand today?
Thanks, Larry. I'll take that one. So COVID had a significant impact on the business. During COVID, we were obligated to allocate assets and manufacturing capability to prioritize the vaccines as well as our existing customers. Operation Warp Speed required us to put the vaccine-related orders at the top of the pile. The lead times increased for our customers in some cases from a normal 10 to 12 weeks up to 40 or 50 weeks. This obviously had an impact on customer order behavior. They generally built higher levels of safety stock. This wasn't something we just saw at West, but it's a phenomenon we witnessed across the entire pharmaceutical supply chain. When COVID vaccine demand declined, this happened pretty much faster than anybody anticipated.
We had invested a lot in our operations to deal with a higher level of demand. And we were able to very quickly increase capacity and drive lead times back to a normal level. So that gave customers a high degree of confidence and safety stocks came down. You could also add in interest rates, which increased, and that fueled pressures on companies to improve cash flow. And then we saw obviously that the safety stocks coming down even more. And I think that's the genesis of destocking, what caused it.
Gotcha. Okay. Great. How about you mentioned the Annex 1 a couple of times in your prepared remarks. Maybe you could just give us a little bit more, you know, color on that and the potential benefits to West, both on new products being approved with higher demand for your packaging components, and I think more importantly, potential conversion or an acceleration in conversion on the legacy older products in the market that may not be adopting some of your high-value products.
So, you know, as I stated in the presentation, you know, this revision, it took into effect in August of 2023. And the main change is that it does require our customers to have a documented contamination control strategy. And it also is having them think differently about just their overall manufacturing environment. And, you know, we certainly see this as an opportunity for West. And maybe just to talk about the spectrum of the opportunity, when we think about a biologic customer, you know, they're already anchoring really high in our HVP. You know, they're using FluroTec-coated materials, NovaPure materials, and very often are already in a ready to, you know, ready to sterilize or ready to use type configuration.
So we see the biggest opportunity is really in the pharma sector and the generic sector where we've got the opportunity to move bulk material that currently doesn't have a finishing step to either a washed or sterilized process, or in some cases, moving a lower-tiered HVP to a higher-tier HVP within that. And so, you know, we certainly are in the early days as we do have early adopters, customers that we've been working with for the past several years. But, you know, currently we've got about 200 projects that are in various stages with our customers. And, you know, what we are seeing is that it's taking anywhere from, you know, 18-24 months for the true conversion to happen, depending upon the type of conversion, as well as if there's any regulatory change that has to occur within our customer base.
Okay. It's sort of like a slow and building, maybe not hockey stick kind of a ramp, but it's not something that's going to happen overnight, and it sounds like a multi-year type of benefit for you. Is that fair to say?
That's the way to think about it, yes.
Great. How about just, you know, switching gears a little bit? Just, I think three years ago, you announced an exclusive partnership with Corning for the development of some innovative glass using your technologies, including NovaPure in combination with their Valor Technology or their Gorilla Glass. Maybe you could just, you know, give us a little more color on that, update us on some of the products that have already come out and the forward-looking outlook there.
Yeah. So, Larry, you know, you mentioned three years ago, and it's correct, about three years ago, we mentioned our supply and technology agreement with Corning, and you know, we are really pleased with the partnership. And it just goes to our development cycle and the long cycle and nature of that, but you know, we've been creating and developing an integrated system for the market with the aim to work with our customers and de-risk their development and manufacturing process with a single product, single regulatory package for all the components in the system and end-to-end support from West. And the first of these products will launch in early 2026. We're currently working with customers and getting preliminary samples to the market, and the feedback has been really positive.
You know, we're excited about that expansion from components into systems as a growth driver.
Gotcha. Okay. All right. I think we have a few minutes left. And we'll switch gears. Just a few financial questions. You guys, in terms of the margin side, I think you target about plus or minus 100 basis points gross overall margin expansion a year. Clearly, mix is a big driver of that. Chad, maybe you could just kind of break out the drivers between gross margin and then on the operating and the leverage side. Is there some benefit there as well?
Yeah. I mean, really, you know, getting back to those gross margins, it is, as you rightly pointed out, it's getting to that 7%-9% revenue growth and the items we talked about a few minutes ago. When we're in that 7%-9%, right, we see that normalization of the mix. We see the capacity increasing back to those normal levels and skewed towards the HVP capacity, particularly in biologics. So that's a key driver to the margin improvement. You know, when you look below gross margin, you know, we're always focused on improving efficiency. We're always, you know, focused on how can we thoughtfully improve our cost basis. And that's also while still, you know, being able to support our growth initiatives.
Gotcha. And on CapEx, it's been somewhat elevated. I'd say going back to 2020, you had a pretty significant expansion there, and it's kind of stayed up pretty high. Can you kind of give us a breakout of just how much of this $350 million plus or minus annual CapEx is maintenance versus growth and IT investments? And do you think, do you feel as we look out, CapEx will remain sort of at these levels over the next few years, or might it change, you know, one way or the other?
So if you look more recently, the $350 you're referencing, you know, is obviously an elevated level of CapEx. And that's higher because of the opportunities that we see in the market now, the investments that are available to us.
Long run, our LRP is based on a CapEx level of about 6%-8% of revenues. And obviously, we're trending higher than that because of those growth opportunities that we're investing in. This year, you know, obviously, we think we'll be elevated again just because of the investments that are in flight. But longer term, we anticipate getting back to that normal 6%-8% of revenues, Larry.
Gotcha. Great. And obviously, that's been a pretty big use of your free cash flow. But your free cash flow obviously is very strong. Just curious, outside of internal investments in CapEx, your priorities for free cash flow, excuse me, and as well as, you know, the acquisition environment, you guys historically have not been a significant acquirer, but just curious if, you know, thoughts on that and, you know, potential actions going forward. Thanks.
Sure. So we concentrate our capital deployment at, you know, CapEx has been a big use, as you point out, leveraging that to drive future growth in the business. The share buyback, that's used to maintain the share count and offset dilution. Now, more recently, we've been more aggressive, probably as a result of, you know, availability of cash flow and putting that to use. And then when you look at M&A, there are certain segments of our business that we're looking at. And as you point out, something we haven't been too active in the past, but as we move forward, it's an area that may well get more focus.
Great. Excellent. I think we're just coming about our time. We have about another minute or so. Would you like to share any closing remarks before we close out the session?
No, Larry, I mean, I just want to thank you for your time and for CJS, our opportunity to be here to tell you our story. You know, great way to kick off the new year in 2025. And we look forward to updating you as we move through the year. And we appreciate being here. And thank you for inviting us.
Absolutely. Our pleasure. Thank you. Thank you, everybody, for joining on the webcast and have a great and productive rest of the day. Thanks.