Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- West Pharmaceutical Services Inc (WST, Financial) expects the second half of the year to be stronger than the first half, with a return to year-over-year organic growth in the fourth quarter.
- The company has a strong position in biologics, which is the fastest-growing segment within injectables.
- Ongoing capital expansion projects are expected to drive increased capacity and address new opportunities.
- The company has received accolades for its sustainability efforts, including being named one of America's Most Responsible Companies by Newsweek.
- West Pharmaceutical Services Inc (WST) is seeing promising signs from customers that indicate a turning point in the destocking trend.
Negative Points
- The company experienced a mid-single digit decline in organic sales and declines in operating profit and diluted EPS compared to the second quarter of 2023.
- Customer destocking continued at a higher rate than anticipated, impacting sales negatively.
- The company had to lower its full-year 2024 guidance due to a more gradual recovery than previously expected.
- Adjusted operating profit margin decreased by 650 basis points from the same period last year.
- The company recorded a significant decline in adjusted diluted EPS, down 28% for Q2.
Q & A Highlights
Q: In this destocking environment, is that related to COVID or is it broader, like injectable drugs, etc.?
A: The destocking activity is a combination of both. We are still seeing some destocking in COVID vaccines, but also during the pandemic, several customers increased their safety stock levels significantly. Now that we've installed the capacity and our service levels are at an all-time high, customers are taking down those safety stock levels. The market shift is not occurring, and our win rates in new molecule approvals continue to be strong. (Respondent: CEO)
Q: What gives you confidence that customers' inventory levels are back to pre-COVID levels or even lower?
A: After discussions with our customers, we had an indication that the return to normalized demand curves would be sooner. As we progressed through Q2, we saw intra-quarter demand slightly less than anticipated, persisting into Q3. We see sequential improvements over the next couple of quarters and expect to return to growth in Q4. Every customer has a different algorithm for managing inventory, so it's not universal. (Respondent: CEO)
Q: Can you explain the increase in CapEx and your confidence in future investments?
A: Our recent investments have been focused on HPP, particularly around stoppers and fill and finishing of those products to support vaccine growth. We are now repurposing those assets to produce other HPP products. Additional investments are supporting biologics growth, GLP-1s, and regulatory changes. We are targeting about 6% of revenue for CapEx, getting back to pre-COVID levels. (Respondent: CEO and CFO)
Q: How is the coverage ratio shaping up and how has that changed throughout the year?
A: The coverage ratio is getting stronger with increased confirmed orders for both Q4 of this year and early 2025. The intra-quarter demand profile is less of a factor in the growth of the business. We are seeing destocking in our Biologics segment and in generics, where safety stock built up during COVID is now being reduced. (Respondent: CEO and CFO)
Q: Are customers now managing inventory levels in line with your lead times?
A: Yes, during the pandemic, our lead times increased to 30-50 weeks. Now, with lead times back to 8-12 weeks, customers are realigning their reordering patterns based on these lead times. This results in more frequent, smaller orders rather than large boluses, which is beneficial for our operations. (Respondent: CEO)
Q: Why not take a more conservative guide at this point in the cycle given the risk of further destocking?
A: We are seeing sequential improvement and a step-up in Q4 driven by the biologics market. We have been managing our cost base tightly and are prepared for returning to growth. We are not making significant cost cuts but are using appropriate cost management to navigate the extended destocking period. (Respondent: CFO)
Q: Can you discuss the impact of new capacity in Dublin on Q4 revenue?
A: The new capacity in Dublin will take a few quarters to ramp up to full capacity, so it is not a major driver for Q4 revenue. However, it positions us well for future growth. (Respondent: CEO)
Q: How do you get confidence that there are no further inventory issues impacting your long-term growth targets?
A: One of the biggest drivers in the last five years has been biologics growth. Our participation in biologics has increased significantly, and we expect this trend to continue. We are confident in our long-term growth targets based on our market position and the areas of growth we are focused on. (Respondent: CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
