West Pharmaceutical Services Inc (WST) — Q4 2015 Transcript

Thank you, Andrew. Good morning and welcome to West’s fourth quarter 2015 conference call. We issued our financial results this morning, and the release has been posted in the Investors Section on the company’s website located at www.westpharma.com. This morning, CEO, Eric Green and CFO, Bill Federici will review our fourth quarter and full year 2015 results, will provide an update on our business and recent organizational realignment, and will provide a financial outlook and expectations for the full year 2016. There is a slide presentation that accompanies today’s conference call and a copy of that presentation is also available on the Investors section of our website. On slide 2 is the Safe Harbor statement. Statements made by management on this call and in the presentation will contain forward-looking statements within the meaning of the U.S. Federal Securities Law and that are based on management’s beliefs and assumptions, current expectations, estimates, and forecasts. Many of the factors that will determine the company’s future results are beyond the ability of the company to control or predict. These statements are subject to known or unknown risks or uncertainties, and therefore actual results could differ materially from past results and those expressed or implied in any forward-looking statement. For a non-exclusive list of factors that could cause actual results to differ from expectations, please refer to today’s press release as well as any further disclosures the company makes on related subjects in the Company’s 10-K, 10-Q, and 8-K reports. In addition, during today’s call, management will make reference to non-GAAP financial measures including sales at constant currency, adjusted operating profit, and adjusted diluted EPS. Reconciliations and limitations of the non-GAAP financial measures to the most comparable financial results were prepared in conformity to GAAP and are provided in this morning’s earnings release. I now turn over the call to West’s CEO and President Eric Green.

Great, thank you Quintin and good morning everyone. As you saw in this morning's press release, we delivered another solid quarter with overall growth in net sales at constant currency of 9.7%. This reflects strength across the entire company; both business units and all geographic regions contributed. In our Packaging Systems business, sales grew nearly 10% at constant currency; our high value product portfolio delivered another quarter of double-digit growth. As anticipated, we continued to experience strong demand from our customers for the higher performance FluroTec products ready-to-sterilize and ready-to-use Westar product, we also experienced strong demand with Envision, in our industry leading NovaPure offering that ensure the highest standards of quality. In Delivery Systems, sales grew above 9% at constant currency versus the prior quarter, delivering sequential growth as we expected over the third quarter of 2015. The growth was driven by demand for diabetes care products including components for insulin pens and glucose monitoring devices. Growth in high-value products and volume driven efficiencies produced 190 basis points of gross margin expansion in the quarter. The related increase in gross profits more than offset $8 million of currency headwinds. This led to Q4 adjusted diluted EPS of $0.47, which was in line with our expectations despite a $0.05 currency headwind. Excluding currency impact, earnings per share would have grown by 16% year over year. The solid fourth quarter capped a successful full-year 2015 as highlighted on slide 4, resulting in net sales of $1.4 billion in constant currency sales growth of 7.2%. For the year, we generated adjusted diluted EPS of $1.83, which was in the upper end of the most recent guidance range. This was despite a $0.29 headwind for currency. Excluding that impact, we would have grown adjusted diluted EPS by 19% over 2014. On slide five, we are showcasing a history of success and the strong foundation. In the fourth quarter, we reformulated our long-term strategy to become the world leader in the integrated containment and delivery of injectable medicine. In order to achieve that, I believe that we need to be more market-focused. At the start of this year, we realigned our company with that in mind. We formed three functional groups: commercial, global operations, and innovation and technology. Each one will focus on customer experience, operational excellence, and product service differentiation. We have historically managed through two segments, each having regional business units. As shown on slide 6, the commercial customer-facing organization is transitioning to focus on three major market segments globally: pharma, biologics, and generics. While all three segments are involved in the injectable therapy space, they each have different challenges and needs. We believe we can more effectively deliver a broad proprietary product portfolio by focusing on these particular needs in each market, from standard to high-value products, delivery devices, and our industry-leading contract manufacturing. West is in a unique position to address these market needs with tailored products and service offerings. Turning to slide 7, the chart provides our relative net sales by category in 2015. Going forward, we are combining our packaging components sales with proprietary devices including reconstitution into the safety system CZ and self-injection devices like SmartDose to form the proprietary product business segment. The proprietary products represent just under 80% of our sales in 2015. Sales and marketing responsibility resides with the new commercial organization. Our industry-leading contract manufacturing segment, representing just under 20% of overall sales, will become a new standalone reportable business segment, also under the leadership of the commercial organization. Critical to our long-term strategy is the improved coordination in our global operations and supply chain, as noted in slide eight. To that end, we are combining management of our global capacity in the newly formed global operations organization. With favorable macro trends for injectable therapy, the demand for our products and services has expanded and will continue to add to our capacity and capability. In 2016, we expect to invest between 10% to 12% of sales in capital expenditures. Projects range from the ongoing construction of our new center of excellence in Waterford, Ireland, through further expansion of high-value component capacity in Kinston, North Carolina, and in Singapore. We are convinced that our increased focus on operational efficiency and excellence will improve productivity, operating leverage, and profitability at our sites around the world. In conjunction with the overall organizational changes, we are optimizing our existing capacity and leveraging our talented workforce. This past week, our Board of Directors approved a restructuring program that will result in a modest reduction in force as we streamline our operations and investments in commercial activities and technology that will drive growth for the future. Bill will provide more details on the program in a few minutes. Turning to slide nine, we're continuing to invest in the development of new products and services. Building on the success of our R&D efforts, the newly formed innovation and technology organization will focus on product design and development to push leading-edge applications to contain, administer and deliver injectable therapies. These include quality enhancements such as the NovaPure 1 and 3 ml syringe plungers, delivery platform including the follow-on generation of the SmartDose wearable injector and new applications of Daikyo Crystal Zenith technology. We continue to see a high level of interest in our technology platforms, as highlighted in last week’s announcement that a major biotech customer is using Daikyo CZ vials and West’s Flurotec stoppers for its new oncology drug. Before I hand it over to Bill, I want to conclude by saying that West’s outlook is very bright. The fundamental long-term trends remain favorable. We can grow profitably by continuing to meet the unique needs of our customers while managing our quality and cost. We have a talented workforce that is over 7,000 strong and focused on quality, safety, and the needs of our customers. As we look at 2016, on slide 10, we are reaffirming constant currency sales growth guidance of 6% to 8%. We expect that high-value products will lead the way with high single to low double-digit growth. Today we provided further 2015 guidance, adding that we expect adjusted EPS of between $2.10 to $2.25, representing 15% to 23% growth over 2015. We will continue to benefit from an improving sales mix and operating efficiency. Now, I turn it over to Bill Federici, our CFO. Bill?

Thank you, Eric, and good morning, everyone. We issued our fourth quarter results this morning. Excluding the effects of special items from both periods, fourth quarter 2015 earnings were $0.47 per diluted share versus the $0.45 we earned in Q4 2014. A reconciliation of these non-GAAP measures is provided on slides 17, 18, and 19. Turning to sales, slide 12 shows the components of our consolidated sales increase. All references to sales amounts are at constant currency. Consolidated fourth quarter sales were $359.7 million, an increase of 9.7% over fourth quarter 2014 sales. Packaging Systems sales increased by $24.3 million or 9.8% over the same quarter in 2014. Our favorable sales mix and volume growth accounted for 7.8 percentage points of the increase. Modestly higher selling prices in Packaging Systems contributed to the remainder of the increase. High-value product sales increased 13.5% versus the prior-year quarter. For the full-year 2015, high-value product sales increased 14.8% versus 2014. Delivery system sales increased $9.5 million or 9.2% over sales in the prior-year quarter. The sales increase was driven by our contract manufacturing business. Fourth quarter sales of proprietary products decreased by $1.6 million and were 23.7% of the segment’s revenues in the quarter. CZ sales and development activity were approximately $3.7 million and SmartDose sample sales were $1.9 million in Q4. On a full-year basis, total 2015 proprietary product sales declined by $2.5 million versus 2014 and represent 24.7% of delivery system segment sales. As provided on slide 13, our Q4 2015 consolidated gross profit margin was 33.3% versus the 31.4% margin we achieved in the fourth quarter of ‘14. Packaging Systems fourth quarter gross margin of 38.5% is 2.3 margin points higher than the 36.2% achieved in the fourth quarter of ‘14. The favorable mix and volume of products sold, modest sales price increases, and continued savings in plant efficiencies more than offset the impact of higher general inflationary costs. Delivery systems fourth quarter gross margin of 21.1% was 1.5 margin points higher than the prior-year quarter. The higher margin was mainly due to a favorable sales mix and greater capacity utilization in contract manufacturing versus the prior-year quarter. As reflected on slide 14, Q4 2015 consolidated SG&A expense increased by $3.6 million compared to the prior-year quarter. The increase was due primarily to higher estimated achievement levels on the incentive compensation program and annual merit increases. As a percentage of sales, Q4 2015 SG&A expense was 0.6 percentage point more than the prior-year period. Slide 15 shows our key cash flow metrics. Operating cash flow was $202 million for the full year of 2015, $30 million more than 2014, primarily due to our strong operating results and lower working capital requirements. Capital additions of roughly $131 million were made in 2015. Roughly half of the capital spend was on new products and expansion efforts including approximately $27 million in Waterford. We expect capital additions of between $150 million and $175 million in 2016, including approximately $60 million of costs associated with the New Ireland facility. Slide 15 also provides a summary of balance sheet information. Our balance sheet continues to be strong and we are confident that our business will provide necessary future liquidity. Our cash balance at year-end was $275 million, $20 million higher than our December ’14 balance. Roughly half of the cash is invested overseas and is generally not available for repatriation without tax consequences. However, we repatriated $120 million of overseas cash during the second half of 2015. Debt at year-end was $298 million, $37 million more than at the prior-year end. Our net debt-to-total-invested capital ratio at year-end was 2.3%, a significant improvement from the prior-year end ratio of 7.7%. Working capital totaled $359 million at year-end, $47 million less than the prior-year end. Our higher cash balances were partially offset by the reclassification to short-term of our $7 million euro note B debt maturing later this month. Our backlog of committed PPS orders remains strong at $413 million as of December ’15, which is approximately 29% higher than our December ’14 balances, excluding exchange. Demand-driven extended lead times for certain high-value products continue to result in advanced customer orders, which inflate our backlog. We expect actions taken, increased capacity, and throughput will reduce those lead times and relieve the backlog in the third quarter of 2016. We have issued our full-year 2016 guidance in this morning’s release. The guidance is summarized on slide 16. Our guidance is based on an exchange rate of $1.12 per euro. Our actual 2015 results are translated at a $1.11 per euro rate. While exchange rates will continue to be a headwind throughout 2016, we expect the euro headwind will be less than the 15% devaluation experienced during 2015. However, currency volatility is high and Asian and emerging markets’ currencies are creating added headwinds to the business in 2016. We expect our 2016 effective tax rate to be approximately 28.5% versus the 27% ETR we experienced in 2015. Our tax rate is highly dependent on a geographic mix of earnings, which is driven by sales of high-value products as we’re migrating toward higher tax jurisdictions like the US, which has an adverse effect on our tax rate. Our guidance includes a $0.02 EPS benefit, resulting from our previously announced 700,000 share repurchase plan, which is intended to maintain a mutual share count. We expect a strong start to 2016 with Q1 EPS growth of between 8% and 15% versus the prior year quarter. We expect to deliver on our full-year earnings guidance of $2.10 to $2.25 per diluted share, which on a constant currency basis, represents an increase of between 15% and 23% in diluted EPS over 2015. That guidance excludes the 2016 restructuring plan charge we announced this morning, which will result in a reduction of course of approximately 1% to 2% of global employees to meet our new market-focused commercial organization. The restructuring charge is expected to range from $23 million to $28 million and will be recognized over the next 12 to 24 months. We expect 2016’s savings of $4 million to $6 million, which is included in our 2016 guidance. Annual savings of $8 million to $10 million are expected as a result of the restructuring. Furthermore, beginning in 2016, we will realign our external reporting to reflect our new organization. Our two external reporting segments will be proprietary products and contract manufacturing products. We will also provide sales data on our three key market groups: Biologics, Generics, and Pharma. We expect that in advance of our Q1 earnings call, we will provide a historical results bridge from our previous reporting segment to our new reporting segment. At that same time, we expect to provide a guidance bridge between old and new reporting segments. I’d now like to turn the call back over to Eric Green.

Great. Thank you, Bill. In summary, we delivered a solid quarter, which capped off a strong year. We are moving into 2016 with momentum and making progress, executing our growth strategy to become the leader in integrated containment and delivery of injectable medicine. I want to invite you to join the leadership team at our Investor Day on March 10 in New York City. Operator, we are ready to take the questions. Thank you.

Hi, good morning. Hey, sort of going through your press release, getting some questions on your actions around the Venezuelan currencies and so could you talk a little bit about that and the size of that business and sort of what your expectations are for Venezuela and I guess the decision why you’re treating it like it is, why you’re doing the treatment this way?

Okay. So let me answer your questions in order. So sales are roughly $10 million annually, Derik, not a big number and our operating profit off of those sales is a little over $1 million annually. In terms of where we are, we have been using the official exchange rate of 6.3 for medical device and pharmaceutical companies, which is the one mandated by law and we have been transacting at that rate through 2015. Obviously, they announced a devaluation to an official rate of 10 going forward. That will impact us to a certain extent, but we will continue to not recognize the full impact of a devaluation to the unofficial rates that you see that are being used to transact, since we’ll be at that required to transact at that rate. We do have exposure in terms of our monetary assets of about $2 million. So when we look at our ability to get dollars out of the country, if we continue to experience delays in receiving dollars out of the country despite the fact that they’ve told us that we can transact at an official exchange rate of 10, we will most likely end up writing off those monetary assets. Again, rough number is about $2 million. If we were to take out the entire operations over there which is what we've disclosed in the release, that number would be somewhere in the range of $7 million to $8 million.

So could you talk a little bit about some of the expectations in terms of capacity builds? I mean I know you're adding things and you're doing that. I guess is there an issue that you may not have enough capacity to sort of meet demand in 2016? I’m just sort of just want to know what are the pluses and minuses around your organic revenue growth guidance around timing.

I'm going to first start with this Derik and then turn over to Bill on some of the guidance. When you look at the capacity and actually I just came back from Jersey Shore and Kinston to see the plans firsthand. Jersey Shore capacity has been running pretty much almost all out because the demand has increased quite nicely with our high-value product portfolio. I can assure you that the lean efforts that are going on at Jersey Shore is increasing productivity on a per hour basis, so that's very positive. When we look at capacity expansion that we’ve completed in Kinston, North Carolina, that has been validated, and we’re working with other customers that continue to divert orders from Jersey Shore to Kinston, North Carolina to start offsetting some of that pressure. But the demand that you see in the backlog is a combination of increased demand from our customers but also still the fact that we have to get it through the system.

So, I think just to add, I agree with what Eric said, we have enough capacity to be able to meet our customer demands today. We do have certain bottlenecks in the operations especially for our high-value products. We've done some work, some lean activities in those affected plants to be able to increase the capacity going through those plants and we've seen the benefits of that at the very end of 2015 and certainly are seeing it in 2016 to begin with. Eric mentioned the Kinston facility and additional capacity there to help process some of those high-value product orders. So we believe we're okay; it is very tight there and we’ll continue to be tight but we believe that the actions that we've taken are actually helping with that tightness, and we believe that we will actually start to see the backlog come down probably in around the third quarter timeframe of 2016.

A follow-up on Derik's question. So, in identifying these bottlenecks, Bill, you just referred to, is the increased demand and the stress on the system that has brought these bottlenecks to light or is this a result of some of the capacity reorganization, creation of centers of excellence and maybe moving things around that has caused the bottlenecks to occur?

Hey Dave, this is Eric. There are two elements that we are seeing: one, there is a true increase in demand that we are seeing from the biologics customers; but also we are seeing an increase with our generics customers, and they tend to come in larger volumes and shorter terms. Therefore, that's one of the issues that we face in the latter half of 2015 that created some of the bottlenecks that we are experiencing today. So it is a little bit of uneven of the demand coming in but it is also due to the demand that we’re seeing with the biologics customers. I would not attribute this to any network optimization that we are working on. In fact, I believe the approach that we’re taking is really with new sites, new capacity, it’s with new orders coming onboard. So it is not creating a bottleneck for us.

Okay. And I wanted to – my next question is around your segments and group. So as I read the press release, I was a little confused by the identification of the groups, but those are not - and those sound like your sales organization, your kind of your direct cost line, your manufacturing production capacity and your R&D organization is what it sounds like. Those groups are to me and so I was a little confused about how you would have revenue to report in global ops and innovation and technology, but the answer is you're not going to report segments along those lines; rather, your reporting segments will be proprietary products and contract manufacturing. So first of all, is that correct? Is my understanding correct?

Absolutely correct.

Okay. And then secondly, you did mention I think reporting or maybe you're only discussing some KPIs around the three groups. What will those be? What will you be telling us about the three groups going forward?

Yeah, so that’s a great question. So when we look at the commercial organization, we are really breaking up into four areas: three of them are around our customer segments of biologics, pharma, engineering. So you will have – we will give visibility of the size and the growth we are experiencing within those three customer segments. The fourth one we are keeping contract manufacturing contained and we will continue to report that as a standalone entity going forward.

Okay. So you will report that in commercial and then will there be anything to tell us about the other two groups or not necessarily?

We'll give you updates and then give you visibility on our cost of our operation. Manufacturing really has been the driver of growth and margin expansion and outflow in R&D is clear line of R&D investment, and we will give you visibility of new products being launched as we introduce them into the marketplace.

Okay. I will ask one more and drop back in, if I could. So I think in the past you have talked to us about contractual arrangements for supply of the inputs to your rubber components and I'm wondering what the precipitous drop in the price of oil does to your supply costs? How much of that comes up for renewal in a given year? For example, how much of that can you effect?

Yeah. Dave, the way to think about it is that there has been a drop in the underlying commodity, but if you remember the way our supply contracts work, we have delay into when that commodity price fits our orders, i.e. our inventory and then when that goes to our P&L, it’s generally a four to six month delay. On the sales side, we have contracts with customers that are multiyear contracts with customers and they allow us to, based on the basket of goods either CPI or PPI, allow us to increase prices based on the last 12 months of activity in those underlying commodities and labor, et cetera. So there is a muting effect or a hedging effect on the input cost and on our ability to catch that in these prices or declining prices as it may be. So the effect is muted. It’s not as strong as the reduction that you see in the underlying commodity. We have baked into our budget that we will – that the commodities are roughly in a standard state about $45 per barrel into our budget. So we've already taken that into our guidance. So if it remains at $30 versus $45, it is not a $35 versus $45 based on this morning. It's Brent, not West Texas by the way, that’s the underlying reference commodity. That would not be a significant difference from where we have guided today.

Okay. And would you be able to qualify what margin impact that slight change within 2016 has on guidance? Can you do that or is that too?

It’s pretty small, Dave, order of magnitude of a couple of cents.

Okay, all right. Thank you.

You are welcome, Dave.

Hi, good morning everyone. I have a couple of questions about the gross margin for the quarter and, more importantly, the outlook. In Packaging Systems, you've had a very strong year, with margins increasing nearly 200 basis points at a gross level. This is clearly driven by the high-value products. However, what factors are preventing this number from rising at a similar rate to last year, or perhaps only slightly below it, while still being above what your guidance indicates?

Yes, I mean, as you know, the growth that we have seen in the high-value products has been a little bit more than what we would look at in terms of our long-term growth trajectory for this business. We believe that our high-value products will continue to grow in the high singles to low doubles. We have seen it obviously this quarter with 13.5 and for the full year, it was 14, almost 15. So that’s above the average. And we see this from time to time, Larry, as customers do make inventory adjustments either based on demand or in this case, some of it was in the action to our extended lead times for some of those high-value products. So we always come back to looking at this as what is the real underlying growth of the business. We don’t think anything has changed in those long-term growth drivers, Eric mentioned that in his comments, that will cause us to believe that our long-term growth trajectory of 5% to 7%, 6% to 8% growth that we expect for the business, of which high-value products being in the high singles to low doubles. On the margin line, there is a corollary effect. So we saw a very high percentage increase in the gross margins for PPS, driven as you said by that really strong high-value product growth in the quarter. But when you look at that, again trying to normalize it, we have things, we know that that growth will come down, so the margin expansion will come down also. We know we will have inflationary increases in underlying overheads and labor, and we know that there are additional costs we are adding to pool. For instance, the work we are doing in Ireland and elsewhere, increase our capacity in the future, we are adding support around that, so regulatory, quality support, underlying support for those new businesses that we’re trying to expand globally around the world. So we look at a normalized growth, Larry, no different than we had in the past. That’s somewhere between 50 and 70 basis points on the margin line over a period of time. Some years, it will be higher as we’ve seen, other years will be less, but that’s where we feel very comfortable with the business in those kinds of ways.

Great. Switching gears a little bit, can you just update us, I know you had an initiative for some of your lower volume products, sort of limit production runs with customers. How has that been – is that still something that’s an ongoing process?

Yes, it is Larry. It’s a long-term process. Though, as you can imagine, you have to work with the customer to get them obviously on the same page as you are. But you’re right, we have made some progress there, especially with some of the customers on the medical device side certainly, and we look to continue to make more progress there. The obvious intention is to be able to stand our productive capacity in meeting the needs of the biologics and the generics of pharma customers for high-value products.

Okay. And then just on the Delivery System side, I assume the margin – the gross margin outlook is primarily driven by the expected 30% increase on CZ and SmartDose or there – is that basically the primary or are there other efficiencies, and I know you had some inefficiencies and build out in some other capacity areas that has been hurting that group. So any color on that would be great.

Yes, Larry, it’s a combination of both. So we’re seeing expansion of our CZ and SmartDose franchise as we continue to build out for that and utilize our facilities more effectively. I think for contract manufacturing business, we will continue to see the expansion with lean processing that team is actually quite very good at. So we are pleased to see the contract manufacturing making good progress.

Okay. Can you – I know, you guys generally provide some kind of quantitative update, I know, maybe you will do that at the Analyst Day. In terms of CZ, I think it was in 14 programs and SmartDose was in 8 last – we heard last quarter. Any change to that or do you want to defer until the next couple of weeks to answer that question?

Larry, I'll provide a quick response to your question. Regarding the SmartDose franchise, we currently have seven in development, and they are performing quite well. The decrease from eight is due to one scheduled for more commercial activity, depending on the PDUFA date with Amgen in July 2016. As for CZ, we're making progress as indicated in our recent announcement; we have ten in formal stability studies and one to four specifically related to the generic zoledronic acid area. Customers are responding positively to the technology, and as I mentioned earlier, we're not standing still; we're also exploring future opportunities for SmartDose to support our customers. We will provide a more detailed update on March 10.

Understood. Regarding the cost savings from the 1% to 2% headcount reduction, we're looking at $4 million to $6 million this year and $8 million to $10 million next year. If we assume that we realize about half of that this year, can you clarify how that will appear in the profit and loss statement? Would it be allocated both to manufacturing and SG&A?

Correct. That’s correct, Larry. As Eric said, most of it was in the reductions or in operations, but there is some SG&A as you can imagine. There is some write-off of assets, and there are some people costs.

Got it. And then obviously the flu situation, but I think maybe going out as you look further, there may be other sort of broader sweep cost cuts like this one or is it more just obviously you’ll have the lean on this year, so it will always be ongoing, tweaks and stuff, but do you see other bigger needle movers that you can actually call out?

Larry, I believe the decision and the change were driven by our growth as an organization. We are increasing our capacity and strengthening our relationships with our customers, and the business remains fundamentally strong. The main factor behind this was the integration of operations that previously spanned three regions and two divisions. While organizational changes often create opportunities, we are doing everything we can to identify ways to redeploy our colleagues effectively. However, moving towards a more global approach in some areas has already resulted in some synergies that we are currently leveraging. As we expand our new facilities, we will continue to add the necessary resources and maintain our investments in both our commercial efforts and innovation initiatives.

Got it. And last question and I’ll stop. CapEx, $150 million to $175 million, I think that’s pretty well high telegraphed as you expand, especially in Ireland. Do you see that number sort of sitting in that range for the next couple of years and then maybe beginning to tail off in the back-end of the outlook?

Larry, I’ll talk more briefly and I’ll let Bill to give you the exact numbers, but the concept is right now, we’re about 10% to 12% of sales. As you can see, the big part is from Waterford, Ireland and some other capacity expansions. Our intent is to bring that down as a percentage of sales as we go forward. This year and next year, you are absolutely correct, Waterford is a larger number, but our intent is to drive that number down as we go forward.

I have nothing to add. That’s perfect.

Okay, great. Thanks guys. I appreciate it.

Thanks, Larry.

Hi, Eric. Congratulations on the quarter and congratulations on that CZ win last week. Can you talk a little bit about how many trials you are involved in on the proprietary products side and what does the number look like to you in terms of the CZ, SmartDose and the proprietary products kind of trial and trial backlog so to speak?

Yeah. Paul, thanks for your comments. As we look at where we’re right now, as we mentioned in regards to CZ, we are in 10 formal stability studies and as I said, 1 to 4 generic zoledronic acid, they’re various stages and as we indicated, we’ve had launch of two vial, CZ vial products just recently. So we’re starting to see the momentum of getting to the point where we actually can start commercializing these endeavors. So I think around SmartDose, again under proprietary, we have seven developments, again at various stages, but the interest continues to be strong. I would also argue that you know with the SmartDose as it stands today we are looking at the next generation which is also stimulating a lot of good conversation with the customers in identifying how we can improve on where we are. And then we’re also obviously anticipating the commercial launch later this year of partnering with Amgen with the Repatha. So those are where we are with our formats and again we're starting to see momentum in the right direction.

And Bill, you guided to 150 bps increase in the tax rate this year. What happens after Ireland capacity gets built, should that tax rate move back down? And then lastly, does the tax rate multi-year get even lower with other moves you can do?

Absolutely, thanks Paul. Good question. We absolutely agree with your comment. So, the idea is we are the beneficiary of having a very, very strong high-value product portfolio. Right now, most of that is manufactured in our highest cost jurisdictions from a tax perspective: both the United States and Germany, little bit in France, and those are the three big ones. So when you think about it as you continue to increase the amount of high-value products sales and profits, they happen to be in those high-cost jurisdictions. So it’s a very high quality problem to have, but one of the reasons that you know from an operating perspective we think that these centers of excellence are excellent ideas from an operating possibility. So making sure that we are providing our customers with the best absolute highest quality product we can that will be uniform in terms of where it’s manufactured from. So we’ll do the core manufacturing in our existing facilities like the US and Germany and France, but we will transfer those for finishing. A lot of the high-value product capacity will be in Ireland and in Singapore. When we get those online, obviously the tax rate differential between someplace like Ireland that’s 12.5% or Singapore that’s even lower than that and say the United States which is 35% will reduce our overall effective tax rate. How low can that go is you know we certainly believe that it certainly would come back to that 27% and quite frankly over a longer period of time, and longer means it’s going to take a long time to get these productive facilities up to speed and validated by our customers. That we could see in the mid-20s.

And then last Eric, why such good traction with Amgen?

I am excited to announce all the customers we have and can confidently say we have excellent connectivity with many customers worldwide. Amgen is one of our outstanding partnerships that began right from their inception, and I believe we are involved in every injectable growth opportunity currently in the market. The truth is, to strengthen our relationships with our customers, we are actively identifying their needs and collaborating with them to address their challenges, which is where West excels. We will continue to pursue this as we move forward, so thank you for your question.

Couple of quick questions for you, in your revenue guidance, what’s the mix between mixed and volume please?

The mix between mixed and volume, is higher obviously on the mix change than the volume. We expect some order of magnitude about 2% to 3% on volume, a little bit of price just under 1%, and the rest would be mix, Arnie.

In your backlog, which has increased by 29%, what percentage is attributed to high-value products compared to the core business, and how much of that backlog do you anticipate shipping this year versus items that may be postponed further?

Yeah, that's a great question. So I won't give you the actual percentages that are high-value products, but the high-value product percentage of the total backlog is increasing. That is one of the reasons why we have such great faith in the future, but also the fact that it has caused the number of orders and the duration of those orders to expand. So normally we would see in our backlog a very high percentage of that backlog be actually produced and shipped in the following quarter. With our increased lead times and our customers’ additional orders, both on the biologics and the engineering side, we're seeing that get pushed out not only to the next quarter being produced and shipped, but being in the next quarter, but in the subsequent quarters after that. So we're seeing a much more even distribution than a big bell-shaped curve for the high-value products and also for the overall backlog. So if we're looking at percentages, rough numbers each of the quarters has increased the amount that we are going to be expecting to manufacture and ship, but the ones in the first quarter obviously is very high, but then the second and third quarters are higher than we’ve seen in the past as a percentage of the total.

So what’s evolving to your longest lead time at this point?

I am sorry, Arnie, I didn’t catch the question.

The longest lead time products, how far out are going on those?

Well, we're in the mid-20s right which has come down from where we were with certain of the capacities, and it’s not the entire plan, Arnie. It’s just, for instance, we had a bottleneck in the washing area where we perform our West process. We've done some changes to the manufacturing footprint, we’ve actually decoupled the washing from the tack off, and that has allowed us to increase the utilization of the wash loads there and has been a big benefit to us. So lead times are coming down, but as I mentioned in my commentary, we don't expect it to get through all of this and see the actual backlog return to more normal levels until about the third quarter of this year.

Okay. Can you give us a quick update on the Arizona facility transition to SmartDose manufacturing?

Yeah, Arnie, that’s going quite well. We are ready to go with the ramp-up of commercial volume when they become available. So at this point, we are the – Arizona investments are in place and being validated.

Okay, two final questions from me. Can you expand a little on the SmartDose sales decline? You obviously have quite a few products in development. We are hearing a lot of new news on large molecule products that would clearly benefit from SmartDose. I guess I'd like a better understanding of what caused the slowdown in your view for the upcoming year. And then I have a follow-up on that?

Thanks, Arnie. First of all, let’s put into context, the slowdown was $2 million on our $1.5 billion business, so not a huge number, but it is reflective of the lumpiness of sampling activities in those proprietary products. As you know, last year, during the fourth quarter of 2014, we had a lot of actual trial activity going on for SmartDose and that has subsequently ceased obviously for that one product. So you don't have that same level of orders coming through. Again, when we look at CZ and SmartDose, the sales level, we expect a significant increase in that sales level from the rough number is $30 million that it is today to maybe even a 50% increase over that for 2016. But it's still small in terms of the overall context of our business. And high-value products in the components proprietary part of this business are going to continue to drive the business in the short term, but important progress is being made on those technologies and we continue to see that and expect it to be very impactful at the back half for our plan.

Final question for me; you mentioned in your prepared remarks $45 million in 2016 from proprietary products, and you also provided in the past your 2021 outlook review. Can you walk us – maybe give us a sense of the 2021 goal for proprietary product revenue in the past from the $45 million in '16 to the past in 2021?

In 2016, $45 million, I think you're referring to, Arnie, is just CZ and SmartDose combined? Remember, there are other proprietary devices like our Medimop which is about $50 million and our safety product which is about $20 million. So overall, our proprietary sales today are rough numbers, $100 million. And we expect that certainly to grow at very significant teens, high teens to low 20s kind of rates, not over the time period. And we expect when we look at the makeup of using the old segment nomenclature of delivery systems business, that’s the combination of the proprietary delivery systems and contract manufacturing, which right now is about 75-25, to be closer to 50-50 by the end of 2020.

Thank you very much.

Hi, thanks for taking the follow-up. On Ireland, slightly different twist on the question that was asked. I believe you’re starting in Ireland with the rubber sheeting for your diabetes clients, at what point, if not already, at what point does that activity begin? And what impact should we expect that to have, I guess, I am thinking primarily tax rate, but if that also has a margin impact, I would be interested in that as well.

Yes, Dave, we are looking at completion of Phase 1 of the Waterford expansion at the end of 2017 with commercial revenue working with our customers in early 2018. So that’s the timeframe of going live with manufacturing now. The volume and the impact is actually quite small on the start-ups. So it’s very narrow on this particular portfolio. The bigger opportunity as we get into Phase 2 of Waterford is putting the capabilities of high-value packaging components in that facility, which will be more in ’18 and ’19 time period.

Okay, so that was going to be my question is, so we are talking about probably close to three, two and a half years to three years to get Phase 1 in place, does it take that long to get Phase 2 in place? It sounds like, maybe not quite.

Phase 1, just to remind you, it also has all the backbones of any additional expansion that will require on this campus, so it’s really more of a campus-like manufacturing process. So it won’t require the same amount of time to implement.

Okay. And then my last question on R&D and innovation. Last quarter you called out in remarks that the development activity had shifted toward customer-funded projects, which then was the reason why R&D was a little lower year-over-year. This quarter, R&D in each segment jumped up a little bit year-over-year. And I hear you talking about second generation SmartDose. If you could just maybe zoom out on that and help us understand what their trajectory is, the activities within R&D, are they more say, company-funded and proprietary or are they more customer development projects where customers stepping in to fund? And how does that trajectory look over the next couple of years?

Actually, there are two basic drivers to that going forward, right? The actual change that you’ve heard in Q4 and going forward is, one is looking at the next generation of SmartDose and that is launched and we are working on that at this point. And also, if you look at a high-value product portfolio in NovaPure, that’s specifically around the one and the three ml plungers that gives us an opportunity to invest in R&D and launch into commercial – meaningful commercial revenues down the road. So those are the types of investments. Now, I do want to just comment that as we – one of the changes that we made with our organization that’s having multiple pockets of R&D and innovation in different parts of the organization, we’re bringing that together, so we can start looking at the interconnectivity between containment and delivery devices. So while it gives some efficiencies on leverage on our innovation group, we will still continue to invest and these are two particular areas that we have invested in Q4.

Okay. Thank you.

Thanks, Andrew. An online archive of the broadcast will be available at the site three hours after the call. You can also dial-in for replay and that will be available through February 25, and those instructions are on the press release. Thank you again for attending this call and we look forward to talking to you again on our March 10 Analyst Day.