West Pharmaceutical Services Inc (WST) — Q2 2018 Transcript

Thank you, Sarah. Good morning, and welcome to West’s second quarter 2018 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 www.westpharma.com. This morning, CEO Eric Green and CFO Bernard Birkett will review our results, give you an update on our business, and provide an updated financial outlook for the full year 2018. There’s a slide presentation that accompanies today’s conference call, and a copy of that presentation is also available on the Investor section of our website. On Slide 2 is the Safe Harbor statement. Statements made by management on this call and in the presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on management’s beliefs and assumptions, current expectations, estimates, and forecasts. There are many factors that can influence the Company’s future results that are beyond the ability of the company to control or predict. Because of these known or unknown risks or uncertainties, 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 which could cause actual results to differ from our expectations, please refer to today’s press release as well as any further disclosures the company makes regarding the risks to which it is subject 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 in constant currency, 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 West’s CEO and President, Eric Green.

Thank you, Quintin. And good morning, everyone, and thank you for joining us today. Before we start the review of our financial results, I am pleased to welcome to the call our newest team member, Bernard Birkett. Bernard joined us as CFO in late June, and you will hear more from him later today. Our outgoing CFO, Bill Federici, is actively working with Bernard in this transition period, and I want to take a moment to thank him. As many of you know, Bill has been a critical contributor to West and our Company’s success over the past 15 years. He’s also been a tremendous mentor and leader for his team as well as a great friend and colleague to his peers and to me. We thank him for his service, and we wish Bill and his family all the best as they embark on the next chapter of their lives following his retirement from West. Turning now to the financial results. This morning we reported our second-quarter performance. We have solid sales growth in our Proprietary Products segment led by double-digit growth in our high-value products. We also saw strong sales growth in our contract manufacturing segment. Because of the strong topline performance, we are starting to see consolidated growth in operating margin expansion in the quarter, in addition to adjusted EPS growth of 25% year-over-year, excluding stock option tax benefits. With the first half of the year in the books, we are reaffirming our overall 2018 sales and adjusted EPS guidance. As Bernard will review in his comments, you will see that his guidance assumes a lower euro exchange rate for the second half of 2018 than previously reported. On Slide 4, shown are our organic sales performance by quarter across both segments of our business. In the second quarter, we had organic sales growth of 9%, the highest level in the past seven quarters. The Proprietary Products segment grew organically by 7% over the prior year, with growth coming from all three market units and all geographies. Looking at our individual proprietary market units, let’s start with Biologics. As we expected and outlined last year, we saw a return to positive organic sales growth in Q2. Our customers in this area continue to turn to us for our high-value products to contain and deliver their sensitive biologics. A few of our large customers are still affected by prior prelaunch activities and inventory management, primarily around self-injection systems. But everything we hear from our customers leads us to believe that we will see continued improvement in the growth rate for the Biologics market unit for the full year. Our Generics market unit had double-digit organic sales growth this quarter, fueled by stronger sales of high-value products led by Westar RU, SelfDose, and Envision products. As we look at the second half of the year, the comparisons start to normalize, and we expect Generics to grow in the mid to high single digits for the full year. Our Pharma market unit returned to positive growth after three consecutive quarters of decline. Consistent with the other market units, we experienced strong high-value product growth. We believe our Pharma customers are beginning to normalize their order patterns following the execution of inventory management programs. As we look at the back half of the year, we expect growth to accelerate as we face more favorable comps from last year. We also believe the additional investments we made in Puerto Rico to expand our capacity for administration systems will lead this market unit to grow in the mid-single digits for the full year. Turning to Contract Manufacturing, this segment has strong sales growth with 17% organic growth. Healthcare customers represent 88% of the contract manufacturing sales, and sales to these customers had strong double-digit gains in the quarter. We are pleased with the success we have had in this area of our business. However, in response to our customers’ increasing demand requirements, we are experiencing some growing pains in the form of labor and operational costs that have impacted the margin this quarter. Bernard will cover the details around this and how we see this recovering. As we look to the rest of the year for Contract Manufacturing, we expect full-year sales growth to be in the high single digits, even in the face of a very tough comparison in Q4. As a reminder, Q4 2017 had a significant amount of tooling sales, which generated the strong recurring sales growth we are now seeing in 2018. We are pleased to announce that several of our newly launched products received industry recognition this quarter, and we introduced another new product category, Westar Select, adding to our already strong high-value product portfolio. Our AccelTRA Component Program was recognized with the 2018 India Packaging Award in the category of packaging design and injectables. AccelTRA was designed for customers like those in our Generics market unit, who are demanding high-quality components, reliable supply, and speed to market. I am pleased with how this program is resonating with our Generics customers. In June, the company received a Medical Design Excellence Award for drug delivery in combination products for our SelfDose patient-controlled injector. The honor was presented to West and our customer Accord Healthcare Limited, who launched their Methofill SELF INJECT product in the UK and Ireland this year using our SelfDose injector technology. And last week, we announced the launch of a brand-new product line, Westar Select. In addition to tighter particulate specifications, this product line will be made available through our optimized global manufacturing network to ensure continued supply while helping to streamline our customers’ regulatory submissions. These products are strengthened by the deep technical team that stands behind them and serves as a valuable resource to our customers. On Slide 6, we have outlined examples of technical customer engagement in support of our customers and our own scientific advancements. These milestones demonstrate the continued momentum we are seeing as we work to further position our company as a scientific destination for the containment and delivery of injectable medicines. I think it’s fair to say that our customers see us as a leader in this space. We have worked hard to achieve this recognition and plan to continue to invest and expand our capabilities in this area of our business. On Slide 7, we present some highlights from the accomplishments of our global operations team in the quarter. Last week, we officially opened our Waterford, Ireland facility. Waterford is designed to be a global center of excellence for West’s advanced manufacturing network. Recently, the site successfully completed its ISO audits and now holds and maintains active drug master files with the FDA and Health Canada. Achieving these milestones means we can now supply commercial products manufactured under CGMP with the appropriate regulatory documentation to support our customers. We anticipate making commercial deliveries in both insulin sheeting and high-value product later this year. We are also in the process of launching new capacity for our proprietary administration systems at our site in Puerto Rico. Puerto Rico is a great example of the benefit of managing a worldwide manufacturing network through a consolidated comprehensive system we now call One West. This business system provides a framework for continuous improvement in safety, quality, service, and cost, while driving lean principles consistently across our global operations. We are also driving more efficiencies and better utilizing capacity across our global network while we manage the growth of the business. This is evidenced in the reduction of CapEx spending for the new infrastructure. As noted in today’s release, we are reducing our CapEx guidance for the year to $120 million to $130 million compared to the prior guidance of less than $150 million. We also continue to be on track with the restructuring plans, which we detailed in our last call. Now I’ll turn it over to our CFO, Bernard Birkett, who will provide more color on our financial performance and details on our long-term outlook. Bernard?

Thank you, Eric, and good morning, everyone. Before I review the details of our Q2 performance, I want to first say how happy I am to be a part of West. With more than 23 years of experience working in med tech, working in healthcare has always been a passion for me. So I’m excited to be part of the company that plays such an important role in helping to improve patient lives. West is well positioned for future growth and I am looking forward to being a part of that journey. I am grateful for Bill Federici’s leadership to date and look forward to continuing the legacy of strong financial management that West is known for. So let’s get to the numbers. In continuing to deliver on the objectives we have set, we are pleased to report for the second quarter reported net sales of $447.5 million, representing strong top-line organic growth of 9% on a constant currency basis; expansion in gross margin to 31.8% versus 31.4% in Q2 of 2017, which represents a 40 basis points improvement, and adjusted EPS of $0.70 as compared to $0.66 last year. Excluding the impact of stock option exercise tax benefits, adjusted EPS grew by 25%. Our financial results are summarized on Slide 8, and the reconciliation of non-GAAP measures are described in Slides 14 to 18. Taking a deeper dive into our sales performance, we have seen sales growth in each of our business segments and market units. Slide 9 shows the components of our consolidated sales increase. Proprietary Product sales increased by 7%, price increases accounted for 1.7% of the sales increase, our high-value product sales increased by 11.7%. The generics market unit business saw double-digit sales growth in the current quarter as expected. Pharma market unit sales growth was in the high single digits, and sales to biologic customers showed low single-digit growth over the prior-year quarter. Our high-value products represented almost 60% of Q2 2018 sales compared to 57% of Q2 2017 sales. For the full year 2018, we expect high single-digit sales growth in high-value products. Contract-Manufactured Product net sales increased by 17%. New product launches in late 2017, particularly in our Dublin facility in support of diagnostic and delivery systems for the treatment of diabetes, are driving much of the increase in sales. We expect high single-digit sales growth in contract manufacturing for the full year 2018. Let’s turn to margin performance and improvements. As provided on Slide 10, our consolidated gross profit margin for Q2 2018 was 31.8% versus the 31.4% margin we achieved in the second quarter of 2017. Proprietary Products second quarter gross margin of 37.2% was 180 basis points above the margin achieved in the second quarter of 2017. The increase in gross margin is due to the favorable mix of products sold, pricing, and production efficiencies coming from the One West initiative, which more than offsets $4 million of overhead cost increases in Waterford, in preparation for the initial production activities in the second half of the year. Contract-Manufactured Product second quarter gross margin of 13.1% decreased by 370 basis points compared to the prior-year quarter. Three items impacted margin: unabsorbed overhead from one of our facilities in the first half of the year. This facility is now back to normal production levels; previously announced plans for consolidation activities; and startup costs associated with launching new programs and increased sales of products with higher purchase material content. We are confident that contract manufacturing margins will improve throughout the second half of 2018 as we complete our restructuring activities, continue to improve our efficiency and utilization levels, which are all part of our One West initiative program, and deliver on the new customer programs. As reflected on Slide 11, Q2 2018 consolidated SG&A expense increased by $8.7 million versus the prior-year quarter. As a percentage of sales, second quarter 2018 SG&A expense was 15.6% versus 15.4% in the second quarter of 2017. Foreign exchange increased SG&A by $1.3 million. Higher incentive compensation costs accounted for approximately half of the remaining SG&A increase. Excluding these items, SG&A grew by approximately 6.8%. For the second half of the year, we are confident in forecasting mid-single-digit growth in SG&A. Slide 12 shows our key cash flow metrics. Operating cash flow was $127 million for the first half of 2018, an increase of $21 million compared to the first half of 2017, primarily reflecting the $20 million voluntary pension contribution made in the prior year. Our year-to-date capital spending is $48.2 million, $18.8 million lower than a year ago, as we have completed our major construction projects in Ireland. We forecast CapEx spend to be in the range of $120 million to $130 million in 2018. Approximately half of our planned capital spending is dedicated to advanced manufacturing growth and innovation initiatives, with the remainder being normal maintenance, replacement, and information systems. Moving onto some balance sheet takeaways. Slide 12 shows our cash balance at June 30 of $225 million, was $10 million less than our December 2017 balance. During the six months ended June 30, 2018, we purchased 800,000 shares of our common stock under our board authorized share buyback plan at a cost of $70.8 million or an average price of $88.51 per share. The completion of our share buyback plan and decreased capital spending projections should result in improved free cash flow in the second half of 2018. Debt at June 30, 2018, of $196 million is roughly the same level as at year-end. On a net debt to total invested capital ratio basis, we are completely deleveraged. Working capital of $479 million at June 30 was $15 million higher than at year-end. Most of the increases in receivables related to the growth in our business and an increase in our day sales outstanding metrics, partially due to the impacts of the new revenue recognition accounting rules. So turning to guidance. On Slide 13, we are reaffirming our full year 2018 sales and EPS guidance range. Even with the impact of lower U.S. dollar per euro exchange rates, which we are forecasting. We anticipate second-half gross margin improvements in both our proprietary and contract manufacturing segments, due to sales mix, production efficiencies, and plant utilization. Our projections now anticipate a euro exchange spot rate of $1.15 per Euro for the remainder of 2018. Our previous guidance was based on an exchange rate of $1.20 per Euro. Our forecast anticipates $9 million or $0.12 per share with the tax benefits from stock compensation for the full year. We expect our 2018 full year effective tax rate to be in the range of 24% to 25%, excluding the impact of the tax benefit from option exercises. To summarize the key takeaways for the quarter, we saw solid sales performance across all segments of our business, overall gross margin improvement, EPS growth, and a reduction in our CapEx forecast for the year. Guidance is maintained, and we are on track to deliver on our goals and objectives for the year. I’d now like to turn the call back over to Eric Green.

Thank you, Bernard. And once again, welcome to West. It’s great to have you on the team. As we look to the remainder of 2018, we believe our long-term growth trajectory remains strong. Through the execution of our market-led strategy, we are making good progress against our goals and objectives for the year. We are growing proprietary and contract manufacturing sales by engaging our customers within the generics, biologics, and pharma markets. We are developing and introducing new high-quality products and services to address unmet customer needs. And we are leveraging our global operations to operate more efficiently and effectively. These efforts are returning value to our customers and to our shareholders. Our continued progress makes us confident in our growth targets for the short and long term, and we look forward to a successful second half of 2018. Sarah, we are ready to take questions. Thank you.

Hi, good morning. Thanks for taking my questions and welcome to Bernard. I wanted to first focus on the revenue number and your nice acceleration there. I think one of the factors that you are expecting to impact the second half was the supply out of Puerto Rico and the contribution to Vial2Bag. And I was wondering if that is still basically proceeding on plan? Or if perhaps there were some contributions to Q2 earlier than expected? Similarly, were there other – I'll call it accelerations in other high-value products that helped Q2 a little more than you might have expected and we should take into account for our second half thoughts? Thanks.

Yes. David, good morning, and thank you for the question. In regards to the administration systems, specifically around Vial2Bag, we’re still on target with our capacity expansion for the second half of this year, which you rightly noted we’ll have a positive impact on our Pharma unit for the second half. What we experienced in Q2, specifically in the Pharma unit, is more around this effort of converting customers to high-value products, specifically with our elastomers. We talked about in past calls, where we have a few customers that are making that conversion from standard to high-value products, and it does take time. It’s a journey, but we’re seeing good progress and traction, and it’s a little bit stronger than we anticipated in Q2.

Okay, very interesting. So given that journey that conversion once started, I would think would have a pretty steady positive influence on high-value product sales. Is that fair?

It does in the sense, David, that as they convert from standard to high-value products, the new basis with the HVPs will continue to have a positive growth for the balance of the year for Pharma.

If I could just ask one more on the cost side, you have a couple of things, the labor and other cost factors that you called out in Contract Manufacturing and the Waterford opening and ramp there. Are those things that begin to alleviate very quickly? Or essentially how long does it take you to scale to alleviate the labor issues and scale into the Waterford plan? Thanks.

Yes, David, good question. Let me take it in two parts, if you don’t mind. One is let’s talk about the gross margins. We had higher gross margin in Proprietary, about 180 basis points expansion, inclusive of about 120 basis points headwind from Waterford. As we discussed, the high-value products really do drive margin expansion as we grow that business near double digits. In Contract Manufacturing specifically, you are correct that we had headwinds in the quarter due to labor and operational startup, but we believe it will stabilize very quickly. The reason for that is because we are ramping up in two particular areas, continuous glucose monitoring devices that we manufacture out of Arizona and Dublin; demand from our customers is ramping a little faster than we anticipated. The second area is around injection devices for the diabetes market, where we’ve also seen very nice expansion. If you look at the growth in those two particular areas, that’s one of the major drivers for our 17% topline growth in Contract Manufacturing, and we expect a strong second half for this year. So we believe the gross margin for Contract Manufacturing will start to improve in the second half of this year.

Super, thank you.

Yes. Thanks, David.

Hi, congratulations on winning West.

Thank you.

On Proprietary Products, with your revenue recognition that you’re doing there now, what was the impact on the quarter in terms of revenue growth and margin?

I believe it was an immaterial effect on the numbers in the second quarter.

Most of the revenue recognition challenges we had year-to-date have really run our Contract Manufacturing business. But the impact of revenue recognition for the quarter is minimal for our business.

Got it. And then on high-value add products, Eric, is that growth rate change or has that been lower than a little bit in your view?

No. The high-value product growth that we’re experiencing in double digits for Q2, we strongly believe that this business should consistently grow in the high single or double digits. So we believe it's in the corridor that we anticipate, not just for this year but going into 2019 and beyond. Just to remind everyone, the volume of units for high-value products is still less than 20% of our total volumes produced annually. So we do believe that the growth trajectory for HVP still has some ways to go.

And then also on the Ireland facility, are you going to have revenue in the third quarter? Or when do you expect a meaningful amount of revenue out of Waterford?

I’m pleased to tell you that we will have some revenue in Q3; however, we need to ramp up both for insulin sheeting and HVP finishing of the final products out of that facility. So there will be some revenue; it won’t absorb that $4 million headwind that we had in Q2 completely. We believe this will take some time. We have orders in hand and are processing them as we speak, and we’ll ramp up gradually over the next several quarters.

I’m sorry for so many questions, but the last one is any color on Crystal Zenith? How is the product update looking there for you, Eric?

Yes. Actually, we are pleased with the progress, and the reason for that is in the first quarter, we had participated with two customers that were approved of final products into the marketplace. The interest level continues to rise. We are seeing various developments from early stages to Phase I, II, and III, all the way up to the recent drug filings for approval, as I mentioned in Q1. We do have line of sight of another product that was submitted for approval. So we are feeling positive about Crystal Zenith, and we are starting to think about the opportunities in that space, which are still pronounced, especially in the Biologics area. Additionally, we are starting to see interest in pharmaceuticals and small molecules. It’s a slow journey, but we are pleased with what we’re seeing. That part of the business grew well in double digits, but from a small base, but expectations are on track.

Okay, thank you.

Thanks. Thank you, Paul.

Hi, thank you very much for the questions, and congratulations on the quarter. My first one here, can you just elaborate a little bit on the strengths in the CMO business you saw this quarter? I know in the press release and you mentioned on the call some benefits from timing of tooling orders as well as some recent competitive takeaways. Can you touch on that, how much of the performance this quarter was driven by that? And what you should expect for the second half of the year?

Yes, Dana, good morning and thanks for the question. We look at the Contract Manufacturing business. Just to give you a little context, we mentioned that about 88% or more than 90% of the business is healthcare. We have been making that transition away from consumer products and are mostly focused on healthcare, including diagnostics markets, and we are having some really good success. We believe that particular market is growing at a mid-single-digit rate. That’s our expectations. But we’re growing faster than that partly due to some competitive takeaways and winning new contracts. The two areas of about 90% of the business, a little less than half of it is directed toward our Biologics customers. To give you an example, we are ramping up an injection device for the diabetes markets for one of our customers. We also participate in manufacturing the NOVACHOICE plunger, which is a high-value product for us. The other part of the growth we saw in Q2 is in continuous glucose monitoring devices, both from Arizona and Dublin. Our production is continuing to ramp up as we’ve been asked to produce more volume because the demand is there. As we look forward, we’re adding new capabilities around cold chain storage and drug handling, which is attracting new customers and projects. I believe some of the volatility we are going to have, on a positive side, will be due to the new offerings we’re going to bring to the marketplace.

Okay, perfect. That’s incredibly helpful. And maybe just my second question, on Generics, again, another very nice quarter out of you guys, actually accelerating from Q1. Can you just elaborate on the strength there? I mean, is that still Asia Pac? And maybe talk a little about the high-value product growth you’re seeing in Generics? What products, what customers, and how you think about just the balance of that as we get into the second half? Thank you.

Yes. Thank you, Dana. I’m really pleased with the Generics team. Obviously, if you look back to 2017, we had some challenges. I truly believe based on interactions with customers that was driven primarily due to our inability to have shorter lead times for our customers in 2016. We had a tremendous volume growth in 2016, and in 2017 customers gained confidence from our lead times, which are now well below – talking about 8 or 10 weeks versus prior 20 to 30 weeks, which is significant. Our customers are praising us now that this change in order patterns. So the growth we are seeing now is normalizing regarding that inventory management cycle, and we’re seeing growth across all customer types: large, mid-size, and small. Let’s break this down a little better. One area is in Asia, where this business continues to grow very fast in double digits like we saw in Q1. We’re also seeing high-value products growth in Generics continue to ramp up, probably a little faster than we anticipated. Westar RU and Envision are gaining traction in that space. So it's across multiple customer segments, and it’s really hitting more high-value products alongside standard products.

Great, thank you.

Great, thanks.

Thank you. Good morning. Just first half, I would just like to congratulate Bill. I am not sure if he’s on the call, but his retirement and thank him for the help through the years, and certainly wish him the best of luck, and of course, also welcome Bernard to the team and I look forward to working with you.

Great. I know Bill is listening to you. So that’s great.

Excellent, excellent. You mentioned just a few global questions; most of my questions have been answered. But on the high-value products, is sustainable high-single, low-double digit growth? Historically, or up until today, it’s been mostly driven by newly approved drugs. Are you seeing more, or do you expect an uptick on the conversion of some of the order legacy products in customer’s pipelines?

Yes, Larry, you’re right regarding the new product pipeline, particularly in all three market units. We’re focused on converting our customers and having focus on high-value products as they go through their approval process. But we’re actually seeing good traction and conversion from standard to high-value products. Additionally, we are seeing upgrades to Westar and Envision from standard products. Every time we are able to take our customers on the journey towards the ultimate NovaPure offering, it not only increases the ASP but also the margins associated with that. So it’s a combination of both, Larry.

Right. And sticking with the product offering, can you maybe just give us a little more color on the new Westar Select, sort of the incremental benefit it provides? I know you mentioned it has a tighter particulate specification. But is that sort of the incremental benefit? And I guess, what’s the expected cadence of growth in benefit? I imagine it will be slow, sort of incremental growth constant over time like many of your other products.

Yes. That’s a good question, because the thesis behind this product portfolio is starting to look at our operations from a process perspective instead of site specifics. One of the conversations we had historically is how can we offer one Drug Master File for regulatory approval that crosses multiple sites. You can imagine the benefit for our customers, but also for us from an operational perspective to start level loading our operations. This is a journey, and it will take some time to convert more customers towards that, but that was really one of the fundamental theses behind the facility built in Waterford. Customers will be able to look towards Kinston, Waterford, and Singapore, and these approvals are made on process and not site-specific, which is a great opportunity. Additionally, we took the opportunity to improve the formulation and processes we put in place around the product to drive the tighter tolerance around specifications. You can imagine that resonates well with our customers. So it is a journey, and it will take time to adopt customers into Westar Select, but this is a change our customers have been asking for a while and now we have the capability to deliver.

Okay, great. And just lastly on the CapEx number, you – it looks like you lowered numbers by $20 million to $30 million. Just a few questions around that; obviously it sounds like it’s a positive thing and sort of relates to successful management of the infrastructure. A couple of questions, is this sort of a sustainable number as we look out at the next few years? Do you have any visibility on that? And is this – I assume, this will help and has probably already helped your operating margin? Is it sort of tied into the ongoing restructuring initiative where I think you said you expect $8 million to $13 million in savings by the end of next year?

When we look at capital expenditures, in the last several years, we had some significant spending on infrastructure. While we feel confident that we’re going to be able to leverage these new assets, i.e., the expansion in Kinston and the new facility in Waterford, we believe fundamentally with the new global operations approach that we can leverage our assets more effectively. We did reduce our guidance for this quarter and will continue to assess because the traction has been very positive for the last few quarters. From my expectations, we need to drive higher utilization of our existing assets to improve upon not just our margins, but our ROIC and other key metrics that are clear indicators of the performance of the company.

Excellent, great. Thanks, Eric. I appreciate it.

Thank you.

Hi, good morning and welcome Bernard.

Thank you.

I’m better molecular biologist than I am an accountant. So I need a bit of clarification on a couple of points. Specifically, with the 606 related points forward of the revenue recognition. So do I take this as you’re now recognizing revenues when they reach a certain level of completion versus being shipped? And I guess, does that mean you can hold products for customers at your facility and still recognize the revenues for them? And if so, doesn’t that cause a spike up in working capital?

Yes. That’s what we talked about as when we looked at our day sales outstanding. We said our receivable book balance had gone up partly due to the revenue recognition changes, primarily in our contract manufacturing business.

Let me add to this, Derik. It’s a good question because in our contract manufacturing business, if you had a chance to visit our site, you’d realize that once we produce product, it’s transported to our customer immediately, whether it’s that day or the day after or the day after that. We don’t hold the inventory in contract manufacturing. That’s how we’ve established the contracts with our customers. In the proprietary business, we manufacture on a made-to-order concept. We have very little inventory on hand, and in addition, we don’t have any agreements that transfer titles to our customers at that point in time. So to clarify, it’s really in the contract manufacturing business, but we’re not holding inventory. We are shipping as soon as we finish production.

Great, thanks for the clarification. Did – unless I missed it, did you reiterate the 6% to 8% revenue growth guide for 2018? And if so, where on the spectrum are you now looking at it, given you’re running 6% for the first half of the year?

Yes. We reiterated that and we’re looking at the midpoint.

Okay. And can you talk a little bit about, I mean, I know some people asked this; I just want a little bit more clarity. Can you quantify the impact on the quarter of the initial stocking orders and the low-margin tooling sales on an organic revenue basis?

The tooling for Q2 was relatively consistent with the Q2 of last year, except for about $2 million. We do have tooling almost on a quarterly basis, but the delta for Q2 is about $2 million.

And the stocking orders? Any – I mean, is that the pull-forward from the…

No stocking orders. To clarify, there was an increase in demand from our customers to increase volume for our facilities because their demand for their end markets is increasing. We started, for example, in our facility in Dublin, we started this journey with a customer and are utilizing existing equipment because that’s a ramp-up process. We’re not going from 0 to 100 within the first couple of months. It’s been a several-months-long process. We do believe by the end of the year, we’ll be nearly at full capacity on the current assets.

Great, that’s helpful. Just one final question. You changed your pension accounting, which is like a little bit of a net benefit to the second order versus the old method. What are the Q3 2017 and Q4 2017 operating margins under the new method, so we can better model to year-over-year comps?

Can we give us a second here for one moment? We have it. So it’s about $700,000 per quarter, so that gives you a feeling of the impact of the pension accounting rules.

Great, thanks.

Okay, thank you.

Hi, good morning.

Good morning, Chris.

I just wanted to ask, we’re finally in a clearly inflationary environment and how do you see your business handling that?

Yes, there are two ways to look at it. One is in our Contract Manufacturing business, we do have agreements with our customers that when raw materials increase, we’re able to pass that along. When we look at net price contribution for our business, it’s neutral in terms of contract manufacturing. In the Proprietary business, we have hedging programs put in place for our key raw materials, and we also adjust our prices regularly to accommodate inflations that may arise whether from raw materials or other costs. So that’s where we stand at this point with our business. We have the ability to pass through costs in appropriate ways.

Okay. And then maybe just one other one. You talked a lot today, thank you, about the high-value products and the growth that you’re seeing. Are there any products you can highlight that you think will be either new or driving the growth in the next sort of one to three years?

Absolutely. Within the high-value product portfolio, we are launching – this is a journey. So if you start thinking about NovaPure, which is the highest quality and most qualified product portfolio within high-value products, we are seeing good penetration and very high growth, but again, it’s a small base, but this tends to be more in the pipelines of molecules for new approvals, and we anticipate continuing to grow over the next several years. We also have the conversion towards Westar Select to leverage our operations that we invested in, both Kinston and Waterford, and that will also be a journey over the next couple of years. I’m very pleased on the initial response by our generics customers with AccelTRA. We launched that less than a year ago, but the number of samples and customers that are going through stability and approval processes gives us confidence that the whole value proposition resonates with our customers, and you’ll see more conversion towards AccelTRA, again, a high-value product portfolio. Lastly, I’m thrilled to talk about the devices side, where SelfDose – we’ve been able to launch as a combination with one of our customers, and we are seeing positive responses by other customers. We believe in the next 12 to 18 months we’ll have one or two more to share with you with the adoption of SelfDose. So I believe there are multiple opportunities for West to continue to drive new innovations into the marketplace, and you see a common theme that we’re pushing up on the value proposition to continue to drive margin expansion through the mix shift.

Great. Thank you very much.

Great. Thanks for your question.

Thank you, Sarah. And thank you, everyone, for joining us on today’s conference call. An online archive of the broadcast will be available on our website at www.westpharma.com. Additionally, you may access the telephone replay through Thursday August 2, by dialing the numbers and conference ID provided at the end of today’s earnings release. This concludes the call for today. Have a nice day.