West Pharmaceutical Services Inc (WST) — Q3 2018 Transcript

Thank you, Haily. Good morning, and welcome to West's third 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, provide 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 call and a copy of that presentation is 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 risk 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. Good morning and thank you for joining us today. This morning we reported our third quarter performance. We had solid sales growth in our Proprietary Product segment and another quarter of strong growth for Contract Manufacturing. We generated 13% growth in adjusted EPS, despite a difficult year-over-year comparison. Bernard will go over the details later in the call. As we look to the remainder of the year, we expect that high-value product sales will continue to drive growth in the Proprietary Products segment, and as mentioned on past calls, we should see a moderation in contract manufacturing growth due to a strong fourth quarter last year with greater than normal tooling revenues. And Slide 4 shows our organic sales performance by quarter across both segments of our business. In the third quarter, we had organic sales growth of 9.6%, the highest level in the past two years. We had another outstanding performance in our Contract Manufacturing segment, and our Proprietary Products segment grew high-single-digits despite softness in Biologics. Let me provide greater detail of the individual proprietary market units, starting with Biologics. The performance in Biologics was driven by two factors: first, as discussed on the last call, we have a couple of customers that are working off of inventories that were built in preparation for drug launches, while others have made the decision to upgrade to a higher value product and need to work off their current product inventories. These are timing issues, and we expect a return to a more typical ordering pattern through 2019 and anticipate stronger high-value product sales as a result; second, our self-injection delivery devices contributed to lower than expected commercial sales. As a supplier to drug companies, our success is ultimately correlated with our customers' commercial success. We have a number of new development programs in the works, and as they progress into commercialization, our growth will be associated with a more diverse group of drugs and that should lead to more consistent sales performance. That said, we continue to see growth with many customers who are purchasing high-value components for the new Biologic drugs. We know that customers are looking for high quality, reliable, and readily available solutions to contain and deliver their large molecules. In this quarter, we saw double-digit growth in high-value product categories such as Westar RS and RU and NovaPure. The fact that our overall business can offset softness in our Biologics unit and still generate 9.6% overall organic sales growth in Q3 is a testament to our robust product and service offerings and the diversity of our customers we serve. Our generics market unit grew mid-single-digits in the third quarter and is on track to finish the year strong. This growth is driven by volume and high-value product conversions, and the long-term outlook is positive. We see growing interest in our AccelTRA Components Program. We have sampled more than 100 customers and secured our first commercial sales. The Pharma market unit grew strong double-digits. As a reminder, we believe the underlying Pharma market volume growth is in the low-single-digits. So the mid-teens growth we saw this past quarter is atypical. Driving this impressive result was a number of factors including high-value product conversion success, increased adoption of our Vial2Bag product in the hospital setting, and a favorable year-over-year comp due to inventory destocking activity last year. In Pharma, we expect to finish 2018 on a solid growth trajectory. Turning to Contract Manufacturing, we had another stellar quarter with 20% organic sales growth. This growth was driven by continued escalation of demand for diabetes-related diagnostics and drug delivery devices, which reflects strong patient demand in the market. As a result, we expanded capacity sooner than originally anticipated and we're seeing the results of that effort in our performance this year. We expect overall Contract Manufacturing sales in Q4 to remain around Q3 levels as we continue to address this increased demand. Turning to Slide 5, I want to give you an update on our self-injection delivery platforms SmartDose and SelfDose. With an FDA approval and two years of performance data in hand, we have proven that SmartDose is a viable delivery device for large volume and highly viscous drugs. We have two SmartDose customers commencing clinical trials. Multiple ongoing development projects, as well as several feasibility agreements that have recently been signed. Earlier this year, we had the first commercial launch of a drug used in the SelfDose patient-controlled injector. We're pleased with the post-launch reception from customers, which has resulted in increased development activities. We have learned a few lessons over the years, as we work to bring our self-injection delivery devices to market. First, customer interest for self-injection platforms continues to grow, and feedback on our proprietary device technology to address this market need has been well received. Second, the development cycle is long and regulatory hurdles are high. Our teams have demonstrated the ability to work with our customers to help them successfully bring these innovative combination products through the regulatory approval process and into the hands of patients. And finally, long-term commercial success of our devices will depend on the commercial success for customers' drugs, fulfilling a diverse and broad customer base and product portfolio, which we're doing, is key to long-term success. We remain confident that along with the expansion of our component offerings and administration systems, our device strategy will allow us to continue to meet the future needs of our customers. Turning to Slide 6. We announced at the two recent major Industry Conferences, the launch of our Integrated Solutions program. We have talked about how much complexity exists when bringing a combination product to the market. Our customers operate in highly regulated markets and the amount of testing and support services required to gain approval is challenging. At West, we have expertise that is unrivaled in the industry which can help our customers simplify the journey throughout the drug development cycle. We have bundled these services in a comprehensive offering that's complementary to our high-value product and device strategy. We have received positive feedback from our customers since our launch and look forward to bringing this Integrated Solutions program to our full customer base. With a solid Q3 behind us, we're reaffirming full-year 2018 guidance and are focused on finishing out the year strong by executing on our market-led strategy. We are addressing our customers' unique needs with both our products and also with the services and technical expertise that West can deliver, and our One West management system is driving improved gross margin and optimized capital spending in addition to delivering innovative manufacturing strategies that have led to better service to customers. We are early in our journey, but are confident that this global operational system will continue to yield benefits to West and to our stakeholders. Now I'll turn it over to our CFO, Bernard Birkett, who will provide more detail on the financial performance and our long-term outlook. Bernard?

Thank you, Eric, and good morning everybody. So let's review the numbers in a little more detail. Our financial results are summarized on Slide 7 and the reconciliation of non-GAAP measures are described in Slides 12 to 16. In continuing to deliver on our objectives, we are pleased to report for the third quarter, reported net sales of $431.7 million representing continued strong top-line growth of 9.6% on a constant currency basis. Gross profit of $135.6 million is $10.5 million or 8.4% above Q3 of 2017. Adjusted operating profit of $63.1 million was slightly above Q3 2017's $62.9 million. Other income in 2017 included a $9.1 million cost reimbursement of a safety technology we licensed to a third party. This is approximately a 17% increase excluding the Q3 2017 license gain. And adjusted diluted EPS of $0.76 as compared to $0.67 last year represents an EPS growth of approximately 13%. Excluding the impact of stock option exercise tax benefits from both periods and the license income of $9.1 million included in Q3 2017, adjusted diluted EPS grew approximately 27%. Taking a deeper dive into our sales performance, we have seen sales growth in each of our business segments. Slide 8 shows the components of our consolidated sales increase. As already highlighted, consolidated third quarter sales were $431.7 million, an increase of 9.6% over Q3 2017 at constant exchange rates. Proprietary Products sales increased 6.6%, price increases accounted for 1.5% of the sales increase. Our high-value product sales increased mid-single-digits. Sales growth was led by our Pharma market units which had double-digit sales growth in the current quarter. Generic market unit sales growth was in the mid-single-digits. Sales to Biologic customers showed a mid-single-digit decline over the prior year quarter, as Eric has noted. Our high-value products represented 59% of Q3 2018 sales, approximately the same level as achieved in our Q3 2017. For the full year of 2018, we expect mid-single-digit sales growth in high-value products. Contract Manufactured product net sales increased by 20.1%. New product launches in late 2017, particularly in our Dublin and Arizona facilities in support of diagnostic and delivery systems for treatment of diabetes are driving much of the increase in sales. So let's take a look at margin performance. Slide 9 shows our consolidated gross profit margin for both Q3 2018 and 2017 of 31.4%. Proprietary Products third quarter gross margin of 37% was 120 basis points above the margin achieved in the third quarter of 2017. This continued improvement in gross margin is primarily due to mix, production volume, and efficiencies coming from our cost-down operational strategies and One West management system initiatives, which more than offset the $2.7 million of overhead cost increases in Waterford. The Waterford facility generated its first sales of commercial product in Q3 and we expect continued improvement in operational efficiencies as our utilization of this facility increases. Contract Manufacturing third quarter gross margin of 14.3% decreased by 200 basis points compared to the prior year quarter. However, margins increased over Q2 2018 in line with our expectations and comments on our Q2 call. The decrease in margins is principally due to start-up costs associated with launching new programs and idle capacity at facilities undergoing restructuring and product transfer activities. We have continued confidence that Contract Manufacturing margins will improve further in the fourth quarter and into 2019 as we complete our restructuring activities, continue to improve our efficiency and utilization levels, and deliver on the new customer program. Q3 2018 consolidated SG&A expense increased 3.7% versus the prior year quarter. As a percentage of sales, third-quarter 2018 SG&A expense was 15%, a decrease of 70 basis points as compared to the third quarter of 2017 and in line with our expectations. Slide 10 shows our key cash flow metrics. Operating cash flow was $215.4 million for the first nine months of 2018, an increase of $33.6 million compared to year-to-date 2017. Part of this improvement is the non-recurrence of a $20 million voluntary pension contribution made in the prior year. Our year-to-date capital spending is $74.7 million, $26.6 million or approximately 26% lower than a year ago as we have completed our major construction projects in Ireland. Now let's review some balance sheet takeaways. Slide 10 also shows our cash balance at September 30 of $297 million, $61 million more than our December 2017 balance, an improvement of approximately 26%. Debt at September 30, 2018, of $196 million is roughly the same level as at year-end and on a net debt to total invested capital ratio basis, we are completely deleveraged. Working capital of $561 million at September 30th was $97 million higher than at year-end. In addition to the increase in our cash balances which represented 63% of the increase, most of the remaining increases in receivables related to the growth of our business and an increase in our daily sales outstanding metric. We have seen improvements in our inventory metrics as our days in inventory have reduced by approximately 8%. As we consider Q3 results and look to the end of the year, we have reaffirmed our sales and adjusted diluted EPS guidance for 2018 which is summarized on Slide 11. We are reaffirming our full-year sales of $1.72 billion to $1.73 billion and adjusted diluted EPS guidance of $2.80 to $2.90. We anticipate Q4 sales in our Proprietary business to be in mid-single-digits and Contract Manufacturing sales approximately even when compared to Q4 2017. Recall that Contract Manufacturing recorded large tooling sales in Q4 2017, as we prepared for the 2018 increases in our Contract Manufacturing business. Fourth quarter gross margins for the Proprietary business should be consistent with our year-to-date 2018 performance, while we expect improved margins in our Contract Manufacturing segment. All projections continue to anticipate a Euro exchange spot rate of $1.15 per Euro for the remainder of 2018. For the first half of 2018, we used $1.20 per Euro. The lower end of the adjusted diluted EPS guidance range reflects the company's expected performance and $1 million of tax benefits from stock compensation in the fourth quarter of 2018. We continue to 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. We're also revising our capital spending guidance. The new range is expected to be in between $110 million and $120 million which is below the prior range of between $120 million and $130 million. Approximately half of our planned capital spending is dedicated to advanced manufacturing growth and innovation initiatives, with the remainder on normal maintenance, replacement, and information systems. So to summarize the key takeaways for the quarter, continued strong consolidated sales growth and 8% increase in gross profits, strong growth in adjusted diluted EPS over Q3 2017, together with strong operating cash flow growth, the completion of our restructuring activity, the ramp-up of production on new customer programs and the increased usage of our Waterford facility bode well for West's future profitability.

I now like to turn the call back over to Eric Green. Thank you, Bernard. With a strong Q3 completed, we have good momentum to finish 2018 and a solid foundation to build upon for next year. We will share our guidance for 2019 at our year-end call in February. We are focused on initiatives across the company to support our vision to be the World Leader in the integrated containment and delivery of injectable drugs; focused execution of our market-led plan will result in above market organic sales growth, gross and operating margin expansion, EPS to free cash flow growth, and ROIC expansion. We have a great team, and we're well-positioned to deliver on our commitments to our customers, patients, and shareholders for both the short and long-term. Haily, we will open and take questions. Thank you.

Hi, Eric. Could you talk to the capacity utilization right now in Ireland? Are you at 5%, 10%? Where do you want to be next year? And then overall, new products obviously hitting your organic number, what would you highlight as some of those new products picking up this organic pace?

Great, good morning Paul, and thanks for the question. We started thinking about the investments we made in Ireland as really twofold: one is in Waterford. We had our first two shipments, two different products; one is high-value product finishing, the other one is products used in the diabetes care market. Those particular products shipped at the end of Q3, and as you can imagine utilization of that plant is very low at this point. And so over the next couple of quarters, we'll continue to transfer product into Waterford, but also new projects customers have asked us to take on, especially on Westar Select. Up in Dublin, we've expanded on our Contract Manufacturing sites; we have new technology put into the facility particularly focused on diagnostics and diabetes-related delivery devices. I would say at that point in time, we're ramping up; we're clearly nowhere near a hundred percent, I would say more around the 50% range at this point in time, and we have room for additional growth of that particular plant. So two stories really for the different locations. From a new product point of view, Paul, our growth in high-value products is the core fundamental growth of West, and what we continue to see is our teams in the market units are putting together very clear value propositions. If I use AccelTRA as an example, I can tell you that the expectations of the customer uptick on sampling and discussions with our customers are far exceeding our expectations at this point. I think it resonates very well in the generic space. We're also expanding our NovaPure product portfolio, such as Syringe Plungers, and also looking at more capacity. From a device point of view, we just started early tourney on SelfDose, with the level of interest continuing to climb. We're very confident that SelfDose will have another growth driver and high-value products in the near future. And I can't miss the opportunity to say SmartDose is also taking off; the last question on administration systems, the Vial2Bag, the capacity put in Puerto Rico, where first shipments are coming up this quarter, is more of a pull versus a push. So I'm very confident administration systems will drive another lever of growth in our proprietary portfolio.

And your tax rate guidance is centered around the stock option expense, right?

Yes.

What guidance range would you provide post stock expense or is that too difficult?

That's difficult for us to determine because it's completely outside of our control; that's people exercising options. On a ballpark, we're estimating about a $1 million potential impact again, but that's for Q4, but again that's something that's hard for us to predict.

Paul, if you look back to 2017, the impact on our EPS is about $0.44 based on stock-based compensation, and if you look at year-to-date what we've produced today in our results is about $0.18. That gives you kind of the large swing that we've had over the last two years on the stock-based compensation tax benefit.

Hi, good morning. Thanks for taking my question. Eric, in the past, the out-year longer-term guidance commentary, I guess specifically for the next year on the third-quarter call has been a little more specific in regard to the 6% to 8% growth range, and I was curious about the changing characterization of that. Does that mean we should read into that there is maybe not a change in your outperformance of the market but a change in your view of the underlying market or something like that that prompted the kind of different characterization there?

Yes, David, thanks for the call, and good morning. When I look at what we've historically talked about, the financial construct for West, I see no change. I think about the overall performance of the company from the top line and also from a margin expansion point of view. So what we've decided, especially with Bernard new to the characterization, is to take the opportunity to really think about let's just finish the year strong for 2018, and we will give clear guidance in the early part of 2019 on how we look at that full year but also well beyond that.

Okay. Got it, thanks. And then Bernard, I think you may have touched on components of CapEx in the end of your prepared remarks, but if I missed some of those I apologize. Can you speak to the kind of sustainability of the lower level of spending that you're seeing in 2018? I think management has commented about kind of the major building projects being done and how should we think about CapEx demands kind of longer-term?

Yes, if we're looking at longer-term, we're not planning to do any major construction projects or anything in the short to medium-term future, so obviously that has an impact on the level of CapEx that we're going to have on the guidance that we've given for 2018. Looking to 2019, we will firm up the numbers for 2019, as Eric said, when we give overall guidance. But that's one of the major drivers there that we don't really foresee those large building projects, and also we're really focused on the utilization of the existing asset base and driving more out of the investments that we've already made. When we look at CapEx, we divide it into three areas; we're looking at maintenance, which is probably just under 50%, and then the balance really focused on growth and investments in our IT systems.

Very good quarter considering obviously the Biologics was a little bit less than expected. I think you had sort of guided towards at least we were expecting sort of high-single even low-double in that and came in sort of a mid-single-digit sales decline. You called out the obviously the slower, it sounds like one particular product on the self-injectable, is that right? And then obviously the continuance of the inventory destocking, I guess that's just going on longer than expected. Is that sort of the two variables that or the difference from what you originally expected?

Yes, Larry, that's correct. When you think about the self-injection, it's really around the SmartDose today, but when we start to think about looking at the out years, we still remain confident, and that's just the products that are in the commercial phase but there are several development improvements that we have in place that we're working towards. So that gives us confidence about the future opportunity with SmartDose. And in regards to the Core Elastomer high-value products, we've worked with a few customers on transitioning from existing configuration to a future state configuration, and in order to do that appropriately, we were seeing them destock and then ramp up. I can assure you that one of those customers, their entire injectable medicine portfolio is on West or West is on their entire portfolio. So we're confident of the future growth; it's just the timing. I just want to put in perspective the Biologic units is significantly less than 10% of the number of units we've produced in our Proprietary business. So you can imagine a shift towards one large customer has a significant impact on the volume component. But we're close to these customers, we're confident; we're for long-term viability and success.

Are you confident that there will be similar declines in Q4, and do you believe a rebound will occur in 2019? What is your visibility on this?

We're expecting to see some improvement in the fourth quarter, so we wouldn't be looking at another decline and then weren't expecting to see growth rates ramp as we go through 2019.

Okay. And then just a follow-up on that, the margins actually did okay all-in considered, actually had a year-over-year decline of 100 bps gain I believe a little more than that on the proprietary side despite the slower biologics sales. As we look out, assuming the biologics return sort of normalized growth and you did some better overhead of capacity absorption coming out of Waterford, it's fair to say that maybe as we look at 2019 and maybe even 2020, you can get even a larger than normal better pickup on the margin on the margin side?

Yes, Larry, that's a great question. When I look at where we are today and we could talk about some of the pressures we had in 2018 particularly around Contract Manufacturing. The top line is growing extremely fast, but the margin expansion was not there; actually contracted, and that was really due to start-up costs associated with launching new programs and idle capacity at facilities undergoing restructuring and product transfer activities. We have continued confidence that Contract Manufacturing margins will improve further in the fourth quarter and on into 2019, as we complete our restructuring activities, continue to improve our efficiency and utilization levels, and deliver on the new customer program. Q3 2018 consolidated SG&A expense increased 3.7% versus the prior year quarter. As a percentage of sales, third quarter 2018 SG&A expense was 15%, a decrease of 70 basis points as compared to the third quarter of 2017 and in line with our expectations. Slide 10 shows our key cash flow metrics. Operating cash flow was $215.4 million for the first nine months of 2018, an increase of $33.6 million compared to year-to-date 2017. Part of this improvement is the non-recurrence of a $20 million voluntary pension contribution made in the prior year. Our year-to-date capital spending is $74.7 million, $26.6 million or approximately 26% lower than a year-ago as we have completed our major construction projects in Ireland. Now let's review some balance sheet takeaways. Slide 10 also shows our cash balance at September 30 of $297 million, $61 million more than our December 2017 balance, an improvement of approximately 26%. Debt at September 30, 2018, of $196 million is roughly the same level as at year-end, and on a net debt to total invested capital ratio basis, we are completely deleveraged. Working capital of $561 million at September 30th was $97 million higher than at year-end. In addition to the increase in our cash balances which represented 63% of the increase, most of the remaining increases in receivables related to the growth of our business and an increase in our daily sales outstanding metric. We have seen improvements in our inventory metrics as our days in inventory have reduced by approximately 8%. As we consider Q3 results and look to the end of the year, we have reaffirmed our sales and adjusted diluted EPS guidance for 2018, which is summarized on Slide 11. We are reaffirming our full-year sales of $1.72 billion to $1.73 billion and adjusted diluted EPS guidance of $2.80 to $2.90. We anticipate Q4 sales in our Proprietary business to be in mid-single-digits and Contract Manufacturing sales approximately even when compared to Q4 2017. Recall that Contract Manufacturing recorded large tooling sales in Q4 2017, as we prepared for the 2018 increases in our Contract Manufacturing business. Fourth quarter gross margins for the Proprietary business should be consistent with our year-to-date 2018 performance, while we expect improved margins in our Contract Manufacturing segment. All projections continue to anticipate a Euro exchange spot rate of $1.15 per Euro for the remainder of 2018. For the first half of 2018, we used $1.20 per Euro. The lower end of the adjusted diluted EPS guidance range reflects the company's expected performance and $1 million of tax benefits from stock compensation in the fourth quarter of 2018. We continue to 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. We're also revising our capital spending guidance. The new range is expected to be in between $110 million and $120 million which is below the prior range of between $120 million and $130 million. Approximately half of our planned capital spending is dedicated to advanced manufacturing growth and innovation initiatives, with the remainder on normal maintenance, replacement, and information systems. Yes, Larry, that's a great question. When I look at where we are today and we could talk about some of the pressures we had in 2018 particularly around Contract Manufacturing. The top-line is growing extremely fast; but the margin expansion was not there, actually contracted, and that was really due to start-up costs associated with launching new programs and idle capacity at facilities undergoing restructuring and product transfer activities. We have continued confidence that Contract Manufacturing margins will improve further in the fourth quarter and into 2019, as we complete our restructuring activities, continue to improve our efficiency and utilization levels, and deliver on the new customer program. Q3 2018 consolidated SG&A expense increased 3.7% versus the prior year quarter. As a percentage of sales, third quarter 2018 SG&A expense was 15%, a decrease of 70 basis points compared to third quarter of 2017 and in line with our expectations. Slide 10 shows our key cash flow metrics. Operating cash flow was $215.4 million for the first nine months of 2018, an increase of $33.6 million compared to year-to-date 2017. Part of this improvement is the non-recurrence of a $20 million voluntary pension contribution made in the prior year. Our year-to-date capital spending is $74.7 million, $26.6 million or approximately 26% lower than a year ago as we have completed our major construction projects in Ireland. Now let's review some balance sheet takeaways. Slide 10 also shows our cash balance at September 30 of $297 million and $61 million more than our December 2017 balance, an improvement of approximately 26%. Debt at September 30, 2018 of $196 million is roughly the same level as at year-end and on a net debt to total invested capital ratio basis, we are completely deleveraged. Working capital of $561 million at September 30th was $97 million higher than at year-end. In addition to the increase in our cash balances, which represented 63% of the increase, most of the remaining increases in receivables related to the growth of our business and an increase in our daily sales outstanding metric. We have seen improvements in our inventory metrics, as our days in inventory have reduced by approximately 8%. As we consider Q3 results and look to the end of the year, we have reaffirmed our sales and adjusted diluted EPS guidance for 2018 which is summarized on Slide 11. We are reaffirming our full-year sales of $1.72 billion to $1.73 billion and adjusted diluted EPS guidance of $2.80 to $2.90.

Yes, Larry, that's a great question. When I look at where we are today and we could talk about some of the pressures we had in 2018 particularly around Contract Manufacturing. The top line is growing extremely fast, but the margin expansion was not there; actually contracted, and that was really due to start-up costs associated with launching new programs and idle capacity at facilities undergoing restructuring and product transfer activities. We have continued confidence that Contract Manufacturing margins will improve further in the fourth quarter and on into 2019, as we complete our restructuring activities, continue to improve our efficiency and utilization levels, and deliver on the new customer program.

Hi, thank you very much for the questions. I guess on the Pharma segment, can you quantify or just help frame the impact of Vial2Bag is having on that segment and when you might lap that impact or that impact would normalize? Just trying to get a better sense of how to think about the Pharma growth in 2019?

Yes, so when you think about the growth that we had specifically in the Vial2Bag, just to recall our investments we made in Puerto Rico, which is one of our contract manufacturing spaces with their expertise core competencies around injection molding, so we're able to bring that production expansion in Puerto Rico and they're just starting to ramp up as we speak at this point in time. The growth that you've seen in Pharma for Q3 in particular has mostly been around high-value product conversions, and a little bit of the year-over-year comparison perspective. The incremental growth in that unit, a smaller portion, was actually attributed to administration systems. There was growth there, but it's a smaller, smaller element of growth; it's actually less than 5% of total sales is what our administration systems are in the Pharma unit.

Okay. And I know you mentioned the weakness in biologics impacting gross margin to some extent in Proprietary Products, is it fair to say that you expect that segment to expand margins into 2019 as these cost efficiencies go into place and biologics returns to growth?

Yes, Dana, absolutely. The opportunity we have with biologics what's really exciting is our customers are adapting to the higher portfolio within high-value products. I will give an example; there's more interest in NovaPure, and so the higher you go in that spectrum of value continuum, the better the margins are. So it should be a natural lift that we'll see in our due to the biologic stronger performance in the coming quarters.

Just to put that in context, there are a number of drivers we have for gross margin expansion and leading to operating margin expansion. So biologics will affect mix, and that's one of them. Obviously, on the operational cost down strategies in the One West Systems that we have in place, we are not just reliant on one area for margin expansion; there are a number of things that will drive it.

Yes, okay, that makes sense. That's it from me. Thank you very much.

Great. Thank you, Dana.

So a couple of questions. So I guess just to make the math a little easier, what's the specific sales impact from FX in Q4 that you're forecasting? Obviously, FX is a big player for you guys, and so your initial thoughts on 2019 on how you see FX moving?

Versus our original forecast, we have 120 versus 115, we expect that's about a $7 million impact on the quarter.

Okay.

And that's what we called out as well on our Q2 call.

All right and for 2019, any initial thoughts?

Derik, it's a bit early. We're going through our forecast right now, and as we already mentioned, we give full guidance on our Q4 call, but just to again put it in context, we're looking at above market organic growth and growth in operating margin expansion into 2019.

Got it. So what was the Proprietary Product backlog this quarter? Last you used to give us numbers, I’m just wondering can you completely update us on that?

Yes, I can provide you with the information. It's slightly above the December 2017 number, which is roughly $263 million. However, it's important to note that we've made some operational changes to better serve our customers. For instance, our cycle times and lead times have significantly decreased over the past 12 to 18 months, often approaching a 2 to 1 ratio. Additionally, we have implemented a just-in-time model with a few of our large customers, allowing us to plan manufacturing on a very short timeline for them. This creates a pull effect from our operations into theirs. Therefore, I can't guarantee that this is a true like-for-like number; in fact, I would consider it somewhat understated due to the initiatives we've put in place.

Got it, that's helpful. And just two more quick ones on just housekeeping. I mean obviously you had a little bit more of a tax benefit this quarter than you thought, I guess by your estimate how much EPS moved from Q4 to Q3 based on the option exercise?

Probably $0.03 to $0.04.

I understand. This is the first time in my 10 years of covering the stock that I haven't heard the company provide a specific outlook for the top-line margin during the third quarter call. I'm curious if this change is related to the new CFO joining the company or if there are other factors at play, similar to what Dave asked.

Yes, it's really my perspective on providing information to the market. I think we've given a holistic view of how we see our business growing in 2019 and it would be above market; the comp structures are the same, our focus is the same: improving gross margin, operating margin, and EPS; and so there's no reason other than that.

Yes, Derik, I will just add to this absolutely; if you have seen in the last 10 years, I mean the change back I can tell you from our view of the business, we still remain very confident and we don't see a change. However, we've decided to give the full guidance in greater detail and transparency in our February call going forward.

Thanks, Haily. And thank you all for joining us on today's conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you can get a telephone replay through Thursday, November 1, by dialing the numbers and conference ID provided at the end of today's earnings release. That concludes this call. Have a nice day.