West Pharmaceutical Services Inc (WST) — Q3 2025 Transcript

Good morning, and welcome to West's Third Quarter 2025 Earnings Conference Call, which has been webcast live. With me today on the call are West's CEO, Eric Green; and CFO, Bob McMahon. Earlier today, we issued our third quarter financial results. A copy of the press release, along with today's slide presentation containing supplemental information for your reference, has been posted in the Investors section of the company's website located at investor.westpharma.com. Later today, a replay of the webcast will also be available in the Investors section of our website. On the call, we will review our financial results and provide an update to our business and outlook for FY '25. Statements made by management on the call and the accompanying presentation contain forward-looking statements within the meaning of U.S. federal securities law. These statements are based on our beliefs and assumptions, current expectations, estimates, and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results as well as those expressed or implied in any forward-looking statements made here. Please refer to today's press release, as well as other disclosures made by the company regarding the risks to which it is subject, including our 10-K and 10-Q. During the call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, free cash flow, and adjusted diluted EPS. Limitations and reconciliations of non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in this morning's earnings release. I'll now turn the call over to our CEO, Eric Green. Eric?

Thank you, John, and good morning, everyone. Thanks for joining us today. I'm pleased to report we delivered solid third quarter results with revenues, margins, and adjusted EPS coming in above our expectations. Revenues of $805 million were up 5% on an organic basis. The adjusted operating margins were 21.1%, and adjusted EPS of $1.96 was up 6% compared to the prior year. As you will hear today, our business momentum is steadily improving, and we expect this trend to continue. As a result of this strong performance, we are increasing our guidance for 2025. I want to especially thank our West team members for their efforts and continued focus in achieving these results. Before getting into the details of our Q3 performance, I want to highlight two notable appointments, which further strengthened our executive leadership team. In August, our new CFO, Bob McMahon, joined West. Many of you know Bob, and he has done an exceptional job transitioning into his role, already visiting several of our sites and meeting with many of you. I'm excited to have Bob on board and partner together to lead the next phase of West's growth. I'm also extremely pleased to welcome Davis Matter, our new Chief Technology Officer, who also joined West in August and is tasked with accelerating our innovation and new product introductions. Our team looks forward to benefiting from his industry experience and expertise. Now back to the Q3 financial results. Let's begin with a review of the Proprietary Products segment. Revenues of $648 million were up 5.1% on an organic basis. These results were driven by HVP components, our largest and most profitable business. We have a strong market position because of our trusted reputation for high quality, scale, and reliability. This business has continued to strengthen each quarter, and revenues increased 13% organically in Q3. Several factors drove the strength of HVP components. First, elastomers for GLP-1 have strong growth and now account for 9% of total company sales. We benefit from our long-standing relationships as we partner with our customers in this market, supporting them as they expand their GLP-1 franchises. We're also collaborating closely with customers who are launching a pipeline of new GLP-1 molecules and generics. And we expect this market to continue to evolve as there are a number of new early-stage trials seeking to expand the range of indications and treatments using GLP-1s. Second, in biologics, we're encouraged by the underlying market demand as ordering trends are returning to normal. The participation rate for biologics and biosimilars is trending above our historical levels year-to-date of greater than 90%. The third driver is HVP upgrades, including Annex 1. Given our strong market position with our elastomers portfolio, we are well positioned to benefit from what we believe is a long-term opportunity. We are tracking ahead of our expectations, and we currently have 375 ongoing Annex 1 upgrade projects. With the robust pipeline of new projects and our ability to partner with customers to convert current projects into commercial production, we anticipate Annex 1 and related HVP upgrades to deliver 200 basis points of growth this year, up from our previous expectation of 150 basis points. We expect Annex 1 to drive continuing demand for higher-quality products as European regulators now require pharmaceutical companies to demonstrate their culture of continuous manufacturing improvement. West is well positioned to support our customers with HVP components and technical documentation to meet those requirements. We continue to work through our constraints at our HVP manufacturing site in Germany. During the quarter, we made good progress hiring, training employees, and installing new equipment to expand capacity. These efforts, in addition to product tech transfers, will allow us to further leverage our investments made in our global HVP components infrastructure and balance production across the network, enabling us to drive future growth. Moving to the HVP Delivery Device business. Revenues declined compared to the prior year as expected, driven mainly by the $19 million incentive payment we received last year. With respect to SmartGild 3.5, which is less than 4% of the total company revenues, we are improving profitability every quarter by driving down costs and remain on track to go live with automation in early 2026, even as we continue to evaluate options to maximize the value of this business. Lastly, our Standard Products business increased 3.6% on an organic basis this quarter. Converting standard products to HVP components over time serves as an important funnel for our business by generating revenue and expanding margins. Turning to the Contract Manufacturing segment. This business performed well in the quarter, delivering revenues of $157 million, growing by 4.9% organically. Moving forward, we are now utilizing our Arizona CTM footprint to consolidate operations from less efficient locations. We continue to expect the second CGM contract to conclude at the end of Q2 2026. The future available space is in an attractive location with a strong operating team that is resulting in a number of promising discussions with multiple customers. Turning to our Dublin site. We continue to ramp production of delivery devices for the obesity market. We are currently validating and testing the equipment installed for the commercialization of our drug handling business in early 2026. GLP-1s in the Contract Manufacturing segment account for 8% of total company sales. Overall, I'm very pleased with the performance of both the proprietary products and contract manufacturing segments, along with the trends that we are seeing in our business and in the markets. Now I will turn the call over to Bob. Bob?

Thanks, Eric, and good morning, everyone. It's great to be here, and I'm pleased to be part of the West team. West's Injectable Solutions and Services business is second to none, and I'm excited about the long-term growth potential of the company. Now before getting into the details, I wanted to highlight that we have revamped our quarterly presentation to provide some supplemental segment information, which we may find useful going forward. Now on to the quarterly results. In my remarks this morning, I'll provide some additional details on revenue as well as take you through the income statement and some other key financial metrics. I'll then cover our updated full year and fourth quarter guidance. As Eric mentioned, third quarter revenue was $805 million, above the top end of our revenue guidance, beating our expectations. On a reported basis, total revenues increased 7.7%. Currency had a positive impact of 2.7 percentage points, resulting in organic growth of 5.0%. Of note, the incentive fee reduced organic growth by 280 basis points. So a solid result overall. I'll now go through each of our businesses in more detail. Within the proprietary segment, HPV components, our largest business, accounting for 48% of total company sales, was the standout. Revenues of $390 million increased 13.3% organically. This was driven by robust growth in GLP-1s, HVP upgrades, including Annex 1, improving performance in biologics, and a normalizing demand environment. We are very pleased with the continued momentum in this business this year. In our HVP delivery devices business, which accounted for 12% of the company's net sales in the quarter, revenues were $99 million. This was down 16.7% year-on-year organically, but roughly flat sequentially as we expected. In Standard Products, revenues of $158 million increased 3.6% on an organic basis, even as we saw Annex 1 accelerate. Standard products accounted for 20% of total company net sales this quarter. Now looking across our end markets for proprietary, Biologics revenue was $329 million and up 8.3% on an organic basis. Growth in products using our laminated technology and strength in Westar and Envision offset the headwind from the incentive fee in the prior year. Pharma revenue rose 1.4% on an organic basis to $183 million, with growth in RU seals, stoppers, and plungers. And generics revenue increased 2.6% organically to $136 million, also driven by growth in seals and stoppers. Now finishing up revenues. Our Contract Manufacturing segment delivered $157 million, growing 4.9% on an organic basis. Segment performance in the quarter was driven by an increase in sales of self-injected devices for obesity and diabetes, partially offset by a decrease in sales of healthcare diagnostic devices. Contract manufacturing accounted for 20% of total company net sales in the quarter. Pricing was a positive 1.7%, and we are tracking at roughly 2.4% for the first nine months of the year, right in line with our 2 to 3 percentage point expectation. Now let's take a closer look at the rest of the P&L. Gross margin was 36.6% in the quarter, up 120 basis points as compared to the prior year. This strong result is due to the positive mix of HVP components, as well as good execution in our supply network. Adjusted operating margins of 21.1%, while down 40 basis points compared to the prior year were ahead of our expectations. And below the line, our net interest income was $4.5 million. The tax rate came in at 19.8%, slightly better than expected, and we had 72.6 million diluted shares outstanding in the quarter. Now putting it all together, Q3 adjusted earnings per share were $1.96, up 6% versus last year and $0.26 above our confident guidance. Moving on to a few cash flow metrics. Year-to-date, operating cash flow is $504 million, up 9%, while free cash flow of $294 million is 54% higher than last year as capital expenditures are down 23%. To date, we have invested $210 million in capital expenditures and remain on track for $275 million for the year. In summary, we had a very solid third quarter operationally that exceeded our expectations. And as a result, we're increasing our full year guidance on both revenue and earnings per share. For the full year, we are now anticipating our reported revenue to be in the range of $3.06 billion to $3.07 billion. This represents reported growth of 5.8% to 6.1% and organic growth of 3.75% to 4% for the full year. The foreign exchange environment has remained relatively stable since our last guide and so currency is still expected to be a $59 million tailwind for the year. We are also increasing our full year adjusted EPS range to $7.06 to $7.11 representing year-on-year growth of 4.6% to 5.3%. A few more items to help with your modeling. This assumes flat other income and expense, a 21% tax rate in the fourth quarter, and 72.6 million diluted shares outstanding. In addition, we continue to anticipate $15 million to $20 million in tariff-related costs this year and now expect to mitigate more than half of those costs in 2025. For 2026, we expect to fully mitigate the impact based on the current tariff landscape. Our updated full year guidance translates to fourth quarter revenue of $790 million to $800 million. This is a reported increase of 5.5% to 6.8% and an organic increase of 1% to 2.3%. And as a reminder, we also had a $25 million incentive fee in Q4 of last year, which we do not expect to repeat this year and is reducing our expected Q4 organic growth by roughly 360 basis points. In fourth quarter, adjusted earnings per share are expected to be between $1.81 and $1.86. Before turning the call back over to Eric, and while we're still going through our planning process, I did want to share a few thoughts on 2026. We are exiting 2025 in a good place. We believe destocking is largely behind us, and demand will continue to improve for our key growth drivers. That said, our end markets remain dynamic, and we could see a range of outcomes. So we will be prudent with our planning. Our HPV components business will lead the way given the multiyear growth drivers of GLP-1s and HVP upgrades driving our biologics end market. We are anticipating the remaining CGM contract will continue to run at full capacity until exiting in mid-2026. This is roughly a $40 million headwind for the second half of 2026. We are actively working on refilling that space with higher-margin business with the expectation of the pacing and ramp, the pipeline coming in better view by the end of the year. Lastly, we are building out drug handling in our Dublin facility, and this is expected to add roughly $20 million in revenue for next year, which will help offset the CGM contract. And we will get back to expanding margins. So while early, I believe 2026 is coming into better focus, and I look forward to giving specific guidance on the next earnings call. Now I'd like to turn the call over to Eric for closing comments. Eric?

Great. Thanks, Bob. To summarize, we had a solid quarter, resulting in an upward adjustment to our guidance. We believe the positive trends in our business are sustainable due to strong execution, improving market conditions, and our ability to respond to the evolving needs of our customers; our reputation for high quality and services is paramount. West has key competitive advantages that allow us to protect our business model long term, especially in our highest-margin HVP components franchise, and we continue to make progress improving our margins. This is why I'm confident that we are well positioned for Q4 and into 2026. Operator, we're ready to take questions. Thank you.

Congrats on the quarter. As you think about your long-term construct of 7% to 9% growth, are we heading there in 2026 in your opinion in terms of the momentum you're citing here in 3Q?

Thank you, Paul. I’ll start and then invite Bob to join the discussion. When we consider the key factors needed to achieve our long-range plan and long-term goals, the focus is on the HVP components, which we believe will enable consistent double-digit growth year-over-year. The primary drivers for us are biologics or biosimilars, which also play a role in Annex 1, along with GLP-1. We are confident that we have established a solid foundation to progress in the right direction toward our long-term objectives. Bob, do you want to add more detail?

Yes. Paul, thanks for the question. As Eric said, the biggest growth driver we're seeing has really nice momentum. As I mentioned on the call earlier, we've got some puts and takes here in 2026. But we feel good about the long-term growth of the business. We have to work through the puts and takes of some of the contracts that are coming in and out. And right now, I would say the street is in a good place.

Maybe just to follow up on that. The HVP components, as you mentioned, are a significant part of the story. We saw strong growth in the second quarter, and this has continued into the third quarter, particularly with GLP-1 and Annex 1. Could you discuss the sustainability of maintaining growth above double digits? You mentioned that we expect to see this in the fourth quarter as well, but can you provide more than just confidence in that trajectory? Additionally, regarding your comment about expanding margins next year, could you elaborate on the new factors influencing that, specifically around gross margin, volume leverage, or your cost actions?

Thanks, Michael. And you're absolutely correct on the HVP components. The growth is starting to sequentially get stronger from the beginning of this year as we were looking at how the order patterns are becoming more normalized. So we're seeing the markets become more in line with what we would expect long term. We're seeing that with the order trends through our discussions with our customers. Another precursor for us is the bioprocessing space, which is a key indicator of what we should see and expect in the near to mid-term. We are confident in our position in biologics and biosimilars, particularly of the products in market, but also new approvals that are in the pipeline. And then Annex 1 is another key driver that has multiyear growth potential, converting from standard to high-value products, which is a big opportunity for long-term growth to get us to that growth algorithm we talked about double digits for high-value product components. And Bob, do you want to?

Yes, Mike, thanks for the question. Maybe to add on the first question about HVP components. Certainly, we're feeling good about the momentum here. We're actually building to our Q4 guidance, which is low to mid-teens. So that momentum we're expecting to continue. Obviously, as we get into next year, there are some more challenging comparisons in the back half of the year. But that said, the long-term growth drivers of GLP-1s and Annex 1 and the HVP upgrades are all there. As for the margin expansion, one of the things we saw here in the quarter was the ability to drive more efficiency through our factories with the investments that we've made over time. As well as being able to provide more value-added products to our customers. I would expect that to continue next year. So when we think about opportunities, I do expect gross margin to be an area of opportunity for us to expand margins. But we're also looking at how to ensure that we're also driving efficiencies below the gross margin level. So I'd say it's both. But certainly, as HVP drives the growth, we generate a mix benefit as well.

Maybe one quick question on the CDM contract. It sounds like it will be exiting mid-2026. I appreciate your comments about the $40 million headwind. Regarding visibility and fulfilling that with high-margin business, what are the conversations about this? What would the timing look like for backfilling? Additionally, following up on Mike's question, I know you've considered margin opportunities here. Can you discuss long-term opportunities you've identified for improving margins, including moving toward high-value products and enhancing operational efficiency?

Yes. No, it's a great question, Patrick. Let me cover the first, and then Bob will address your second question. Regarding contract manufacturing, specifically the CGM manufacturing we have in Dublin, we have a number of customers we're engaged with today that are in late-stage discussions to identify what would be appropriate business to replace the CGM business that we are exiting or finishing the current agreement until the end of June of 2026. So we feel good about the prospects. We do know that the economics of the future business are expected to be stronger than what we currently have in that facility. Secondarily, there will be a transition period in the second half of 2026. But usually, we find that as we extract the equipment for our previous customer and install new equipment, there are engineering fees that we incorporate into our revenue for contract manufacturing. So there will be revenues to replace the gap. I won't say it's going to be a 1:1 match, but we anticipate healthy revenues and margin. We expect to have commercial operations up towards the end of 2026, if it is a pretty straightforward process. So I’m feeling good about the prospects, and the ongoing conversations have been ongoing and very, very attractive business that we could put into that location.

Yes. And Patrick, on your second element of the question regarding our supply network, there’s an opportunity in the medium and longer term to optimize our footprint. We are currently going through that analysis, given the investments that we've made to level load and fill those factories with tech transfers while also being able to drive more efficiency within the existing footprint. I think there's a significant opportunity to consolidate certain areas to drive greater efficiency as we go forward. That said, that’s not a 2026 element; it’s more of a longer term opportunity, which makes me feel good that we have near-term opportunities to drive cost efficiencies and also longer-term opportunities.

Guys, congrats on the print and welcome, Bob.

Thanks, good to be here.

Awesome. So Eric and Bob, I had a 2-parter for you. First, I'm curious about high-level headwinds and tailwinds to high-value components in 2026 as you see it today. As I think about it, I see a few tailwinds. One is that you're comping the destock, especially in the first half. Second, you have GLP-1s growing off of a larger base. Third, Annex 1 is accelerating following the uptick in project growth through 2025. Lastly, you have this unique one-off customer situation that I think was about a 150 basis point headwind to 25%, but should benefit $26 million. So wrapping up on this first one, is there anything else I should be thinking about as a headwind on the other side or anything I'm missing? And then the second question, zooming in on one of those on GLP-1 elastomer growth, it was mid-single-digit percent of sales in 2024, and now it's been climbing pretty steadily to now about 9% of total revenues. That implies a pretty healthy growth for GLP-1s in 2025. Is it right to think it's more than like 50% growth? And if so, what's causing that? Should we expect sustained over 20% growth over the next few years? Thank you and sorry for being long-winded.

Yes, I'll confirm your calculations, Dan. We are very pleased with the growth in GLP-1. I'll hand it over to Eric for some insights on what has been driving this growth. It's important to note that we anticipate continued growth in GLP-1s long-term, especially with the potential introduction of oral versions. We believe the market will be a healthy mix of injectables and oral products, with injectables remaining the larger segment. Overall, the market is growing nicely based on feedback from our customers and other sources, and we are well positioned with GLP-1s. This growth leverages our high-value product manufacturing plants, five of which are located globally, giving us significant scale. Our portfolio supports our customers in this area. You mentioned the timing of potential challenges. One area to consider is Annex 1; while we have strong momentum in our contamination control strategy with customers, it is effective. This strategy involves converting our standard products currently on the market into high-value products, which is very beneficial for us. The average margins for standard products are in the 20 to 30% range, whereas high-value products exceed 60%. The timing for these projects to translate into commercial revenue varies among clients. I wouldn’t categorize it as a headwind; it's more about the timing from quarter to quarter. We're very optimistic and confident in the pipeline we are developing. Currently, we are only addressing a small portion of the $6 billion components market opportunity.

Yes, that's an excellent question. So as we think about the key drivers for other product components, you're absolutely correct that GLP-1s will continue to grow over time, even as you think of long-term opportunities with the potential introduction of orals into the equation. We believe the market itself will be a healthy blend of injectables and orals, with injectables continuing to be the larger portion, but the overall market continues to grow quite nicely based on what we are hearing and collecting feedback from our customers. As for the timing of potential headwinds, I think the one potential area is on Annex 1 while we have great momentum on our contamination control strategy working with our customers. There is a very significant opportunity for conversion from standard products that are currently on drug molecules to high-value products. The economics are very compelling, but the timing does vary between clients, and I think that’s something we need to watch closely.

Thank you, and Bob, you might have addressed my question right there, but I have a follow-up on GLP-1. It does seem like from the script data for Novo and Lilly that you're growing a lot faster than the market is growing. I wonder if there's a way to reconcile that. Could there be a compound element here? Is it the clinical trial participation you alluded to? Any thoughts would be appreciated.

Yes, Dan, this is Eric. You're touching on exactly the areas that are influencing the dimensions of growth. We're starting to see an increase in vials, which means our stockers and seals are necessary, which is one factor when we think about our volumes. Additionally, the pipeline of new molecules being evaluated in various clinical trials is another factor that influences growth. So there are multiple factors we are working with several customers. There's also a geographic component, as well as an element surrounding generics that we’re able to support. Overall, it is a little broader than just the script data from our two customers.

Good morning everyone, and first, I appreciate the increased detail and transparency on some of the disclosures this quarter. So a 2-parter for me. One, I just wanted to follow up on Annex 1. There were some updates earlier this year, and just curious how that's impacting customer decision-making and some of the conversions. Is that a catalyst for some of the acceleration we're seeing? And then part two, earlier in the prepared remarks, you talked about liquid handling in Dublin being about a $20 million opportunity, plus or minus. Is that sort of the peak opportunity? Or is there room for growth there in that facility beyond 2026?

Yes, Justin, thank you for that. First of all, regarding Dublin, the $20 million we communicated is really what we are expecting as we ramp up a new site. It takes time to get to full utilization. So I would consider this as early stages. As we move into 2027 and beyond, that's when we get into peak volumes and revenues. As for Annex 1, we're seeing more conversations with the EU regulators as our customers' audits and discussions about the regulations. There is increased interest to continue these projects on an accelerated pace. Again, while we see great momentum in our contamination control strategy, there’s still a tremendous amount of opportunity to capture. We believe we are only at the early stages of converting the $6 billion components opportunity.

I appreciate the transparency and welcome Bob. I want to follow up on the gross margin, which was really strong this quarter. I'm curious if you are experiencing an improvement in the mix within HVP and moving more towards the higher margin NovaPure and HVP components. Is that dynamic continuing?

Larry, I appreciate the feedback. To your question on gross margin, yes, that certainly is an element of it. When you look at our gross margin, despite the incentive fee, we were actually up year-on-year 120 basis points. That was up almost 300 basis points if you take that out on a like-for-like basis. And really the proprietary business and our HVP component business drove that. We are seeing not only the investments that we made over the last couple of years being able to be realized in terms of capacity and incremental margins flowing through but as you're having these higher-value products there, you're driving higher ASPs through the facilities. We’ve seen that as a positive mix standpoint. The team has also done a good job of driving down costs and improving efficiencies. I think we have a multiyear opportunity from that standpoint.

Two quick topics I want to touch on. One is just a question on Q4 guidance and then one is on really visibility heading into next year. So on the fourth quarter, I want to confirm that you essentially bumped up guidance by the magnitude of the revenue beat. And if so, were there any timing dynamics in the third quarter that held you back from bumping up guidance more? Or was this just trying to be conservative in a period of continued uncertainty? So that's the first topic. The second is risk and visibility as a topic. So part of the attraction for a long time of West for investors has been that this has been a great sleep-at-night story, a steady compounder last year, with that in mind, I think the company and certainly the investment community were surprised by the roll-off of the incentive payments and drug delivery and also the changes in contract manufacturing. How would you characterize anything resembling that category of risk heading into year-end? I would guess you feel pretty good about it, but I just want to give you an opportunity to tell us where we should all feel better about this getting back to being the old West again?

Yes, I'll start, Doug, on the Q4 guidance. Don't read anything into that. We don't believe that there was any material pull-forward when we look at it. Actually, if you look at it on a 2-year stack basis, Q4 is accelerated, but there is an element of prudence involved, given the market dynamics. We want to make sure that we feel good about that. And we do have some good momentum there. I'll just leave it at that. Maybe I'll start with the second piece and then turn it over to Eric as well. This is an area I'm focused on intently, and I don't want to declare victory just yet. We do feel good about some of the trends. I would say we are committed to improving and providing more transparency, which we'll continue to do over time. But the market is still dynamic. We are improving our visibility but it remains to be seen how quickly we can return to what we would consider historical performance.

Yes, that's a great question, Doug. Historically, demand within the injectable market has been quite stable. Based on our recent efforts, which Bob also mentioned, we believe that focusing on various segments with clear accountability has given us a better understanding of our markets. Engaging more closely with our customers, something we realized we needed to do more during the pandemic, has been beneficial. I'm confident we're making progress in that area. Market conditions are improving compared to where we were previously. However, we are focused on reducing risks and increasing visibility while providing more information in our customer interactions.

Just one on delivery license, relatively flat year-over-year, excluding the incentive fee. I think you highlighted some improving economics ahead of the automated line coming on in 2026. So, can you just highlight some of the various aspects driving performance during the quarter and the variables that you're seeing on the top line of margins as well?

Yes. No, absolutely. Thanks for the question. When we look at the direct delivery device business, the area we look at it holistically, the entire portfolio, we have administration systems in that category. We have Crystal Zenith and obviously, injectable devices like SmartDose. I'm really pleased with the progress we're making throughout the year for our Crystal Zenith and admin systems. The focus on SmartDose is to drive two levers: one is to drive down costs and improve efficiencies. The progress the team has made is on track with our expectations. We're seeing improved margin performance or profitability quarter-over-quarter, and there's more to come. With the automation that we are commercializing in early 2026, we are currently going through the validation process as we speak. We're confident we will be able to drive even more cost out of the product itself while also looking for alternative options to create even more value. We will communicate on that once we can come to a final decision, but we're making progress in both areas.

Yes. I would just add, Mac, on that. If you look at it on a quarterly basis sequentially, it is where we expected it to be. So we feel good about that and that work that Eric just talked about. We're looking at both those paths with urgency and focus. So I feel good that each quarter, the economics have improved in delivery devices, as we said in our prepared remarks, and there's more room to go. We're also making sure that we're considering what’s best value for shareholders in the long term.

Kind of a 2-part question around your manufacturing network. So after a couple of years of pressure on free cash flow and obviously an elevated CapEx spend for you, you've had a significant improvement in free cash this year as CapEx has normalized down to around 9%. So Bob, you referred a couple of times to the opportunity for network optimization. But there's then the balance of obviously customers thinking about regionalization of manufacturing, some of the policy dynamics, and obviously still significant investment in HVP. So just as you think about maybe that balance of network optimization versus making sure you have capacity available for customers. But how are you thinking about the levels of CapEx needed to support growth? That would be the first part. The second part is there's been several recent headlines around pharma tariffs and MFN. I realize your business is tied to commercial volumes, not necessarily earlier-stage R&D. How tuned in are your customers to those headlines in terms of influencing investment decisions versus the train has left the station in terms of realization of their manufacturing?

Yes, Matt, thanks for the question. Let me start with the CapEx that we have spent. But you're absolutely correct. Our focus really is on the high-value product components with our five centers of excellence that we have, obviously, in Asia, Europe, and the U.S. Fortunately, over time, we've built the capacity and capabilities to support our global customers from multiple sites. As you think about being more regionalized, we can support our customers in all markets. We're well positioned from an infrastructure perspective. You're correct that as volumes increase, we will need to layer in additional capital, but we feel comfortable that we're going to be back to the 6-8% of sales corridor for CapEx, but heavily weighted towards the high-value product components business. Again, the concept of the center of excellence is giving us that network capability and a campus site perspective versus doing more greenfield.

Yes, Matt, I'll just add a couple of things. Obviously, that's one of the areas that's pretty dynamic when we talk about the MFN here in the U.S. just recently. We haven't seen any change in our customer buying behavior. That’s something we'll continue to watch. On the other side, I think that’s a potential lift of an overhang so that they can now move forward. We are seeing real multiyear investments coming into the U.S. But as we think about it, we're talking about kind of level loading. We've made a lot of investments in the U.S. for the COVID capabilities and capacity a couple of years ago. So we're working closely with those customers who are building out additional capacity in the U.S. about this tech transfer that Eric was just talking about. I think we're well-placed to continue to invest. I want to reiterate what Eric said: we do believe that we will continue to drive down our capital spend as a percentage of revenue while disproportionately investing behind our highest growth opportunities.

I had another question on Annex 1. So talk about the 2% contribution this year from Annex 1 projects. Can you break down how that splits between those projects that are in a development or validation phase versus switches that have already been put in place and sort of hitting what I would call commercial production?

Yes, great question. At the end of Q3, less than 40% of the open projects we are currently working on have been converted into revenues since we started transitioning to Annex 1. This indicates how we have ramped up new projects and their progression. We previously mentioned that some projects might be in the development phase for 3 to 4 quarters, while others could take 6 to 8 quarters, depending on how quickly our customers choose to transition.

Just wanted to ask here about capital allocation. First off, a hat tip to the transparency on the deck is beautiful. Given that you guys have a pristine balance sheet right now, producing a lot of cash margins, going the right way, free cash flow seems to be picking back up. So update us on your capital allocation priorities, especially the favoritism towards maybe a repo versus more bolt-on M&A?

I appreciate the feedback. This is Bob. You're hitting on one of the key priorities for us, and talking with Eric and the rest of the team. I’ve spoken with our Board about this, and I think there's an opportunity for us to better define and establish a capital policy. Given our strong balance sheet and cash flows, it's essential to utilize those cash flows to drive the business. I would say to stay tuned, but it is a high priority for our team moving forward.

Thank you all very much for joining us today on the call. An online archive is available at our website at westpharma.com in the Investor Relations section. That concludes the call. Thank you very much, everybody, and have a great day.