West Pharmaceutical Services Inc (WST) — Q4 2025 Transcript

Good morning, and welcome to West Fourth Quarter and Full Year 2025 Earnings Conference Call, which is being webcast live. With me today on the call are West's CEO, Eric M. Green, and CFO, Robert McMahon. Earlier today, we issued our fourth quarter and full year 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 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 2026. 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 belief 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 such as our 10-K and 10-Q regarding the risks to which the company is subject. 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 and today's slide presentation. I will now turn the call over to our CEO, Eric M. Green. Eric?

Thank you, John, and good morning, everyone, for joining us today. I am pleased to report we delivered another solid quarter, with fourth quarter revenues, adjusted EPS, and cash flow coming in above our expectations. Before I get into the details of the quarter, I would like to take a moment to reflect on what we accomplished in 2025. We returned to growth and had many notable achievements. Our performance in the year underscores the effectiveness of our growth strategy and our team's relentless focus on execution to deliver for our customers, and we enter 2026 with momentum. Our company surpassed the $3,000,000,000 mark in net sales, achieving year-over-year organic growth of over 4%. We also expanded operating margins, delivered 8% adjusted earnings per share growth, and grew our free cash flow by 70%. Our growth was fueled by increasing demand for high-value product components as we continue to meet the evolving market and customer needs. Our growth in that business is driven by three key drivers: the rise of biologics and biosimilars, the increase in global regulatory requirements, such as Annex 1, which continue to drive HPP conversion, and the expanding GLP-1 market. These are long-term secular growth drivers that we believe West is uniquely positioned to capitalize on. We continue to address the needs of our customers through scientific support and innovation. A recent example is the launch of the West Synchrony prefillable syringe system. Synchrony marks a significant shift in drug delivery solutions by offering a fully verified platform from a single supplier. Designed specifically for biologics, this system sets a new standard in drug delivery by accelerating syringe selection through its comprehensive performance and regulatory data packages. In early 2025, we announced our intention to conduct a comprehensive evaluation of the SmartDose 3.5 mL business. After our portfolio review, we announced last month the sale of the business, which aligns with our ongoing commitment to our customer development pipeline and patient-centric approach for large, on-body delivery devices to drive durable and profitable growth. We expect to close this transaction midyear. For our Contract Manufacturing segment, we continue to scale up operations in Dublin for drug handling, and I am pleased to announce that just earlier this month, we commenced commercial production on this program. This remains an exciting and long-term growth opportunity for the Contract Manufacturing business. Finally, we have strengthened our executive leadership team in 2025, with five out of the 10 members having joined in the last twelve months. This seasoned leadership team is already making meaningful contributions to our organization. With that, I would like to turn to the fourth quarter performance. Revenues of $850,000,000 exceeded our expectations and were up 7.5% reported and up 3.3% on an organic basis. Adjusted operating margins in the quarter were 21.4% and adjusted EPS of $2.04 was up 12% compared to prior year. Free cash flow in the fourth quarter was $175,000,000, more than double the prior-year level. Let us take a closer review of each of the business segments. First, HVP components in our Proprietary Product segment represent 48% of our company's total net sales and continue to be the primary driver of revenue growth and profitability. This business grew over 15% in the fourth quarter and was up 9% for the full year of 2025. HVP components have been tracking on a strong recovery throughout the year to align with market demand. This business is a key differentiator for us because of our quality, scale, and technology. Once customers are specced into our products and reference our drug master file, there is a dependency there that makes it highly unlikely that customers will change partners. Growth was led by strong GLP-1 performance and continued recovery in our non-GLP-1 business. We continue to see increasing demand in this business and continue to ramp capacity. Bob will talk about our outlook in more detail, but we are expecting 2026 will have a more broad-based growth profile driven by our non-GLP-1 HVP components growing high single digits to low double digits. Moving to HVP delivery devices, which represent 14% of our sales. As expected, fourth quarter revenues declined compared to the prior year, driven by the incentive payment we received in the prior-year quarter. However, performance was better than we expected as we saw strong growth in parts of our portfolio. Standard products, which represent 20% of our business, declined 1% on an organic basis during the fourth quarter. Standard products are an important funnel as we convert standard products to HVP components over time, which provides incremental value to our customers and generates incremental revenue and margin expansion for us. Lastly, Contract Manufacturing revenues increased 1.9% organically in Q4. As I mentioned, we commenced commercialization of our drug handling business at our Dublin facility, and we expect this to ramp up throughout 2026. Our drug handling business is more profitable and less capital intensive than the legacy Contract Manufacturing business. Moving into 2026, we have robust momentum as we are well-positioned to advance our strategies supported by growth drivers of biologics, Annex 1, and GLP-1s. In biologics, inclusive of biosimilars, we continue to have great success partnering with our customers early in the pipeline, resulting in a strong participation rate of greater than 90%, which is a key indicator for future HVP components revenue growth for this market. For Annex 1, we are well positioned to support our global customers' contamination control strategy and container closure integrity requirements outlined in the European regulations that were adopted in 2023. For West, this is a multiyear opportunity of currently 6,000,000,000 West components to be upgraded that support on-market injectable medicines. I am pleased with the progress to date with over 700 Annex 1 projects initiated, over half of which have been completed and now generating revenues. This represents less than 15% of the 6,000,000,000 components. We completed 65 projects in 2025. With 325 Annex 1-related projects currently underway, and more in the pipeline, we anticipate these projects will drive additional revenue growth in 2026 and beyond. Now let me spend some time on oral GLP-1s and injectable formats. GLP-1s will continue to support our growth in 2026. As many of you are aware, oral GLP-1s have entered the market, and I want to share our view on their potential impact on the overall market. To provide context, I would encourage you to listen to publicly available remarks from the two leading companies that are producing GLP-1s and their expectation that orals will expand, not substitute, injectables in the marketplace. Both companies have noted that eight of ten patients using oral GLP-1s are new to the market, suggesting that orals will not cannibalize the injectables market, and that several new injectables are about to launch. We expect growth from GLP-1 elastomers in 2026 and beyond for the following reasons. First and foremost, the adoption of GLP-1s is still in the early stages with penetration of the potential patient population in the low single digits by many estimates. Market access is continuing to expand, driving volume. The available clinical evidence continues to show meaningful advantages for injectables. Historically, oral formulations show higher rates of GI adverse events and treatment discontinuations than injectables. With regard to auto-injectors and multidose pens, we believe that there will be multiple injectable formats based on customer preference. We expect any mix shift will happen over multiple years given the installed capacity and investments that our customers have already made. The upcoming launch of injectable GLP-1 generics in Canada, China, India, and Brazil represents incremental business for us. In addition, there is an exciting clinical pipeline of GLP-1 molecules in development for obesity, diabetes, and other metabolic conditions. Many of these GLP-1s are similar to what is currently on the market today. There are also newer combination molecules which potentially offer increased efficacy, improved tolerability, or therapeutic benefits for adjacent comorbidities. Finally, there are a number of exciting new GLP-1 molecules serving indications other than obesity and diabetes that are projected to come on the market over the next several years. These include NASH, sleep apnea, chronic kidney disease, heart failure, pediatric obesity, and cardiovascular risk reduction. With five of these six indications being treated exclusively by injectables, these indications represent potential multibillion-dollar therapeutic classes. As a result, we continue to believe that both injectables and oral formats will continue to grow. Let me turn to our operations. With our strong reputation for quality, scale, and operational excellence, we are poised to capture growth from these three key drivers as we leverage our global manufacturing network. We are actively hiring and training employees who are installing and operating new equipment to optimize our European facilities and respond to strong customer demand. We utilize tech transfers to help our customers balance production across the network, enabling West to drive future growth. We entered 2026 with momentum and are starting the year with guidance of 5% to 7% organic revenue growth and 10% EPS at the midpoint of the range. I will now turn the call over to Bob to discuss the financials and guidance in more detail.

Thanks, Eric, and good morning, everyone. In my remarks this morning, I will provide some additional details on Q4 revenue, take you through the income statement and some other key financial metrics. I will then cover our full-year 2026 and first quarter guidance in more detail. As Eric mentioned, we exceeded our expectations in the fourth quarter, with revenues of $850,000,000. Q4 revenue increased 7.5% on a reported basis and grew 3.3% organically. As we mentioned last call, 2024 included a $25,000,000 nonrecurring incentive fee which reduced our organic growth in the quarter by 360 basis points, so a very good result to end the year. Now a few more details on what drove our growth in the quarter. Our HVP components business was a standout, delivering $390,000,000 in revenue and growing 15.1% organically. This was driven by robust growth in GLP-1s, HVP upgrades including Annex 1, and overall continued improving performance in biologic revenues. The business outside GLP-1s continues to recover nicely, growing mid single digits in the quarter while demand outstripped our supply. As Eric mentioned, we continue to ramp capacity and expect stronger growth in 2026. In HVP delivery devices, revenues were $110,000,000 in the quarter and up $11,000,000 on a sequential basis. The quarter was down 18.1% year-on-year organically, driven by the incentive fee in the prior year. Excluding the incentive fee, revenues would have been up slightly in the quarter. In standard products, revenues of $162,000,000 were down 1.7% on an organic basis, partially driven by Annex 1-related conversion to HVP components. Lastly, our Contract Manufacturing segment delivered $143,000,000 in revenue, growing 1.9% on an organic basis. Segment performance in the quarter was driven by an increase in sales of self-injection devices for obesity and diabetes, partially offset by a decrease in sales of health care diagnostic devices. In the quarter, our Contract Manufacturing segment revenue and profit performance was negatively impacted by a temporary production disruption due to a burst water main at our Arizona facility. The facility is back up and running, and we expect Contract Manufacturing to return to mid to high teens profitability in Q1. Now let us take a closer look at the rest of the P&L. Overall gross margin was 37.8% in the quarter, up 130 basis points year over year. This strong result was due to the positive mix impact of HVP components growth and better-than-expected performance on our HVP delivery device business outside of SmartDose. This proof point demonstrates the earnings power of our business strategy as we continue to upgrade customers to our high value products. Adjusted operating margins of 21.4% were down 30 basis points compared to the prior year as we increased investment in R&D and had higher incentive compensation year-on-year. Below the line, net interest income was in line with our expectations, our tax rate came in at 18.9% for the quarter, slightly better than expected, and we had 72,700,000 diluted shares outstanding in the quarter. Adding it all up, Q4 adjusted earnings per share were $2.04, up 12.1% versus last year and $0.20 above the midpoint of our guidance we gave on the last earnings call. Before moving into 2026 guidance, I did want to highlight our cash flow performance. In the quarter, we delivered operating cash flow of $251,000,000 and our full-year operating cash flow was $755,000,000, up 15.5% compared to the prior year. This is a very strong result and a testament to the West team. We are also continuing to drive increased efficiency in our capital spending. Capital expenditures for the year of $286,000,000 are down $91,000,000 year on year, and we expect another step down in 2026 to a range of $250,000,000 to $275,000,000 as we move back to the construct of spending 6% to 8% of sales in CapEx. The combination of strong operating cash flow and the lower CapEx drove free cash flow to $469,000,000 for the year, up 70% year on year. We ended the year with $791,000,000 in cash on our balance sheet. In summary, we had a very solid fourth quarter that exceeded our expectations and we are entering 2026 with momentum. Now let me talk about our initial guidance for 2026.

First, we anticipate the injectable market to continue to improve throughout 2026 driven by the underlying trends I talked about earlier. In addition, we have assumed the tariff landscape will remain at the current levels globally and we have effectively covered that impact. We are assuming that we will close the SmartDose transaction midyear. To help you with your models, we generated $55,000,000 in SmartDose sales in 2025, and we have adjusted our full year 2026 expected organic revenue growth to account for these revenues. That said, our end markets remain dynamic and we could see a range of outcomes, so we are being prudent with our forecasting to start the year. Now let us get into our full-year guidance. For the year, we anticipate revenue to be in the range of $3,215,000,000 to $3,275,000,000. Reported growth is 4.6% to 6.5%, and with FX and the SmartDose adjustment roughly offsetting to get to our organic growth range of 5% to 7% for the year. From a segment perspective, we expect HVP components to be the primary driver of our revenue growth. We expect this segment to grow high single digits to low double digits organically for the year, accounting for just over five points of total company growth at the midpoint of our guidance.

Given the focus on GLP-1 elastomers, we thought it would be helpful to provide some additional details on how we established our initial guidance framework. First, we expect the non-GLP-1 HVP components to drive the majority of growth, accounting for four of the five points of growth. This is driven by continued recovery in the biologics market where we have a very strong position, Annex 1 HPP upgrades, which we expect to deliver growth in line with 2025, ramping capacity, and price. We continue to expect GLP-1s to grow in 2026 albeit at a slower pace than in 2025. To get to our midpoint, we would expect GLP-1s to grow roughly 10% year on year to deliver that one point of growth. To put this in context, this represents a greater than 30% oral GLP-1 penetration by 2030, which is more aggressive than our current expectation. To frame the low end of our guidance, GLP-1s would need to be flat in 2026, which we view as unlikely for all the reasons Eric talked about. It is important to note, this would free up some capacity, which would be absorbed by our non-GLP-1 business, so the impact to overall growth would not be a full point reduction. To help round out the rest of the Proprietary business, we expect mid-single digit growth in HVP delivery devices after accounting for the SmartDose divestiture and Standard Products to be roughly flat for the year. We also expect Contract Manufacturing to be flat for the year as drug handling revenues of $20,000,000 and other program growth will help offset the CGM contract that we exit starting in July. We expect to expand margins over 100 basis points with margins increasing over the course of the year, driven by HVP components and the SmartDose divestiture. Adjusted earnings per share is forecast to be between $7.85 to $8.20, representing double-digit growth at the midpoint. Lastly, a few below-the-line items to help you with your models. We are assuming roughly $10,000,000 in net interest income, a 20.25% tax rate for the full year, and 72,700,000 diluted shares outstanding for the full year. Moving on to our first quarter 2026 guidance. We expect first quarter revenue in the range of $770,000,000 to $790,000,000. This is a reported increase of 10% to 13% and an organic increase of 5% to 7%. We expect first quarter adjusted diluted earnings per share in the range of $1.65 to $1.70, up 13% to 16% year on year. We exited 2025 in a good place, and we are seeing positive momentum to start the year, driven by our key growth drivers, and we are optimistic about the future.

Thank you, Bob. To summarize, the solid financial performance reported today continues to affirm that our growth strategy is working as we build our momentum in 2026. We have a strong business which delivers unique value to our customers. We remain laser-focused on our critical growth drivers. For the long term, the macro trends support West's growth as a global market leader in the injectable medicine space. Finally, I want to thank our West team members for their commitment and hard work that allowed us to achieve these strong results. Operator, we are ready to take questions. Thank you.

Great. Thanks for the question. Appreciate all the color you guys gave on GLP-1. That was really helpful in terms of framing it both for Q4 and 2026. But I want to dig into it a little bit more. You ended the year on a good note. You have had sort of really steady dollar ramp throughout the year. Looking at what you talked about in terms of 10% at the midpoint of the guide for 2026, 10% growth, that seems relatively conservative given recent trends. I am just wondering, has anything changed in your conversations in recent months with your major GLP-1 customer, especially in Proprietary Product? Is there any change in demand or tone as the orals have launched and ramped? Or just anything else you could say in terms of level of conservatism you have embedded in that? Because we could see some pretty decent upside there.

Hey, Michael. Yes. Look. Let me jump right in. Thanks for the question. I am glad you brought that up. You are spot on. We have not seen any changes in our customer behavior. What I would characterize that as is a very conservative start to our initial guidance. We continue to believe that the oral penetration by 2030 is going to be 30%. In order for us to achieve 10%, it would have to be greater than that, which we do not view as a likely scenario. What we are trying to show is that the strength in the business is more than just GLP-1s and that we can get to our guidance with a lower-than-expected GLP-1 number and feel good about the continued momentum that we see not only in GLP-1s, but the rest of the business.

Awesome. Thanks. Can I squeeze in a quick follow-up, sorry, on the free cash flow? You touched on operating cash flow and free cash flow in the press release a number of times. You had strong free cash in the quarter. You have a solid cash balance. You also have the proceeds from the SmartDose sale coming midyear, I think, $120,000,000 to $130,000,000. Your CapEx is moderating. Are you hinting at something that historically we have not really seen West do a ton of, M&A, but I am just wondering, are you thinking about share buybacks, maybe doing a little bit of inorganic, just what are you thinking there?

Yeah. Michael, good morning. This is Eric. Thanks for the question. We think about the opportunity and our capital deployment. Our first priority, just to be clear, does not take our eye off the organic growth. We will continue to invest in the business disproportionately towards our high-value product components. With that said, if there are technologies that would be of interest that we could bolt on to our existing portfolio, particularly around how we can accelerate our HVP components business while enhancing we think about the further differentiation of our product offering to our customers, that may be of interest. It would have to be accretive. That would be the focus in that area. Bob, do you want to cover the question just on the piece regarding returning cash to shareholders? That is something that we are actively discussing. I view that as upside to our plan. It is one of the beauties of this business that we have got a tremendous cash flow business here, and I will just leave it at that.

Hey, guys. Thanks for taking my question. On the high-value components ex-GLP-1s in Q4, it is nice to see mid single digits. That number keeps moving in the right direction. But you mentioned that demand outstripped supply. Would you be able to give some color on what the delta was, how much the demand outstripped supply, and when you are expecting to bring on the incremental capacity to service that demand?

Yeah, Daniel. Let me touch on the capacity and also the demand that we are seeing build in our HVP components business outside of GLP-1. We have commented previously that we had some constraints with our operations in Europe in 2025, that we were expanding capacity, both labor and equipment. That has continued, and the demand continues to outpace our supply. As you think about the end of 2025 going into 2026, we feel really good about the order book. We feel really good about the demand that we are seeing from our biologic customers, in particular the work that we are doing in Annex 1. So the areas outside of GLP-1 continue to ramp up compared to what we saw in 2025.

Yeah. And, Daniel, just to add on to what Eric is saying, we are not going to give you the details of what that gap is, other than to say our capacity, if I looked at what Q4 was versus Q1, it grew substantially in our European operations, but demand is growing faster. We are continuing to add capacity beyond what our expectations were, I would say, this time last year. That is a good sign.

And a final point for you there, Daniel. If you noticed in our prepared remarks, we said high-value product components excluding GLP-1s are going to grow high single to low double digits in 2026. That is part of the acceleration there.

Thank you, and good morning, everyone. John, you just answered a question that I was going to get clarity on, but Eric, I did want to talk about some of the new GLP-1 molecules that you are seeing in the pipeline and then some of the newer diabetes GLP-1s as well. Are those molecules, the basic question is, are they speccing in on a different type of HVP component, i.e., like a NovaPure or a FluroTec or just a different configuration of some of the legacy programs? Is it similar ASP from what you are seeing in the broader portfolio?

Yeah, Justin, it depends on what part of the portfolio. There is consistency of new molecules being developed that would use similar elastomeric HVP components that we currently supply for the GLP-1 space. We also see new combination molecules that would require some barrier coating that would move it towards FluroTec, the proprietary technology that we have with our partner, Daikyo, and also NovaPure. It is a mix. As we see the pipeline evolve, particularly in that space, there will be more different combinations that will be used. Just to remind ourselves that it is not just one format. We see vials, we see prefilled syringes and cartridges, and we are in a very good position to support all modalities. A step further, when we look at the other parts of the portfolio in the pipeline, outside of GLP-1s, it is very exciting. As I mentioned in the call, the win rate in biologics and biosimilars is consistent with what we have always seen. What I am encouraged about is it is broader geographies for West, and we are able to respond accordingly. That is why it is important, as Bob highlighted, that the capacity expansion, although it is larger than it was in the early part of 2025, we still need to expand capacity to keep up with what is currently in hand and in the pipeline.

Yeah. And just, Justin, to add to what Eric is saying, if you think about the future fast forward, I think it is fair to assume that the pricing today for the future will either be equal to what it is today or higher, given that positive mix.

Hi, congratulations on the quarter, Eric, Bob, and John. The Grand Rapids and the Dublin sites, where are they in kind of ramp-up stage? Are they at 10% utilization, 40%? Can you give us some color on that?

Yeah, Paul. Good morning. I would characterize those two sites differently. Grand Rapids, Michigan, is a little more mature in their ramp-up, so their OEE is closer to what we would say is peak volumes. In 2026, while there is still some room for improvement in further output, we are really pleased with the progress and what they are able to deliver for our customer. In Dublin, it is really two different areas. One, we are still in the ramp-up phase of auto-injectors and multidose pens. As I mentioned in my prepared remarks, we just commenced commercial drug handling operations, which will ramp up throughout 2026 and well into 2027. We are excited on both fronts, and it is going to be a ramp-up phase on aggregate over the next twelve, eighteen, or twenty-four months.

Yeah. And, Paul, just to add to what Eric was saying for the latter piece that he was just talking about with the drug handling, we talked about it being a $20,000,000 opportunity in 2026. That is going to ramp throughout the course of the year, so the second half will be larger than the first half. It is going to be even bigger in 2027. That certainly is not the annual opportunity for that program. It is significantly larger than that, and we are really excited about that going forward.

Hi, thanks for taking my questions. Third question. You, I think, exceeded our margin and maybe the Street's margin expectations in Proprietary Products pretty nicely. It sounds like, or looks like, utilization, you know, may be mixed, but utilization is probably also improving. You have commented on capacity a little bit already. I want to understand how your tech transfer activity and the rebalancing of capacity are progressing in the context of some comments that you have already made about demand outstripping supply and comments about needing to add capacity. I want to understand that more comprehensively about whether demand is outstripping everywhere or if you still have an imbalance of demand is essentially where I am trying to get to.

Yeah, Dave. Good morning. I will focus on the HVP components because that is what is driving the mix shift from a margin expansion perspective. You have seen this historically for West: when we start driving HVP components close to that double digits, the mix shift effect on margins is quite pronounced, and we will continue to see that. Our expectation is to still have a mix shift effect moving forward as we continue to drive. As I mentioned earlier, biologics, Annex 1, and even GLP-1s offer that mix shift effect for us. Our capacity expansion has been heavily focused in Europe, which we are alleviating as we speak, but we are also ensuring that we are ahead of the curve in our U.S. HVP components operations because we are seeing demand increase, frankly, in all HVP plants across the globe, which, as you know, we have five of them. We will continue to invest. Fortunately, at this point in time, a lot of the investments are more around labor versus extensive capital around facilities. Then we will drop in new equipment and extend the lines when necessary. We are very well positioned, but we need to get ahead of the curve. As Bob has mentioned earlier, the demand is outstripping supply right now, which we need to get caught up.

Yeah. I think it is fair to say, David, that we are looking at tech transfers throughout the course of 2026. They will help alleviate some of that imbalance. We have been on that journey already, and Eric mentioned that in his prepared remarks. It is a combination of both. We feel like we are in a better position than where we were a year ago, and in a year, we are going to be in a better position than we are right now.

Thank you. Our next question coming from the line of Patrick Bernard Donnelly with Citi. Your line is now open. Hey, guys. Thank you for taking the questions. Bob, maybe for you on the margins. It sounds like over 100 bps expansion in 2026, which is nice to see. Can you talk about the drivers there, the mix piece? Then maybe on the multidose, helpful, Eric, to hear you talk about that gradual shift. What does that mean on the economic side? Maybe just the confidence that that is a gradual shift, maybe given your experience in Europe or whatever else you might be able to point to? Thank you, guys.

Yes. Hey, Patrick, thanks for the question. I will take the first one and then I will hand it over to Eric to talk a little bit about some of the economics. Yes, if we talk about the expansion, your math is, as usual, spot on. We are delivering over 100 basis points of margin expansion, or expect to, in 2026. A large piece of that is really a result of a couple of things. One is that continued demand within the high-value product components, which is driving better utilization within the plants, which is helping with our absorption, but then also the mix shift. I would say it is a good combination of both of those. In addition, we continue to generate positive price. But I would say it is the first two, and then really one of the focuses that we had over the last couple of years is around the conversion through Annex 1 and the regulatory requirements. We see that as a continual multiyear journey, as Eric mentioned earlier. We have a long runway, in our belief, to upgrade some of the Standard components to those HVP components, which will also help with the margin. We see some of that in here as part of that positive mix. It is really both. Then we are continuing to leverage our OpEx as well, below the gross margin line, to get to some of that, but most of it will be in gross margin. You want to talk about the?