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West Pharmaceutical Services Announces Second-Quarter 2017 Results



7/27/2017 8:05:43 AM

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EXTON, Pa., July 27, 2017 /PRNewswire/ -- West Pharmaceutical Services, Inc. (NYSE: WST) today announced its financial results for the second-quarter 2017 and updated financial guidance for the full-year 2017.

West Pharmaceutical Services, Inc.

Second-Quarter 2017 Highlights

  • Reported net sales of $397.6 million, a record high, grew 2.5% over the prior-year quarter. Net sales at constant currency (organic) grew by 3.9%.
  • Second-quarter 2017 reported-diluted EPS was $0.51, compared to $0.60 in the prior-year quarter. Second-quarter 2017 adjusted diluted EPS was $0.66, compared to $0.59 in the prior-year quarter. Second-quarter 2017 reported and adjusted-diluted EPS include the impact of a tax-related EPS benefit of $0.13 regarding share-based payment transactions.
  • Revising full-year 2017 sales and adjusted-diluted EPS guidance. Full-year 2017 sales guidance is expected to be in a range between $1.585 billion and $1.600 billion, compared to the prior guidance range between $1.585 billion and $1.610 billion. Full-year 2017 adjusted-diluted EPS guidance is expected to be in a range between $2.66 and $2.73, compared to the prior guidance range between $2.66 and $2.78. Both current and prior guidance ranges include the favorable impact from tax-related benefits associated with share-based payment transactions.

"Adjusted-diluted EPS" and "net sales at constant currency" are Non-GAAP measurements.  See discussion under the heading "Non-GAAP Financial Measures" in this release. 

Executive Commentary

"Following a strong start to the year, we generated approximately 4% organic sales growth in the second-quarter," said Eric M. Green, President and Chief Executive Officer.  "However, due to an unfavorable sales mix in the quarter, our margins did not meet our expectations."

"Strong Contract-Manufactured Products sales growth and solid performance of the Pharma market unit did not offset the softness in the Generics market unit and, to a lesser extent, Biologics market unit, which were impacted by customer inventory management and delays in several new drug launches.  In addition, our Generics unit experienced lower volumes from select customers that have had their production impacted by regulatory issues."

Mr. Green concluded, "We believe that we are taking the appropriate actions to bring our full-year 2017 results in-line with our updated guidance.  We see no fundamental change in the markets we serve.  We have confidence in our strategy and our long-term view of West's ability to grow organic sales 6% to 8% per year with expanding margins for the next several years.  West has participated on 100% of the newly-approved biologic drugs in the U.S. this year, and we are encouraged by indications that a number of large customers are resuming their typical order patterns.  We continue to invest in our business to fuel our long-term growth potential and are managing our costs.  Based on market dynamics and customer order patterns, we expect sales performance to continue to build over the balance of the year, with normal seasonality trends for the third and fourth quarters."

Second-Quarter 2017 Financial Results (comparisons to prior-year period)

Reported net sales were $397.6 million, compared to $388.0 million.  Reported net sales growth was 2.5%.  On a constant-currency basis, sales growth was 3.9%.

Proprietary Products segment reported net sales were $312.8 million, compared to $311.0 million.  Reported net sales growth was 0.6%.  Organic sales growth was 2.2%, led by mid-single digit growth in the Pharma and Biologics market units.  The Generics market unit organic sales declined mid-single digits.  Weaker-than-expected Biologics and Generics market unit performance also resulted in low-single digit organic sales growth for high-value products.

Committed orders in the Proprietary Products segment at June 30, 2017 were $382 million, a decrease of 7% at constant currency compared to June 30, 2016, and a decrease of 0.8% at constant currency compared to December 31, 2016.

Contract-Manufactured Products segment reported net sales were $84.9 million, compared to $77.2 million.  Reported net sales growth was 9.9%, and organic sales growth was 10.5%. 

Gross profit margin was 31.4%, a decrease of 300 basis points.  Proprietary Products segment gross profit margin was 35.4%, a decrease of 310 basis points due to weaker Generics and Biologics market unit sales growth and to higher labor costs and unabsorbed overhead.  Contract-Manufactured Products segment gross profit margin was 16.8%, a decrease of 80 basis points due to increased labor and overhead costs, partially offset by sales price increases and production efficiencies. 

Second-quarter 2017 reported operating profit was $42.7 million, which represented an operating profit margin of 10.7%.  Excluding the impact of the deconsolidation of our Venezuelan subsidiary, second-quarter 2017 adjusted operating profit was $53.8 million, representing an adjusted operating profit margin of 13.5%, a year-over-year decrease of 190 basis points.  The major driver for this decline is lower gross profit margins, partially offset by lower R&D and SG&A expense on a combined basis as a percentage of sales.

Income tax expense in the quarter was $2.9 million, which represented an effective tax rate of 7.1%.  The effective tax rate reflects the impact of a tax benefit of $9.6 million associated with the previously-discussed adoption of FASB-issued guidance.  Our estimated full-year 2017 effective tax rate, excluding this tax benefit and other discrete tax benefits, is 30.8%.

During the quarter, the Company did not repurchase any shares.  For the first six months of 2017, the Company repurchased 325,000 shares for $26.9 million.  There are 475,000 shares available to be repurchased in the program authorized by our Board of Directors in December 2016.

Full-Year 2017 Financial Guidance

The Company is revising its full-year 2017 constant-currency (organic) sales growth guidance to approximately 6%, compared to a prior guidance range of 7% to 9%.

West's expected full-year 2017 net sales, margin and EPS guidance are as follows:

(in millions, except EPS)

2017 Updated
Guidance

Prior Guidance

Consolidated net sales

$1,585 to $1,600

$1,585 to $1,610

Consolidated gross profit margin (% of net sales)

32.7% to 33.3%

34.4% to 34.8%

Proprietary Products net sales

$1,240 to $1,250

$1,245 to $1,260

Contract-Manufactured Products net sales

$345 to $350

$340 to $350

Full-Year adjusted-diluted EPS*

$2.66 to $2.73

$2.66 to $2.78


*Includes the reported-diluted EPS impact of $0.34 for the first-half 2017 tax benefit associated with the previously-discussed adoption of FASB-issued guidance.

 

The principal currency assumption used in preparing these estimates is the translation of the euro at $1.14 for the remainder of 2017, compared to a prior assumption of $1.05 per euro.

Excluding the impact from tax benefits associated with the previously-discussed adoption of FASB-issued guidance, the Company expects that its annual effective tax rate will be approximately 30.7%.  The Company does not plan on forecasting future benefits as they could vary quarter to quarter with the time and size of stock option exercises.  Instead, the Company will include the impacts with each reported period.  As a point of reference, the Company would have had $2 million of net income benefit in the second quarter of 2016 and would have had $18 million for the full-year 2016, resulting in an EPS benefit of $0.01 in the second-quarter 2016 and $0.24 for the full-year 2016.

The Company estimates its 2017 capital spending to be up to $150 million, compared to a prior guidance range between $150 million and $175 million.

Second-Quarter Conference Call

The Company will host a conference call to discuss the results and business expectations at 9:00 a.m. Eastern Time today.  To participate on the call please dial 877-930-8295 (U.S.) or 253-336-8738 (International).  The conference ID is 47244012.

A live broadcast of the conference call will be available at the Company's website, www.westpharma.com, in the "Investors" section.  Management will refer to a slide presentation during the call, which will be made available on the day of the call.  To view the presentation, select "Presentations" in the "Investors" section of the Company's website.

An online archive of the broadcast will be available at the website three hours after the live call and will be available through Thursday, August 3, 2017, by dialing 855-859-2056 (U.S.) or 404-537-3406 (International) and entering conference ID 47244012.

Forward-Looking Statements

Certain forward-looking statements are included in this release.  They use such words as "expected," "reflects," "no fundamental change," "we are encouraged," "continue," "see," "increase," "remain," "may," "believe," "expects," "revising," "include," "estimates," and other similar terminology.  These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this release.  There is no certainty that actual results will be achieved in-line with current expectations.  These forward-looking statements involve a number of risks and uncertainties.  The following are some of the factors that could cause our actual results to differ materially from those expressed in or underlying our forward-looking statements: customers' changing inventory requirements and manufacturing plans; customer decisions to move forward with our new products and product categories; average profitability, or mix, of the products we sell; dependence on third-party suppliers and partners; interruptions or weaknesses in our supply chain; increased raw material costs; fluctuations in currency exchange; and the ability to meet development milestones with key customers.  This list of important factors is not all inclusive.  For a description of certain additional factors that could cause the Company's future results to differ from those expressed in any such forward-looking statements, see Item 1A, entitled "Risk Factors," in the Company's Annual Report on Form 10-K for the years ended December 31, 2016.

Except as required by law or regulation, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. 

Non-GAAP Financial Measures

This press release and the preceding discussion of the Company's results, financial guidance, and the accompanying financial tables use the following financial measures that have not been calculated in accordance with U.S. generally accepted accounting principles (GAAP), and therefore are referred to as Non-GAAP financial measures:

  • Net sales at constant currency (organic sales growth)
  • Adjusted operating profit
  • Adjusted operating profit margin
  • Adjusted income tax expense
  • Adjusted net income
  • Adjusted diluted EPS
  • Net debt
  • Total invested capital
  • Net debt-to-total invested capital

The Company believes that these Non-GAAP measures of financial results provide useful information to management and investors regarding business trends, results of operations, and the Company's overall performance and financial position.  The Company's executive management team uses these financial measures to evaluate the performance of the Company in terms of profitability and efficiency, to compare operating results to prior periods, to evaluate changes in the operating results of each segment, and to measure and allocate financial resources to its segments.  The Company believes that the use of these Non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends in comparing its financial measures with other companies.

The Company's executive management does not consider such Non-GAAP measures in isolation or as an alternative to such measures determined in accordance with GAAP.  The principal limitation of these financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded.  In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which items are excluded.  In order to compensate for these limitations, Non-GAAP financial measures are presented in connection with GAAP results.  The Company urges investors and potential investors to review the reconciliations of its Non-GAAP financial measures to the comparable GAAP financial measures, and not to rely on any single financial measure to evaluate the Company's business.

Net sales at constant currency translates the current-period reported sales of subsidiaries whose functional currency is other than the U.S. dollar at the applicable foreign exchange rates in effect during the comparable prior-year period.  In calculating adjusted operating profit, adjusted operating profit margin, adjusted income tax expense, adjusted net income and adjusted diluted EPS, the Company excludes the impact of items that are not considered representative of ongoing operations.  

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