West Pharmaceutical Services - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered modest top-line growth and healthy margin control: net sales $698.0M (+0.4% YoY; +2.1% organic), gross margin 33.2% (+10 bps YoY), adjusted EPS $1.45 (vs. $1.56 YoY) as restructuring charges shifted reported EPS to $1.23.
• Both revenue and adjusted EPS exceeded internal Q1 guidance; management raised FY25 net sales to $2.945–$2.975B and adjusted EPS to $6.15–$6.35, citing FX tailwinds and operational execution, while embedding a $20–$25M tariff headwind and a ~22% tax rate assumption.
• Demand in GLP-1 continued to ramp; HVP GLP-1 elastomers reached about 7% of total revenue in Q1, while Annex 1 projects rose to ~340, supporting a favorable mix shift longer term.
• Near-term watch items: pricing running slightly lighter than prior expectations, a temporary constraint in one HVP plant, and tariff uncertainty; management outlined mitigation levers (pass-through, regionalized manufacturing) and left SmartDose pricing/incentives out of guidance, keeping “all options” on the table.
• Leadership changes announced: CFO Bernard Birkett to retire after successor is appointed; Shane Campbell named SVP, Chief Proprietary Segment Officer—organizational transition should be monitored for execution continuity.

What Went Well and What Went Wrong

• What Went Well

  • “Delivered a solid first quarter as both revenues and adjusted-diluted EPS exceeded our first quarter guidance,” with confidence to achieve raised FY25 guidance.
  • Proprietary Products organic net sales +2.4%, with GLP-1 self-injection devices and Pharma standard/Westar products offsetting lower FluroTec; adjusted operating margin 17.9% (+20 bps YoY).
  • Cash generation improved: operating cash flow $129.4M (+9.5% YoY), free cash flow $58.1M (vs. $27.6M YoY), while capex fell to $71.3M (-21.3% YoY).

• What Went Wrong

  • Adjusted EPS declined YoY to $1.45 (from $1.56), with reported EPS $1.23 influenced by $17.8M restructuring and related charges; price contribution in 2025 expected to be “a little bit lighter” versus prior assumptions.
  • Segment mix and production inefficiency pressures: Contract Manufacturing gross margin 16.1% (-90 bps YoY); negative volume/mix (-$9M) and FX (-$11.7M) offset a +$23.3M price contribution.
  • Tariff uncertainty (net $20–$25M for the remaining 2025) with mitigation strategies not yet embedded in guidance; SmartDose pricing/incentive changes remain out of guidance pending negotiations.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the West Pharmaceutical Services First Quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Sweeney, Vice President of Investor Relations. Please go ahead.

John Sweeney (VP of Investor Relations)

Good morning, and welcome to West's First Quarter 2025 earnings conference call. We issued our financial results early this morning, and the release has been posted in the investor section of the company's website located at westpharma.com. On the call today, we will review our financial results, provide an update for our business, and present our financial outlook for FY25. There is a slide presentation that accompanies today's call, and a copy of the presentation is available on the investor page of West's website. On slide four, there is a safe harbor statement, and statements made by management on the call and in the accompanying presentation contain forward-looking statements from the meaning of the 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 any other disclosures made by the company regarding the risks to which it is subject, including our 10-K, 10-Q, and 8-K reports. During today's call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS. Limitations and reconciliations 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'll now turn the call over to our CEO, Eric Green. Eric.

Eric Green (CEO)

Thank you, John, and good morning, everyone. Thanks for joining us today. I'll begin today's remarks with our performance in the first quarter. I will provide some context on the trends we are seeing and share how the company is positioned for long-term growth, followed by Bernard's detailed financial review. I will then wrap up with some closing thoughts. Starting on slide five, I'm pleased to report that we delivered a solid start to the year as both revenues and adjusted EPS exceeded our expectations. This was largely driven by solid contributions from GLP-1s and a reduced impact from industry-wide destocking. Our results reflect the West Team's operating execution in the areas where we maintain competitive advantages and strong customer relationships.

Moving to slide six, our Proprietary Products business, which includes HPP components, standard products, and HPP delivery devices, was up 0.6%, or up 2.4% on an organic basis. In the past five years, HPP components have grown at a CAGR of 13%. Overall, we expect HPP components' revenues to grow mid-single digits in 2025, down from our previous expectations of mid to high single digits, a change driven by mix and timing. A key driver of HPP components' growth is our ability to capitalize on the significant opportunities in the GLP-1 market. Our HPP GLP-1 elastomer business is performing well, growing to about 7% of total revenues in the first quarter. Furthermore, we continue to make progress with our biologics customers, solidifying our position as the global leader in this space.

There are two parts to our biologics business that I would like to address individually. First, delivery devices is a small portion of the portfolio within biologics and is a current source of growth as we installed a new production line in Q3 of 2024. However, the growth will reverse in the second half of 2025 when we comp against the significant incentive payments we received in Q3 and Q4 of last year. The largest portion of the portfolio within biologics is HPP components, and this has a positive trend. These are pacing negative in the first and second quarters of 2025, a function of tail-end destocking. We anticipate that this trend will reverse and expect a high single-digit growth rate in the second half of 2025 for biologics HPP components.

On an aggregate basis, we expect biologics growth of low single digits in 2025. We are encouraged with the progress we're making with Annex 1. In Q1, Annex 1 revenues were about 200 basis points of total revenues. This was stronger than our expectation of 100-150 basis points for the full year, driven by favorable Q1 timing. To date, we have approximately 340 Annex 1 projects in various stages with our customers, up from the 280 we mentioned the last earnings call. Importantly, Annex 1 increases the value proposition of our HPP portfolio with a positive mix shift. Moving on to a discussion of our HPP delivery devices business on slide seven.

The growth in this area was driven by a continued volume ramp in SmartDose in the first quarter of 2025. We have a twofold strategy for this area of our business. First, we're working hard to drive significant margin improvement as we move forward. This incorporates driving scale for the business, introducing an automated line later in 2025 to early 2026, and we're working to improve the economics around this business in the near term. Second, we continue to evaluate the best path forward for this business, and all options remain on the table.

Finally, standard products were relatively flat year over year. Overall, we are seeing improvements in the Proprietary Products business, driven by strength in GLP-1s in line with our expectations in 2025. In our Contract Manufacturing segment on slide eight, revenue growth in our GLP-1 auto-injector business is offsetting the CGM contract exits. We continue to work towards filling the space and onboarding new contracts as we continue to execute on this business. We believe that for the full year, our investments in GLP-1 facilities will continue to deliver low single-digit growth for this segment. Our goal is to continue growing our Contract Manufacturing business and moving into drug handling, which we believe will be higher margin and comes with lower capital intensity.

In the near term, we are executing on our capital allocation strategy, which involves investing in the overall business to drive future performance, returning capital to shareholders through our stock repurchase program and dividends. Before I turn the call over to Bernard, I'm sure you have seen the press release this morning regarding the executive leadership changes. I know that Bernard's decision was not made lightly, and we appreciate the notes he has given the company in order for us to seek a successor and ensure a smooth transition of his role. Bernard has been an invaluable partner, an advisor to me in the entire organization. His contributions and leadership over the past seven years have been instrumental to our success. He will be missed.

We have initiated a search process to identify Bernard's successor, and he has committed to be part of the selection process where his insights will be beneficial. Additionally, I am pleased to highlight an outstanding new addition to our executive leadership team. Shane Campbell is joining us as the Senior Vice President of Chief Proprietary Segment Officer. He comes to us from Carlisle Companies, where he served as a Chief Commercial Officer of the Construction Materials business. As an accomplished leader, including a 20-year career at DuPont, Shane brings extensive global management experience in areas of elastomers, polymers, building materials, chemicals, and packaging. We look forward to working with him and the vast experience he'll bring to West. I'll now hand the call over to Bernard. Bernard?

Bernard Birkett (CFO)

Thank you, Eric, and good morning. I appreciate your kind words. As you know, I really enjoyed our partnership working with the West Team, and I am proud of what we have been able to achieve. Now, let's review the numbers in more detail. We'll first look at Q1 2025 revenues and profits, where we saw a low single-digit increase in organic sales, an increase in adjusted operating profit, and a reduction in diluted EPS compared to the first quarter of 2024. I will take you through the drivers impacting sales and margin in the quarter, as well as some balance sheet takeaways. Finally, we will provide an update to our guidance. First up, Q1. Our financial results are summarized on slide nine, and the reconciliation of non-U.S. GAAP measures are described in slide 17-19.

We recorded net sales of $698 million, representing an organic sales increase of 2.1%. Looking at slide 10, Proprietary Products' organic net sales increased 2.4% in the quarter, primarily driven by positive sales price slightly offset by mix. High-value products, which made up 73% of proprietary product sales in the quarter, increased by low single digits, led by customer demand for self-injection device platforms. The Biologics Market Unit delivered mid-single digit organic net sales growth, driven by an increase in sales of self-injection device platforms, partially offset by lower sales of FluroTec products. The Pharma Market Unit saw mid-single digit growth, primarily due to an increase in sales of standard products and Westar products, while the Generics Market Unit declined mid-single digits, driven by a decline in sales of standard and FluroTec products.

Our Contract Manufacturing segment experienced low single-digit net sales growth in the first quarter, primarily driven by an increase in sales in self-injection devices for obesity and diabetes. We recorded $231.9 million in gross profit, which was $1.7 million, or 0.7% higher than Q1 of last year. Our gross profit margin of 33.2% was a 10 basis point year-over-year increase. Our adjusted operating profit margin of 17.9% was an increase of 20 basis points from the same period last year. Finally, adjusted diluted EPS declined 7.1% for Q1. Excluding stock-based compensation tax benefit, EPS improved by 1.4% compared to the same period last year. Now, let's review the drivers in both our revenue and profit performance.

On slide 11, we show the contributions to organic sales increase in the quarter. Sales price increases contributed $23.3 million, or 3.4 percentage points of growth in the quarter. Offsetting price was a negative volume and mix impact of $9 million, as we saw higher sales of self-injection offset by a decline in FluroTec and a foreign currency headwind of approximately $11.7 million. Looking at margin performance, slide 12 shows our consolidated gross profit margin of 33.2% for Q1 2025, up from 33.1% in Q1 2024. Proprietary Products' first quarter gross profit margin of 37.3% was 30 basis points higher than the margin achieved in the first quarter of 2024.

The key drivers for the increase in Proprietary Products' gross profit margin, in addition to sales price or production efficiencies, were partially offset by a negative shift in sales mix from HPP components to HPP devices. Contract Manufacturing first quarter gross profit margin of 16.1% was 90 basis points below the margin achieved in the first quarter of 2024, primarily due to increased spend and production inefficiencies.

Now, let's look at our balance sheet and review how we've done in terms of generating cash for the business. On slide 13, we have listed some key cash flow metrics. Operating cash flow was $129.4 million for the three months ended March 2025, growth of $11.2 million compared to the same period last year, a 9.5% increase, primarily due to favorable working capital management. Our first quarter 2025 year-to-date capital spending was $71.3 million, $19.3 million lower than the same period last year. Working capital of approximately $931 million at March 31, 2025, decreased by $56.9 million from December 31, 2024, primarily due to a reduction in our cash balance. Our cash balance at March 31, 2025, of $404.2 million was $80.4 million lower than our December 2024 balance.

The decrease in cash is primarily due to $134 million of share repurchases and our capital expenditures offset by cash from operations. Turning to guidance, slide 14 provides a high-level summary. We are increasing our full year 2025 revenue guidance for the impact of foreign currency exchange. We expect net sales in a range of $2.945 billion-$2.975 billion, compared to prior guidance of $2.875 billion-$2.905 billion. There is an estimated full year 2025 headwind of approximately $5 million based on current foreign exchange rates. We continue to expect organic sales growth to be approximately 2%-3%, unchanged from prior guidance. We are increasing our full year 2025 adjusted diluted EPS guidance to a range of $6.15-$6.35, up from the previous range of $6-$6.20.

Full year 2025 adjusted diluted EPS guidance assumes no impact based on current foreign exchange rates, compared to an FX headwind of $0.23 from prior guidance. The updated guidance also includes EPS of $0.02 associated with first quarter 2025 tax benefits from stock-based compensation. Our guidance excludes future tax benefits from stock-based compensation. Here is our assumption about tariffs in our EPS guidance. Based on the tariffs that have been set, we believe the net impact to our business will be $20 million-$25 million for the remaining three quarters of 2025. However, there is a lot of uncertainty here, and we appreciate that this number could be more or less depending on retaliatory tariffs and other factors. We continue to monitor the situation, and we are utilizing every available mitigation lever to offset this impact.

The tariff headwind is more than offset by the strength we saw in the first quarter, foreign currency improvement, and the first quarter stock comp benefits. We are not currently incorporating any estimate for tariff-related pass-through revenues in our guidance at this point. Moving on to our second quarter guidance, we anticipate revenue to be in the range of $720-$730 million, which translates to approximately 3%-4% of second quarter organic sales growth. Second quarter adjusted diluted EPS is expected to be in a range of $1.50-$1.55. Lastly, our 2025 CapEx guidance is $275 million for the year, unchanged from prior guidance. I would now like to turn the call back over to Eric.

Eric Green (CEO)

Thanks, Bernard. As you have heard today, 2025 is off to a solid start. We look forward to building on this momentum as we move throughout the year. Our team is steadfast in meeting the expectations to drive our growth. To that end, today we have increased our adjusted diluted EPS guidance for 2025. You can expect us to continue to capitalize on our competitive strengths and make decisions that improve our overall margin. We're laser-focused on returns on invested capital, and we'll have more to share in the coming quarters. Over the past few months, we were fortunate to have the opportunity to speak with many shareholders and our analysts.

There seems to be a general consensus among those who we spoke with on those challenges and opportunities here at West, and we're committed to delivering on those goals and objectives. Lastly, I would like to thank all the team members at West who contributed to our successful first quarter. Operator, we're ready to take questions. Thank you.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Paul Knight with KeyBanc. Your line is open.

Paul Knight (Managing Director)

Thank you. Great quarter, Bernard. Thanks for everything. We'll miss you a lot. The two questions are: what percent utilization are you assuming in the new site in Dublin, Eric, in your guidance? The follow-up is for Bernard, and that is your margin seems to have been a little bit better on the adjusted op margin in one Q. Is it business mix, or are things getting a little improved at delivery devices? Thanks.

Eric Green (CEO)

Yeah, thank you, Paul, for the question, and good morning. Specifically in our Dublin site, which is for Contract Manufacturing, we initiated ramping up earlier this year, and that will continue throughout the year. The utilization percentage is quite low as we speak, and that's incorporated into our guidance. As we mentioned before on that site, it will handle drug handling, and that will be available towards the end of the year, early next year to launch and for commercialization. Low percentage at this point in time, Paul. Bernard?

Bernard Birkett (CFO)

Yeah, Paul. On the operating margin, we actually saw better efficiencies within our EMPC business compared to what we had originally forecast. That was a positive. We also saw an improvement in the margin within Contract Manufacturing versus the forecast that we had for Q1. Very positive there. On our SG&A and R&D, the spend was a little bit lighter in Q1 again versus what was forecast. We have made some adjustments in those areas to control costs. Some of that was related to timing. That is updated in the guidance that we have given. A lot of positives for us around the cost base, and we just need to maintain that as we go through the year.

Operator (participant)

Thank you. Our next question comes from Larry Solow with CJS Securities. Your line is open.

Larry Solow (Managing Director)

Great. Thank you. I echo Paul's comments. Bernard, I wish you best of luck as well. I guess first question, just on the guidance and the high-value product mid-single-digit growth, is that purely a function of just the—I know you mentioned timing, and you discussed inventory destocking. Is that primarily a function of that? It does feel like as you run through the year, it sounds like you continue to expect that to track upward. Is there really any other change outside of the timing? I know you mentioned Annex 1 was a little bit better in Q1 or contributions from that, but that sounds like that might tail off. I am just trying to get a little more color just around the high-value product outlook.

Bernard Birkett (CFO)

Yeah, Larry, there's a couple of factors impacting that. One is on pricing. We're seeing pricing come in a little bit lower than we originally anticipated. Not overly material, but we just want to make sure people understand that. When we report in the next couple of quarters, you'll see it a little bit lower. We also have a constraint situation in one of our facilities where a customer has switched the product that they want to take from us. It has put a lot of demand into one facility where originally we had that demand spread out across a number of sites. We do see a constraint here in the short term. It is more of a short-term supply issue rather than a demand issue.

What we are actually seeing is increasing demand, but we have to be able to deliver on that. When Eric called out timing, that's what that relates to. We do expect in the second half of the year to see a step up in HPP components across all our sites. Again, that's embedded in the guidance.

Larry Solow (Managing Director)

Okay. Just the second question, you mentioned sort of the impacts or the unknown impacts, obviously, of tariffs and geopolitical. What about just any thoughts on, obviously, with the reduction in government spending going on and lots of headlines on the impacts of healthcare? You mentioned some also on the macroeconomic stuff there in your prepared remarks. Eric, do you see any real significant impact outside of some of the direct tariff impacts, but just on demand or concerns on demand in your business because of some of the sort of government headwinds going on?

Eric Green (CEO)

Yeah, Larry, it's a very good question. As we talked about tariffs, we feel we have a good view of where we are today based on the current factors. As you know, that landscape could change. We do have several programs that we are implementing and have implemented to mitigate those expenses, such as passing on some of the costs to our customers. Also, a fortunate part of our business is that we created this network of operations across the globe to be able to support more in the region. Regional support, therefore, there's a lot less cross-border movement of our goods for our customers.

While it's not 100% pure, I think this global network that we've created, HPP as an example, a couple of sites in the U.S., a couple of sites in Europe, one in Singapore, gives us great leverage to build support to our customers. The other factor is macroeconomics. There are other levers that we'll keep an eye on, but right now we don't see that impacting our volume and demand commitments that we are going to fulfill for our customers throughout the year. We're not seeing patterns change. In fact, as Bernard talked about a little bit earlier, the one change we're seeing is an increase. We're seeing a visible increase in demand as we go through this year, which is a positive sign, which is consistent with what we talked about in the last quarter.

Operator (participant)

Thank you. Our next question comes from Justin Bowers with Deutsche Bank. Your line is open.

Justin Bowers (Equity Research Analyst)

Hi, good morning, everyone. I just wanted to follow up on the last question related to timing and sourcing. It sounds like that's related to HPP. I just want to confirm that. Part two of that would be, with the increase in demand and the timing shift, should we infer that some of that demand spills over into 2026?

Eric Green (CEO)

Yeah. You're correct, Justin, that very good question. The demand that we're talking about right now, the constraint is in one of our HPP plants that we're working through those constraints as we speak to be able to support our customers. With the lens that we have today, we just want to make sure we call that out. There are a number of initiatives to address that. As the demand continues to climb, there might be some that goes into 2026, but we'll keep you updated as we go throughout the year.

Justin Bowers (Equity Research Analyst)

Okay. Just a quick follow-up on the tariffs. Is that mostly how much of that impact is from component sourcing versus maybe something that's going cross-border in terms of a finished good? The follow-up to that is, does that all drop through, or should we just assume kind of the overall tax, the effective tax rate, or is there any tax offset there?

Bernard Birkett (CFO)

Sorry, I couldn't actually hear the question very much.

Larry Solow (Managing Director)

Justin, I think I have it. You're asking about tariffs, and you're saying, is it in finished goods, or is it in the sourcing? It's actually in a little bit of both. You're also, I think, asking about the proposed U.S. manufacturing tax rate of 15% and if that's something that could potentially be an offset. Is that correct?

Eric Green (CEO)

That's right.

Bernard Birkett (CFO)

Yeah. As we've looked at the tariffs, we've looked at it from multiple different perspectives. One is on components, as John said. The second is on other sourcing where our suppliers would pick up the tariff, but then potentially pass it on to us. We've embedded estimates of that into our guidance. We're also looking at where we, on the Incoterms, where we ship product to, and if we're the importer, do we pick up the tariff cost at that point? Again, all of those elements are built into our guide. Based on what we know today, it's a very fluid situation. There are various mitigations that we're actually working on at this point to reduce that number over time. Again, we want to see those materialize before we call those out and say what they are.

We're giving you the clearest picture that we have today. When we look at any future tax benefits that could come in the U.S., yeah, if the tax rate lowers, it is a benefit. Again, we have to wait and see when and how that materializes.

Operator (participant)

Thank you. Our next question comes from Michael Ryskin with Bank of America. Your line is open.

Michael Ryskin (Managing Director)

Great. Thanks. Quick follow-up question. I thought to an earlier question, I think you said that one of the factors was that price came in a little bit lower than expected. I want to make sure I heard that correctly because I think you did 3.4% price contribution in the quarter for the business overall, and that was a little bit more than we thought it would be. Just if you could clarify your comments on price and sort of where it was a little bit better.

Bernard Birkett (CFO)

Yeah. Michael, when we look at it for the year, we expect it to be a little bit lighter than originally estimated.

Michael Ryskin (Managing Director)

Okay. Okay. In the quarter, did it come in also lighter?

Bernard Birkett (CFO)

The quarter we were happy about. It's more of a forward-looking.

Michael Ryskin (Managing Director)

Okay. Okay. All right. Just the other questions that are related to tariffs and your customer behavior. One of the things we're thinking about is that some of your customers may be looking to speed up some manufacturing or maybe accelerate some plans to try to get ahead of tariffs on their products, on pharmaceutical products. If that comes in during the year, there's some reports of elevated levels of manufacturing or product shipments in the first quarter. Did you see any of that? Did you see any weird timing of maybe things pulling forward a little bit or customers moving around timing plans for the year from their perspective?

Eric Green (CEO)

Yeah. No, Michael, that's a very good question. For us, since most of our transactions or our manufacturing processes are made to order, the answer is no. We did not see any changes to the demand profile and the order cadence that we're seeing throughout the balance of the year. At this point in time, we're not seeing any adjustments or any change of behaviors due to these tariffs. Again, just to reiterate, a lot of our manufacturing sites are not 100%, but the majority of it is co-located in the geographies where our customers reside or where they want to take shipments. Therefore, that's a net benefit. We're not seeing a change of behaviors at this point in time or their demand profiles of their own products.

Operator (participant)

Thank you. Our next question comes from David Windley with Jefferies. Your line is open.

David Windley (Managing Director)

Hi, good morning. Thanks for taking my questions and congrats to both Bernard and Mr. Campbell going out and coming in. The first question I have is around utilization, I guess, or margin trade-off, so to speak. When I look at your year-over-year comparisons, P&L comparisons, they are surprisingly similar: revenue, gross margin, operating margin. Basically, the EPS difference comes down to SBC tax benefit differences. Yet, within the P&L, I think we know that, as you're calling out, very, very high margin FluroTec is down and low margin self-injection devices is driving the growth. You have some offsets in there otherwise that are helping to mitigate that mixed trade-off. I wondered if you could explore or better elucidate what some of those things are. In that, maybe Annex 1 is potentially one of them.

If you could comment what the typical upgrade or step up in economics is that we should think about when a client goes through one of these Annex 1 projects and moves forward to a change in their component sourcing. Thank you.

Bernard Birkett (CFO)

Yeah, David, I'll take that to start with. On Annex 1, it's not having an overly material impact at the moment. It is growing. As Eric said, the level of interest is increasing. What we would typically see if we're moving to Annex 1, you're moving from standard-type product margin to a HPP margin, probably a little bit north of our corporate average. I would say it is a pretty significant step up. That can vary depending on how far customers want to move up that HPP curve.

Really, when we've been looking at our business and managing the P&L, as we've been moving into 2025 and looking at the growth challenges that we have been facing and trying to get back to that LRP, there's been a lot of focus on utilization and efficiencies within our manufacturing operations. We're starting to see positivity there. I called it out earlier, I think, when the question was asked about operating margin improvement. That is one of the key drivers. We're also seeing it across our Contract Manufacturing business and also looking at our spends within OpEx. We're seeing really a lot of control around research and development and SG&A. It's really managing our P&L on an active basis to make sure that we're at least maintaining the margin in this period as we transition back to the LRP.

Justin Bowers (Equity Research Analyst)

Got it. My follow-up, Eric, is for you. The couple of announcements today from a management standpoint seems like you're in the process of perhaps rebuilding your management team on a broader basis. There was an 8-K about a Chief Commercial Officer departure, and I think some others. I wondered if you could comment on where that stands and how you're thinking about the leadership team that you need to build for the next, say, five years of your company's growth. Thanks.

Eric Green (CEO)

Yeah, David, thanks for the question. I've been fortunate to have a 10-year career here at West. I've been to work with some phenomenal people, and there's been a lot of tenure with the leadership team. There does come times where individuals have to make decisions to do other next steps of their careers. For example, Bernard has been a phenomenal partner, and I've said that many of times. This is an opportunity at this point to continue to, as opportunities present themselves, bring new leaders into the organization. I wouldn't characterize it as a change. I would just say there is a natural evolution of leadership over long periods of time, and I think that's what you're seeing. Again, very appreciative of the partnerships I've had over the years.

As we move forward, we'll continue to bring leaders in that have seen where we want to go and be part of that journey.

Operator (participant)

Thank you. Our next question comes from Daniel Markowitz with Evercore ISI. Your line is open.

Daniel Markowitz (VP)

Hey, thank you for taking my questions and congrats on the quarter. The first one is on Annex 1. I think that's a really exciting part of the bull case for investors, and I appreciate all the disclosures there. They're very helpful. There was better performance in one Q, and this is now the second quarter in a row with double-digit % sequential project growth. Can you discuss the potential upside you could continue to see from Annex 1 over the coming quarters and years? If there are any customer anecdotes that would suggest we could see more upside? Thank you.

Eric Green (CEO)

Yeah. No, thank you for the question. It's a very good question. I mean, we're obviously excited about the prospects of Annex 1. As you know, it's an element of a regulatory change that fits well with the thesis of West, particularly on the HPP portfolio. This is what we've been driving for a number of years, and that's been giving us great confidence of future growth and margin expansion. That gives us that mixed shift effect that we're looking for. You're right. There has been an increase of the number of projects that we have taken on since the last call. We anticipate that to continue to grow. I won't articulate the numbers we're targeting. Bernard was right to call out earlier. It's not a significant number now. The way I would characterize this is in twofold.

One is one project is not always one customer is not just one project. It could be multiple projects. It also means that it could be large and small. The general thesis of moving from a lower margin, lower ASP to a higher ASP, higher margin, because the services and capabilities we are providing and leveraging the existing assets we have in place for HPP processing is a perfect fit of the growth algorithm more long-term. This is not just a one or two-year event, but more long-term. In the second area, I will just comment on it. There are opportunities. It tends to be more around the pharma and the generic space than biologics.

As biologics, when they enter into the market, the new molecule, we tend to be already in the mid to high end of our HPP spectrum. That is how I would kind of characterize it. It is long-term. Initial traction looks strong, in line with our expectations, and the team's very much focused on executing this initiative for a number of years ahead.

Operator (participant)

Thank you.

Bernard Birkett (CFO)

Next question, please.

Operator (participant)

Our next question comes from Thomas DeBourcy with Nephron Research. Your line is open.

Thomas DeBourcy (Principal)

Hi guys. Thanks for taking the time. I just had a question first on your transition in Contract Manufacturing. As CGM revenue rolls off at GLP-1 contracts, you build that pipeline. I was curious just in terms of the level of demand and your ability to capitalize on that opportunity and actually fill that supply that, I guess, left open by the previous CGM manufacturing.

Eric Green (CEO)

Yeah. No, thank you for the question. I will say that since we've had some discussions the last couple of months, we continue to see interest with a number of customers to identify new projects, long-term projects. As you remember, the agreements we tend to sign within Contract Manufacturing are seven-plus-type years. These are very long contracts with clear sharing of capital deployment between our customers and ourselves as we move forward with these business arrangements. We have transitioned more of our focus towards more of the delivery devices like auto injectors and pens, and also moving downstream with drug handling, which will take time, but it has higher margins and lower capital investments.

We have engaged with a number of customers, and we're excited about the prospects we have in hand to not just leverage the space that's going to be vacant when the CGM is moved out, but also even future growth. I think we're positioned well right now. In 2025, we still have ramp-up and GLP-1s and some more ramp-up in Grand Rapids from a utilization perspective. As I mentioned to Paul's question earlier, in Dublin, we're basically starting early this year of manufacturing commercial product, which will take us throughout the year and then moving into drug handling.

That's pretty typical, 12-18 months to get to utilization levels that we're very comfortable with. That is the intended installed capacity. That gives you kind of a framework where we are with CM. Yes, a lot of interest with our customers, and we will continue to report out as we get more clarity and sign agreements over the next couple of quarters.

Thomas DeBourcy (Principal)

Just as a follow-up question on SmartDose, I know the second quarter you mentioned all options on the table. I know SmartDose margins currently are below typical HVP margins. In terms of, I guess, your evaluation of options, do you see a pathway for SmartDose to become close to HVP component margins, or do you just view that maybe as a separate business, or you would need a significant increase in the volume in order to have similar margins? That does it for me.

Eric Green (CEO)

Yeah. No, thank you for the question. Our view hasn't changed on SmartDose. We will, there's a two-prong approach that we have. Our team that's running that business is focused on driving cost out of that production process, and they're making good strides. However, it really does require going from a manual two-line process to fully automated. As you can imagine, the yield, the output, productivity, and just the cost structure does change. That will not be validated and commercialized until the end of this year. Going into early next year, it'll take time to ramp. That is the first lever and focus that we have for the team and the organization. While the demand continues to increase, we will build support our customer. Secondly, as we have discussed the last call, we have been reviewing options on what's the best path forward with this product within our portfolio.

We do have a belief where we should be going. At this time, I'm just going to leave it as that. We'll just say that all options are on the table to make sure that the best path forward is the best result for our customers, but also for our shareholders and for our team.

Operator (participant)

Thank you. Our next question comes from Doug Schenkel with Wolf Research. Your line is open.

Doug Schenkel (Managing Director)

Good morning, and thank you for taking my questions. I just want to, I guess, take the opportunity to ask a few follow-ups or just maybe do some cleanup. Following up on the SmartDose question, could you share anything in terms of what are the what's the status of discussions pursuant to getting the price that I think you hoped to get? Essentially, I think you had hoped to turn those incentive payments into durable pricing. That obviously hasn't happened yet. What is the status of those discussions? I just want to confirm there's nothing in guidance for pricing benefits related to SmartDose. That is the first topic. The second follow-up I want to ask is on tariffs. I just want to confirm there's no pricing or tariff surcharge benefit factored into your new guidance assumptions.

You talked about working towards further mitigation efforts. Those, I think, could be amongst those. I just want to make sure those are not in guidance right now. Lastly, on operating margin guidance for the year, which I do not think you provided, which is normal. I am sorry if I missed that, but it looks like mathematically you are targeting around 19%. I want to make sure I am in the right neighborhood. If so, then looking ahead, how far away sitting here today are you from getting back to that 23% LRP target? Thank you.

Bernard Birkett (CFO)

I'll try and take those in sequence. From the SmartDose, we have not embedded anything in our guidance related to price gap at this point. If there's anything there, that's upside. On the tariffs, we've given a net figure. There's a lot of mitigation work that we're doing around customers and looking at passing through some of those tariff charges. Again, not embedded in the guidance at this point until we actually get agreement on that so we're not overextending ourselves. We're giving you the clearest picture we can. You'll appreciate it's a moving target at the moment given what's happening. Essentially, we're trying to be relatively conservative around the tariff approach. Operating margin, we typically don't guide, but I don't think you're a million miles away based on the assumption that you've made.

Then getting back to the higher operating margin, I think you called out 23%. For us to get back to that margin, we need to be at LRP, and we would typically be targeting a similar mix profile compared to what we experienced, I would think, in the early part of the stock in the 2023 timeframe, and that would get us back to that margin.

It is really getting back to LRP, seeing biologics, getting back to that double-digit growth rate that we called out in the past, and obviously growth in Annex 1 and mix shift and GLP-1s. We are starting to see traction in some of those areas. As we have said, we believe it is going to take some time to transition back to LRP. It is not going to be overnight or a hockey stick based on what we see today.

Operator (participant)

Thank you. Our next question comes from Matt Etoch with Stephens. Your line is open.

Matt Etoch (Equity Research Analyst)

Good morning, and thank you for taking my questions. Just a few, but I appreciate the color around 2Q. It seems to be a little bit outside of what the street was modeling and what I was expecting as well. Maybe can you just discuss how the year's progressing as compared to your internal expectations thus far? Yeah, we'll go from there.

Eric Green (CEO)

Yeah, Matt, thank you for the question. The year's progression as we anticipated. The one area that we did call out was around the HPP products components, and that was really what Bernard discussed earlier around a little bit of lightness in the price. Also, we're working through a shift in demand into one particular plant, but that will be at a near term that we will work through. In general, we're seeing the trends that we anticipated for the rest of the year. I would say to be clear on biologics, as I mentioned, there's two elements to that.

What you are going to see, especially with HPP, is that in the back half of the year, the reason why we are calling out strong high single digits on HPP components is because that is when we see the biologics continue to escalate based on the demand that we are seeing with our customers. The offset of that a little bit is in the biologic spaces around this SmartDose we called out where the incentives that we had in Q2 and Q3 of last year do not—I'm sorry, Q3 and Q4, thank you—are not planned to be repeating at the end of this year. That kind of gives you perspective, but really consistent as we discussed a couple of months ago.

Matt Etoch (Equity Research Analyst)

Got it. Given the cost associated with the restructuring, it appears you may have already accounted for this and the investments in R&D and SG&A with your original guidance. Is it fair to assume these costs will not reoccur? Secondly, what all does the restructuring entail?

Bernard Birkett (CFO)

Yeah, I think once the costs are out here, they're not going to reoccur. We have some various smaller levels of consolidation at some of our sites. Most of that restructuring work is done at this point. The cost savings that come from that are embedded in the guidance.

Operator (participant)

Thank you. Our next question comes from Patrick Donnelly with Citi. Your line is open.

Patrick Donnelly (Managing Director)

Hey, guys. Thanks for taking the questions. Maybe another one on the high-value components piece. Certainly appreciate that shift in demand to the one plant you talked about. Just curious, in terms of the ramp, what are you guys seeing on the order front? Just wondering on the visibility if you're continuing to see the orders improve, destocking lift, and just the confidence in that second-half ramp given, again, some of the stuff seems temporary. Just wanted to talk through the order trends there.

Eric Green (CEO)

Yeah, Patrick, very good question. Good morning. Yes to both of those elements. The destocking, it's consistent with what we anticipated throughout the year. Obviously, pharma has subsided. We're comfortable in the pharma. The biologics, we commented that a while back there would be destocking continued in the first part of 2025. As I just mentioned earlier, we'll see a ramp up in the second half. The demand profile based on orders that we're receiving supports that statement. Generics will persist throughout 2025, but again, no change to what we discussed before on the destocking side. The order patterns are we're feeling good about the demand, and it's consistent to what we anticipated and guided that it will be a sequential improvement as we go throughout the year.

I'm not going to give guidance going forward, but it's a favorable view that we see today on the order patterns.

Patrick Donnelly (Managing Director)

Okay. That's helpful. Maybe one for Bernard, just following up on Doug's question on the pricing. It sounds like you guys are working with customers to pass through some of the pricing on the tariff piece. Can you talk about how those conversations are going? It does not sound like it's embedded in the guide, at least on the revenue side. What would the impact be if you did pass along some of this pricing? It feels like maybe the offset is built into the P&L, but not the revenue. I just want to make sure we're understanding that appropriately. Thank you, guys.

Bernard Birkett (CFO)

Yeah, the offsets, there are additional offsets that we are working on that are not embedded in the P&L today. At this point, given that it's a very fluid situation, I'm not prepared really to give a number on that until we get a clear line of sight as to what that would be and agreement with our customers. What I would say is, based on how we've been able to guide tariffs and assess it, we believe there are mitigation factors on a number of different levels that we can work through over the next number of months to help mitigate some of that number. On our Q2 call, we'll give you a greater level of clarity around that when we have it ourselves.

Operator (participant)

Thank you. Our next question comes from Matt Larew with William Blair. Your line is open.

Matt Larew (Research Analyst)

Hi, good morning. The first is a follow-up to your progress on the automated line. Obviously, that's something you've been speaking about and working towards for the last couple of years. Eric, at this point, do you have enough pieces in place that have made enough progress that the timeline you've cited, you feel confident won't slip? Or are there sort of additional hurdles remaining that potentially could put that timeline at risk?

Eric Green (CEO)

Yeah, Matt, good question. We're on schedule in line with the schedule that we communicated. Towards this end of the year, we'll have validation and start moving towards commercialization. Pleased with the progress more recently. You're right. A couple of years ago, we had some delays, but we are in a good position today as we move towards the schedule for the end of the year.

Larry Solow (Managing Director)

Okay, thanks. The second one is kind of a broader question around GLPs and long-term growth.

Bernard Birkett (CFO)

Obviously, as you are emerging from this period of destocking and hopefully getting back to longer-term growth, relative to perhaps a couple of years ago, GLPs as a percentage of revenue, and I'm thinking just on the component side, not even factored in Contract Manufacturing, it's a bigger piece of the revenue book. Maybe 18 months ago, the consensus would have been that would have been growth accretive. Perhaps with Silily oral readout and others coming, maybe there's some debate as to whether it might be growth dilutive. Just curious how you're thinking about GLP growth in the future, what you're hearing from customers, including those that may have molecules delivered both using your products and potentially oral.

Beyond GLPs, thinking more broadly on the products and the category you play in, whether you still feel confident in the longer-term growth plan that you've outlined.

Eric Green (CEO)

Yeah, Matt, that's a great question. I know there's some recent news that stimulated more conversations about oral. Let me step back a moment and just simply say the benefit that we, the position where we are in the market right now with our HPP portfolio and how we're able to support multiple customers, a very diverse portfolio of customers, a very diverse portfolio of which type of molecules we're touching in regards to our primary containment and delivery devices. While GLP-1 is a fast-growing area, we still are excited about other areas of the business too as we continue to see new drug launches. I'm very pleased with the results of the Q1 with the approvals that we've seen and what we're participating on.

To answer your question directly, though, in the GLP-1s, we have been in discussions with our customers for a long period of time in regards to oral versus injectables. In our position, I'd rather have our customers talk about how they see the market shifting. When we modeled our investments, when we modeled our forecast, we took that into consideration of these various inputs of the potential impact of orals. We do still believe the majority of the delivery of GLP-1s in the future will continue to be injectables. However, there will be a space one day in regards to oral. I would say our customers are in a better position to say that. We're positioned well. What's really good about the GLP-1 growth for us is the assets we put in for COVID are fungible for GLP-1s.

We think about HPP processing, the washing, the sterilization, and etc. in our HPP plants. We are leveraging existing assets. Again, as I said, we modeled our future growth based on some assumptions of a shared market between injectables and oral.

Operator (participant)

Thank you. Our next question comes from Kyle Crews with UBS. Your line is open.

Kyle Crews (Equity Research Associate)

Thank you for taking the questions. With regards to the updated adjusted EPS guide, if you walk through the FX adjustment tax benefit and the tariff headwind, it seems like core EPS was increased by an implied $0.15. Is that a result of the restructuring efforts? Secondly, could you talk to the incremental opportunity you see from drug handling and attempt to size it? Thank you.

Bernard Birkett (CFO)

On the guidance, not specifically all around restructuring, we did see an improvement in efficiencies and profitability across a number of our businesses. Our proprietary business, we saw improvements in Contract Manufacturing. The beat was really operationally driven. We passed on a certain amount of that beat. There is an element regarding timing on some spend, particularly around R&D and SG&A that we expect to move into future quarters. It is business performance rather than restructuring.

Eric Green (CEO)

Thank you, Kyle. Thank you, Bernard. Kyle, I'll address your question in regards to drug handling. It's an exciting opportunity for us. It's very early. We do have a few customers in a smaller scale that we're working on adapting the technology and start that capability. We do have in our Dublin facility, we have a significant portion of that asset will be to support drug handling. It's early for us. What's exciting for us at West is just the continuum of downstream. It just shows you the confidence our existing customers have with us, not just providing the components or the devices for their drug molecules, but also now handling some of the drug handling and then going into the market. It's early. We'll update you as we go forward. We're excited about the prospect. It's leveraging our competencies. It's leveraging our existing customers.

It is just a continuum of what we do today in the marketplace.

Operator (participant)

Thank you. I'm showing no further questions at this time. I would now like to turn it back to John Sweeney for closing remarks.

John Sweeney (VP of Investor Relations)

Thank you so much for joining us today on the call. An online archive of the broadcast is available on our website at westpharma.com in the investor relations section. Additionally, you can access a replay for 30 days following the presentation by using the dialed numbers on the conference IDs provided at the end of today's earnings release. That concludes the call. Thank you. Have a great day.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.