West Pharmaceutical Services - Q2 2024
July 25, 2024
Transcript
John Sweeney (VP, Global Controller and Chief Accounting Officer)
Good morning, and welcome to West's Second Quarter 2024 Conference Call. By way of introduction, this is John Sweeney, the new head of investor relations at West. I'm delighted to be here, and I look forward to working with all of you. We issued our financial results earlier this morning, and the release has been posted to the Investors section on the company's website, located at westpharma.com. On the call today, we'll review our financial results, provide an update in our business, and present an updated financial outlook for the full year 2024. There's a slide presentation that accompanies today's call, and a copy of the presentation is available on the Investors section of our website. On slide 4 is our safe harbor statement. Statements made by management on this call and the accompanying presentation contain forward-looking statements within the meaning of the U.S. Federal Securities law.
Bernard Birkett (CFO)
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 subject, including our 10-K, 10-Q, and 8-K reports. During today's call, management will make reference to our non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS. Reconciliations and limitations of the non-GAAP financial measures to the 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 Green (CEO)
Thank you, John, and welcome to West. I would like to thank Quintin Lai for his partnership over the past eight years and for his many contributions at West. Joining us today. We will start on slide five, where I will cover three main topics. First, examine the drivers of Q2 performance. Second, discuss a revised outlook for the remainder of 2024, and third, provide insight on our long-term financial outlook and why we remain confident in our growth strategy. Let's begin with Q2 performance. We had a lower than expected second quarter, impacted by continued customer destocking. That being said, we are seeing promising signs from our customers that give us confidence of a turning point in this trend.
Bernard Birkett (CFO)
Looking ahead, we expect the second half of the year to be stronger than the first half, with a return to year-over-year organic growth in the fourth quarter, led by our proprietary product segment, specifically biologics. We have adjusted our full-year 2024 guidance to reflect a more gradual recovery as compared to our previous expectations. While I'm disappointed that we're lowering our guidance, I want to reiterate my confidence in West's proven market-led strategy and attractive long-term growth potential. Turning to slide six. We are the market leader in containment and delivery of injectable medicines, which is one of the fastest-growing areas of healthcare. We have an even stronger position in biologics, which is the fastest-growing segment with injectables. Our products are addressing the most critical therapeutic areas, including immunology, oncology, rare diseases, and obesity.
For the past five years, West has achieved a CAGR of double-digit organic revenue growth, demonstrating that we have been able to deliver our long-term financial construct of 7%-9%. Moving to slide seven. Our confidence in our medium to long-term trajectory is underscored by our ongoing capital expansion projects. The investments we have made to address COVID are now being repurposed to drive increased capacity to address new opportunities. In addition, we have expansion plans focused on HVP products that provide a combination of increased manufacturing capacity and higher level of global standardization through our network. Biologics, GLP-1s, and changing global regulatory requirements, we are seeing increased customer interest for higher quality, lower particulate, and more standardized solutions. This favorably positions West's innovations and leading products such as Westar Select and NovaPure.
Another focus for our capital allocation is our HVP devices, which includes our self-injection devices. Our platforms are an integral part of our customers' drug device combination products that are making a difference to patients. These expansion projects remain on target for the back half of the year and 2025. Lastly, for contract manufacturing, we have an exciting growth contribution from our new capacity at our Grand Rapids site. A few weeks ago, I had the opportunity to join our team as we opened this new portion of the state-of-the-art facility in support of our customer's injection device platform and producing product in Q4. We have the ongoing expansion in Dublin, which is already dedicated to contracted demand for components associated with drugs for diabetes and obesity. We expect it to be completed by the end of Q3.
Our promising growth drivers have us positioned to drive significant value for our customers, the patients, and shareholders as we move forward. Shifting to slide eight. At the end of June, we published our 2023 sustainability report on the company website. Proudly, we received several accolades, including being named as one of America's Most Responsible Companies by Newsweek. Now, I'll turn the call over to Bernard. Bernard?
Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q2 2024 revenues and profits, where we saw a mid-single-digit decline in organic sales, as well as declines in operating profit and diluted EPS compared to the second quarter of 2023, given the current market dynamics. I will take you through the drivers impacting sales and margin in the quarter, as well as some balance sheet takeaways. And finally, we will provide an update to our 2024 guidance. First up, Q2.
Our financial results are summarized on slide nine, and the reconciliation of non-GAAP measures are described in slide 17 to 22. We recorded net sales of $702.1 million, representing an organic sales decline of 5.9%. Looking at slide 10, proprietary products organic net sales decreased 8.4% in the quarter as customers destocking continued at a higher rate than anticipated. High-value products, which made up approximately 71% of proprietary product sales in the quarter, declined by double digits, primarily due to decreased sales of our Westar, Daikyo Crystal Zenith, and FluroTec products. Looking at the performance of the market units, the Biologics market experienced a mid-single-digit decline, primarily driven by lower volumes of Daikyo Crystal Zenith and Westar products.
The Pharma market unit saw a low single-digit decline, primarily due to a reduction in sales of admin systems and Westar products, while the Generics market unit declined double digits, primarily due to lower volumes of our FluroTec and Westar products. Despite these revenue declines in the quarter, we do expect revenues in the second half of 2024 to be greater than the first half. Our contract manufacturing segment experienced mid-single-digit net sales growth in the second quarter, led by growth in sales of components associated with injection-related devices. Our adjusted operating profit margin of 18% was a 650 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 28% for Q2. Excluding stock-based compensation tax benefit, EPS decreased by 28.4%. Now, let's review the drivers in both our revenue and profit performance.
On Slide 11, we show the contributions to organic sales decline in the quarter. Sales price increases contributed $21 million, or 2.8 percentage points of growth in the quarter. More than offsetting price was a negative volume and impact mix of $65.5 million, primarily due to lower sales volume caused by customer inventory management decisions in the period, and a foreign currency headwind of approximately $6.1 million. Looking at margin performance, Slide 12 shows our consolidated gross profit margin of 32.8% for Q2 2024, down from 38.7% in Q2 2023. Proprietary products' second quarter gross profit margin of 37% was 690 basis points lower than the margin achieved in the second quarter of 2023.
The key drivers for the decline in the Proprietary Products' gross profit margin were lower production volume due to the reduced customer demand in the period and an unfavorable mix of products sold, partially offset by increased sales prices. Contract Manufacturing second quarter gross profit margin of 16.2% was 80 basis points greater than the margin achieved in the second quarter of 2023, primarily due to increased sales prices. 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, metrics.
Operating cash flow was $283.2 million for the six months ended June 2024, a decrease of $24.1 million compared to the same period last year, or a 7.8% decrease, primarily due to a decline in operating results, offset by favorable working capital management. Our second quarter 2024 year-to-date capital spending was $190.8 million, $33.3 million higher than the same period last year. We continue to leverage our CapEx to increase both our high-value product and our contract manufacturing capacity. Working capital of approximately $849.3 million at June 30th, 2024, decreased by $415.3 million from December 31, 2023, primarily due to a reduction in our cash balance.
Our cash balance at June 30th, 2024, of $446.2 million was $407.7 million lower than our December 2023 balance. The decrease in cash is primarily due to $454.1 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 updating our full-year 2024 net sales guidance to a range of $2.87 billion-$2.9 billion, from a prior range of $3 billion-$3.025 billion. There is an estimated full-year 2024 headwind of approximately $5 million based on current foreign exchange rates. We expect organic sales to decline approximately 1%-2% compared to our prior guidance of 2%-3% growth.
We are updating our full year 2024 Adjusted Diluted EPS guidance to be in a range of $6.35-$6.65, compared to a prior range of $7.63-$7.88. Also, our CapEx guidance is expected to be $375 million for the year, which is an increase from the previous guidance of $350 million. The increase in CapEx is driven by additional investments in growth initiatives and the timing of spend on one of our major projects. There are some key elements I want to bring your attention to as you review our guidance. Full year 2024 Adjusted Diluted EPS guidance range includes an estimated FX headwind of approximately $0.03, based on current foreign currency exchange rates, which is a decrease from the prior guidance of $0.04.
The updated guidance also includes EPS of $0.22 associated with first half 2024 tax benefits from stock-based compensation. Our guidance excludes future tax benefits from stock-based compensation. I would now like to turn the call back over to Eric.
Eric Green (CEO)
Thank you, Bernard. To summarize on slide 15, we are the market leader in injectables with an even stronger position in biologics. We are seeing promising signs from our customers that destocking is at a turning point. We are investing significant capital in higher growth areas with expanded margins and cash flow, and I'm confident that we'll achieve our long-term financial construct with our proven market-led strategy and future growth drivers. With great pride, we will continue to live by our purpose and make a positive impact on patient lives. Shannon, we're ready to take questions. Thank you.
Operator (participant)
Thank you. 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. Please stand by while we compile the Q&A roster. Our first question comes from the line of Paul Knight with KeyBanc Capital Markets. Your line is now open.
Paul Knight (Managing Director)
Hi, Eric. I've got two questions. Number one, in this destocking environment, is it things related to COVID, or is it, you know, broader than that, like injectable drugs, et cetera? If you could kind of give color on that. And then lastly, these new expansions, specifically cited in Kinston and Grand Rapids, do they contribute to revenue here in 2024, and therefore, your improved 2H?
Eric Green (CEO)
Yeah. Thank you, Paul. The destocking activity that we are seeing is actually a combination of both. Obviously, we're still seeing a little bit of destocking in the COVID vaccines, but also during the pandemic, there was several of our customers, when we are having discussions with them, were increasing their safety stock levels significantly to from several months to because our lead times got a little bit longer. Now that we've installed the capacity, our service levels are at an all-time high for our customers, and we're able to respond quickly, they are now taking down those safety stock levels. So it is a combination of both, but it is also allowing our customers to normalize their safety stock for our products in the market.
Bernard Birkett (CFO)
Our belief, in speaking with our customers, the end patient demand on the molecules still remains in line as with what we expected. Our market shift is not occurring. It's consistent, as we've been speaking for the last several years, and our win rate in new molecule approvals continues to be as good, if not in some cases, better than what we had in the past. So I feel really good where we are, moving forward. In regards to our investments, two particular areas in contract manufacturing will be online in second half of this year. That's in Grand Rapids, Michigan, and also in Dublin, Ireland. And then in regards to proprietary, yes, we have additional benefits coming from Kinston and other expansions in our HVP plans towards the end of this year.
Paul Knight (Managing Director)
Thank you.
Eric Green (CEO)
Thanks, Paul.
Operator (participant)
Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Your line is now open.
Larry Solow (Analyst)
Great. Thank you, and good morning, and welcome, John, to the company. I guess, Eric, just a couple questions. It sounds like the demand environment, or, you know, mid to long-term environment hasn't changed at all. I'm just curious on the destocking and inventory levels, what, how's your visibility, you know, with that? Are levels like back to where they were pre-COVID, or are we, or maybe even lower? You know, what gives you kind of confidence that customers aren't, you know, maybe this goes even a little bit longer than thought? You know, we keep kind of moving that to the right a little bit. You sound pretty confident that, you know, you have a good hold on it, but what kind of gives you that confidence?
Eric Green (CEO)
Yeah, Larry, that's twofold there. One is, in the beginning of the year, after having discussions with our customers, we had an indication that the return would be a little bit sooner than we anticipate. What I mean by that is a little more pronounced back to normalized demand curves in the second half of this year. As we progressed through Q2, we started seeing the intra-quarter demand slightly less than we anticipated, and we see that persisting a little bit into Q3. So we do see sequential improvements over the next couple quarters, and as I mentioned, returning back to growth in Q4. And that is really our customers are gradually going back to where they were pre-COVID. So we don't see any variations below or any variations slightly above.
Bernard Birkett (CFO)
It's pretty much consistent when a customer tells us what they're targeting, i.e., 12 months or 9 months or 4 or 16 months. I will tell you, though, every customer that we're speaking to has a different algorithm that they manage to, so it's not universal from one customer to the next. And as we go through the different segments, whether it's Generics, Biologics, or small molecule Pharma, they're also in different stages of this of the destocking.
Larry Solow (Analyst)
Okay. In terms of the CapEx, obviously, that's a little bit of an increase. I guess, you know, to me, it certainly signals your confidence, although you mentioned a little bit of timing there. But as we look out over the next few years, do you expect to still kind of spend this, you know, $350 million-$400 million in investment? You know, is that something that you still have a several-year runway to continue?
Eric Green (CEO)
Let me start and I'll turn over to Bernard, because that's important. It's a good question, Larry. You know, our investments more recently have been, I mean, obviously during the COVID pandemic, it was focused on HVP, particularly around stoppers, and the finishing, of those HVP products to be able to support the vaccine growth. We're able to pivot that, those assets as we speak right now, to continue to produce other HVP products for our customers. These additional investments we've been layering in really is to really support, I would say, three specific areas. The continuation of the biologics growth, and our participation in that area is extremely high. So we want to be ahead of the curve.
Bernard Birkett (CFO)
So these investments we've been making is really more in the finishing process, when you go into Kinston, Jersey Shore, Eschweiler, Waterford, that's what you'll see. Secondly is, we are a significant player in the GLP, and from two angles, one on the proprietary elastomer side, which we've always had a very strong foothold, and we continue to do so on all commercial drugs. And frankly, there's several that are in the pipeline are being in development by several customers, and we're participating in that arena also. But also in contract manufacturing, we are producing and will produce even more auto-injectors and pens that in some cases, doing some of the filling at the end of the process for our customers. So that's the second area is around the GLP-1s.
And the third area, which really kind of ties to the biologics also, is that there's more demand in the future, talking to our customers about some of these regulatory changes that we're working through with them on moving all standard material more up the HVP curve. So those are the three areas that we've really focused our capital. Now, the long-term output-
Larry Solow (Analyst)
Mm-hmm.
Eric Green (CEO)
I wanted to touch on that because that's a good question. How long will this persist?
Bernard Birkett (CFO)
Yeah, Larry, just two things on that. One, on the increase in CapEx for this year, really the major driver behind that is business that we've been awarded from customers for, you know, for our Dublin facility, where they actually want us to put the capacity in place sooner than originally anticipated. So we pulled some of that CapEx that we had earmarked for 2025 into 2024 to meet those requirements. When we look at the longer term, we're really targeting about 6%-8% of revenue, so getting back to pre-COVID levels of CapEx for our business.
Larry Solow (Analyst)
Mm-hmm.
Bernard Birkett (CFO)
You know, but that, again, if... And that's based on the demand that we're seeing today and how we're going to meet it. If that demand increases or goes beyond that, and particularly around finishing capacity is the areas where we see that could potentially happen, then we would deploy more capital, but it would be very growth focused if that was the case, and always around or predominantly around HVP.
Larry Solow (Analyst)
Got it. And the 6%-8%, Bernard, the CapEx of revenue, does that kind of support your sort of 7%-9%, you know, targeted growth outlook? Not this year, you know, maybe I don't know if it begins next year, but certainly, you know, multi-year, so 7%-9%. Has that changed at all, that 7%-9%? I should say, you know, let's rephrase it.
Bernard Birkett (CFO)
No, the 6%-8% would support that level of growth. And as we say, if we go beyond that, and then it depends on what areas and where the growth comes from, we always have the ability to go and adjust that. But again, the CapEx remains very growth focused. And I think we're getting to, like, 60%-70% of our CapEx budget is really growth-focused at this point, and predominantly around HVP, and then some, as Eric said, in contract manufacturing. But that's for very specific customers and very specific business.
Larry Solow (Analyst)
Got it. And sitting here today, I know it's, you know, there's no guarantees, it's hard, but do you feel comfortable that you can return to sort of that, you know, 7%-9% growth in 2025?
Eric Green (CEO)
I won't be able to pinpoint exactly which quarter over the next few quarters, but we will get back to that 7%-9% construct. Like I said earlier, our position in the marketplace, the areas of growth that we're focused on is biologics and some across the entire portfolio, but what's outsized that growth is biologics, GLP-1s, and some of the work we're doing with our customers about moving up the HVP curve. So yes, we feel confident we will be back to that 7%-9% construct.
Bernard Birkett (CFO)
Yeah, and if you, if you think of, you gotta remember, within the construct, Larry, there's three drivers in there.
Larry Solow (Analyst)
Mm-hmm.
Bernard Birkett (CFO)
One is volume, the other is price, and then you've got mix shift. So you've got three drivers, you know, supporting that construct over the long term. And if you look back over the CAGR between 2019 and as to where we're guiding today, you know that that's about 10% growth.
Larry Solow (Analyst)
Right.
Bernard Birkett (CFO)
So that construct is underpinned by those three drivers. And then if you look at the areas that Eric just called out that support that thesis, particularly around the mix shift, you're looking at the changing regulatory landscape, GLP, or high level of participation around biologics, and then d-
Larry Solow (Analyst)
Mm-hmm.
Bernard Birkett (CFO)
demand normalization. Plus, we have the infrastructure and capacity in place now to be able to respond in the required lead times by customers to be able to support that growth over the next number of years.
Larry Solow (Analyst)
Got it. Great. I appreciate the call. Thank you, guys.
Eric Green (CEO)
Thanks, Larry.
Operator (participant)
Thank you. Our next question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open.
Bernard Birkett (CFO)
Hi, Justin.
Justin Bowers (Analyst)
Hi, good morning, and thank you. So just a couple of questions. How is the coverage ratio shaping up, and how has that changed throughout the, you know, year? And then the other question would be, just in terms of the destocking. I think earlier in the year, you mentioned that it was skewing heavier towards standard components versus like HVPs. And just curious if that's still what you're seeing.
Bernard Birkett (CFO)
I'll take the second part, and then I'll kind of-
Eric Green (CEO)
Oh, yeah, I'll take the coverage ratio.
Bernard Birkett (CFO)
Eric will take the coverage.
Eric Green (CEO)
Yeah, absolutely. So Justin, thanks for the questions. The coverage ratio is getting stronger. So there's two aspects we look at is firm confirmed orders, scheduled out, and we're seeing that increase nicely, not just on a percent ratio perspective, but on an absolute dollar for both Q4 of this year and also going into the early part of 2025. That's one aspect. And therefore, as that kind of increases, the interquarter demand profile is actually less of a factor in the growth of the business. And so we're seeing that come back a little bit slower than we had originally anticipated in the middle part of this year, as we were articulating back in February, I believe. And so that's why, hence why we changed the guidance.
Bernard Birkett (CFO)
But when we look out to Q4 and to 2025, we're seeing very strong indication with confirmed orders. In our discussions with our customers are lining up exactly to that to that conclusion when we look at their destocking programs and when they feel they'll be at a level that they feel is acceptable. So it's lining up nice. You want to touch on destocking?
Yes, on the destocking, Justin, when we look at that, you know, we have been seeing that in our biologics segment and in generics. That's where we saw the biggest impact here in the second quarter. And you know, that's really where, as we were going through COVID, that's where we saw the most pressure also around lead times, where customers really had to manage their supply chains. And you know, that's where we believe the safety stock built over time. So that's why we are seeing destocking in those areas right now, you know, to a larger extent versus comparing this to our other market units. And you can see that play through then on the impact on our gross margin and operating margin; that's impacting our mix.
So we're having one, a volume impact because of that, but we're also having a mix impact. And I think what we saw in COVID and what we would see when we return to normalized growth rates in seeing that gross margin up and operating margin expand in line with our long-term construct and, you know, potentially beyond that. So that's. I think that's where we, when we look at it, we're looking at it from a revenue perspective, but also looking at an impact on margin and saying: How do we get back to the margins that we're used to delivering on? And when we see those biologics and generic markets start to normalize, we'll see the revenue rebound, and also from a margin perspective, we'd see that also.
Justin Bowers (Analyst)
Understood. And then maybe just one quick follow-up in terms of your improved throughput. Do you have a sense from your or conversation with customers, are they, are they now trying to manage inventory levels in line with, with your lead times? Or-
Bernard Birkett (CFO)
... Just trying to get a sense of change in ordering patterns and where that might normalize.
Eric Green (CEO)
Yeah, Justin, exactly, that's the point. We're unfortunately, during the pandemic, due to the demand that was put on our business, our lead times did go up to anywhere between 30-50 weeks. And with the consistency now in the last several quarters of, call it, 8-12 weeks, sometimes earlier, sometimes a little bit longer, depending on the processing. Our customers are realigning their reordering patterns based on those lead times, and we're seeing that clearly. So as they've built inventories during the longer lead time periods and during the supply chain constraints during the pandemic and across the whole industry, we're seeing that also coming down, but also they're realigning.
Bernard Birkett (CFO)
So what you'll see a pattern of more frequency, instead of one large bolus, it's more paced throughout the next 3 or 4 quarters, which, by the way, is also very effective for our operations. So it aligns real well with where we wanna be long term.
Justin Bowers (Analyst)
Got it. Appreciate the questions.
Eric Green (CEO)
Thank you, Justin.
Operator (participant)
Thank you. Our next question comes from the line of Avantika Durbaria with Bank of America. Your line is now open.
Michael Ryskin (Managing Director)
Hey, this is Michael Ryskin from BOFA. I just wanna go back and just touch on the destock one more time, because that's where we're getting the most debate. I mean, appreciate all your comments about coverage ratio and conversations with your customers, but you know, you also had some more comments after four Q and one Q earlier this year. So it just seems like the situation does evolve and the conversations with customers do evolve. You know, as we look to the guide for three Q and four Q, you know, it seems like there's a little bit of a step up in volume three Q and a pretty sizable step up in four Q, just to get to the fiscal year number.
Bernard Birkett (CFO)
So, why not take an even more conservative guide, at this point in the cycle? I mean, it just seems like there's still some risk that the destock could evolve one more time. So just would love to get your thoughts on that, as you progress through the year. And then tied to that, I'll throw in my second question right away. Has to do with the margins and the EPS outlook. Is there any incremental cost cuts that are assumed in 4Q, 3Q or 4Q to get to the EPS number? You know, obviously, volume deleverage has a big impact on gross margins, but just wondering, what's implied there as you go through the year. Thanks.
Yeah. So what we are seeing is that, you know, for Q3, we don't see any major step up, I mean, really continuing the way we're, you know, we've been going. Some sequential improvement, as Eric mentioned, and then a step up into Q4. And that step up in Q4 is really driven by the customer segments within biologics and, you know, a reasonable improvement in generics. But the main driver is around the biologics market, and that's what we're seeing, and that's the information we're getting from our customers. And that informs the basis of our guide at this point. And as Eric said, then there are metrics around that which are giving us, you know, confidence that that will actually materialize. And then on the EPS, we have been managing our cost base pretty tightly.
As you know, we're very operationally focused, and we've been managing the variable costs across our plants. As we have been going through 2024, one thing that we have to be cognizant of with cost management is that when we're expecting to get back to growth, we need to make sure that we have the right resources and capabilities in place to be able to support that growth, so we don't derail it. So we're managing that pretty tightly. Other than that, we're not making any significant cost cuts, but we are, I would think... I would say we're using appropriate cost management to manage through the destocking period, although it is extending a little bit longer than we originally anticipated.
But also, we have to be prepared for returning to growth to make sure that we're able to support our customers with that. Hopefully, that helps.
Operator (participant)
Thank you. Our next question comes from the line of Matt Larew with William Blair & Company. Your line is now open.
Matt Larew (Analyst)
Hi, good morning. I just wanna, you know, go back again to what exactly happened in your quarter from a destocking perspective. You know, if I go back to the initial outlook from the Q4 call, where you had incorporated about 200-300 basis points of the cut from the Q3 call last fall from destocking, but, you know, mentioned that 75% of destocking was from 6 customers. Obviously, the first quarter results themselves actually were positive relative to the outlook you'd provided, and you maintained the guide for the year. So, you know, now having 400-500 basis points come out of the organic guide with, you know, about 4 months left, 4 or 5 months left in the year, is the magnitude pretty large.
Bernard Birkett (CFO)
So just was it going back to, you know, conversations specifically with that, that group of big customers? Was it something that, you know, historically, you've used the term broadened and worsened, did things broadened and worsened further? Was there one or two pockets of customers or, or product categories? Just trying to understand what happened from, you know, mid-April to the end of, of June, in terms of the, the big change here.
... Yeah, Matt, I'll start off, and then, Eric, if you want to add. Yeah, what we did see as we were progressing through Q2 and the level of intra-quarter orders that we would have anticipated us to, you know, materialize in that period of time, you know, just it wasn't at the rate that we would have expected it to be. So—and then there was some timing with customers moving some orders out late in the quarter, would have, you know, has impacted us.
Then as we've looked at the balance of the year, and as we've rolled through the end of June and practically through July, what we're seeing in Q3 is that orders that we would have anticipated, you know, materializing for the period and even some for Q4, they just weren't coming through. You know, when we assessed what was happening there, it's still really related to levels of destocking, so it's gone longer than we would have originally anticipated. You know, that is essentially the main driver. And when we had looked at it originally, our coverage rate for Q3 and Q4 was pretty much in line with, or a little bit ahead of, you know, pre-COVID levels.
But what hasn't happened then is filling in between the actual orders confirmed and the forecast that we had, that hasn't accelerated in the way that we would have anticipated that that would take place. And so, you know, when we did the assessments, we felt that, you know, we have to be transparent and do the right thing and take the guide down and, you know, do it with the right level, where we don't, we don't want to be in the position where we're cutting and cutting and cutting. So hence the reason why the drop in the guide is, you know, pretty significant. It's not something we want to do, but it's reality that we're dealing with today.
I think the good thing and the positive for us is that it's actually returning to growth, you know, in Q4, so it's really pushed it out a quarter. And again, Q4 isn't as strong as we would have originally anticipated, so we've taken that down as well.
Eric Green (CEO)
And I'll just add to this. Thanks, Bernard. And it became more of a gradual recovery, I believe, in what we're seeing versus a more pronounced Q3 recovery. And that's actually one of the drivers of why, based on the customer conversations, it's still a similar group of customers across multiple segments. Yes, there's some of the larger ones we highlighted earlier in the year, that they're actually going through the process and then getting to closer to the end of that process. But as we look through with these discussions, we look at where they are in their process, where we are with our able to produce products in a very short period of lead times. We are confident moving back to long-term construct. And that will ...
Bernard Birkett (CFO)
It's gonna take a little more time than we anticipated, but as indicated in the guidance that we gave, we're getting closer to that in Q4. And we believe that will carry on going forward. So yes, Matt, that's a very clear statement we made earlier this year about being more acute, but it is, it's taking a little bit longer to work out than we anticipated in the industry.
Matt Larew (Analyst)
Okay, understood. And I think having observed this in the bioprocessing industry over the last 18 months, you know, fully appreciate that it's challenging to understand customers' pace of inventory work down, and at times, maybe there's competing incentives in terms of them wanting to have capacity available for demand that, you know, they may or may not give you in the next quarter or two. So in light of that, you referenced, you know, now understanding that customers are managing to, you know, you're now more normalized to reduced lead times. As part of those conversations, do you feel like you have a better understanding of how much inventory is sitting out there?
Bernard Birkett (CFO)
When you kind of combine those, you know, two observations, does that give you, you know, conviction, specifically, not in the back half of the year, but specifically in, in the third quarter? And how did you incorporate perhaps these, you know, better understanding of where customers are at into the way you're, you're thinking about this back half guide?
Eric Green (CEO)
Yeah, Matt, the clarity of more recent conversations than the beginning of the year gives us that conviction of where we're going in the near term. And moving up to, you know, when I talk about the mid to long term, getting back to that growth algorithm we've been accustomed to and we expect based on our market position and what we see ahead of us. But yes, we're the clarity of where they want to land with the safety stock, and the confidence they have in our ability to deliver and meet those service levels that we expect and our customers expect. And we're able to do that today with the capacity we have online.
Bernard Birkett (CFO)
And that's the reason why we need to fuel the capital, so that as the growth continues to occur in 2025 and beyond, is that we're well positioned versus again getting behind the curve, which what happened during the pandemic. So we have much more visibility today and better clarity, and we're firm on making sure that we are gonna be delivering what we said we were gonna deliver.
Matt Larew (Analyst)
Okay, understood. Thank you.
Eric Green (CEO)
Thank you, Matt.
Operator (participant)
Thank you. Our next question comes from the line of Jacob Johnson with Stephens. Your line is now open.
Jacob Johnson (Analyst)
Hey, thanks. Good morning. Maybe just to go back to the EPS guidance. You know, you're pointing to kind of down 1-2 organic growth this year, and I think it would seem to apply probably like 300-400 BPS of operating margin contraction, which is kind of greater decremental margins than the long-term algo would suggest. Can you just flesh that out a bit more? Is some of that capacity additions, et cetera? And then I think I heard Bernard mention earlier, perhaps, as revenues recover, maybe we could see something better than 100 BPS of margin expansion. Can you just talk about the incremental margins as we return to growth in 4Q and beyond?
Bernard Birkett (CFO)
Yeah. So the major impacts on margin that we've seen here, you know, in Q2 is really driven by volume and then mix. And, you know, for a high volume manufacturing operation, any decrease in volume like that is gonna have a significant impact. And where we're seeing it, Jacob, is really in HVP, so the drop is in biologics and generics. And so we're getting this kind of outsized impact on margin, where if you look back at, take the COVID years when we were getting a large amount of expansion in HVP and growth in that area, we were getting outsized margin expansion, you know, well beyond our 100 basis points. So essentially what we're seeing now is the reverse of that.
So when things normalize, we start to see growth again and getting back into our long-term construct, that volume growth will be driven within HVP, and then also that aligns with the mix shift as well, improving where, you know, our HVP was in the kind of mid-70s% of proprietary revenues, and today we're saying it's about 71%. And that's the type of impact it has on our business. So you know, when we're returning to growth, we would expect to see that margin recover pretty much, you know, pretty quickly and in line with that growth, particularly around biologics and the generic space. And then obviously-
Jacob Johnson (Analyst)
Thanks for that, Bernard.
Bernard Birkett (CFO)
Yes.
Jacob Johnson (Analyst)
Sorry.
Bernard Birkett (CFO)
It's all in gross margin. The OpEx is pretty tight, so.
Jacob Johnson (Analyst)
Got it. Makes sense. And then maybe just on the stopper vial side of things, you guys referenced the capacity you brought on during COVID and repositioning that now for non-COVID applications. Can you, one, talk about the timeline for kind of transitioning that capacity to non-COVID demand? And I guess, two, the other concern, I think a peer of yours referenced the other day is that, you know, you weren't the only one who brought on capacity during COVID and lead times are shorter, and they suggested that customers are going below pre-pandemic inventory levels. And I think investors may be worried that this could be structural for some time. Can you just talk about that dynamic as well? Thanks.
Eric Green (CEO)
Jacob, I'll take that. So first of all, on repurposing the assets, that's done. So we're able to leverage the, not just for, like, NovaPure stoppers, but now also use the processing for plungers, as an example, or other types of SKUs in the HVP portfolio. So the team has done a great job to get those assets ready to go, and they're ready to go. And so as demand comes in, we're ready to respond accordingly.
Bernard Birkett (CFO)
In regards to what our customers are telling us in regards to where they want to stay with their safety stock, because of where we are in the supply chain, and if you think about the economics of our product as a percentage of the drug molecule, we don't see that going any down, further down below pre-pandemic levels. So we believe it's gonna for us, I can't speak for others, but for us, with our customers, for the types of products we provide, the lead times that we can provide, and it's the number of SKUs we provide our customers, we believe, based on the conversations, we'll be back to pre-pandemic levels.
Jacob Johnson (Analyst)
Got it. Thanks for that, Eric. I'll leave it there.
Eric Green (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Dan Leonard with UBS. Your line is now open.
Dan Leonard (Analyst)
Thank you. I have another question on visibility. Can you discuss the breadth of your visibility? And I ask because I'm wondering if we're in a situation where you have close contact and visibility with those large customers, but rather it's the long tail of smaller customers that are driving the downside surprise.
Eric Green (CEO)
Actually, so Dan, thanks for the question, but the more variability has been with the larger customers. And the smaller customers, although obviously we're very focused on that, because that's really feeding the pipeline when you think about new developments and, the volumes there are less, and the frequency of orders are probably a bit higher. The predictability of which quarter it lands in is lower, but the order of magnitude on the stocking impact is less. So I'm not sure if that helps, but, you know, obviously, a very important part of our portfolio are the smaller biotech pharma companies, when you think about their innovation pipeline and how that feeds into the whole ecosystem of, the injectable medicines space. But the impact that it has on our fluctuation on the revenues is not as great.
I don't know if that helps, Dan.
Dan Leonard (Analyst)
That's great. That helped. Thanks for that clarification, Eric. And a quick follow-up. You mentioned that the new capacity in Dublin opens in the third quarter. How important is Dublin to the fourth quarter revenue ramp?
Eric Green (CEO)
... Not really. I mean, the team is gonna work really hard to get that capacity up and running and, you know, full utilization. But the reality is, it takes us a few quarters to ramp any new site of that magnitude up to full capacity. So I would suggest that it's not a major driver to why we're giving the guidance the way we are for Q4.
Dan Leonard (Analyst)
Got it. Thanks a bunch.
Eric Green (CEO)
Yeah. Thank you. Thanks, Dan.
Operator (participant)
Thank you. Our next question comes from the line of David Windley with Jefferies. Your line is now open.
Dave Windley (Managing Director)
Hi, good morning. Thanks for taking my questions. I'm gonna try to ask a few in a different way. Eric, in June, when we were together, you talked about 50% or maybe a little less of your revenue comes from large customers where your visibility is higher, I thought you said, because of the high volume that you do with them, the connectivity that you have with them, and then the smaller customers are much more volatile. And you kind of to Dan's question there, commented on that. I thought you said that your you know your visibility or your forecasting accuracy around those large customers was really accurate over time, but you also then just said that those are actually the source of the destock.
Bernard Birkett (CFO)
And so I wanted to make sure I understood kind of the, you know, the historical accuracy and tie in with those large customers, but seemingly a disconnect on that right now. Is that the right way to think about it?
Eric Green (CEO)
No, what I would say is that, So David, thanks for the question. But I would say is that the larger customers have larger variability. When they do, we'll have a discussion about a forecast, and then they would, when we get to the point of, actually firming up the, as a firm order, there's, there is some movement that is occurring. And since it doesn't take many of them to have a meaningful impact compared to the smaller account. It is true on a smaller account, and maybe I should have been clearer. When we look at degree of accuracy, we're looking at quarter versus quarter prior year. And therefore, in the smaller accounts, that's less predictable on which exactly month, quarter, it will land.
Bernard Birkett (CFO)
We have a high repeat business model, and we mentioned this before, that majority of our revenues, it's almost, annuity-like. Every year there's a repeat, and then what the variable would be, drug demand up or down, and then that's, that's the throttle. But in this particular case, when we talk about the degree of accuracy, the smaller accounts, from a quarter versus prior quarter is, is a little more harder to predict. But from a impact to the revenues, the larger accounts are the ones that have a more meaningful impact on the dollar value perspective from one quarter to the next.
Dave Windley (Managing Director)
Got it. Okay. And then in terms of the improving confidence, I guess I'd like to key on Bernard's answer about, you know, kind of the cuts to this year and the order patterns. You know, earlier in the year, your coverage was encouraging relative to pre-COVID levels, but then the fill-in on top of that not coming as you expected. Can you give us some sense of, you know, what is the normal level of coverage versus the amount of go-get? Like, how much go-get do you have for the second half of the year, you know, in absolute or relative, that gives you the confidence that you can get to the levels that you're now setting?
Bernard Birkett (CFO)
Yeah, what the exact number we're not gonna give out for, like, pretty obvious reasons, but it's our coverage rate and the go-get that we would have to do now on this new guidance is, I would say we're more confident around that and delivering it and being able to get it. And that it's. That go-get is based on conversations with customers, understanding their order patterns and changing order patterns and factoring all of that in, and then understanding what their forecasts are. So that's, you know, that's what's given us the confidence. So the size of what we have to go get isn't as large from a dollar perspective.
And you know, as I said, when we talked about it earlier in the year, we had a level of confidence around it and anticipate a certain conversion rate. Obviously, you know, that hasn't materialized in the way we would have anticipated, so we've had to, so we have adjusted our guidance to reflect that and give us confidence about being able to deliver on the numbers now that, now that we're guiding to.
Dave Windley (Managing Director)
Got it. And Bernard, to your point, you did management did say similar things about, you know, when those six customers kind of arose and kind of shockingly were not gonna be ordering as much earlier in the year, and the guidance was 2-3 instead of, you know, the 7-9 construct. So you had those conversations earlier in the year and, you know, are talking about having them again here in the middle of the year. I guess I'd also invoke, you mentioned that, you know, you go back to pre-COVID levels and look at the growth rate. We've done the same. You said 10, it looks like it's even a little above 10.
Bernard Birkett (CFO)
I guess using that construct, if we were to use the midpoint of the LRP, the 8% of your long-range targets, you know, that would imply a revenue level that's still $200 million below where you're guiding today, or said differently, that next year would be a flat year to grow into an 8% growth rate from 2019. How do we get confidence that there are factors that, you know, that bias to the upside, what that growth should be, or conversely, that there's not still $200 million of overbuying in your customers' inventory levels that they still need to work through before you get to that, you know, that multi-year growth support level?
Yeah, David, I'll start with this one here. One of the biggest drivers in the last five years, CAGR, taking out COVID, was the biologic growth. If you recall back five or six years ago, our participation rate was high, but the percentage of sales of biologics was sub 20%. And I don't have the exact number in front of me. It was about 20% of our overall business, if I recall. And as the years progressed over those five years, the number of approvals, the number of biologics have really accelerated in the market, and there's a few that we still see continuing to outpace the demands that we forecast with our customers, which is a positive. Now, the base of that business is much larger.
I believe it's we were roughly around 40%, so we 2x'd it as a percentage of the whole company, and the whole company has grown or doubled in size. So as we kinda think forward a little bit, you know, the 7-9 is what—why we say the financial construct going forward, 7-9, is we feel we take that into consideration as a bigger base we're operating off of. Continue with the leading with HVP in the biologics area will give us that type of growth off of a close to a $3 billion business.
Dave Windley (Managing Director)
Got it. Okay, I'll leave it at that. I was gonna ask one more, but I've probably beaten it up enough. Thank you.
Bernard Birkett (CFO)
Thanks, David.
Operator (participant)
Thank you. Our next question comes from the line of Tom DeBourcy with Nephron Research. Your line is now open.
Thomas DeBourcy (Principal)
Hi, good morning.
Bernard Birkett (CFO)
Morning.
Thomas DeBourcy (Principal)
Good morning. Just had a quick question, I guess, on CapEx. And you know, so the current level of CapEx, you know, 12%-13% of revenue. And so I just wanted to get a sense of how you're, I guess, metering the demand, you know, or long-term capacity expansion versus maybe, you know, short-term, weaker demand due to destocking. And then just as you look to 2025, you know, I think consensus has maybe the number going down to $300 million of CapEx. And just, I'm not asking you to endorse that number, but just would you expect CapEx to be down year-over-year in 2025?
Bernard Birkett (CFO)
Well, I'm not gonna guide 2025 at this point, but what I would say is that the investments we're making and the higher level of CapEx that we're experiencing right now, you know, compared to pre-COVID levels, is really targeted at growth in a number of different areas. For us to layer in that capacity, you're looking at 12, 24, like, 36 months in some cases, depending on the lead times of the equipment and the technology that we're installing. When we're doing that, we're looking at, you know, what markets are growing. We're looking at the regulatory landscape, what changes are requiring there, and what finishing capacity we need.
We're looking at GLP from both a proprietary and a contract manufacturing perspective, and then we're also looking at our participation across biologics, and again, what sort of capacity we need there. So we've got three pretty powerful drivers for growth coming on over the next couple of years, and for us, we need to have that capacity installed to meet that demand when it actually materializes, so we can respond. So we don't get into the position where our lead times get pushed out like they had during the COVID timeframe. Looking beyond, as we said earlier on the call, we would expect our CapEx over the next year or two to get back to more normalized levels of 6%-8% of revenues.
You know, that's what we would target, we'll be targeting, and that supports the long-term construct growth of 7%-9% on the top. And be more focused again on creating that mix shift and supporting that HVP growth. So hopefully that kind of gives you some color.
Operator (participant)
Thank you. This concludes the question and answer session. I would now like to hand the call back over to John Sweeney for closing remarks.
John Sweeney (VP, Global Controller and Chief Accounting Officer)
Thank you all for joining us today on the conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you can access a replay for 30 days following the presentation by using the dial-in numbers and conference ID provided at the end of today's earnings release. That concludes the call. Thank you very much, and have a nice day.
Operator (participant)
This concludes today's conference call. Thank you for your participation. You may now disconnect.