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Executives

Donald Morel – Chairman, Chief Executive Officer

William Federici – Vice President, Chief Financial Officer

Analysts

Arnie Ursaner – CJS Securities

Dave Windley – Jefferies

Ross Taylor – CL King

West Pharmaceutical Services Inc. (WST) Q4 2012 Earnings Call February 21, 2013 9:00 AM ET

Operator

Good morning and welcome to the West Pharmaceutical Services Fourth Quarter and Full Year 2012 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero and we will be happy to assist you. This call is being recorded on behalf of West and is copyrighted material. It cannot be rerecorded or rebroadcasted without the company’s express permission. Your participation in this call implies your consent to our taping. If you have any objection, you may disconnect at this time.

And now I’d like to turn today’s meeting over to Mr. John Woolford from Westwicke Partners. Sir, you may begin.

John Woolford

Thank you, Operator. Good morning everyone and welcome to West’s fourth quarter and full year 2012 results conference call. We issued our financial results this morning and the release has been posted in the Investor section on the Company’s website located at www.westpharma.com. If you have not received a copy of this announcement, please call Westwicke Partners at 443-213-0500 and a copy will be sent to you immediately.

Posted on the Company’s website a slide presentation that management will refer to in their remarks today. The presentation is in PDF format. Should you require a link to a free download of that software that will enable users to view the presentation, it is also available on the website.

I remind you that statements made by management on this call and in the presentation will contain forward-looking statements within the meaning of U.S. federal securities law and that are based on management’s beliefs and assumptions, current expectations, estimates and forecasts. Statements that are not historical facts, including statements that are preceded by, followed by, or that include words such as estimate, expect, intend, believe, plan, anticipate, and other words and terms of similar meaning are forward-looking statements. West’s estimated or anticipated future results, product performance or other non-historical facts are forward-looking and reflect our current perspective on existing trends and information.

Many of the factors that will determine the Company’s future results are beyond the ability of the Company to control or predict. These statements are subject to known or unknown risks or uncertainties and therefore actual results could differ materially from past results and those expressed or implied in any forward-looking statement. You should bear this in mind as you consider forward-looking statements.

For a non-exclusive list of factors which could cause actual results to differ from expectations, please refer to today’s press release. Investors are also advised to consult any further disclosures the company makes on related subjects in the company’s 10-K, 10-Q, and 8-K reports. Except as required by applicable securities laws, the company undertakes no obligation to publicly update forward-looking statements whether as a result of new information, future events, or otherwise.

In addition, during today’s call management may make reference to non-GAAP financial measures including adjusting operating profit and adjusted diluted EPS. These measures and their component parts have no standardized meaning prescribed by U.S. GAAP and therefore may not be comparable to and should not be viewed as a substitute for U.S. GAAP operating income and diluted EPS. Reconciliations of the non-GAAP financial measures to the most comparable financial results prepared in conformity to GAAP are provided in materials accompanying this morning’s earnings release.

At this time, I would like to turn the call over to Don Morel, West’s Chairman and CEO. Don?

Donald Morel

Thank you, John, and good morning everyone. Welcome to West’s 2012 year-end conference call. Joining me today are Bill Federici, West’s Chief Financial Officer, and Mike Anderson, our Treasurer and primary investor relations contact. This morning, Bill and I will be giving an overview of our fourth quarter and full-year 2012 performance and our outlook for 2013. Throughout our remarks, we will refer to a PowerPoint slide deck that can be accessed via our website under Investors. If you cannot access the file, the information in the slides is covered in both this morning’s release and our commentary.

Financial highlights for our fourth quarter are summarized on Slide No. 3. Continued strong demand in both operating segments resulted in sales of $321.5 million for the quarter, an increase of 10.6% over the prior year, excluding the impact of currency. Both packaging systems and delivery systems posted double-digit sales gains, again excluding the effects of currency. Sales in packaging were lifted by ongoing demand for our high value product lines while delivery systems benefited from growth in both our proprietary products and contract manufacturing operations. For the quarter, our consolidated gross margin improved to 30.3%, an increase of 1.4 percentage points. Adjusted operating profit improved 10.7% when compared with the prior year and adjusted earnings per share were $0.61.

Additional segment details are provided on Slide No. 4. Pharmaceutical packaging sales were again driven by volume growth, higher selling prices in key product lines, and the continued positive sales mix bolstered by higher sales of proprietary products such as Westar, FluroTec, Envision, and ready-to-use stoppers and seals. Delivery system sales grew as a result of strong demand for contract manufacturing services with existing healthcare customers, stronger CZ sales in the quarter, and proprietary devices for reconstitution and safety.

The quarter was a fitting finish to a very strong year for West. Slide No. 5 provides a high level overview of our 2012 full-year results. Revenues for the year totaled $1.27 billion, an increase of 10.1% versus 2011. Our gross margin and operating margin improved by 2.1 and 1.3 percentage points respectively. As a result, full-year adjusted operating profit increased to $141.8 million or up 20.6% versus 2011. The euro strengthened a bit against the dollar during the quarter, which created a slight tailwind through the end of the year. Full-year earnings at actual exchange rates were $2.76 per adjusted fully diluted share, ahead of our expectations at the end of the third quarter.

In prior years, we have typically seen a dip in our order backlog as customers work down inventories and begin to plan for the upcoming year. This is not the case as we move into 2013. Demand remains robust and order flows ahead of expectations. Our backlog of firm committed orders at the end of the year was slightly in excess of $350 million, an increase of approximately 13% from three months ago and has continued to strengthen in the early part of 2013. The composition of the backlog is currently weighted toward the high value products as well. Based on this trend, West should have a good first half to start the year, even when compared with 2012’s very strong first half.

Slide No. 6 provides a high level summary of our major expansion and new product development programs. Customers continue to convert their existing products to Westar and other West value-added offerings such as FluroTec, Envision and NovaPure. Given the expansion in our backlog for these products, we have been proactively working with our customers to ensure that their inventory and production needs are understood and factored into our manufacturing capacity planning.

Clearly the investments we made over the past two years in washing and vision systems are bearing fruit as we continue to see high double-digit growth in the packaging systems segments. With continuing product conversions by our customers and new products coming to the market, we expect the high value products to continue their growth for the foreseeable future.

We have completed installation of the first phase of equipment in the China rubber facility and have started to supply customers with validation and test samples. We expect to begin first commercial shipments from the plant early in the second quarter. Construction on the India facility was slowed by a heavy monsoon season; however, expect to catch up and be on schedule by the third quarter. The India plant will start metal overseal production in early 2014 followed by rubber production in 2015.

Proprietary sales in the delivery systems group reached almost 25% of total sales during the quarter. CZ revenues hit $4.5 million during the quarter and demand remains strong as we begin 2013. We expect double-digit increases in sales of our proprietary systems during 2013, including CZ, following on a 16% increase during 2012.

The most important milestone for CZ during the year is the number of molecules our customers place on formal stability. While revenues during the next year and a half are expected to be somewhat lumpy, the formal stability trials put a stake in the ground in terms of timing for commercialization.

Our proprietary work on SmartDose remains on schedule. We achieved a major milestone on the program, delivering 10,000 demonstration and training units in the fourth quarter. The next milestone is to deliver units for a clinical trial in the second quarter of this year. As in 2012, we continue to see significant customer interest in delivery systems capable of administering volumes in excess of 1.5 mL.

Turning to our outlook for 2013, as outlined on Slide No. 7 and in this morning’s release, we believe sales growth for the year will range between 6 and 8%, giving revenues approaching $1.4 billion at constant exchange rates. The primary drivers for packaging systems remain mixed in increased sales of our high value products, whereas in delivery systems the ongoing shift to proprietary products and rising demand for contract manufacturing will be key. We are forecasting improvement in our gross margin which, when coupled with our assumptions for SG&A and R&D spending, should produce full-year adjusted earnings in the range of $2.97 to $3.17 per share. Bill will provide some additional detail on 2013 in his commentary.

We remain firmly committed to our strategy of focusing on expansion of our value-added product lines and packaging systems while continuing to build on our proven ability to develop technologies and products to address currently unmet needs in the marketplace with safe, accurate and simple administration of injectable drugs. Our investments in both new product development and our manufacturing footprint over the last few years have put us in an excellent position to deliver organic growth consistent with the range outlined in our five-year plan objectives discussed in our third quarter call.

I will now turn the call over to Bill Federici for a more detailed discussion of our financial results. Bill?

William Federici

Thank you, Don, and good morning everyone. We issued our fourth quarter results this morning, reporting net income of $21.1 million or $0.60 per diluted share versus the $0.54 per diluted share we reported in the fourth quarter of 2011. Excluding the effects of restructuring costs and acquisition-related earn-out adjustments, fourth quarter 2012 earnings were $0.61 per diluted share versus the $0.59 we earned in Q4 2011. A reconciliation of these non-GAAP measures is provided on Slides 15 through 18.

Keep in mind as you review our results that foreign currency translation rates, most notably the decline in the euro’s value compared to the U.S. dollar, resulted in a $0.02 per share reduction in Q4 2012 earnings per share in comparison to the same period in 2011. For all of 2012, foreign currency translation is $0.16 per share unfavorable to the prior year.

Turning to sales, Slide 8 shows the components of our consolidated sales increase. Consolidated fourth quarter sales were $321.5 million, an increase of 10.6% over fourth quarter 2011 sales, excluding exchange. The increase was driven by a favorable mix in unit volume gains and sales price increases which in the aggregate added sales of $31 million in the current quarter at constant exchange rates.

Packaging and system sales increased by $22 million or 10.5% over the same quarter 2011 sales, excluding exchange. A favorable sales mix and volume growth accounted for six percentage points of the increase. Higher selling prices in packaging systems contributed the remainder of the increase. High value product sales increased 17% versus the prior year quarter, excluding exchange.

Our Q4 2012 sales comparisons to the prior year period continued to benefit from customer inventory management actions. Excluding the positive effects of the customer inventory builds and our higher than normal sales price increases to recover historical material cost increases, we estimate our normalized 2012 sales growth was in the range of 5 to 7%. Delivery system sales increased by $9.5 million or 11.1% over sales in the prior year quarter, excluding exchange. The sales increase was driven by good performances in our contract manufacturing operations and our proprietary businesses. Sales of proprietary products were $23.5 million or 24.8% of the segment’s revenues in the quarter. CZ sales and development activity were approximately $4.5 million in Q4, about 2.7 million above the prior year quarter. On a full year basis, total proprietary product sales grew 16% in 2012 versus 2011.

As provided on Slide 9, our consolidated gross profit margin for Q4 2012 was 30.3% versus the 28.9% margin we achieved in the fourth quarter of ’11. Packaging systems fourth quarter margin of 34.6% is 2.2 margin points higher than the 32.4% achieved in the fourth quarter of ’11. The impact of high raw material prices and general inflationary increases in costs was more than overcome by the favorable mix of products sold, the sales price actions that took effect over the past year, and continued lean savings and efficiencies in our plans. Delivery systems fourth quarter gross margin was 20%, roughly equivalent to the prior year quarter. The positive sales mix and operating efficiencies were offset by increases in labor and overhead costs.

As reflected on Slide 10, Q4 2012 consolidated SG&A expense increased by $10.2 million compared to the prior year quarter. The increase comes from $1.6 million of stock-based compensation expense caused by the rise in our stock price and higher estimated achievement levels on longer term performance-based share programs. In addition, sales bonus and other annual incentive payment programs are $1.1 million above Q4 2011 levels due to the favorable sales and operating results versus plan targets. In addition, $2 million of the increase relates to costs associated with our new headquarter relocation.

Slide 11 shows our key cash flow metrics. Operating cash flow was $187.4 million for the full year of 2012, 57 million more than ’11 due to the strong operating results. Capital additions of roughly 151 million were made in 2012, including the capital associated with the new corporate office and research facility. Roughly half of the remaining capital spend was on new product and expansion efforts, including our new rubber plant in China. We expect capital additions of between 125 and $150 million in 2013, including approximately $20 million of costs associated with our new China facility but excluding the 35 million of accrued new headquarter building additions which were paid in 2013.

Slide 12 provides some summary balance sheet information. Our balance sheet continues to be strong and we’re confident that our business will provide necessary future liquidity. Our cash balance at December 2012 was $162 million, $70 million higher than our December 2011 balance. The majority of our cash is invested overseas and is generally not available for repatriation without tax consequences. Debt at December 31, 2012 was $411.5 million, $62 million higher than at the prior year end. Our net debt to total invested capital ratio at quarter end was 25.5%, a significant improvement from the 2011 year-end ratio.

Working capital totaled $295.5 million at December 2012, $67 million higher than at the prior year end. The main reason for the increase is due to the higher cash balances mentioned previously, as well as higher accounts receivable balances. We have not experienced any material collectability issues related to our growing receivables.

Our backlog of committed orders remains strong at $354 million as of December 2012, significantly higher than December 2011 balances. Our expanding lead times and customer inventory management actions continue to impact our backlog and our results.

We have issued our full year 2013 guidance in this morning’s release. That guidance is summarized on Slide 13. Our guidance is based on an exchange rate of $1.33 per euro. Our actual 2012 results are translated at $1.29 per euro rate. The favorable exchange rate environment creates favorable earning comparisons to the prior year. Each one penny change of the dollar versus the euro results in about a penny and a half change in full-year EPS as a result of translation.

We believe 2013 revenue growth will be in the 6 to 8% range at constant exchange rates. Our consolidated sales should be in the range of 1.36 to 1.4 billion at current exchange rates. Both operating segments should generate margin expansion. Our guidance for 2013 includes an estimate of 20 to $25 million of sales growth in CZ and other proprietary products. R&D funding for all development programs is expected to be $6 million more than 2012 levels. Using these assumptions, our full-year 2013 earnings per diluted share should fall in the range of $2.97 to $3.17 compared to $2.76 per share in 2012, an 8 to 15% improvement in EPS excluding restructuring costs and other one-time items.

Slide 14 shows the significant factors that are expected to impact our margins in 2013. We expect sales price increases to return to more normal levels. We expect to see a continuing favorable mix shift towards our high value product components and proprietary delivery systems which carry higher revenues and gross margins per unit. Our backlog of committed orders remains high in part due to customer inventory management initiatives responding to our lengthening lead times in certain of our plants, and general customer risk mitigation efforts.

We continue to have less visibility to second half orders. Raw material, labor and overheads are expected to continue to increase in line with inflationary pressures. Our plant lean initiatives are expected to partially offset our increasing costs. China and India start-up costs are expected to adversely impact earnings versus the prior year as we continue our expansion efforts in Asia. We expect the net effect of these items will produce expanded margins in 2013.

I’d now like to turn the call back over to Don Morel. Don?

Donald Morel

Thank you very much, Bill. This concludes our commentary for this morning, and we now look forward to answering any questions you might have. Operator?

Question and Answer Session

Operator

Thank you. [Operator instructions]

Your first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed.

Arnie Ursaner – CJS Securities

Hi, good morning. A couple questions related to the headquarter relocation. What expenses should we assume in 2013, and how should we think about the timing of those?

William Federici

The 2013 expenses, obviously we own the building now so we will be having depreciation as opposed to rent that we had in the past with our old building. We actually expect that the net expense – that is, the difference between our cost and the depreciation – will be less than our lease costs. There are some costs associated with moving into the building that will be hit in the first quarter, but those should be relatively minor to the lease cost versus the deprecation.

So overall net, we expect a net benefit from the headquarter addition.

Arnie Ursaner – CJS Securities

Okay, well again, if you had 2 million of what I would call one-time expenses related to the move, that’s almost $0.03 a share that impacted Q4. Is that the right way to think of it?

William Federici

That is the right way to think of it. Again, there will be some of those costs, moving costs moving into the first quarter as we exit the existing building and we finish the actual move itself, which we did in January, some of the costs associated with that. But yes.

Arnie Ursaner – CJS Securities

Similar-type level, and all incurred in Q1?

William Federici

Not similar-type level, less than that – much less than that. Less than a million dollars and all would be incurred in quarter one.

Arnie Ursaner – CJS Securities

Okay. You led right into my next question – so you obviously are building a number of facilities that are coming online. How should we think about depreciation and amortization on 2013?

William Federici

Depreciation and amortization in 2013 will go up. If you think about the low to mid-70s that we had in depreciation in 2012, you can add rough numbers about $5 million to that, and that should cover the increased depreciation.

Arnie Ursaner – CJS Securities

Okay. And again, I just want to go back to the headquarters. I think you said you accrued all of the expenses, all of capital items in ’12 but they were paid in ’13.

William Federici

Correct.

Arnie Ursaner – CJS Securities

So I’m just trying to make sure I get—so your actual CAPEX--?

William Federici

Actual CAPEX cash was 131. If you add back the 20 million which was the increase in the accrual primarily related to the headquarters cost, you get to the 151 million that I disclosed to you.

Arnie Ursaner – CJS Securities

Okay. And just to clarify – in ’13, do you have any of the headquarters embedded in that number you gave us?

William Federici

Add in the 125 to 150 number.

Arnie Ursaner – CJS Securities

Perfect. CZ total last year did about 9 million. I think you indicated it could jump to 20 to 25 million. Can you go through the factors—

William Federici

Not in this year.

Donald Morel

Not in this year. That’s a total number for proprietary.

William Federici

The 20 to 25 million increase, Arnie, includes the Airis (ph) safety system, B.safe, and some of the other proprietary products in that space.

Arnie Ursaner – CJS Securities

What are you looking for on CZ?

William Federici

About a $2 million increase in the sales over the 9 million you quoted.

Arnie Ursaner – CJS Securities

Got it.

Donald Morel

Somewhere in the range of 12 to 14.

Arnie Ursaner – CJS Securities

Okay. Before I jump back in queue, if you could broadly speak—I know you have a slide that talks about factors that could impact 2013, but maybe you could just expand a little on in your mind the factors that would impact the high or low end of the guidance range that you’ve provided.

Donald Morel

Yeah, I think the high end of the guidance range is going to be impacted by a couple customers bringing new facilities online in China. I think clearly part of the backlog build has been a result of their preordering into their European facilities in preparation for getting the China facilities operational.

On the low side, I think what you may see in the latter part of the year – and again, we’ve got pretty good visibility in the first half, not as good into the second half – as we get into Q3 and late Q4, you may see some customers pull back on inventory builds that happened during 2012 to get their inventories back to more normalized levels after ’09, ’10 and ’11.

Arnie Ursaner – CJS Securities

I’ll jump back in queue. Thanks.

Operator

Your next question comes from the line of Dave Windley with Jefferies. Please proceed.

Dave Windley – Jefferies

Thanks for taking the questions. So my question kind of takes off on Arnie’s last, and that is understanding to the extent possible the visibility on clients’ above-normal ordering. I guess if we go back through time, starting to see this trend, I think, a year ago or a little more. To state it briefly, it’s lasted already longer than was originally expected. How much additional work—I think you mentioned in your prepared remarks that you were trying to have more conversations with clients to understand the visibility around that. If you could elaborate on that and just kind of help us to understand what’s driving the clients to rebuild inventory for this long a period of time, and how much longer could it last, I suppose?

Donald Morel

Well, there’s a couple parts to the answer, Dave. Number one, clearly some of the inventory builds we’re seeing relate to these new plants coming online in China. A couple of them are fairly substantial, so we’ve seen, we think, a pretty good part of the additional backlog growth be due to those customers getting prepared to launch production in those new plants, and that would be a combination of samples for validation and line runs, as well as commercial production.

The second part of this is that we have several customers that are looking at tender business for clients in the Middle East and Africa and in the Far East. For those tenders, they’ve put orders in ahead of the actual awarding of the contracts, but they have to build inventory to be ready to deliver against those.

We’ve also had a modest part of the backlog be due to discontinuation of a raw material in part of our process in Germany where customers have had to order some extra samples to be able to run validation runs with the components processed with this new material in advance of getting approval to run full commercial production with it. So you’ve got really three parts to the equation there.

How long will it continue? We always see customers change inventory strategies as they get to the latter part of the year. What we are trying to do where we have substantial backlogs built up and lead times that have extended beyond what we consider to be acceptable is simply sit down with the customers, understand their current inventory situation, what they consider to be their desired level of safety stock and ordinary inventory, and then match that against the additional demand and our capacity and availability to deliver. So it’s an exercise where we’re going to stay close to those customers that are experiencing lengthening lead times so that we can plan our production accordingly and meet expected deliver times.

Dave Windley – Jefferies

Okay. So that’s helpful, thank you. Last year, a fair amount’s been made about FDA approval pace in 2012 accelerating to levels we haven’t seen for quite a while. I have to admit, I haven’t paid close enough attention to know what the mix of oral administration versus injectable administration is in those product approvals, but is any of this demand being driven by an uptick in new product launches that your clients are doing that require supply?

Donald Morel

Not that we can say. When I think back to the approvals for last year, they were up a little bit from the prior year. The balance between injectables and orals hadn’t changed a whole lot. There are a range of new injectables over the next two to three years that we expect to see come to the market that we know are in Phase III trials, but they wouldn’t be building inventory for those right now.

The only other thing that might impact that, and I honestly—I’d have to go back and check it, would be expanded approvals for indications above current indications for certain drugs, which often happens.

Dave Windley – Jefferies

Okay. And coming back to your first answer, you mentioned some clients putting in tenders for volume ahead of contract award. Does that present backlog risk for you if those contracts don’t go through to those clients?

Donald Morel

A backlog is firm, committed orders, so we do not include any sales in that backlog number unless we have a firm PO for it. So it doesn’t represent risk in that sense; however, as a bolus order, it’s one that may not reappear in 2014 if you have a multi-year tender offered.

Dave Windley – Jefferies

Okay. And then finally on CZ, I wonder if you could give us a more specific update on that proprietary product in terms of clients’ formal stability, timing of win, when you might expect to see some substantial commercial orders that will cause the inflection in CZ that is so important for the delivery systems business.

Donald Morel

Yeah, nothing is changed from our call commentary at the end of the third quarter in terms of timing. Right now, we’re watching closely as best we can when customers will and in fact reveal to us when they have something up on formal stability. Many of them are being very tight-lipped about that, which is understandable. The variable, of course, is that there may be a molecule in the queue that’s on formal stability that has a shelf life of nine or 12 months and doesn’t require the full two years, versus typical drugs that require the two years. Unfortunately because of confidentiality, we can’t talk in depth about those.

But nothing has changed in terms of our expectations for what we know now. Assuming a two-year formal stability period, we think the ramp-up occurs toward the fourth quarter of 2015 or early ’16.

Dave Windley – Jefferies

Okay, thank you very much.

Donald Morel

Thank you.

Operator

Your next question comes from the line of Ross Taylor with CL King. Please proceed.

Ross Taylor – CL King

Hi. I have a couple of short questions. First looking at your organic revenue guidance for next year of 6 to 8%, if you strip out some of this inventory building action, what do you think kind of the underlying organic growth rate for the company might be?

William Federici

It’s still in line with—

Donald Morel

It’s still in line, yeah. Sorry Bill, go ahead.

William Federici

No, please, please.

Donald Morel

No, it’s still in line with that kind of mid to high single digit range that we’ve talked about.

Ross Taylor – CL King

Okay, okay. And on CZ, the $12 million-ish in revenues you expect for 2013, is that basically for the same types of activities that you got the $9 million in revenues for in 2012, and is kind of the profit or margin contribution roughly the same?

Donald Morel

Yeah, I mean as we’ve talked about before, it’s going to be lumpy and those samples fundamentally are for line trials, for stability trials, and in many circumstances even for pre-formal stability testing in the laboratories.

Ross Taylor – CL King

Okay. And also on CZ, can you comment whether you expect sort of the first commercialized product is likely to be a new drug, or is it likely to replace existing packaging for a drug that’s already on the market?

Donald Morel

No idea. Unfortunately we don’t have very good visibility into what’s up on formal stability currently. What we do know in talking with our customers is that the gamut of drugs being tested runs from products that are currently on the market all the way through new drugs that are in early testing that are incompatible with glass. So we will have to wait and see on that question.

Ross Taylor – CL King

Okay. And last question, just a modeling question, your interest expense is a little bit lower in the quarter than what I modeled. Is that 3.2 million kind of a good quarterly run rate to use for 2013?

William Federici

Yeah, between 3.5 and 4 is where you ought to be, Ross.

Ross Taylor – CL King

Okay, good. Thank you very much.

Operator

Your next question is a follow-up from the line of Arnie Ursaner with CJS Securities. Please proceed.

Arnie Ursaner – CJS Securities

Hi, a couple of quick questions. On India, you mentioned you’re doing the more traditional stoppers and closures. Is there some reason you’re not prepared or thinking about doing the more higher end products there?

Donald Morel

I think we’re going to watch how the market develops, Arnie. What we’re starting out with, of course, if the metal overseals which are less regulated than the rubber products. But with the capacity that we’ve got in Singapore for the value-add products, we will have the capability to supply out of there as we see how the market evolves in India.

My guess is because we’re phasing in the construction of that plant as we begin to put in the rubber equipment, that we will quickly follow on with Westar washing and some of the other technologies to meet market demand there.

Arnie Ursaner – CJS Securities

Okay. A couple questions on pharmaceutical delivery. You mentioned CZ might be, I gather, around 11 million of the 20 to 25 million in revenue. How much of the remaining revenue would be SmartDose for early testing?

William Federici

It’s a small number, Arnie. It’s less than $3 million.

Arnie Ursaner – CJS Securities

So what are the big items in there?

William Federici

As we said, it’s Airis, the safety system, as well as B.safe which is another safety device that we have.

Donald Morel

And reconstitution systems on the Medimop side.

William Federici

The Medimop side, and the increase in those.

Arnie Ursaner – CJS Securities

Okay. And again staying on pharmaceutical delivery, you highlighted you had some tooling and development expense in the quarter. In the past, you used to basically not get paid or minimal payment, minimal margin on that. How much was it in the quarter, and can you speak perhaps broadly about where this is going for? Is it a specific customer program, or--?

Donald Morel

Yeah, normally when we’re reimbursed for tooling, it is a customer-specific program and it’s a tool unique to their design. I honestly don’t know what that number is, but it’s a small one. It’s probably on the order of $1 million or so.

Arnie Ursaner – CJS Securities

But this is for a specific customer?

Donald Morel

It would be, yeah.

Arnie Ursaner – CJS Securities

Okay. Going back to Slide 10, which is your SG&A costs, obviously in the IT and relocation we have 2 million. So going forward, it sounds like we may have some additional, call it a million of expense for relocation. What should we think about for IT in the upcoming year?

William Federici

IT, a significant amount was associated with the new building, getting the infrastructure in place IT-wise to accept the new building, which will obviously come down a little bit. But we were also spending money on, for instance, systems and upgrades in the HR area overseas which will continue, so that IT number is not a bad number to use on a go-forward basis.

Arnie Ursaner – CJS Securities

Okay. And the outside services of 1.4 million, is that a one-time or an ongoing?

William Federici

It’s a little bit of both. There were some one-times in there, but there are some—for instance, in association with how we’re looking at our global supply chain, we have some consultants helping us work through that issue, and that was about half a million dollars in the quarter, and that’s not a bad idea to think of that on a quarterly basis going forward.

Arnie Ursaner – CJS Securities

Okay. And then going back to an earlier question on the backlog growth and the expansion of time to deliver products, normally the way West has ended this process is by adding capacity. So I guess a couple questions related to that – how much incremental—of the capital spending you’re taking, how much capacity addition might you be able to get to help clients minimize some of this issue? And is some of it impacted by competitor changes? Garmisch has been—you know, pieces of their business, they’ve acquired—I guess they were sold to Aptar. Can you comment on how competitor changes might be impacting capacity within the industry?

Donald Morel

Yeah, it was actually Stelmi that was sold to Aptar. As far as we can tell, there hasn’t been a substantive change in terms of share, so we think the competitors are most likely growing a little bit less than we are in terms of dollar value. It’s difficult to say in terms of units. For us, when we look at our capacity demands and we make our capital plans, as you know, Arnie, we typically try to plan two to three years in advance based on not only looking back at how demand has evolved but talking with our customers and making our best projection going forward. It’s likely that when you look at our CAPEX going forward, outside of the maintenance CAPEX which runs probably about 60 to 65 a year, the bulk of the remaining is going into not only new products for delivery but for capacity in Envision, in NovaPure and in Westar. So it will go into the addition of washing and finishing lines, FluroTec molding capacity, and then the vision systems.

But that is one of the hardest things we have to deal with, is trying to get that timing right.

William Federici

I think, Arnie, just one other comment. I absolutely agree with Don, but remember that we’re not talking about large volume growth in terms of expectation. A lot of this, where the growth is going to come from is in this mix shift, so you have a little bit of price this year, a good deal of mix shift towards the high value and proprietary products, and then a little bit of volume.

Arnie Ursaner – CJS Securities

Are you reaching a point where on the lower—I mean, within your pharmaceutical area, you have quite different margins in packaging between the high and low end. Are you reaching a point where you’re telling certain customers at the low end that we just don’t have the capacity to meet your need and getting different pricing if they want to continue to get it from you? I mean, you can’t do everything for every customer.

Donald Morel

No, but historically the way our plants have been aligned, we cannot easily shift capacity from pharmaceutical to med device, so the med device and the lower margin customers are done in venues where we think we’ve got a favorable cost structure, and we focus only on those products in that venue. When we look at the higher value-added products that are going to pharma, those are concentrated in Singapore and Le Nouvion in France, and Eschweiler, Jersey Shore here in the United States.

The one plant where we are changing to accommodate capacity is in Kinston where the changeover from med device to pharmaceutical is taking place; and in fact, a large part of our CAPEX for the next year or two on this side will go into Kinston so that we have a second high value product pharma facility in the U.S.

Arnie Ursaner – CJS Securities

Okay, thank you.

Operator

And at this time, I am showing we have no further questions. I would now like to turn the call back over to Don Morel for any closing remarks.

Donald Morel

Thank you very much for your time today everyone, and we look forward to talking with you in late April when we present our first quarter results. Thank you.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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