Theresa Kelleher - West Pharmaceutical Services - IR Don Morel - West Pharmaceutical Services - Chairman and CEO Bill Federici - West Pharmaceutical Services - CFO

Arnie Ursaner - CJS Securities Ross Taylor - C.L. King & Associates

Good morning, everyone. Welcome to the West Pharmaceutical Services first quarter 2008 results conference call.

As you know, we issued our results this morning. The releases have been posted at the company's website located at www.westpharma.com.

If you have not received a copy of this announcement, please call FD at 212-850-5600, and a copy will be sent to you immediately. Before we begin, I would like to remind you that certain statements that may be made by management of the company, may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements set forth anticipated results, based on management's plans and assumptions. Such statements give our current expectations or forecast of future events.

They do not relate strictly to historical or current facts. In particular, these include statements concerning future actions, future performance or results of current and anticipated product, sales efforts, expenses, the out come of contingencies such as legal proceeding, and financial results.

We have tried, wherever possible, to identify such statements by using words such as estimate, expect, intend, believe, plan, anticipate, and other words and terms of similar meaning, in connection with any discussion of future operating or financial performance or condition. We cannot guarantee that any forward-looking statement will be realized.

If known or unknown risks and uncertainties materialize, or if underlying assumptions are inaccurate, actual results could differ materially from past results, and those expressed or implied in any forward-looking statements. For a non-exclusive look of these factors, which can cause actual result to defer from expectations, please refer to the factors listed in today's press release.

Investors are advised however, to consult any further disclosures the company makes on related subjects in the company's 10-K, 10-Q and 8-K reports. The company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future information, or otherwise.

This call is being recorded on behalf of West Pharmaceutical Services and is copyrighted material. It cannot be rerecorded or rebroadcast without the company's express permission.

Your participation on this call implies to your consent on our taping. Once management has concluded their remarks, we will open the floor for questions.

At this time, I would like to turn the floor over to Dr. Don Morel, Chairman and CEO.

Thanks very much, Theresa, and good morning, everyone. Thank you for joining our call today.

As Theresa mentioned, I'm joined by our Chief Financial Officer, Bill Federici; and by Mike Anderson, our Treasurer and primary Investor Relations contact. Earlier this morning, West announced earnings for the first quarter of 2008.

To begin our commentary, I would like to touch on a few key elements about Q1 results, update you on several key programs, and then review our guidance for the full year. I will then turn the call over to Bill who will walk you through the particulars of our results for the quarter.

From a revenue standpoint, we are very satisfied with our overall performance for the first three months of the year. Consolidated revenues were $277.7 million for the quarter versus $257.6 million for Q1 '07, an increase of 5.1%.

As you will recall during our February update, we outlined in some detail the impact of three significant issues that would lower our revenue growth in 2008. The market uncertainties surrounding the Exubera device and the exiting production of the diagnostic components, both items that we no longer expect to sell, and the changing status of ESA drug reimbursement.

Collectively, these three issues hit our Q1 revenue line, in line with our expectations or roughly $20.9 million. Management is very pleased with the quarter overall, because the rest of the businesses came through with stronger than anticipated results, leading to earnings of $0.76 per diluted share, $0.72 after removing some items that might complicate comparisons to other periods.

Gross margins were solid at 30.8%, although slightly lower than the 31.2% reported for the first quarter of 2007. We had no expectation that it would equal or exceed last year's all-time record first quarter.

However, the consolidated results get 2008 off to a very good start. A number of factors contributed to our performance, and I would like to focus for a moment on several of the larger issues.

First, the tech group managed to limit the bottom line effect of losing Exubera with some notable sales gains, progress toward turning around losses at the new Michigan facility, and by reducing its overall cost as a result of the restructuring. Second, West and the pharmaceutical system segment in particular, is a multi-national business.

As a result, we benefited significantly from our exposure to foreign currency, particularly the Euro. We will continue to identify the impact of currency translation on sales and profitability.

However, during the first quarter, the continued weakening of the dollar, combined with our geographic spread of business, provided a significant improvement against expectations from last year. Third, while we did increase spending on R&D and information systems, we also continued our intense focus on improving efficiency in our operations through lean and on keeping discretionary SG&A spending low.

Our total SG&A was a little higher than we would have liked as a result of the first quarter rebound in our share price, and while not positive in terms of year-over-year comparisons, the IT and R&D investments are critical to our long-term growth objectives. All in all, Q1 was a good quarter financially, and one in which we continued to make progress toward our longer term strategic objectives.

During the first quarter, we also held our second investor day in New York. I would like to thank those of you who took time to attend or listen in on the web or telephone.

It was a long day where we provided a detailed overview of our product development strategy and primary programs. Although that was only a little over six weeks ago, I'd like to provide a brief update on several of the key programs that we reviewed during that presentation.

First, as you know, we have a broad range of expansion programs underway, ranging from increasing in Westar capacity and our pharmaceutical focus factories in Europe, to a new greenfield facility in China to manufacture plastic components for IV systems. We also begun two expansion projects in the US to develop needed capacity in our metal business and create a new pharmaceutical molding capacity and compounding capacity in our Kingston operation.

The Europe and North America programs are on schedule, and construction has begun at the China plastics facility. Turning to our IT investments in North America, the first phase of our SAP conversion project went live during the first week in April, and is operating very smoothly.

The project team did a great job bringing the systems up on schedule and within budget. Phase two has now begun with the primary objective of revamping our shop floor systems and implementing SAP in our production facilities.

Regarding our key innovation projects, we're on track to introduce the Daikyo Crystals Zenith luer lock product in Europe during the second quarter. US introduction will occur later in the fall.

This is a product that could potentially be revolutionary, eliminating silicone oil from drug contact surfaces, and with it, a source of potential drug product contamination that adds cost and risk to our customers product, but has the advantage of looking and handling very much like existing products. In formal feedback from potential customers remains consistently positive, and demand for samples in advance of the formal introduction are stronger than expected.

We hope that many opportunities to update you on this and related CZ programs over the next few quarters and years, and believe that this project has the potential to bring significant added value to our biologics customers. We are also on schedule to introduce the Orion Passive Safety Needle System in the fourth quarter.

This product represents an elegant solution to a critical yet unmet medical need. The sharp's protection device that is self-activating, that is, it does not require an active step on the part of the user, either clinician or patient, to do anything other than to inject and withdraw the needle, in order to activate and deploy the needle cover.

We thoroughly expect the file for approval to market this device during the third quarter. Finally, we are launching an initiative aimed at our development organization of our former and biotech clients.

We are getting ready to use Lyo, Westar's FluroTec stoppers and seals together for direct introduction into small scale sterile suites, typically table-top micro environments where new products are produced and packaged for pre-clinical and clinical applications. We believe this provides a simple solution for the development scientist, one vendor instead of two or three, providing all of the necessary packaging and critical documentation for development work.

The advantage for West is obvious. The kit maintains or raises our profile with drug development scientists within our client organization, and it introduces our components to particular product very early in the development process.

While these and other projects will have their commercial success points somewhere between 2008, we remain focused on achieving our earnings guidance, although several issues need to be taken into consideration. First, currency.

Currency is lifting our revenue expectations, and with global economic conditions in a state of flux, it seems unlikely that the Euro will resume our former planned estimate of $1.40, which was embedded in our earlier guidance. We are now estimating that the currency will have a more positive impact on sales and are raising that target accordingly.

Bill will discuss this in some detail during his commentary. Secondly, the impact of the revenue loss from ESA drugs is expected to be at the high end of our previously announced range.

The size of the ESA issue has increased because of changes in forecast from intermediaries, that is contract fillers and integrated device sellers who provide components to the several ESA product companies around the world. Unfortunately, we don't have as much of the visibility as we might like into those inventories and supply lines.

While none of this is written in stone, we do feel constrained to maintain guidance within the earlier range at this stage in order to allow for possible changes and order patterns later this year. Overall, 2008 is off to a solid start, and we remain on target to achieve our full-year performance targets.

Looking at the longer term, our primary drivers remain intact, and our ongoing investments, and capacity and innovation, continue to set the stage for continued growth into the foreseeable future. With that, I'd like to turn the call over to Bill for his comments on our financials.

Bill?

Thank you, Don, and good morning, everyone. As indicated in this morning's press release, West reported first quarter 2008 income from continuing operations of $26.2 million, or $0.76 per diluted share.

Our reported earnings this quarter include a net-after-tax benefit of $1.3 million for the combined effects of a $1 million unfavorable restructuring charge incurred in our tech group, a favorable $1.3 million gain from a contract settlement we reached with our customer Nektar, and a $1.1 million discrete tax benefit, principally relating to a retroactive reduction of our Singapore tax rate. Excluding the net positive effect of these three items on current period earnings, first quarter 2008 earnings per share from continuing operations were $0.72 per diluted share, versus last year's first quarter earnings of $0.77 per diluted share.

There were no charges or benefits outside our normal or operating results in our first quarter 2007 results. However, the $0.77 2007 first quarter included $0.16 of income related to the lost sales of Nektar Exubera devices, anemia drug components, and disposable medical device components.

The company's consolidated sales in the quarter were $270.7 million, a 5.1% increase over first quarter 2007 sales. Excluding exchange effects, consolidated sales declined by 1.2%, versus is the prior-year quarter.

At $207.5 million, our [in-systems] first quarter sales were 8.4% above first quarter 2007 first quarter sales, with all but seven-tenth of a percentage point of the increase due to currency effect. The modest growth was as expected, and was due to an $11 million decline in sales of high value components for ESA drugs used to anemia, cancer, and dialysis patients, and also to the company's decision to discontinue manufacturing certain blood collection system components in Europe.

These items serve to reduce year-over-year segment sales growth by 5.8% points. Saying it another way, Q1 2008 pharma system sales grew 6.9%, excluding the lost sales and excluding exchange effects.

This growth rate for the quarter is in line with our estimates of how favorable market trends are continuing to drive our sales growth in line with our long-term expectations. The tech group segment generated sales of $66.4 million in the quarter, 5.9% below sales in the prior year quarter excluding exchange.

Tech sale decline was largely due to the loss of sales of Nektar of the inhalable insulin device, prompted by a Pfizer's fourth quarter decision to discontinue marketing efforts for Exubera. In the first quarter of 2007, sales to Nektar were $9.9 million, hence first quarter 2008 sales growth was approximately 10% over the 2007 first quarter if you exclude the 2010 Nektar sales and exchange effects.

To partially offset the Nektar sales loss were price increases and increased demand for several specific customer products, including IV and blood filter products, components used in an intranasal allergy treating delivery system, an insulin pen delivery device, and the SpoutPak juicing packaging closure. Looking at margins, consolidated gross profit margins for the quarter were 30.8%, compared to the 31.2% margins we achieved in the first quarter of 2007.

The loss Nektar, anemia, and disposable medical device sales represent a 1-margin point drop in consolidated gross margin. Gross margins in the pharma systems segment were 36.1%, 1.5 percentage points lower than in last year's first quarter, with most of the decline coming in the North America unit.

The margin decline primarily reflects the impact of a less favorable sales mix, and increased manufacturing expenses and plant overhead costs in support of expanding manufacturing capacities. Increased sales prices in the segment partially offset the effect of increased raw material, labor, overhead, and utility costs.

In the tech group, margins increased over the prior year quarter by 7/10 of a margin point to 12.9%. Increased activity within our tooling and engineering facilities, and a decrease in plant overhead costs, stemming from our restructuring effort, more than offset an overall decline in product mix related to the loss of the Exubera device.

Our first quarter 2007 R&D spending increased by $1.8 million over first quarter 2007, due to increased development activities, mostly associated with systems utilizing the Daikyo's Crystal Zenith polymer, and on an advanced injecting system, using technology acquired in the first quarter of 2007. Consolidated SG&A expenses increased by $3.1 million, or 8% in the quarter versus the prior-year quarter.

The increase was primarily due to higher director and officer stock-based compensation expense, due to the increase in the company's stock price in the quarter, versus the decline in the 2007 first quarter, the impact of higher IP spending, and the impact of foreign exchange. SG&A cost increases were partially offset by a variety of expense reductions, including the recovery of a prior-period bad debt write-off and lower asset amortization costs.

As a percentage of sales, first quarter 2008 SG&A expenses at 14.8%, were 0.4% higher than first quarter 2007 sales levels. Excluding the impact of higher stock prices on incentive compensation expense, Q1 2008 SG&A expenses, as a percentage of sales, were 13.9% versus 14.3% for the first quarter of 2007.

As I mentioned previously, our reported results also include the continuing effect of our restructuring plan for the tech group segment, approved by our board of directors in December. The plan was developed to align our manufacturing capacity and workforce with the business's current outlook.

The total cost of the restructuring plan is now estimated at $9 million to $10.5 million, down from earliest estimates, and includes charges for severance obligations, the write-down of redundant assets, and lease and contract termination costs. $1 million of the restructuring charges were recorded in the first quarter of '08, in addition the $3.4 million we recorded in the first quarter of 2007.

The remaining charges will be taken throughout 2008, as we complete customer transition and equipment transfer requirements. We also recognized a $1.3 million gain in the quarter, related to a contract settlement we reached with Nektar, our customer for the Exubera device.

Under the terms of the agreement, Nektar is to provide for the full reimbursement of our investment and materials, facilities, equipment, and personnel associated with the continuing operation and eventual shutdown of the Exubera production facility. In the first quarter, the payments we received from Nektar, more than offset the cost of operating the facility, resulting in a $1.3 million gain.

In April, Nektar advised us that they no longer require us to maintain their facility. Final settlement payments were received in April, and are expected to more than offset the anticipated remaining costs.

Net interest expense was $800,000 higher in the 2007 first quarter, mostly due to higher debt levels associated with our convertible debt, which we issued toward the end of last year's first quarter. As such, interest expense was incurred, very minimal, interest expense was incurred in first quarter of 2007.

The effective tax rate for the quarter was 24.2%, which includes $1.1 million in discrete tax benefits, mostly relating to the retroactive reduction of our income tax rate in Singapore. Our annual effective tax rate for 2008, excluding discrete tax items, is currently estimated at 27.3%.

Our affiliates produced a $100,000 loss for the quarter, $600,000 the $500,000 in equity income we generated the prior year first quarter. The 2008 first quarter results included West's share of the demolition and disposal costs related with a plant shutdown.

Our balance sheet remains strong, and our business continues to provide necessary liquidity. The company's cash balance at March 31, was $93.6 million, down $15 million from year-end, primarily due to the payment of tax obligations in Brazil, and increased working capital requirements.

Working capital totaled $264 million at March 31. Debt at March 31, was $417.5 million, and our net debt to total invested capital ratio at quarter end was 38.6%, 1.7% higher than at year-end.

We incurred capital expenditures of $22.8 million in the first quarter, with more than two-thirds of the capital focused on IP our initiatives and new product and expansion activities, mostly for our pharmaceutical systems, North America, Europe, and Asia capacity expansion. In summary, we experienced another solid operating quarter.

Looking ahead, our order backlog at March 31 remains strong at $267 million, $5 million plus, higher than our year-end backlog of $253 million, excluding exchange effects. Considering the continuing sales challenges we're encountering, we now expect full-year sales of $1.08 billion.

Consolidated gross margins are expected to approximate 29.5%, and we expect 2008 adjusted earnings per diluted share, excluding restructuring costs, to be between $2.40 and $2.50 per diluted share, assuming an exchange rate of $1.50 per Euro. Included in our EPS estimate is an adverse impact of $0.41, representing a loss sales for Nektar, anemia drug components, and disposable medical device components, partially offset by the favorable currency effect of the weak US dollar of $0.18.

Adjusting for the lost sales and currency impacts would result in an increase in estimated of year-over-year sales of 7.5%, and EPS growth of 13 plus %. We project full-year sales in the pharmaceutical segment of $830 million to $840 million, up from earliest estimates, and expect to achieve full-year gross margins of 34% for the year.

To achieve these margin levels, we're counting on price increases and on deriving additional lean savings in our Europe and America units to offset raw material price increases, wage increases, and higher overheads in depreciation expenses. Tech group's gross margins are now expected to reach 13.5%, an improvement of 1.2 margin points over 2007 margins, on sales of approximately $260 million to $270 million, which includes $15 million of intracompany sales, eliminated in consolidation.

With the gross margin improvement due to lean savings, cost reductions from our restructuring, and a return to normalized margins at our Michigan facility. We continue to expect that full-year capital expenditures will be approximately $145 million at current exchange rates, including the establishment of a plastic manufacturing facility in China, for which ground breaking occurred in January.

As we've indicated previously, much of the capital will be expended for needed, added capacity to meet increasing customer demands for key products at various locations around the globe. I would now like to turn the call back over to Don Morel.

Don?

Thanks very much, Bill. This concludes our prepared remarks for this morning.

We'd now be pleased to take any questions that you might have. Operator?

Hi. Good morning, Don.

Good morning, Arnie.

Most of my questions relate to gross margin. I know you renegotiate most or many of your contracts at year-end.

We've been through unprecedented increases in raw material costs. I'm trying to evaluate your 34% pharma systems margin to get a feel for if you believe you have fully recovered your raw material costs and if you are changing the way you perhaps structure your contracts, given the volatility around some of the raw materials.

We really didn't restructure, the way we do the contracts. We still have the adjusters in for all the agreements that have been completed.

And the ones we discussed last year, they are all done and signed, except for one, where we're going on an order basis while we finalize a couple of the terms. So far for this year, our purchase price variance on raw materials has been slightly favorable on the Elastomer side of the business, because our supply agreements with our suppliers.

The area where we're running the biggest negative variances is on plastic resins, actually flowing through the tech-side of the business. But because of the pass-through nature of those agreements, we've actually recovered more than 90% of the raw material costs that we've seen.

The short answer rather, is we're recovering the majority of those costs under the terms of the agreements that we have with our tech customers for plastic resins. So far so good on the Elastomer side of the business, but it's something we're watching very closely through the year obviously, with oil where it is.

Okay. And again, a lot of your customers shut their plants on Easter, which occurred in Q1 this year, occurred in Q2 last year, and you've also been running a lot of overtime to deal with plant inefficiencies as you ramp up capacity.

Can you give us an update on those two items, plus specifics, can you give us an update on the negative hit you may have taken in Grand Rapids and what you think you'll hit for the current year?

Starting from the end and working backwards, we still had a slight negative hit from Grand Rapids in the first quarter. We're working our way through that.

The major lines for the customer are coming online. One major line is now up and running smoothly, which will have a dramatic improvement there.

We expect the other lines to come in the second and third quarters. We do believe by end of the year, we should be running positively for Grand Rapids.

Each month has been progressively less of a loss than the month before, Arnie.

What was the loss in the quarter?

It was $600,000.

And again, regarding Easter and plant inefficiencies and overtime, how much of a margin impact do you think that had in Q1 for you?

The Easter impact, it is there. You're absolutely right.

There are less days to sell, but that was not a dramatic fact in first quarter. The impact of inefficiencies, yes, they do continue, because we are continuing the plant expansions.

We don't quantify it exactly; but in the previous quarters, it's been running around $1 million or so per quarter, and that's not an unreasonable estimate for the current quarter.

Okay.

That should come down as we progress through the year. Remember, sequentially the new capacities will come online through the end of the year and the beginning of '09.

We expect to see that ramp down.

Don, I was a little confused by your comments (inaudible) Maybe you can clarify that. In your prepared published comments, you speak about potential recovery the back half of the year, and you thought customers might not take more product as the year went on.

But I thought you heard in the presentation indicate that you thought they would have less contribution from ESA. Just clarify your view of how ESA will play out for the year.

Yes. There's King of two parts to it.

I think you nailed it there. There was another ODAC meeting that King of changed the reimbursement guidelines for certain indications again.

We're very comfortable with our prior guidance, as it relates to the materials that we sell directly to the producers of those drugs, and we've taken that into account in our guidance. What we're seeing is a little uncertainty, which we think will continue through the end of the year in the downstream suppliers, that is, where our customers actually ship bulk product to contract fillers, whether it's a vile or a pre-filled syringe, and to some of the producers where these drugs might go into a finished system.

That's where we don't have a whole lot of visibility into the pipeline. We're just hedging our bets a little bit for the end of the year.

As you know, when we get to the September, October, November timeframe, we see changes in order patterns that are harder to predict.

Two more clarifications if I can. On CZ, you indicated you are going to introduce it in Europe.

But introducing means you'll have a product that your customers can test. Just as a are minder, I'm assuming you're not implying or hinting any revenue expectations for the foreseeable future?

There will be a modest amount, simply because of the selling of the samples, but you're exactly right. The first part of the launch process is the sampling for them to do the necessary stability and line trials.

And typically, what will the incremental cost be to a customer who does decide to use this product versus the traditional measure?

I'm not sure we've got a good gauge on that yet, because it depends on the attributes that the customer requests in the system. Some of them are going to take the CZ barrel on its own, assemble the plunger and the plunger rod, along with sterilizing or Westarring it.

It's going to depend specifically on the attributes of the product. From a gross margin standpoint to us, in terms of the selling price, it's going to be one of the higher items in our portfolio.

Okay. Very last quick final question, Lexington Rubber Products went into bankruptcy.

They at least have a tiny overlap of business with you on the more mundane stoppers. Do you see opportunities there?

We've looked carefully at them in the past. They actually compete with us on only one item, which is an IV component that goes into line systems for intravenous administration.

It's probably business we can pick up through bidding, because we supply some of those now, as opposed to an outright purchase of that part of their business.

Thank you very much.

Thanks Arnie.

Hi. Can you all hear me okay?

I'm on my --

Yes. You're fine.

I think most of my questions were actually answered, but maybe just two or three brief ones. Don, I don't know if you can expand at all in regards to the ESA drug?

My expectation would be that you really receive minimal revenues from those in the first half of the year and get some in Q3 and Q4, and is that still the right thing to look at things? Or is the revenues there been pushed out even farther towards the back-end of the year?

I think that's the right way to look at it. If anything, you will probably see a little bit of slippage into the fourth quarter.

But right now, everything that we're hearing and seeing indicates that the orders will start to return at that point. The only other clarification I would add is that if you look at the scripts for the ESA drugs, and look at the impact that the reimbursement guidelines have had on those sales, clearly our unit volume was not going to return to the historically high levels of '06 and '07.

But we do expect to see some return to a more normalized level. But again, looking at the fourth quarter and beyond.

Okay. And another question.

With regard to the benefit foreign currencies are having on revenues, does much or any of that actually flow down to the earnings line?

Yes, it does Ross. In the first quarter, we had a $3.8 million dollar positive impact to operating profit.

Okay. And last question relates to the CZ product.

Are there any particular things you think are driving the higher interest levels in that product than it sounds like you've previously expected?

I think really, it's King of an enhanced sense of urgency on the part of the major producers, because of the silicone issue. Any visible particulate in the drug substance itself is clearly cause for concern, and when silicone oil causes a conglomeration of the proteins, as we talked about during the investor day, you can visibly see that precipitate in the drug solution.

To the producers, it means very substantial cost savings, because they can reduce the amount of drugs that they put in. They don't have to account for this drug loss through the contamination.

We think it's going to have tremendous potential downstream.

Okay. That's great.

Thanks very much.

Thanks Ross.

Arnie, we can't hear you if you're asking a question. Operator, is his line open?

Is this better?

Now, we can hear you. You're very faint, Arnie.

You mentioned recovery of bad debt write-offs. Can you quantify that, please?

A small item, about $300,000 in the quarter.

Okay. And the benefits you're getting back from Nektar, I assume we just subtract that out when we look at your segment margin in tech group?

Yes.

Okay. I think that's it for me.

Thank you.

Thanks Arnie.

Thanks very much, operator. And thanks to everyone for your time this morning.

2008 is off to a good start, and we look forward to speaking with you again in early August to discuss our second quarter results. Thank you again for your time today.