Q4 2019 Earnings Call
Ladies and gentleman today's conference schedule begin shortly please continue to standby and thanks for your patience.
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Good morning, and welcome to recruit games failure in 2019 financial results Conference call.
At this time, all participants are in listen only mode.
Later, we will conduct a question answer session and instructions will be given at that time.
If you're Carney systems during the call. Please press Star then zero.
As a reminder, discovered this now recorded at the company's request.
I would now like turn the call over to Claudius by Slinger Investor Relations you may begin.
Good morning, and thank you for joining us on today's conference call to discuss recruits year end 2019 financial results. This is Scott do you start here and I'm joined today by Gerri, Henwood, President and Chief Executive Officer, and Ryan like Chief Financial Officer.
Following prepared remarks today by Jerry and Ryan We will open the call for questions.
Earlier. This morning, we issued a press release detailing our financial and operating results for the full year ended December 31, 29 cheat. The press releases are available on the investors page of our web site at Recro Gainesville Dot com.
Before we begin our formal comments I'll remind you that bearish remarks, we made today constitute forward looking statements pursuant to the safe Harbor provisions on the private Securities Litigation Reform Act 1995, including statements related to our financial outlook. These forward looking statements are subject to risks and uncertainties that may cause actual results to.
Differ materially from our expectations import Kathy can be identified by words, such as expected plan will may anticipate believe estimate coming should intend and any other words of similar meaning.
The following are some of the factors that could cause our actual results to differ materially from those expressed in or underlying our forward looking statements.
Customers changing inventory requirements in manufacturing plan.
Customer in perspective customers decisions to live word with her manufacturing services.
Rich profitability or mix other products to manufacture or customer facing increasing or new competition competition.
The west of important factors, if not all inclusive.
Any such forward looking statements are not guarantees or.
A future performance and book and involve certain risks uncertainties. These risks are described in the risk factors and the management's discussion and analysis of financial condition results of operations sections of recur again cells.
<unk> annual report on form 10-K for the fiscal year ended December 31, 20 like team in any quarterly reports on form 10-Q, which are on file with the Securities Exchange Commission and available on Stcs website.
The information we provide on this call. This call is provided on the S. as of today on this call March worth 2020, we undertake no obligation to update any forward looking statements really make on this call on account of new information future events or otherwise. In addition, any unaudited pro forma financial information that may be provided its preliminary and does not reports you project financial because.
Sessions were operating results of the company actual results may differ materially.
We may also discuss certain non-GAAP financial measures with respect to our financial performance for the full year ended December 31 2019.
Specifically, we may discuss the earnings before interest taxes, depreciation and amortization or EBITDA as adjusted or contract development and manufacturing organization or CDMO business.
We believe this non-GAAP financial measure is helpful in understanding or CDMO business as it gives investors greater transparency into the supplemental information used by management and evaluating the financial performance of our CDMO business. This non-GAAP financial measure should be considered in addition to but not as a substitute for or 40 GAAP results included in our earnings release.
And to be discussed on this call.
We have included a reconciliation of EBITDA as adjusted to GAAP measures in a supplemental financial schedule, which has been made available on the investors page of our website at recruit Gainesville Dot com I would not like to turn the call over to Gerri Henwood Jerry.
Hi, good quality and good morning, everyone. Thanks for joining us on today's call. This is our first earnings call since becoming a pure play CDMO and I'm pleased to discuss recourse achievements for 2019.
Company has completed several important corporate initiatives that we believe are integral to our future growth and success.
With respect to our financial performance.
Our full year 2019 result, but upgraded guidance as we generated 99.2 million in revenue setting a new annual revenue record Ryan will cover the financial results in more detail in just a few minutes.
As we've stated previously we achieved consolidated operating profitability during the third quarter 2019, which was earlier than expected and the company then remain cash flow positive through the end of 2019.
Looking ahead into the first half of 2020, we expect this trend to continue.
One of the corporate front, we completed the separation of the bought AG bio business from re grow in late November of 2019. This initiative was implemented.
To build upon the strength in commercial success of the CDMO business, while providing additional opportunities for future growth.
The new Spinel company bought AG bio began trading on the NASDAQ capital market on November 21st 2019 under the ticker symbol Bx Rx recur board of directors have declared a special dividend distribution of one share boardex bio common stock.
Every two and a half shares every group common stock held.
We implemented this separation because it allows us to direct the entirety of recruits cash flow and other resources back into the CDMO business with the goal is continuing to execute on our existing customer contracts secure new customers and ultimately grow revenue.
I would personally like to thank our shareholders. Our board of directors in every one at recruit Gainesville for their dedication and for the hard work and the team, which led to another great year.
With that I'll turn the call over to Ryan for the financials Ryan. Thanks, Jerry Good morning, everyone. Since we issued a press release and our form 10-K earlier. This morning outlining our full financial results I'll just review some of the key highlights as of December 31st 2019, we had cash and cash equivalents.
Oxiclean 19.1 million.
Most of the acute care business is presented as discontinued operation as of December 30, Onest 2019, the acute care businesses results are excluded from our continuing operations.
Periods presented revenues generated from our contract manufacturing division for the full year 2019 were 99.2 million compared to 77.3 million for the full year 2018. This reflects a 20% increase year over year.
The increase of 21.9 million in 2019 revenue versus 2018 revenue was due to increased royalties recognized from one of our commercial partners and an increase in product sales to various commercial partners.
For the full year 2019 operating income from continuing operations operating income as adjusted EBITDA as adjusted work 23 point, Sixmillion 32 point, Threemillion and 49 million respectively cost of sales for the full year 2019 was 51 million compared.
The 43.2 million for 2018, which increased primarily due to product mix, an expanded service in development capabilities as well as growth in manufacturing demand.
There were no research and development expenses for the full year 2019.
Point Fourmillion for 2018, the decrease of 4.4 million in 2019, primarily resulted from the inclusion of such costs in cost of sales in 2019, rather than research and development due to the change of focus of the personnel to revenue generating activities.
Selling general administrative expenses for the full year 2019 were 19.9 million compared to 14.4 million for 2018.
The increase of 5.5 million was primarily due to higher public company costs, including corporate initiatives, which increased by 4.1 million to 16.3 million for 2019 compared to 12.2 million for 2018.
The remaining 1.4 million increase was driven by higher business development costs as we expanded our sales team and various geographies in anticipation of business growth from new formulation development capabilities.
Net interest expense for the full year 2019 was 19 million compared to 8.1 million for 2018. The increase in net interest expense was due to higher principal balance on our theory senior secured term loan and amortization of the related financing costs for the full year 2019.
In regrow reported net income from continuing operations of 4.6 million or 20 cents net income per diluted share compared to a net loss at 13.1 million were 64 cents net loss per diluted share for 2018, including the impact of discontinued operations we've reported.
The net loss of 18.6 million or 79 cents net loss per diluted share for 2019 compared to a net loss was 79.7 million or $3.90 net loss per diluted share for the comparable period in 2018.
Moving on now to our financial guidance for 2020, we expect revenue to be in the range of 97 million to 100 million, depending on market dynamics contracts timing of customer order patterns accuracy of our customer product market estimations, new market entrants and such.
Sasson timing related to business development activities, we expect our operating income to be in the range of 21 point Threemillion to 25 point Threemillion, an operating income as adjusted to be in the range of 27.3 million to 30 point Threemillion. We also expect our EBITDA as adjusted to be in the range of four.
87 million to 50 million.
I'll now turn the call back to Jerry for closing comments, Jerry Thanks, Ryan.
Looking ahead to 2020, we see a highly productive year for Recro as we continue to focus on the further growth and development of the CDMO business. We believe we set the stage for future commercial corporate success.
In the meantime, we're focused on delivering exceptional service and quality to our customers partners and we look forward to this impacting our shareholders in a positive way as well in the year to calm we've had an eventful start to 2020, and we look forward to maintain a positive momentum we have created.
I'd now like to open the call for questions operator.
That concludes our prepared remarks, we will now open the call to your question to ask the question you will need to press star one of your telephone to withdraw your question press. The pound key please standby will be compiled the county roster.
Our first question comes from Mr., Hong with Janney. Your line is open.
Hi, good morning. So thanks for taking my question short morning, first so I can you speak about 2020 revenue guidance and then expectations of growth versus.
2018 revenue that was reported this morning, and then ESCADA fall off.
Hi, Aster, yeah sure. Thanks, so that the CDMO business continues to be very strong and performed very well for 2019, obviously, achieving 99.2 million in revenue, which represented a 20% growth and the operating income from continuing.
Operations.
Represented 89% growth from the prior to your and EBITDA of 49 million was 52% growth over the prior year. So we think this business is performing very strong we have industry leading.
EBITDA margins and all while continuing to invest and scaled it really support our future growth you saw that really beginning in 2017 and more dedicated in 2018, we began investing several million dollars and.
In our formulation and development capabilities and our new business development efforts and we're really excited about the anticipated new business development growth efforts as we think about the guidance revenue guidance for 2020, we are expecting to see a shift in revenue.
The mix in 2020 from 2019, our base business core business, what you'll recall in 2019 was was strengthened by us walking locking into long term.
Relationships with our core commercial customers, including a five year deal in a six year deal with.
Novartis and toddler, respectively, as well as extending a relationship that we have with whatnot and improving the economics that we had under that agreement. So our base business in 2019 really saw a notable upside.
Due to a competitor Mylan with respect to wrap it no MSR and T M products and they were only supplying the market on a limited basis and obviously this resulted in an increase in purchases by both how the and one that <unk> for us and.
As they were essentially filling mylan shortfall within the market, which resulted in higher manufacturing and profit sharing revenues for US you know we are certainly I'm hopeful or we were hopeful that mylan wouldn't returns for the market not a notable level.
But it appears that they are supplying the market on a more consistent basis.
We're not sure to what extent Mylan will come back into the market, but we expect to see some inventory rebalancing by tablet and one that in 2020.
But with that said, we do expect.
To be able to cover that that decline in the base business with increase in our new business development efforts and Jerry I don't know you want to talk about some of our new <unk>. Yeah. So activities. So we had as you know how to gold who have a significant impact on new business commitments new cost.
Tumors coming in which we believe we achieved in 2019 of the sales team that was available to do that under the guidance of our strong leadership in that area was successful and brought in a total backlog of just under $10 million in 29 team were.
Expecting to exceed that you know by a goodly percentage storing 2020 that will contribute both to current period income as well as to providing as and hopefully even more substantial backlog by the end of the year as we would go into 2021. So those are.
Those are the parameters that we think there's going to allow us to continue to grow we're also looking at.
New business segments of emphasis we're us within this CDMO business to complement what we're already doing things that would not require extensive or virtually any significant investment you know very minor a equipment, if any and we'd use existing personnel but.
I have some additional sales emphasis in addition to having added a couple of more very experienced sales persons to the team.
2020, as well so that's why we're optimistic that growth will happen I mean, you know us we like to be.
Do our very best could be solid and dependable with respect to guidance. We're that is what our belief is because the numbers that we put out but our goal is always try to see these numbers.
Great excellent great and then just a follow up and then can you speak about the kit the quarterly cadence for revenue then for 2020. Thank you.
Yeah, I mean, I think you know as Weve talked about it's in previous quarters. You know we've observed patterns, where you know there there can be.
Since since we're not driving the the end user sales in the market, it's really our customers. It really depends on what their inventory ordering patterns are and as we described earlier, we do think that both Teva and one that will we be.
Rebalancing their inventory based on some of the long range customer forecast that we've received although there may be some conservative conservatism built into these estimates you know we do expect you know that they will read that rebalanced some of those.
Inventories, which could mean that there could be some lower inventory or shipment orders initially before.
They they work through that to me to move out of the sort of very specific to that I would just.
Remind our investors that this is the this is a lumpier business. Then if we were the direct marketers that these products, where you have an opportunity you know, what's the sort of directly influence what's going on quarter to quarter. The inventory. We produce for customers is often you know three six months ahead of its actual utilization in the field.
So we do feel comfortable at this point in time with the guidance that we put out there, but we don't think it's gonna be you know and easy quarter, whereas it has been in past years, a bit lumpy, but we do achieved the annual guidance too. So that would just be the framing I put on that.
Great. Thank you so much.
Q Esther.
Our next question comes from Leland Gershell with Oppenheimer. Your line is open.
Hey, good morning, and thanks for taking my question and thanks for sharing that additional were prior question just so.
For the question in terms of your mix of Oh, the spoke R&D development services versus Frito contract manufacturing, if you could sort of qualify if not quantify.
For us what what that May look like going forward as you commit more resources toward business development on kind of the more bespoke services side and how that fits within your current capacity under utilization in terms of potential for you know additional business and then a couple of things.
Sure. So there's really three different track that we're we're looking as we look at this business. One is there are some tech transfers that we're working on summer for smaller companies and so they'll come in and ultimately you. Some additional general commercial manufacturing capability that we have.
But they won't be who didn't impact in the early stages. There are some other projects that were working on that we would hope to be able to announce sometime during 2020, there could be more substantial tech transfer, but I'd like to wait till this contracts are into talk specifically about those.
That's one track then we have the what I call, putting the seats in the ground track, which are earlier projects where programs from well funded companies that have more than one candidate typically.
In the clinical phase or about to be in the clinical phase.
And for whom we're doing formulation work analytical work clinical trials materials.
Those are going to be growing we believe in 2020 based on the work that was signed in 29 team.
And the work that's currently proposed and pending final decision.
Even assuming a discount rate of what percentage of that business we get.
That will begin to occupy more of the capacity in the RTD facilities, the development facility and over a period of likely a couple of years would become projects. It would either go to registration batches for potential commercialization.
In the cooled facility.
The third track is looking at ways that we can use.
Both of the facilities that we have two.
Perhaps intensify our presence in a few other areas that would not as I said require much Oh my way of additional capital equipment investment, but we'll leverage capability. So we have currently leverage personnel that we have currently.
And allow us to do some work that could more fully utilize some of the capacity. Some schools that are not street manufacturing for instance.
Certain types of packaging operations and similarly in the goals facility around potentially clinical trials materials packaging additive to what we're already doing.
Okay. That's that's very helpful. And then with respect to EBITDA margins is there anyway, you can kind of qualify for us as as you see the the various streams as the business moving forward.
You know any directionality to those obviously they've season, you know they've been strong and that's been proven I'm. Just wondering if you could provide any color on how you see those margins over time. Thanks.
I think just adding to it you know Jerry had said you know the growth rate of the commercial business, we expect our existing business the kind of be steady in the.
Outer years.
For the the growth rate for the new business, we expect that to increase significantly and we've made the investments a preferred for that to grow and that that will really be the growth driver for us and the growth vehicle for us to drive utilization in the future I think from UBS.
Gross margin perspective overall, we expected for 2020 to being the low 40% range. The EBITDA as adjusted margins would probably be in the 40% range you know as we think about the volume.
In the gold plan kind of being steady or slightly declining products mix change from commercial manufacturing revenues, where the plant costs are remaining in line with volumes as well as kind of an expected you know a rebalancing or decline.
Line in the royalty and profit sharing mix you know it that's certainly contributed to higher margins and this is.
It's been partially.
We did that I guess decline is partially offset by increasing HM margins on the R&D, new business, which we expect.
Would be you know in the 35% to 40% range is typically well we're targeting for for a lot of those new business development.
Revenue when customers, but keep in mind those those costs in those investments that we've been adding aren't yet fully absorb so you do have a product mix kind of going on as I mentioned earlier. We're you know we are also expecting to add additional costs within cost of goods sold to be up.
Well the continue to support our expected growth and in the demand in those or formulation and development activity.
I mean, but bottom line. We went I think if you look out on a reasonably longer horizon, you know more than 2020, we do expect because still hobby appear to maintain very substantial margin.
Compared to the number of others because of the nature of the development services, we're doing and the projects that we're doing in those areas are typically bid in a way that comp compatible with industry norms, but is on the higher margin side. If those go on to be commercial products in the cool facility. They should continue.
Need help keep those margins high as well for the overall mix would stay very healthy we think.
Alright, Thanks, I appreciate the added detail.
Thanks Lou.
Thank you once again, ladies gentlemen, if you wish to ask a question at this time. Please press Star then one are you touched on telephone.
Our next question from Jacob Johnson with Stephens. Your line is open.
Hi, Thanks for taking the questions maybe following up on that last answer Gerry if we think out longer term. It sounds like 2019 really strong year. It makes for a tough comp in 2020, how should we think about the long term revenue growth profile of the business sort of beyond the 2020 timeframe.
Yes. Good question, Thanks tick up for asking so I think we as we look at the macro of the business.
We know that some of the mature products will have a very modest at least as we've seen in the past change year over year other than this rebalancing associated with Mylan as possible reentry into the market.
We think that we've taken that into account in our current guidance at some rational levels.
And I think that the new business will sop up a lot of that that gap that would have existed and then some.
I think as we look out further we have the potential for very substantial growth.
New business wise year over here as we get you know through the end of 20 and beyond because we've been building investing and what we see in proposal volume and win rates and things like that which were not ready to give total granularity on I'm sure you understand because it's still the mix is still shaking out but very positive signals.
I think we see is a very strong business ahead of us.
In addition, we we continue to look at opportunities for inorganic growth. It could make sense you know theres a company that would allow us to be able to do a deal. This accretive in adds to the capabilities and service offerings that we have.
Okay. That's helpful. And then just the one follow up.
It sounds like you have added some salespeople and we'll continue that more maybe going forward what are the key priorities for these new hires. It is entering some of these new verticals a that you mentioned earlier, Jerry that adding new customers or sort of all of the above.
Yes, Chris pretty much all the above I mean during 2019, we added new customers <unk> looks like we will be able to add more at a higher rate. In addition to the healthy sign of.
Repeat business and extensions from the customers that we put on board. During 2019. So I think those are very healthy we are looking specifically for more work for the high potency suites, we know that's an area of need.
And so much the the areas where there has been hiring we have thought candidates who have relationships with some of the companies that we know to have those types of compounds from with no liquid in need that help.
Addition, looking at certain other segments of service provision.
Such as clinical trials associated materials packaging and logistics that could also be very additive to margins and that are in general you know shorter term, it's not like a four year project to get to more substantial revenues with those for any given project is can be.
Pretty good standalone on them.
Great. Thanks for taking the questions.
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Thank you and we're showing no further questions I'll now turn the call back over to Jerry for closing remarks.
Thank you very much at all and thank everyone for joining us. This morning, we very much appreciate your support and look forward to speaking to you again soon have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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