Q2 2021 Avid Bioservices Inc Earnings Call

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Good day, ladies and gentlemen, and welcome to the.

The bio services' second quarter fiscal 2021 financial results conference call.

At this time all participants are on a listen only mode. Later, we will conduct the question and answer session and instructions will follow at that time.

As a reminder, this conference call may be recorded I would now like the hand, the conference over to Tim Brandt of avid Investor Relations Group. Please go ahead.

Thank you good afternoon, and thank you for joining us on today's call. We have lick agree President and CEO, Dan Hart, Chief Financial Officer and.

The Companys Chief commercial officer.

Today, we will be providing an overview of avid bioservices contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended October 30, Onest 2020.

After our prepared remarks, we will welcome your questions before we begin I'd like to caution that comments made during this conference call. Today December 2nd 2020, we will contain certain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 concerning the current belief of the company which involves.

The number of assumptions risks and uncertainties actual results could differ from the statements and the company undertakes no obligation to revise or update any statement made today.

I encourage you to review all of the Companys filings with the Securities and Exchange Commission concerning these and other matters with that I will turn the call over to net green avid president and CEO.

Thank you Tim and thank you to everyone, who has dialed in on to those who are participating today via webcast.

I am pleased to report of the second quarter was highly productive for avid pro financial perspective, we again, the revenue expectations and had a strong showing in other key financial metrics.

On business development, we added a new process development customer.

As well as another new manufacturing project from the existing customer.

The company had a strong operational performance during the quarter.

During which we successfully completed our annual maintenance program.

More importantly, we finalized our view of expansion options and we look forward to proceeding with this important effort.

Tim and I will provide additional details on business development and operations. Following an overview of our second quarter financial results on for.

With that I'll turn the call over to debt.

Thank you Nick.

Before I begin in addition to the brief financial overview on provide on the call today. The additional details on our second quarter financial results are included in our press release issued prior to this call and in our form 10-Q, which was filed today with the SEC.

I will now provide an update of our financial results from continuing operations for the second quarter ended October 31 2020.

Revenues for the second quarter of fiscal 21 or $21.1 million, the 15% increase compared to revenues of $18.3 million recorded during the second quarter of fiscal 2000.

The growth in the number and scope of in process and or completed manufacturing runs continue to drive our revenue growth increase.

The increased utilization and improve our gross margin.

In addition, the increase in manufacturing revenues included recognition of $1.7 million during the quarter from changes in estimated variable revenue consideration of.

The result of completing performance obligations for certain manufacturing projects, therefore, increasing revenue recognized during the period.

With an increase in the number of batches manufactured combined with increased utilization of our personnel facilities and equipment gross margin for the second quarter of fiscal 21 was 30% of.

Significantly compared to the gross margin of 18% for the second quarter fiscal 20 on.

Gross margin was further strengthened due to the increased the manufacturing revenues discussed previously and increase capacity utilization.

Excluding the $1.7 million in additional manufacturing revenue from a change in estimated variable revenue consideration during the quarter.

Gross margin was approximately 24% still a significant improvement compared to the 18% of the prior year period.

Total SG net expenses for the second quarter of fiscal 21 per $4.2 million, an increase compared to 3.5 million recorded for the second quarter of fiscal 2000.

The increase in SDMA was primarily due to increases in payroll related costs, including stock based compensation.

For the second quarter of fiscal 21, the company reported a consolidated net income attributable to common stockholders of approximately 800000 or one cents per basic and diluted share.

As compared to a consolidated net loss attributable to common stockholders of $1.9 million or three cents per basic diluted share for the second quarter of fiscal 2000.

We're also pleased to report the company generated cash flow from operating activities of $10 million during the quarter and $8 million year to date.

Our cash and cash equivalents as of October 31, 2020, or $35.7 million up $7.5 million from the end of the first quarter and consistent as compared to the 36.3 million as of the end of the prior fiscal year.

Cash for the period remains steady primarily due to revenue growth and expansion in gross margin, partially offset by increasing capital expenditures.

While we are highly optimistic regarding the balance of the year. We must remain mindful of currently unknown challenges that may present, as the result of the COVID-19 pandemic or other industry factors having.

Having said that based on the strength of the first half of fiscal 21, the current backlog and together with our visibility into customer demand. We are pleased to report the we're increasing our annual revenue guidance for fiscal 21 from the between 76 and $81 million to between 84 and $88 million. This.

This concludes my financial overview I'll now turn the call over the Tim for an update on business development activities and achievements for the quarter.

Thanks, Dan on the heels of a strong first quarter, we continued to expand avid tougher bait and project pipeline.

During the second quarter EBIT development team on new orders for $28 million with new and existing customers, including a new process development customer and the new manufacturing project within an existing customer.

While we are all pleased the add new company to our customer list we.

We are equally happy to expand our relationships with existing customers as their needs grow.

With our $21 million in revenue and the signing of new orders totaling $28 million during the period our backlog at the end of the second quarter of fiscal 2021 grew to $67 million.

An increase of 12% compared to $60 million at the end of the first quarter of fiscal 2021.

This represents the highest level of backlog avid has achieved since becoming a pure play CDMO.

And we expect to recognize the majority of this over the next 12 months.

Finally, I am happy to report that the bid development team continues to operate engage the both prospective and current customers with no slowdown in our activity.

In fact, the number of requests for proposals continues to ramp and the value of our sales pipeline is at an all time high.

Thankfully, we have not experienced any negative biz development related interruptions of the result of the pandemic and we're hopeful that this will continue.

This concludes my business development overview, and I'll now hand, the call over to Nick.

Thank you Tim.

During the second quarter average operations continue to manufacture the clock.

As we reported last quarter, we initiated our scheduled annual preventative maintenance shutdown at the end of July and this was brought to the successful conclusion during the period.

As I indicated last quarter, one of my first tasks that avid was to review the company's expansion plans as well as of ancillary requirements ahead of making our final decision with respect to the best path forward.

We have now completed this review and I am happy to report the the company is already moving forward without expansion using a phased approach.

We recently developed plans for the two phase expansion of our Myford facility.

The first phase expands the production capacity of our existing life of no facility by the addition of the second downstream processing suite.

The second phase further expands the capacity through the build out of the second manufacturing train, including both upstream and downstream processing suites within MISO South.

Due to an anticipated increase in customer demand. We have commenced the first phase of expansion, which we estimate will take approximately 12 to 15 months the complete with an estimated cost of approximately $15 million.

We expect the in the first phase of expansion could increase our annual revenue generating capacity by up to $50 million, bringing the combined annual revenue generating capacity of our Franklin. Unlike the no facilities of to $170 million.

The decision to commence in the second phase of expansion will be dictated by revenue growth on projected customer demand.

Based on preliminary conceptual plans, we estimate of the Myford South expansion will take 18 to 24 months to complete the the cost of approximately $45 million to $55 million.

We estimate of the addition of the future Myford South facility will increase our annual revenue generating capacity by up to $100 million.

To complete these anticipated expansions, we expect to raise external capital as the appropriate time.

Accessing the form of capital that we determine is the most appropriate considering the markets available to us on their respective cost of capital.

In closing we are happy to report of very positive quarter during which we achieved strong revenues and margins, beating estimates for both revenue and earnings per share as well as generating operating cash flow and the income from our operations.

Further increasing our backlog from $60 million to $67 million, while delivering the of both is testament to the excellent work of our business development team and the many people behind the scenes the support them.

As a result, we have been able to increase guidance on the also initiate our expansion plans with the phased approach, which we believe provides capacity well aligned with demand while being cognizant of both time on cost.

This concludes my prepared remarks for today and we can now open up the call for questions.

Operator.

Thank you ask the question you read the press Star then one on your tell the phone so lift of all your question. Please press the pound key.

Our first question comes on the line of Matt Hewitt with Craig Hallum Capital Group. Your line is now open.

Thank you for taking the questions on congratulations on a really strong quarter.

Maybe first on the vaccines have been hitting the news I mean that is one of the top items that you see these days. The I'm wondering if you could talk a little bit about the market beyond that the beyond vaccines. What are you seeing what are you hearing from customers as far as.

Maybe capacity constraints within the market there is that helping drive some business your way anything that you can help there.

Tim do you want to take the.

Yes sure. Thank Matt Thanks for the question.

Yes, you can imagine the vaccine market of taking up the significant amount of capacity right now in the marketplace.

And so certainly we look to take advantage of that having our.

Available capacity as well as continuing to build and expand our capacity to meet future demand as the Nic just described.

So they're so they're likely at the shortfall of capacity out there with the amount of capacity is being consumed by cobot today.

And it's not looking like that the that capacity is going away I mean, the still a number of vaccines in development.

As well as therapeutics for the for the COVID-19 as well.

The Thats helpful. Thank you and then on.

Obviously with the the phased approach for the for the build out on the expansion for Myford.

I guess what was it as you kind of looked at things Nick.

What was the the drove you to the the decision to kind of split things out that way.

Is there any way that you can get customers the kind of lock in the or.

Maybe even help pay for some of that expansion and then as you look out to the phase two of piece. The same thing. There is that is there a situation where you could actually have customers prepaying essentially to have access to that capacity.

Yes, so the terms of both of those questions Matt.

In terms of the phased approach I guess, what would particularly liked about that approach was.

It has the shorter time line than the than doing it all at one gross or that would take us.

Somewhere between 18 to 24 months to do the of the full life of South expansion. So this brings the available capacity forward, which is a big benefit and secondly also.

Allows us to reduce the amount of the immediate capital requirement. So it's only of $50 million expenditure.

Rather than the the sort of 45 to 55 million, maybe somewhere around there that we would do for the whole lot of the whole expansion of my per et cetera.

And then on top of that in coming fall, bringing it forward on at a lower cost. It also enables us to of sort of an interstitial step in terms of our revenue growth kept capability, adding that $50 million, which in turn over the allows us to generate some additional profits in the meantime, and contribute towards the.

Being able to pay for that to some degree depending on the timing of those revenues the the.

The idea of the concept of of.

Getting somebody else to pay all of the people to pay.

We're very fortunate that we've managed to maintain.

Capacity ahead of demand I think thats been some foresight within the business to do that we certainly anticipate continuing to do that so that our clients know the as they are successful we can continue to meet their requirements, but also I.

Hi.

Think of it is opportunity out there.

We do see a lot of demand for this capacity otherwise it wouldnt be building it.

And certainly see opportunities potentially to have of this pay for it but nothing I can announce right now for sure.

Understood. Thank you very much.

Net.

Thank you.

The next question comes on the line of Paul Knight with Keybanc. Your line is now open.

Hi, net could you talk to the number of customers that you now have and number of products in place as well.

Good question, Alan I'll, probably the best on that one over to Tim Who's got full detail of that one but.

Tim do you want to just pick of on the total number of customers.

You know I actually don't have a role of roll up of the total number of customers.

But that does continue to expand every quarter as we announce them.

And when we're able to announce them.

Quarter by quarter and the in program by current program as well with existing customers.

Art in on how many are in commercialization Tim.

Well of the as we previously disclosed we have won one commercial customer at this point in time.

Okay, and then Nick the based on your long experience in the industry, what the gross margin.

The you believe you should ultimately run at.

So.

In terms of.

In terms of adding the new business the to.

The the.

To our existing capacity, we expect somewhere between 30 and 40% gross margin.

Okay and then the.

On the new additions and the and then as you look at these additions at Myford North Myford South what do you think you need to do in terms of.

Commercialization.

Talent that you would need to add or do you have the talent now.

So in terms of the you're talking about business development of bringing those new opportunities in the low yes, yes.

On gains presence of a little bit of the bigger the the last quarter's call, but I think at Tim on the team and as I did also today two of the team is doing an excellent job. Obviously, we have more insight into the leading indicators on the business and the like but.

I think as we see the the team is working extraordinarily well we brought three new clients in as many months in quarter one.

Under the new client this this quarter plus an expansion of an existing clients of.

And as of today, we can see the pipeline going forward, hence the expansion. So I think we've got a team that is moving capable of the of.

Dealing the dealing with the.

The seeable future.

And we may add to that but at this moment in time there is no immediate plans to do so.

Okay and then what's your what's your outlook in terms of or do you want to go beyond monoclonal manual non monoclonal antibody manufacturing. The you envision some of this the capacity expansion in other areas like M&A or.

LNG on therapy.

I think those are always interesting areas again kind of from a strategic perspective on my.

My side first and foremost was to sort of the.

Make sure that we we sort of looked after our existing client base and make sure that was strong. Good relationship secondly was to ensure that we have the right infrastructure and the.

On people in place to ensure that we execute in a share on time of in full in spec manner for our clients and then also assets out of business development team that we believe can drive the gross so that's kind of been the first the the cornerstones of the of the strategy for the first period.

I think where we're moving nicely ahead on that one with the amount of adding to that of the expansion and then from that point forward I think the areas that you highlighted are always of interest the.

Maybe consider.

Of the expansion of our offering but the again little early for the first to say anything further than that.

Then lastly, based on your global experience, how do you feel about a company with the southern California presence you have visited the what are the positives and negatives regarding your your your presence.

Yes, so I mean I've run facilities.

Not all over the world, but I think it's about 14 countries. The last time I checked.

I.

I think it's as I mentioned again I think in the last quarters call is the.

California is a nice place to be right now I think we're seeing quite a lot of the.

Uh huh.

Sort of domestication of a of supply chains of late to the COVID-19ien, adding to the on the need to do that so we've seen sort of localization rather than globalization of the.

Outsourcing strategy loans amongst many of the pharmaceutical companies in the Frac in some cases even.

We received regional head of purchasing by some people are literally want to stay on the west coast of not moving to the still vice versa. So.

If I look of the the U.S. market is probably the strongest market in the world in terms of farm the development.

California corridor is the very strong component of the overall market. So.

I think being in southern California is not about place to be right now so very happy.

With this is the location.

Thank you.

Thanks, Paul.

Thank you. Our next question comes on the line of Jacob Johnson with Stephens. Your line is now open.

Hey, Thanks, and I'll add my congrats on a really nice quarter, maybe first Nick following up on Paul's last question and on.

On high level strategy, if we think as you're thinking about avid longer term at some point could avid habit president be on southern California, or or how should we think about that.

Yes.

I think it's more than possible.

I think the.

We do have a global market.

Europe and Asia of both very active markets.

And the if.

If we go to successful Formula then there's no reason why we shouldn't want to to market our capability on a day to a broader base of clients that ultimately at the end of the day cost of manufacture does benefit from some degree of localization and being close to your client in terms of project ex.

Execution and transfer so.

A broader geographic spread would and would not be out of the question from my end from my thinking.

As equally of broader a broader offering fulfilling some of the areas that the maybe we don't fill flow today. So.

So.

Again first and foremost was to make sure that we got what we're doing.

Well honed.

Get the expansion moving and then we can start to look at of the things that.

The where we feel we can bring value.

Got it so the and maybe kind of the follow up on it tied the elevated I think covitz highlighted the value of the U.S. pharma manufacturing and I think maybe in coming years, we could see some somewhat of an in sourcing of.

Manufacturing back into the US is this something that debt.

That could benefit from the at some point.

I'd like to think so yeah, I mean, I think we've seen this happening before covert.

So even in small molecules to be Frank with you I'd say we've seen.

On a lot of a lot of molecules coming back from Asia back to add to west of manufacturers.

For a variety of reasons.

And so.

Obviously in the terms of the large molecule of biologics I don't think anywhere near as much of the manufacturing has gone abroad.

As it did in small molecules that weve already seen that trend coming back.

I think politically we'd seen the strong push towards.

More localized supply and then Kobe day on top of that I think has made everybody very much aware of the.

Of the risks in the frailty, sometimes global supply chains can have in the.

And so I do think that.

We will likely benefit from that in the foreseeable future.

Great and then make [laughter] outside of tier.

Maybe just a last one for Dan.

Looking at guidance I think it implies kind of the weaker back half versus what was the really strong first half on and certainly as you called out we're living in an uncertain environment, but the terms of puts and takes just one thing I wanted to ask about I think last quarter, you got a fee per some unused reserve capacity.

I think that might of been for the third quarter.

Is that something that could be a bit of the head headwind next quarter and maybe.

It Tim wants to chime in just any comments on the effort to maybe backfill and to fill that capacity.

Yes, Jason Thanks for the question I think what I'd start with is we initially thought it'd be a little bit of a headwind when we exited the first quarter of look.

Looking at the pipeline and.

Our visibility into our customers.

Essentially the demand that we're seeing and the backlog that we have on the books. We did have some puts and takes we have the the $3 million that was for the onetime fee and Additionally, we had 1.7 this quarter.

The helped out the first half of the year, but looking at what we can see as far as the the visibility into the backlog and our customer demand and where the first half ended up that's how we got to the $84 million to $88 million for the.

For the full year guide.

Great. Thanks for taking the questions.

Thank you.

This concludes today's question and answer session I will now hand, the call back to the green for closing remarks.

Thank you operator on the thank you to everyone participating on today's call.

In closing I'd like to thank all our employees at the of its not only of they've been effective and efficient in improving the business performance. The they continue to do this in the challenging environment as the result of covered 90.

Of its success is dependent on our incredible employees and I wish the thanking them for their continued efforts in the adapting to the challenges which are impacting both the professional but also their personal lives. Thank.

Thank you again for participating on todays call on for your continued support of avid bioservices.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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