Q1 2023 Catalent Inc Earnings Call
[music].
Hello, everyone and welcome to the <unk>, Inc. First quarter fiscal year 2023 earnings Conference call My.
My name is <unk> and I'll be coordinating your call today.
If you would like to register a question ready for the Q&A session. Please press star followed by one on your telephone keypad.
I would now like to hand, the call over to your host Forza does vice President of Investor Relations to begin cycle. Please go ahead.
Thanks, Stacy good morning, everyone and thank you all for joining us today to review <unk> first quarter 2023 financial results. Joining me on the call today are Alessandro Maselli, President and Chief Executive Officer, and Tom Castellano, Senior Vice President and Chief Financial Officer. Please.
Please see our agenda for today's call on slide two of our supplemental presentation, which is available on our Investor Relations website at Investor Dot <unk> Dot com.
During our call today management will make forward looking statements and refer to GAAP and non-GAAP financial measures. It is possible that actual results could differ from management's expectations.
For you to slide three for more detail on forward looking statements slides four and five discuss catalysts use of non-GAAP financial measures and our just issued earnings release provides reconciliations to the most directly comparable GAAP measures.
Please also refer to <unk> Form 10-Q that will be filed with the FCC today.
Additional information on the risks and uncertainties that may bear on our operating results performance and financial condition.
Now I would like to turn the call over to Alessandro Maselli Who's opening remarks will begin on slide six of the presentation.
Thanks, Paul and welcome everyone to the call.
We started the year with the solid results and positive momentum as a strong constant currency growth in excess of 25% in non Cogs related revenues.
To offset headwinds from lower coffee product demand inflation and unfavorable foreign exchange translation.
First I would like to highlight that the results of the in the first quarter were initially expected to include 54 media Ana.
$1 of revenues and adjusted EBITDA related to the resolution of take or pay contracts are fulfilled and finish of the young <unk> viral vector a COVID-19 vaccine at our Bloomington, and our 90 sites.
We agreed to donate the elimination of the contact center, which reflects the changing demand.
<unk> for the COVID-19 vaccines in order to accommodate that these longstanding a significant customer base, we set a new and strengthened fed him work with our growing partnership we received the payment on visa set though contractor in October and now expect that recognition of the related revenue will occur.
<unk> in the second quarter of this fiscal year the change in the expected timing of these revenue recognition was not a multiple factor when we updated our fiscal 2003 guidance, which I will cover in a few moments.
Turning to our Q1 results as shown on slide six without including our revenues or adjusted EBITDA the $54 million.
Just discussed we reported first quarter revenue of one BD on the $22 million flat.
Flat on a reported basis or a 4% increase in cross currency compared to the first quarter of fiscal 'twenty two.
We also exclude acquisition and divestitures organic revenue declined 1% measured in constant currency.
Our first quarter adjusted EBITDA of $187 million declined, 26% as reported or 24% on a constant currency basis compared to the first quarter of fiscal 2002, when excluding the acquisition and divestitures. The decline was 28% measured in constant currency.
Turning to the business as noted on slide seven first quarter non coffee organic constant currency growth was more than 20%.
Growth in our non Covid business was driven by our cell and gene therapy offerings in our biologic segment as well as our clinical development services here in our pharma and consumer health segment, which is starting to benefit from commercial synergies under the new organizational structure.
As we have shared in the past we have strategically invested the coffee related to returns over the last over the past two years. We just have to ensure we have the necessary growth levers in place to enable the future growth that we are forecasting and we will continue taking the action to keep our eyes on a part of success.
Slide eight provides a schematic of timelines of substantial non cogs related capacity, we put in place during the last few years, including the new capacity that we expect to activate its fiscal 'twenty three continues to unfold.
As you can see some of these growth drivers big data back to years, including our entry in sales into cell therapy in February 2020, which was not expected to contribute meaningful revenue in its few years of ownership as we scale the business through internal investments and tuck in M&A, including for <unk>.
<unk> and <unk>.
We now have the right assets in place to drive future earnings and earnings growth through these new modalities.
Other large expected the contributors to our growth has been our organic investment to enhance our BWI gene therapy assets a.
A year ago, we brought online six additional suites to bring besides total to 10 suites and now and now are running at high utilization rates. In addition, we are now opening a new building on the same campus containing eight more suites, which will progressively come online over the next 12 months as our client's pipeline progress.
Some of the other key investments we have made over the last few years include the deduct product strange capacity that led to recent <unk> investments in additional single use drug substance production capacity and our entry into the gummy nutritional supplement market that just over a year ago among others.
Laying on top of our organic growth to diverse as the acquisition of metrics contract services, which we closed on October 3rd. It is now accounted for in our updated guidance. This acquisition is just beginning to enable us to accelerate our existing plants to meet the increasing demand for feed for scale high portent that Jack manufacturing.
Underlying the growth in this vis vis the increasing number of potent compounds in D&O solid market, particularly in the oral oncology pipeline.
Adding a fourth enabling capabilities in fit for scale capacity through Magic City presents a continuation of our strategy to maintain a balanced portfolio of offerings that closely matches. The overall industry R&D pipeline, which includes a growing number of analogy with small molecules that are complex to formulate.
All required a specialized handling.
I think explained why we continue to project a solid long term growth for cattle into I will briefly highlight factors that have led us to a more conservative orientation towards fiscal 'twenty, three and the decision to adjust our guidance for the year, including changes to the market conditions. So since our last call.
And some updated outlooks received from customers as well as other macroeconomic and sector specific factors.
The macro factors include the further deterioration of the overall economic landscape, particularly in Europe with increased likelihood of a recession and further tightening of capital markets.
We are also beginning to see anticipate further ripple effects from either inflation, which is impacting the consumer confidence and discretionary confidence in discretionary spending.
We are now seeing signs of lower end demand.
And the.
End market demand for nutritional supplements in additions we are experiencing delays in the delivery of the new economy manufacturing lines due to shortages of key components at our European suppliers. We have therefore, adjusted our near term growth assumptions for our consumer health offerings within our pharma and consumer health segment.
While our Biopharma and consumer as pipelines remain robust we are starting to experience it signs of cash sensitive decisions by some of our customers. This is most evident in relationship to inventory levels for finished good OIBDA prioritization of discounted. This is the progressive through the pipeline.
Our adjusted forecast also reflects a decent new claims.
Finally, after several years of elevated levels of capital expenditures, we have made that the fiscally prudent decision to defer some of our Capex spending plan for this year to maximize utilization increase free cash flow as we load our balance sheet.
Some of the capacity, we initially factored into our initial fiscal 'twenty three guidance will now be delayed into fiscal 'twenty four but these will be facing that will not impact our long term growth targets.
To respond to the urgent patient demand for vaccines and therapies during the pandemic, we significantly increased our direct and indirect cost base for the past two years negatively impacting our operating efficiency given the new conservative approach to the management team has been working diligently on plans to optimize.
The cost structure of the organization as he covered our historical productivity levels.
Any of these actions are already in flight and all are expected to be operationalized by the end of this calendar year. This is also reflected in the revised guidance.
While we are taking the prudent step of adjusting guidance as we navigate dx at the front of the pandemic I want to be clear that our underlying business still displays signs of significant areas of strength.
Some examples we continue to forecast strong growth for our overall non <unk> business. Our <unk> business continued its historic record performance our gene therapy business has proven out that the Tennessee, we lay out when we initially acquired the Paragon <unk> and <unk>.
Our overall funnel of new non profit opportunities is at a record high.
Shifting gears I would like to address the FDA audits over the summer that led us to form a 43 observations.
Quality and compliance are central to everything we do and we invest constantly to assure the strength of our quality systems and the quality of our operations and that quality is constantly audited.
In fiscal 'twenty, two our facility was subject to approximately 750 inspections, including more than 50 from FDA and other regulators around the world as well as hundreds of customer audits and build this via our own independently managed internal audit staff and then I'll cycle in cell phones.
So regulators inspections of core routinely and boulevard regulators customers and covenant are all working to assure that patients received timely safe efficacious and quality medicines and vaccines.
We did the soda routinely despite the challenges of the pandemic as we provided vaccines to many millions of people around the world and we will continue to do so with.
With that said that the regulatory compliance landscape is always evolving including what is considered best practice.
And so we take all observation, we receive a seriously a sponsor them in unrealistic and complete way.
We believe that our responses by our Bloomington, and Brussels teams will comprehensively address the recent FDA observations and they've already deployed all necessary resources to implement the change UCITS in which we are committed in a timely manner.
To close the start because I want to highlight visa while there are some near to have a negative P&L effects as we address these observations.
Youll get all related to the litigation cost and not a multiple factor in our revised full year outlook.
To close my remarks, we continue to be excited about the breadth of our offering and their ability to meet customer needs, which will deliver meaningful growth even in a less favorable macroeconomic environment.
With the sharp drop in COVID-19 vaccine demand, we pivoted to alternative future growth drivers early in the pandemic cycle and are starting to see the fruits of those investments.
We remain deeply focused on executing our mission to develop manufacture and supply products that help people live better and healthier lives, while enhancing value for our shareholders now I would like to turn the call over to Tom.
Thanks Alessandro.
To begin this morning with a discussion on segment performance, where commentary around segment growth will be in constant currency.
This is the first quarter, we are reporting under our new segment structure announced back in July .
And both of our Q1 earnings release and slide presentation, we are providing historical revenue and EBITDA results that had been recast as if each segments have been in place for fiscal 2021 and 2022.
I will start on slide nine with the biologics segment.
Biologics net revenue in Q1 of $523 million decreased 2% compared to the first quarter of 2022. The decline is primarily the result of a settlement of take or pay contracts for a COVID-19 vaccine that was not considered revenue in the quarter, but was previously expected to.
We will offset the negative impact later in the fiscal year likely in the second quarter. Following the completion of an outstanding performance obligations for the client if.
If we were to include this amount as revenue in Q1, we would have seen growth year over year fueled organically by strong demand for our non COVID-19 programs, particularly our cell and gene therapy offerings. This strong demand more than offset the decrease in revenue from COVID-19 related programs.
The segment's EBITDA margin of 21, 5% was lower by nearly 900 basis points year over year from the 34% recorded in the first quarter of fiscal 2022.
Year over year margin, primarily contracted due to the underutilized capacity.
Other factors included the remediation activity in Brussels, which is ongoing as well as the negative carry related to the Princeton and Oxford facilities.
As shown on slide 10, our pharma and consumer health segment generated net revenue of $499 million.
An increase of 11% compared to the first quarter of fiscal 2022.
With segment EBITDA, increasing 20% over the same period last fiscal year.
Both top and bottom line growth were driven inorganically from the acquisition of the Terra business.
<unk> contributed 10 percentage points to PCH with net revenue growth and 12 percentage points to segment EBITDA growth during the quarter.
As a reminder, starting in Q2, the terra will be considered organic.
The organic PVH business did see modest revenue growth driven by a wide variety of development offerings, including clinical development supply.
Partial offsets to growth came from a decline in prescription drug products and the mandatory closure of our largest PCH site located on Florida's West coast due to hurricane in the site was closed for four days, but did not withstand any structural damage.
Moving to our consolidated adjusted EBITDA on Slide 11, our first quarter, adjusted EBITDA decreased 26% to $187 million or 18, 3% of net revenue.
On a constant currency basis, our first quarter adjusted EBITDA declined 24% compared to the first quarter of the prior year due primarily to the year over year decline in COVID-19 related activities.
As shown on slide 12 first quarter adjusted net income was $61 million or <unk> 34 per diluted share compared to adjusted net income of $128 million were <unk> 71 per diluted share in the first quarter a year ago.
Note that our income tax rate was higher in the first quarter than our full year expectation because of the frontloaded waiting in higher tax jurisdictions, which we expect to normalize over the remainder of the fiscal year.
Slide 13 shows our debt related ratios and capital allocation priorities.
Catalyst net leverage ratio as of June 32022 was three two times slightly above our long term target of three <unk> times.
On a pro forma basis for which we assumed the metrics acquisition closed on September 32022, as opposed to October three 2022 catalysts net leverage ratio would have been three six times.
This compares to net leverage of two nine times on June 32022, and two one times on September 32021.
Our combined balance of cash cash equivalents and marketable securities as of September 32022 was $345 million compared to $538 million as of June 32022.
Note that free cash flow still remains negatively impacted by our strategic decision to hold increased inventory levels. When we feel the time is appropriate in a more comfortable with the stabilization of our supply chain, we will begin to reverse course.
As of September 32022, a contract contract asset balance was $461 million.
An increase of $20 million compared to June 32022.
The overwhelming majority of this increase is related to some notably large development programs, particularly within our biologics segment, where revenue was recorded based on our percentage of completion versus entirely on batch release as it is for commercial programs.
Difference in approach effects, when we are able to invoice customers, thereby delaying cash realization and negatively affecting free cash flow.
The expectation however is that this figure will decrease throughout the fiscal year as we made progress in shortening the cycle time.
Yes.
As a final point regarding our free cash flow I note that the decrease in contract liabilities also had a negative impact.
Contract liabilities arise predominately within our biologics segment and are linked to upfront cash proceeds related to our gene therapy programs as these programs mature and the performance obligations are met these balances will shift to recognize revenue and we have already seen this play out with several large gene therapy customers over the last several quarters.
Yes.
Moving on to capital expenditures.
We now expect our fiscal 'twenty three capex as a percentage of revenue to be between 10, and 11% down from our previous projection of 13% to 15%.
This moderated rate of Capex spend and overall more prudent approach to capital deployment as we navigate through a challenging macroeconomic environment better positions talent for free cash flow generation.
As we have previously shared we accelerated several planned initiatives to address the pandemic and build capabilities for new modality sooner.
Put the company today and are positioned to leverage these new assets and capabilities earlier than anticipated and lead to continued strong non COVID-19 revenue growth.
Now, we turn to our adjusted financial outlook for fiscal 2023 as outlined on slide 14.
This new outlook assumes the challenging macro economic environment will persist longer than originally expected back in August , which justifies a more conservative orientation.
It also reflects our acquisitions of metrics, which closed just after the end of the first quarter.
We now expect full year net revenue in the range of $4 625 billion to $4 875 billion, representing a range of 4% decline at the low end and 1% increase at the high end on an as reported basis compared to fiscal 2022.
FX continues to be a headwind with an incremental impact of approximately one percentage point on both revenue and adjusted EBITDA versus our previous guidance.
As a reminder, the guidance we announced in August already included a negative FX impact of approximately 3% to four percentage points on our revenue and adjusted EBITDA growth.
So after taking into account these considerations our revised expected organic constant currency net revenue growth rate in fiscal 'twenty three is expected to be essentially flat at the midpoint of the guidance range.
For full year adjusted EBITDA, we now expect a range of one to two to $1 3 billion.
Representing a decline of <unk>.
<unk>, 5% at the low end of the range and an increase of 1% at the high end of the range compared to fiscal 2022.
You are familiar with the seasonal nature of our business, where revenue and EBITDA generation are each more weighted to the back half of the year, which has historically led to approximately 60% of our EBITDA to be realized in that period.
In fiscal 2023, because we just started the implementation of our cost efficiency activities. We now expect adjusted EBITDA to be even more weighted to the back half of the year at approximately 63% to 64%.
Also accounts for the much more pronounced year on year decline of Covid related revenue, we expect in the second quarter versus the first quarter.
There are a number of factors that continue to negatively impact margins in fiscal 2023 that we reviewed last quarter, but that will be partly offset by our cost saving actions.
Factors include headwinds from Covid related volume declines.
Inflationary and supply chain pressures.
Startup costs related to our acquisitions of Princeton, and Oxford, which were absorbed absorbing in our organic assumptions other pockets of underutilized utilization across the network as we bring on additional capacity and foreign exchange translations as our margin profile is higher outside of the U S. While the majority of our corporate costs.
Domestic note that swings in the euro have a greater impact on FX translation and the pound.
Moving to adjusted net income, we now expect full year Eni of 567% to $648 million.
Representing a range from a decline of 18% to decline of 7% on an as reported basis compared to fiscal 2022.
The Eni decline, we foresee for fiscal 'twenty three is being driven by several items first the inclusion of the new debt used to fund the metrics acquisition, which closed in October .
Servicing the full year of the new variable debt, we raised in part to fund the <unk> acquisition as well as other interest related increases and the current rising interest rate environment.
Next our expectations for our full fiscal 'twenty three tax rate remain unchanged from prior guidance, but as a reminder, we will experience a higher effective tax rate in the 24% to 25% range compared to the 23, 4%. We saw in fiscal 2022 due to the geographic mix of earnings.
And finally increased depreciation expense due to a significantly larger asset base, which is also more heavily weighted towards the U S.
We continue to expect our share count to be in the range of 181 to 183 million shares.
Operator, this concludes our prepared remarks, and we'd now like to open the call for questions.
Yes.
Yes.
And then Keith if he wants to ask a question. Please press star followed by one on your telephone keypad.
Maybe a question. Please press star followed by chain will brief closing my questions are now being much edge.
Our first question comes from the line of leaks Circle of Barclays. Please go ahead.
Blake Please kindly on mute your line. Please proceed with your question.
Okay.
Sorry, operator, let's move to the next question.
Of course, our next question comes from Tejas Savant of Morgan Stanley . Please go ahead.
Hey, guys good morning, and I appreciate the time here.
Perhaps alessandra and Tom just to kick.
Things off on the guide can you help us build the bridge between the old and the new outlook at the midpoint. It sounds like you trimmed your topline by about 350 <unk> by 90.
And I'm, assuming the COVID-19 payment should have no impact and the hurricane impact I'm, assuming can also be recaptured down the road, but I was just curious in terms of what are your new growth assumptions that you are embedding for non COVID-19 biologics as well as the BCH segment growth. In addition to the metrics deal.
So thanks <unk> for the question Alexandre here I will cover quickly part of Eaton, there I'll hand over to Tom.
As you see in the in the first quarter we recorded.
Our non coffee growth.
As we expected in the range of 20% plus and we expect these to continue through the year. Tom would you like to go a little bit more detail sure. So good question Josh related to the guidance I think your assumptions related to both the timing of the revenue recognition item as well.
The hurricane or not impactful in terms of the full year guidance both of those we view as as timing related the.
The macroeconomic backdrop and the worsening conditions, we're seeing there are much more of the driver here of the call them I would say as we look at consumer confidence and discretionary spend and the impacts we're seeing there.
Related to our consumer health business, I would say, that's probably 25% to 35% of the call them.
Related to those items I would say the cash sensitive decisions that we're seeing from some of our customers is not only related to biologic related customers, we're seeing that on the pharma and consumer health side, as well, especially as it pertains to levels of safety stock inventory that customers are willing to hold at this point in time, if they can.
What we view as a more cash preservation approach to managing their overall supply chain.
As well as how they are thinking about the prioritization of some of the candidates that they have in their pipeline as well as the timing of the progression of those so those are I would say the larger factors.
That we continue to see here.
Your comments also around metrics that as that acquisition did close in October that is included in our guidance now as well as well as the further strengthening of the U S dollars.
That was that we're seeing here those two things I would say nearly offset maybe not quite not quite exactly but they are directionally in the same approach in the macroeconomic landscape. Obviously has just given us a much more conservative orientation to look at the remainder of the fiscal year.
Got it that's super helpful. And then as a sort of an unrelated follow up Alessandro two questions. One on the quality front and one on your Capex decision to trim.
The spending.
Sure. So on the quality front, you noted that both Brussels in Bloomington earn out operational. So can you just share any update particularly in terms of your.
Your confidence in your ability to ramp manufacturing for customers at the site.
Irrespective of what happens with some of these 483.
Letters that you received in the activities you are taking to address them as well as any sort of customer conversations around future projects is any of this noise had any impact on that and second on capex with the decision to pull back capex here, a little bit given the macro.
Can you just talk to us about your ability to continue to meet demand at.
At least over the near term given the push out to fiscal 'twenty four.
Yes sure <unk>.
On the first question I would say that.
What we provided during the in the in the prepared remarks is pretty comprehensive in terms of describing the status there. So.
I will for sure that being any any more close to that because I believe that this is pretty comprehensive for sure there are.
We continue to keep a fully transparent approach with our customers and sharing with them updates but at this point in time is as we said that we are confident that.
Our responses are.
<unk> seen the yields division as expected with regards of your question on Capex Thats a very good question.
Look the reality of the way you go to slide eight of our presentation.
Slide really illustrates what we have already done what we have in flight.
As you will recall in.
In the one order composition.
A few a few weeks ago I detailed that we were in the mold, making sure that we had excess capacity across the board, but to make sure that.
It was inevitable instead, rather than not having enough capacity.
Given the current macro economical environment that we decided that the capacity. We our estimate is the capacity that we have even more than an offer for the runway that we have in front of us for the next several quarters and there will be plenty of time is really feeds the capex more in the in fiscal 'twenty four to be the.
Same very position to continue to drive long term growth. So that is really not not affecting our long term outlook here and I would just add to address in the near term.
Really the only two capex projects that we have that I would say, we would have an impact on our fiscal 'twenty three year decision to delay both related to Oxford and <unk> and those are now expected to come online during fiscal 'twenty, four and contribute revenue in that period versus in the current fiscal year.
Very helpful. I appreciate the color guys. Thank you.
Thank you. Our next question is from Sean Dodge from RBC capital markets. Sean. Your line is open. Please go ahead.
Good morning, maybe just staying on the guidance for a moment.
Changes there.
From the cash lengthen the decisions youre seeing from some customers just to clarify is that something youre seeing in Europe , only or is that happening and I would say too and then Tom you said happening both on biologics and the PCA side is there any more context, you can give us there is that this smaller clients make any decisions or larger ones too and then maybe any more kind of.
Pockets or characterization you gave us.
The cash into their decision.
Yes, Sean I would say this is not just the dynamic we're seeing in Europe , we're seeing it across both I would say, our European and U S based customers and I did say that this is a dynamic that is crossing both our pharma and consumer health and biologics segments I would say on the pharma and consumer health side, it's more related to commercial products.
And consumer health products, and I think it's it's really driven.
Driven by cash decisions I believe that our customers are making in terms of how they're managing their supply chain. So it's not just tied to smaller customers either I mean, I think our approach.
As a large company in terms of looking at things from a more conservative cash flow position is exactly what we're seeing from some of our customers do as well as they look to manage.
Working capital and supply chain in this macroeconomic backdrop, so much more across the board, both large and small customers and also across biologics and.
Sure.
And the pharma consumer health the only other thing I'll add is related to the examination of the pipeline and progression of the pipeline and some of the slowdown we're seeing there that's more attributable to the biologics side of the business, but again I wouldn't say, it's only tied to smaller customers. We are seeing some larger customers that may not be in phase III.
More earlier phase, one and phase II programs, just looking to slow play them as they navigate through the macroeconomic environment.
Okay, and then just thinking about some of the factors that give you visibility on the new guidance. If we go back to the Tech transfers you all talked about before is there anything else you can share that give us some sense of how meaningful those those should be in aggregate to the year and maybe like the incremental contribution of revenue from those is that they cover a quarter of it.
What you need to hit the new guidance or is it is it more or less than that.
Theres been no change I would say with regards to the assumptions around those.
Those tech transfer programs, they continue to be a meaningful contributor to us in the fiscal year. There are several of those that will be ramping on through the fiscal year here. So.
We're not going to quantify those Sean in terms of what their contributions we don't talk about individual customers.
Or products and.
So I would just say that that continues to be.
A driver of improved capacity utilization as well as revenue growth as we get into the second half of the year and that would add look.
When you look at the drivers that give us conviction about the non coffee grew.
Growth.
Pointing to these techs answer, but also gene therapy, which was a strong contributor to up to four months in Q1, we continued to see to have a good visibility into the trends in these.
These areas of the business. So the BD deal on visa on these assets continue to perform E is good.
Okay, great. Thanks again.
Yeah.
Thank you.
Next question is from Dave Windley from Jefferies. Your line is open. Please go ahead.
Hi, Thanks. Good morning, Thanks for taking my questions. My first question.
Similar to one of Sean's around revenue mix I'm wondering if you could I'm trying to get a better understanding of the relative balance of the impact of the items that you're calling out that drive the reduced guidance across biologics and PCH. It kind of sounds to me like maybe more of it is.
Is th leaning in biologics, but I don't want to over assume there could you give us some some help.
Sure, Dave So I would say.
The de risking we've taken approach we've taken a more conservative approach we've taken to guidance here really spans both PCH as.
As well as our biologics segment I wouldn't necessarily say, it's overly weighted towards.
The PCA side of the segment I think where we're seeing the bulk of the impact of PCH is related to the consumer confidence discretionary spend given the macroeconomic inflationary environment that we're seeing that that has a more immediate impact, particularly on the on the pharma sorry on the consumer health side of the business.
The gummies business, but also just I would say the softgel business associated with with OTC and consumer products I mentioned in my earlier responses I think it was.
About 25% to 35% I would say of the revenue call down was related to that consumer confidence.
<unk> spend dynamic that again is more impactful around the PCH side of the segments. The remainder though is really just in terms of positioning.
Of our customers across both.
Large the biologic side as well as the PCA side.
Cash a sensitive decisions and just slowdown in overall pace around.
Around new programs that we are seeing again on the PCH and biologic side. So it's.
<unk>.
Part of that is on the on the PCM side.
That in addition to the consumer spend gets you to probably little less than half of the impacting on the PPA side of the business and the rest of it being on the large molecule side.
That's helpful. Thank you if I, if I've been focused in biologics.
I'm wondering if you might help us to understand how.
The relative modality growth within biologics is driving that business.
You've called out gene therapy, a couple of times in your prepared remarks and answers.
I guess I'm just wondering.
Like the Tech transfers do we know have you shared with us that those are specifically in sterile fill finish or or.
We're not and as we think about kind of the mix of your biologic modalities in 'twenty three versus 22 does that change materially.
I would say it doesn't change materially David we have said that the tech transfer programs are growing.
Growing to be meaningful contributors in the second half growth and part of the second quarter, but into the second half growth as they really start to ramp we have said that those are drug product related and tied to our sterile fill finish.
Assets on past quarters.
The comments, we made around the first quarter and some of the growth that we've seen on the gene therapy and cell therapy side is expected to continue so that is a business that saw strong performance in the first quarter will throughout the fiscal year as well. So look Alessandro here I would tell you that we need to clearly here.
It's a very very important that we make evaluations on.
All in the basin are known Colby debate is clearly because of biologics is truly the segment that these are most impacted by the COVID-19. The coffee volume reduction as you all know and particularly the fill and finish side of the business.
I would tell you, though that across all the modalities, where you look at them and the prospects of growth ex called on all of them. We are pretty excited about the dynamic that even after our more conservative approach to guidance, which is reflecting to some macro factors, which led us to be adding them.
More conservative orientation here, but even with that conservative orientation, we feel very very excited about the opportunities we see in gene therapies.
The expected.
<unk>.
Tipping point to put other.
What other and end to end also in the in the tech types are still in biologic seats.
On an <unk> basis, we continue to be excited.
Excellent. That's helpful. My last question is around kind of general margin Bridge I guess it goes back to <unk> question, a little bit.
But youre, taking revenue down as you said more conservative we would normally.
Spect some.
Decrementals.
High fixed cost business, so that as a baseline expectation you'll also have remediation costs related to the quality issues that you raised in your remarks.
Inflation and other things that are challenges.
Yes.
Your margin forecast for the new guidance is essentially the same as the old guidance.
Looking for help on the cost levers that you were able to pull to mitigate the decremental on the revenue drawdown.
Yes, no. Good question, Dave look I think our margins are looking to be flat. This current year.
New guidance in comparison to where they were in the prior year the cost savings initiatives that we have underway that we've already started to take action.
All of those will be operationalized by the end of the calendar year. So we will be seeing full impacts in the second half of the year.
Related to those I think the dynamic that we're seeing around the Underutilization is certainly playing into the margin.
The margin situation here in the quarter as is the material.
Piece of the business when we think about the component sourcing side of things the startup costs.
Related to Princeton, and Oxford ramping up also margin dilutive in the period, but the cost actions that we have underway running the business in a much more efficient way looking at things from a span and layer standpoint in terms of how we operationalize our large sites are meaningful meaningful cost savings actions.
We have that we have the ability to two two to utilize here in the level that we absolutely are pulling.
Okay, great. Thank you.
Thank you.
Next question is from Julia Qin from Jpmorgan, Jamie Your line is open. Please go ahead.
Hi, Good morning. This is Amy on for Julien. Thank you for taking our question. So I have a follow up on the Capex. The slowdown of the Capex could you tell me, which capacity or areas that you guys are cutting down is this a reflection of financial prudence or are you concerned about overall.
Overcapacity and the topic of answer to that is can you also add more colors on the pushout of the Princeton and Oxford plans into 2024.
Sure look I wouldn't call it necessarily visa cards in our spend as we said that this is Eddie facing these are different timing in which we're going to bring online.
These capacity and clearly.
Our job <unk> is always to keep our utilization rates at the.
Reasonable levels to continue to drive margin and as such cash flow. So this is this is a.
A combination of when you look at.
How much we are below the line, which is on slide eight which is a very exciting.
Sure if you like in terms of how much we have drilled a lineup which is nonsense.
<unk> called it related and how many levers that we have to continue to drive growth.
The industry in areas that continue to be very exciting from a pipeline standpoint, we feel pretty good about what we've already built and looking into the future.
Given our more conservative approach to guidance, we thought it was prudent to.
It slowed down a little bit to the additional capacity coming online so that we could keep at the level of obsession.
<unk>, but also not to jeopardize the long term growth prospects of the company so diesel.
Resulting in a fiscally prudent approach, which I believe given that the environment that I think to do.
Thank you I have one question and then I'll hop off so can you share some visibility about the noncore with base business ramp into the 2023 under our new guidance, especially in the biologic sectors like what percentage of the revenue will come from customers that stick around after.
Covid and what supports your confidence into the rest of the year second half of the year. Thanks.
So look.
We're very pleased with the start we had fiscal 'twenty one here in a non COVID-19 basis, we mentioned in <unk> prepared remarks, as well as mine that we saw more than 20% growth across across the company on a non COVID-19 basis in the first quarter.
Our guidance assumes we continue to see growth around those levels, we haven't disclosed what the split out will be between the pharma and consumer health side of the business versus that of the biologics side of the business, but many of the growth drivers we have do.
Are related to <unk>.
<unk> that were not impacted by Covid related volumes, just think about the cell and gene therapy strength that we saw in the first quarter.
The expectations that that continues here into the into the second half of the fiscal year. So again, we're just really looking at things to continue to trend on a non COVID-19 basis in line with what we saw in the first quarter in the more conservative view of our of our guidance that we presented today.
Thank you.
Right.
Thank you. Our next question is from Derik de Bruin from Bank of America stomach. Please go ahead. Your line is open.
Hi, good morning, So I've got a few here.
Can you just elaborate a little bit more on what you mean by the slowdown in pacing starting programs.
I mean, it's not fill finish it did more drug substance and then on the then.
And then on the consumer side, just what you're seeing just a little bit more color around what exactly.
It's being adopted.
So Derek I would say, it's really it's really very widespread I mean, we're seeing it as I mentioned not only on the biologic side of the business but.
On the pharma and consumer health side, we're seeing it across both commercial products, where customers are willing to.
Appear to to manage the supply chain to a more conservative.
Level here and not run on the same levels of inventory here as they look to manage working capital.
But I would say the pace is more around some of the development programs that we have now phase III programs that are full blown into clinical trial activity are not the types of programs that we're talking about here, but we have plenty of programs across the network. Both on the biologics and PCA side in development that I would say in that in that phase III.
Range, where we are seeing.
Maybe some temporary expectations in terms of the pace in which customers are moving through there as they look to potentially manage.
Their cash situation. So again go back to comments I made earlier really across both pharma and consumer health and against the.
Commercial products and development side of things. So just a more conservative approach to guidance from our standpoint was necessarily based on some of these trends we're seeing across the customer base.
Okay, and a couple of just housekeeping questions.
So what is given the new debt and increasing interest rates what is your expectation for net interest expense for the year.
How big is your macro sensitive, which you would consider macro sensitive portion of the business.
Sure.
Sure so the slide in the deck.
<unk> has a good view of the capital structure.
Eric for you for you to take a look at I would say about 25% of our debt when you take into consideration the debt thats been borrowed.
On the revolver to fund the metrics acquisition is floating and more.
Ride to the rising interest rate environment with about 75% of that being being considered are fixed so hopefully that can be helpful. As you look to model. This.
Okay.
Do you feel like you're appropriately derisked because of it enough to cover expected for this year.
Yeah.
I would say theres been very little change to our assumptions around COVID-19 just given the contractual obligations that we have here much more of the call down was related to non COVID-19 business in the macroeconomic environment that we're in here so.
Nothing else to noted on the corporate side of things.
Okay. Thank you.
Thank you next question is from Max smoke from William Blair. Your line is open. Please go ahead.
Alright, thanks for taking our questions just the first one from me here you've called out a number of factors really behind the reduced guide for this year, but one of the things we haven't touched on is the ability for you to changeover from Covid to non COVID-19 work and whether or not that factored into the results in the quarter as well as your outlook for the year. So I'm just trying to get a sense for them.
Whether or not this transition has maybe been a little harder than you expected or it's part of the issue here or if you've been able to kind of make that shift in line with your expectations.
Now look at Alexander here.
As we said multiple times that most of the non call. It. The work is executed on assets whichever which are unrelated to the coffee the execution. So the two things that don't think to interfere.
With each other.
As we have said that even.
The settlement with each theme for the quarter was something that was somewhat.
Four.
And so and given the given our approach that we shared multiple times. So that our approach is really sticker and looking at the partnership with important customers, which have a much more than just the <unk> relationship with us. So I wouldn't say that this is any interference with our ability to execute on the come.
<unk> come to work and look I always go back to the point that.
In our Q1, we were able to deliver a non coffee growth of 20% plus which is.
Which is a remarkable performance.
Got it that's helpful. So.
As a follow up I mean, one of the things you mentioned last quarter was that non covered growth benefited a little bit from some backlog pointed system related to some projects that maybe had suffered a little bit as you prioritize COVID-19 just wondering if theres any way to quantify whether or not this has.
Impact in the quarter.
And if so is it is there.
Backlog now largely worked through or should we expect this to be a.
Somewhat of a tailwind I guess for the business.
Fiscal trying I'm trying to.
Well there are some areas, where we continue to be a little bit tougher.
Is it constrained when when you look at the demand Thats I would say that the little the backlog.
Danville demanded that we need to still create out this not to change dramatically in terms of the picture.
That are maybe some areas of the business, where we're seeing even more success than what we anticipated in terms of demand alike.
I named the <unk> says the one notable item in our in our business, where we are trying to do.
To build additional capacity at speed.
I would say with all of the backlog situation has not changed dramatically.
Yes.
Got it.
Thank you.
Thank you next question I would just like to ask everyone. If they could limit themselves to one question to allow everyone. The Chang.
Our next questionnaire.
Justin.
<unk> from Deutsche Bank Justin. Please go ahead your line is open.
Hey, good morning.
Just on the.
Uh huh.
On this settlement you described is that a good kind of.
Quarterly run rate.
<unk>.
That we should assume with the exception of kind of like the true up that youre going to have an IND.
Into Q and then the comments on reduced utilization is that does that how does that split between biologics and PCH. It seems like it's more weighted to PC.
PCH and then on PCH, what's kind of like lead time for <unk>.
Lots of discretionary and and.
Thank you.
So just to take your.
Kind of just around the timing of Covid related to the settlement. So there is no quarterly phasing here that I would read into the recognition related to this in terms of a run rate. This was a settlement related to one customer as you know there are two major customers in which we have COVID-19 related volumes.
We're here.
I'll say the comments I made are that the COVID-19 related headwinds that we see during fiscal 'twenty three is going to be more pronounced in the second quarter than it was in the first quarter and I would say it will be equally as pronounced in the third quarter, our second and third quarters are the quarters in which we were most.
Where we're most expected to see Covid related volume declines as we as we head through the as we head through the fiscal year.
In terms of the comment related to capacity utilization I would say as you look at the slide on.
The materials here on slide eight where we talk about new capacity that has come online or is in the process of coming online.
Many of those are biologics related assets. So the assumption that some of the under utilization and capacity that we're going to see in fiscal 'twenty, three which we've alluded to before given the timing of bringing on this new capacity as well as the ramping associated with starting to fill that is much more of a biologics dynamic than it is.
As a pharma and consumer health dynamic.
Next question please.
Thank you. Our next question is from Jacob Johnson from Stephens Jacob Your line is open. Please go ahead.
Good morning, everyone. This is Matt on for Jacob just to just a quick question from me.
Related to your cell and gene therapy business.
I think you have at least one commercial customer and another potentially coming.
How should we think about the size of a given commercial celgene derby customer or looking at it in another way.
What is the potential revenue capacity of suite at BWI.
So.
You can't look at the suite to BWI on a revenue basis known programs are equal there is a lot of different things I would say that factor into how you would look at the potential <unk>.
Revenue here I think your comments are spot on we have had a commercially approved program. We have several programs that I would say are in later stage I think you're probably referring to one specific.
Look I think that continues to be meaningful customer for us it's assumed in.
In our guidance.
Fiscal 'twenty three that it will continue to be.
Difficult to comment on any specific.
Customer or individual programs as well as the revenue.
Well as the revenue.
I would say attached to it but the progress of the pipeline that we have within gene therapy. The fact that we've been investing here to bring on additional suites, which will have 18 suites here as we get through fiscal 'twenty, three up and running as well as 150 different development programs that we have on the gene therapy side of the business here. So.
A very robust pipeline that continues to mature so and digest without the more helicopter view, we believe that our BWI asset that we did in Sweden will be one of the largest if not the largest to viral vector manufacturing assets out there and that clearly is going to be a meaningful contributor to our growth story in the.
A few years given also the strength of the pipeline that we're seeing that with the customers progressed into late stage and potential approval.
Alright next question operator.
Thank you. Our next question is from Jon <unk> from UBS. John Your line is open. Please go ahead.
Thanks for taking the question, maybe just one one here and some of the comments you mentioned on the inflationary pressures and the updated guide.
Can you talk a little bit just on pricing.
Are you starting to see now more pushback from customers, maybe more specific on biotech customers on some of the price increases with the inflationary pressures in the market. Thanks.
Yeah sure look I do believe that we have been successful in leveraging the price the price is appropriate really.
It is not a one size fits all around but the different offerings that are different the market positions.
Clearly on your more.
Commercial business, where you have a long standing contracts and that I'd make any sand relationship and so forth.
It tends to be more.
Easier and more aggressive stance on the other places where youre competing to win business, you really need to be careful around the where the market is growing but we have a very good pulse of without the areas of opportunity that we are doing.
Doing everything we can on <unk> opportunity there to make sure that we offset as much as we can the inflationary pressure that we are seeing.
Yeah.
Alright.
Next question Daisy.
Our next question is from Jack Meehan from Nephron research.
Please go ahead.
Good morning.
Alessandro or Tom can you provide color on cancellations how are they in the quarter relative to historical periods.
So I.
I wouldn't say, we've seen much in the way of cancellations.
In the current quarter here, there wasn't an impact of the results and first quarter.
So I would say we've seen a handful of cancellations as we think about the remainder of the fiscal year, but I wouldn't necessarily say, it's any different than what we're seeing.
What we've seen historically I would say, though the overall progression of not things that are being canceled, but just the pace at which customers are willing to move is where we're seeing the slowdown right. So this isn't programs that are that are being necessarily canceled, but certainly a slowdown in that slowdown both on the pharma and consumer health side as well as the biologic side was what was contemplated.
And the more.
And the more conservative view of the guidance.
Yeah look I would call it more selectivity right set activity on both side that side the customer side in terms of understanding how we're going to progress the business going forward given the cash situation.
Thank you.
Next question is from Adam Dave back from Baird. Your line if I can please go ahead.
Yes, I want to make sure.
I understand how consumer spending habits actually.
Impacts your business. So earlier in the question and answer you said that the change in consumer spending was about 30% of the guidance cut.
Or my math, that's about $100 million and also if I look at what that would relate to.
Your consumer health, an OTC business.
It was about a $700 million business in fiscal 'twenty, two I guess $800 million, if I have fully impacted with the Tara.
I mean, I just put those two together and it's a $100 million cut on a seven or $800 million business.
<unk>.
Strong double digit impact for that business for a change in consumer spending behavior, which seems like a big change in end market demand.
So I just wanted to make sure I really understand how that consumer spending impacts your business.
Well look I will just have.
To talk about on the specifics that are going to tell you that you don't have to look at these only or not and the market that the vendor's standpoint that at times. The compounding effects of one is the end market and the other one is the stock levels and.
There are temporary.
Demand our demand is the combination of the entity and how much inventory our customers want to carry about each individual outfitting and clearly when there is more uncertain etfs should lead yielding patients towards the end market demand that tends to be a little bit lower than just surely capital tied to market.
Because we are running today that is a more conservative approach of March how much inventory you want to carry so these are the inventory piece is a temporary effect that tends to.
Balanced alpha in a few months video to because at some point once the destocking at that point, you're really really serving the end market demand about the <unk>.
These are the two effects that compounded the probably explained better.
The dynamic around the your question.
Thank you our last question today is from Nick <unk> from Barclays. Your.
Your line is open. Please go ahead.
Great. Thanks for sneaking me in at the end here.
So as you think about the can you guys.
Give us a sense of the guidance methodology and how you guys factor in potential approvals from some of those LNG and therapy businesses.
And then can you give us a sense of or just give us.
Size of the business of cell and gene therapy, and how that's been growing.
So look I'll give you some directional color here.
We havent quantified this LNG therapy business in terms of its size, but all ranked our revenue contributors biologics overall here and I would definitely dissect both cell and gene therapy, because they are very two very different business in different stages of maturity, our drug product business around biologics our largest revenue contributor here about our gene therapy, I would say as a close second to that.
In terms of its contribution to the $2 5 billion of biologics revenue that we would have annually I would say from there. It's our drug substance business and then our cell therapy, and then you start getting into some smaller revenue contributions from plasma DNA ips's et cetera here. So our gene therapy is the number two contributor to our overall biologics revenue in terms of absolute.
It's the area, where we're seeing the fastest growth right now for sure and a big reason of why we saw the growth we did in the first quarter across the company of.
More than 20% on a non COVID-19.
On a non COVID-19 basis in terms of assumptions.
Here, we're not going to.
Take an overly aggressive approach to regulatory approvals, which are <unk>.
Outside of our control and in many cases in most cases outside of our customers control as well.
So we're not assuming any significant impacts from commercial approval down the road here that that factors into us being able to achieve our guidance, especially.
Our guidance that's been built out with a much more conservative orientation than what we had previously had.
I have discussed maybe allowed the just one comment at Danville that thing.
Additional color to the dynamics you need to think about the potential.
Most of that through and our policy is that dynamic to serve the commercial approval, but there is also a dynamic that precedes that that these are more launched stalled.
Build out which you do normally for sizable approvals, which we are a little bit more confidence around the what the impact could be.
So with that said I would like to wrap up the call I guess, we are done with questions. So thanks, everyone for taking the time today to join our call and for your continued support of Covenant. Thank you everybody.
Yes.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
Okay.