Q2 2023 Maravai Life Sciences Holdings LLC Earnings Call
Thank you for standing by I would like to welcome everyone to the quadrature tiny tiny seat miles by life Sciences earnings Conference call.
Things have been placed on mute to prevent any background nice I'll studio speakers remarks, there will be a question and answer session.
I will now turn the conference over to Deborah height.
Please go ahead.
Good afternoon, everyone. Thanks for joining us on our second quarter 2023 earnings call. Our press release and the slides that accompany today's call are posted on our website and are available at investors Dot Mario by Dot com.
As you can see on our agenda on slide two joining me today are trademark our new CEO , Kevin Hardy, Chief Financial Officer, and Carl Hall Executive Chairman of the board.
Drew Birch executive Vice President and general manager of our nucleic acid products and basketball Z O. Our chief commercial officer will join the call for a question and answer session. Following the prepared remarks.
We remind you management will make forward looking statements and refer to GAAP and non-GAAP financial measures. During today's call. It is possible that actual results could differ from management's expectations.
We refer you to slide three for more details on the forward looking statements and our use of non-GAAP financial measures.
Our just issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to the SEC.
SEC filings for additional information on the risks and uncertainties that may impact, our operating results performance and financial condition.
Now I will turn the call over to Carl.
Well, thank you Doug and good afternoon, everyone. We appreciate having you join us for our call today.
During this call we will provide the details of our financial results for the last quarter and our updated guidance.
But first I want to officially introduce and welcome moral those new CEO trade Martin.
Over his role on July 27.
As many of you know trade in season Global Life Sciences executive with highly relevant industry experience from his time at <unk>.
And then or.
He brings tomorrow ideal mix of strategic operational and scientific acumen combined with an outstanding operational track record over.
Over the course of his career he has built and complex global operations.
Successfully integrating multiple acquisitions experience that is particularly well aligned to lead the execution of a moral law as long term strategic growth plan.
I have already seen firsthand the tray is an excellent cultural fit.
Moreover.
As a result oriented leader with the ability to go out and motivate teams within a culture of high integrity and high performance I know he's the right CEO to take more volume through its next phase of innovation and growth.
Before I turn it over to Trey I want to share with each of you the observation that leading Moreover, it has been the single most rewarding experience in my career.
I could not be more proud of what we've accomplished together.
I extend my sincere thanks to our leadership team answered the dedicated employees across the world, who enthusiastically serve our customers and their communities every day.
I am excited about the company's future, where we're going and what we can achieve together.
Confident that we have the team the talent and the technology needed to deliver on our long term objectives.
Turn to slide five I'll now ask trade to introduce himself and share. Some early observations overtime will have many other opportunities to get to know them better.
Thank you Carl.
It's an honor and a privilege for me to become the CEO of <unk> at this important juncture for the company.
I believe we have immense potential to deepen our connections with the scientific and Biopharma communities and further serve our customers while elevating the company is the life science tools provider of choice.
During my 29 year career in genomics I've had the good fortune to participate in several overlapping waves of technology.
Q PCR to Nextgen sequencing.
From synthetic biology to CRISPR gene editing, what I see now with the opportunities in mrna is a convergence of technologies and experience that also leverages. The many recent learnings from the pandemic and is driving the rapid growth of the mrna therapeutic pudic steel I.
I believe <unk> has a particularly strong position with our technologies expertise and long history in mrna.
And the broad field of nucleic acid chemistry.
I strongly believe that this conversion gives us a unique opportunity to move the needle for human health.
This is a unique opportunity and I'm excited to be leading the company at a time, where we're focused on expanding the many growth opportunities in our base business and innovating to support the rapidly evolving needs of our mrna genomics cell and gene therapy customers.
Okay.
<unk>, serving as the president of Biologics safety testing here at marathon as it enabled me to focus deeper into that part of the business to work with the team to help navigate the post pandemic transition and to understand the future value levers for the business I look forward to bringing the insights gained over the past seven months to my new role as I.
<unk> transitioned to lead the full company and as we work to unlock the potential we have across <unk>.
In my first 11 days as CEO I've already had the opportunity to meet with many of the team members in the nucleic acid production segment spend time in our labs hold strategy sessions with the leadership team and meet with customers and commercial partners.
Across <unk>, we have gold standard tools and technologies and a highly motivated employee base with a strong will and determination to meet our customers' needs through innovation and value added products and services.
I had learned has only just begun but let me share what I'm most excited about starting on slide six.
We have a broad and diverse footprint of products and services that span many of the fastest growing segments of biologics genomics and cell and gene therapies, particularly at the front end of the drug development funnel, where we have the ability to win early and then to grow with our customers as they advance through the various phases of therapeutics development.
<unk>.
We are the go to nucleic acid chemistry provider in mrna modalities and now have the opportunity to leverage our technology leadership to expand wallet share and mrna and adjacent growth areas.
We have a strong balance sheet that provides us the ability to augment our internal investments through strategic M&A and we're planning to have M&A continue to be a key part of our capital allocation strategy.
If we examine each of these a little more closely starting on slide seven.
And products and services clean cap has positioned us as the leader in co transcriptional capping an mrna manufacturing technologies.
Our clean cap franchise is a strong and meaningful technology differentiator with the flagship brand in the marketplace.
Clean cap reagents have been cited in over 950 obligations in the last eight years, including over 250 in 2022 alone.
Incorporated in three clinically approved products and dosed in billions of patients worldwide.
We continue advancing the science and I will provide an update on our newest clean cap analog and six in a few minutes.
In addition to our leadership there our services team has completed over 110, GMP manufacturing batches across 70 different products that.
That type of expertise is a key differentiator for us in a competitive industry, where we remained very focus on mrna and nucleic acid chemistry.
Hey, Marni manufacturing is not a commodity expertise with flexible custom services like we offer is unique and can support all facets of product realization to make our customers successful.
We're actively and continuously making improvements to meet the evolving needs of our customers both in <unk> and GMP.
Again, we believe we can win in discovery and assist our clients to slightly move to GMP for phase one and then beyond.
First in our UO or turnaround times suffered through the pandemic demand we've engaged in programs to dramatically accelerate our turnaround time since late 2022. Additionally.
Additionally, we have streamlined our ordering and manufacturing processes through automation and added enhanced training for our commercial teams and added in house analytics expertise.
Through these efforts our team has been able to sustain more than a 50% reduction in turnaround time for the past six months.
Our proactive efforts to improve customer experience are paying off in June we saw an increase in commitments for our UO services, indicating we're meeting our customers' demands.
Second in our GMP manufacturing services, we saw a doubling of signed contracts in Q2 versus Q1 as well as strong funnel growth to support expected revenue recognition for GMP services in 2024.
We are seeing investments in our capacity and capability is strongly resonate with our G&P customers, who need to see a path to commercialization for their molecules. We are addressing those opportunities with our Flanders to facility expansion that is nearly complete.
With the Flanders to site customers will be able to continue manufacturing post phase one and tech transfer their late phase programs into our state of the air GMP mrna manufacturing facility.
Our key differentiator is that we've been making mrna for over 20 years and get customers direct line to our experienced team to use our process <unk> developed processes optimized to each program with scale up validation analytics and qualification capabilities. This is what customers need from reliable.
Manufacturing partners and for a successful supply chain.
The capabilities, we are building in Flanders, two should provide our customers with a seamless path to late phase manufacturing and commercial GMP manufacturing of drug substances.
On slide eight you will see the clinical pipeline continues to accelerate and they are a growing number of these customers. In 2019, there were 14, new clinical mrna entries during the year, we have already seen 30, non COVID-19 programs into the clinic in the first half of 2023, indicating the pipeline stands to be four times larger than.
Pre pandemic levels by the end of this year.
This philosophy of mrna drugs moving into clinical phases demonstrates our investments are well positioned to be our for customers first choice from discovery through commercialization with our broad and diverse footprint of products and services that support the development of biologics genomics and cell and gene therapies. Our goal is to win in discovery.
Where the front end of the funnel and then pull through our phase one enablement and stay with our customers through the lifecycle of their products.
In addition to having products and services that enable us to serve as a trusted partner for different customer needs. We also have both deep chemistry and biology capabilities under one roof.
Let's turn to slide nine.
We have a reputation as the go to nucleic acid chemistry provider and a real expert in mrna related to modalities.
By leveraging this technology leadership position and continuing to innovate we have opportunities to gain wallet share in mrna and adjacent advanced therapy areas, such as cell therapy and gene editing.
Our commitment to innovation advances the technology in key areas, allowing us to be a multi modality supplier for.
For example, we have customers performing novel in vivo gene editing techniques that rely on us to initially deliver key raw materials for their research grade mrna manufacturing.
And then perform <unk> services to produce their mrna drug substance and thirdly supply them with long oligonucleotides.
We believe our longstanding expertise in our manufacturing mix as the supplier of choice when looking to work on the leading edge of technology.
It's very common for our nucleic acid productions customers to need multiple products from cap analogs to other NTP select and one metal pseudo European.
Oligonucleotides to enzymes.
Almost three fourths of our E&P customers buying multiple products and we strive to consistently build our technology portfolio production capabilities and trusted supplier relationships.
We continue to add new customers under form a license and supply agreements during the first half of the year. We've executed three new agreements. The newest members of this value classic customers include innovators in gene editing as well as developers are key vaccines for infectious diseases, and the Asia Pacific region.
Top LNP developers and manufacturers of multiple delivery systems frequently use clean cap and theyre mrna manufacturing.
And see this as the standard for drug substance use in their studies.
The reliability and quality of the mrna produce is critical for the discovery and development of novel lipid technologies.
Similarly, many customers are looking for our partnership to provide guidance and enable their encapsulation of mrna in progression from drug substance to drug product.
Our commercial team is expanding globally to bring our expertise to customers in key markets, including Europe , Japan, and Korea, and we are finding strong engagement and adoption with innovators in each of these markets.
There are many customers around the world doing exciting work in mrna and cell and gene therapy, who need products we provide.
These are just a few examples of how we are actively expanding our reach and ensuring even more customers benefit from our leading nucleic acid chemistry solutions and mrna expertise.
Moving to slide 10.
Our balance sheet remains exceptionally strong which will allow us to pursue additional M&A to augment our organic growth initiatives. Our efforts here are focused on acquiring additional differentiated technologies to serve our customers and help them succeed.
As we look ahead to the completion of 2023 and prepare for 2024, we remain focused on growing our base business and expanding margins with revenue leverage.
Im excited about our future our capabilities and what we can achieve together to make a meaningful impact improving human health I am confident that we have the team technologies and the talent to deliver on our long term objectives.
Those headwinds include the inventory rebalancing dynamics as we discussed in our earnings call for Q4 dollars 22.
And the broader biotech market sluggishness that we discussed in our Q1 2023 earnings calls.
Industry wide, we are seeing customers changing their spending priorities in the wake of broader economic uncertainty and lower levels of venture and private equity backed investment.
As a result key customers have become more focused on capital conservation efforts, which has constrained research and development budgets and is leading to longer decision, making process, causing customers to strategically prioritize end stage their programs.
We continue to see customers utilized inventory levels built up during the pandemic, leading to lower near term demand for some products as they return to a business as usual inventory approach from.
From what we can gather this situation is clearly affected all players in the bioprocess Ing and CDMA services industries.
Despite the slightly softer than expected performance I'm highly encouraged by the positive performance. We saw in several pockets of our business during Q2, including non Covid clean cap sales, which were up 21% year over year in the quarter.
We announced our new clean cap and six products on the Q1 call and product uptake has been especially encouraging as we saw orders from approximately 70 different innovators and have already received many repeat orders.
This interest has come from a broad group of vaccine leaders from non vaccine large pharma customers and from smaller mrna focused companies.
Early feedback from customers has been encouraging and I believe that <unk> is a truly differentiated product that positions us to gain share from alternate captain methods.
We think this is a game changing innovation for manufacturing more potent mrna therapeutics and vaccines and that it's higher protein yield may offer the opportunity for higher efficacy lower dosing or both.
Within the biologics safety testing segment, we continue to expand our presence in the cell and gene therapy space.
<unk> now supports all 17 out of 17 approved car T cell and gene therapy products, plus the first ever car T approval in China.
We are also seeing continued positive early interest in our <unk> product line within DST.
Additionally, we realized solid cash flow from operations during the second quarter of $19 million, bringing the first half cash flow from operations to a total of $104 million.
Our revised market outlook for 2023, which Kevin will discuss in greater detail in a moment takes into account the Q2 results and more modest expectation for the second half of the year.
We are removing approximately $35 million of COVID-19 related revenue and reducing our outlook for the base business due to changes in our customers' spending priorities and ongoing weakness in early stage biotech funding as a result of slower than anticipated improvement to the broader market as previously discussed and a lack of <unk>.
<unk> improvement to the economic activity in China.
All of which is pressuring the business.
We believe this revised stance for the full year properly accounts for the current industry trends and economic uncertainties and mitigates the risk of shortfall relative to the expectations in the second half.
Although I'm, taking the helm during a uniquely challenging time and macro environment my belief and enthusiasm for the company have not wavered.
The strategic priorities investments in innovation and a superior customer experience that Carl and the team had previously laid out remain unchanged strengthening our commercial operations driving long term base business revenue growth through market share gains with clean cap cross selling products and product portfolio expansion.
And our relentless focus on new innovation all of these are longer term priorities that will enable us to emerge from the short term pressures as a stronger company.
And speaking of innovation, let's move to slide 12.
I am excited to share that we'll be hosting an investor R&D day in New York on September 28, the day will provide a deeper dive into our company wide initiatives to deliver sustainable long term growth and showcase our leadership team.
That will be providing more details and registration information as we get a little closer and I look forward to meeting many of you in person.
I'll now ask Kevin to provide details on our second quarter performance and our updated guidance Kevin.
Thanks for the hand off track and good afternoon, everyone.
As Trey mentioned I will dive deeper into our Q2 and year to date financial results and discuss our updated outlook for 2023.
Starting on slide 14.
As per our press release. This afternoon. Our Q2 2023 revenues were $69 million roughly in line with our expectations for the quarter.
As for earnings per share, both our GAAP based basic and diluted EPS <unk> <unk> per share loss, while adjusted fully diluted EPS was zero cents per share for the quarter and was <unk> <unk> per share for the first half of 2023.
Okay.
Our GAAP based net loss before the amount attributable to Noncontrolling interest was $11 9 million for the second quarter of 2023.
Adjusted EBITDA, a non-GAAP measure was $9 1 million for Q2, resulting in an adjusted EBITDA margin of 13% for the quarter.
For the first six months of 2023, our adjusted EBITDA, a non-GAAP measure was $32 9 million, resulting in adjusted EBITDA margin of 22%.
The overall lower revenues over our cost structure led to the lower margin in the second quarter.
In the second quarter, we also saw higher overhead and related direct labor expense versus first quarter levels. These incremental expenses reflect the lower manufacturing throughput in the quarter and the assessment of inventory turns in light of the lower projections for 2023.
These expenses combined with the higher depreciation and amortization associated with our organic and inorganic investments that offset the lower variable material portion of cost of revenues.
We remain focused on balancing our investments in our facilities and our labor to best position us for the future. While also actively managing our expense structure to address our current revenue outlook.
This balance is critical to ensure we have the right capacity capabilities and resources to be the best solution for our customers' needs and best position ourselves for long term opportunity, we see in our addressable markets.
Overall, given our low variable cost of revenues, we expect will continue to see dynamic margin fluctuations it correlate to our revenue performance when.
When revenues meet certain levels, we see good leverage in our cost structure. This was exemplified by our performance within the recent quarter as we saw an adjusted EBITDA margin of 35% in the month of June with approximately $31 million in revenue.
Turning to slide 15, as Trey mentioned, we continue to have a strong balance sheet, our cash and cash equivalents ended Q2 at $580 million up approximately $30 million from a year ago.
Reflective of our strong cash generation over the last 12 months offset by capital outlays for both organic investments and overall capabilities and the inorganic cash used to acquire unique additional capabilities such as our <unk> acquisition earlier this year.
Our adjusted free cash flow for the quarter was a negative $18 million adjusted free cash flow is a non-GAAP measure that we define as adjusted EBITDA less capital expenditures.
The negative free cash flow in the quarter reflected net capital expenditures of $27 million tied to the completion of our biologic safety testing new facility in Ireland, and the Flanders Buildout foreign nucleic acid production business for which we now have full occupancy of both components of that building.
So we sit here today with $580 million in cash and gross debt of $536 million, which does not have a term maturing for over four years.
This gross debt cash and debt structure continues to allow us maximum flexibility to actively evaluate additional M&A opportunities.
We had a net interest expense in the first half of 2023 of $6 million, which is an effective net annualized rate of below 3% I am very proud of our treasury and cash management team's efforts over this year.
Now turning to slide 16 ill provide some more insights into our business segment financial performance for the quarter.
The nucleic acid production business revenues were $53 million for the second quarter nucleic acid production represented 77% of the company's total revenue in the quarter and generated $14 million and adjusted EBITDA in the quarter for a segment margin of 27%.
On a year to date basis adjusted EBITDA for the segment was $42 million.
A margin of 37% from the first half revenues of $115 million.
Included in the results of the nucleic acid production segment for the second quarter as our estimate of clean cap revenues from our large COVID-19 vaccine customers of $11 6 million.
This brings this total to $27 5 million for the first half of 2023, I will touch more on the remaining 2023 expectations for this in a moment.
Our biologics safety testing business revenues were $16 million in the second quarter contributing 23% of our total revenues are biologics safety testing business contributed $10 million of adjusted EBITDA in the quarter a margin of 66%.
Corporate expenses that are not included in the segment adjusted EBITDA totals I just spoke to for $15 million in the quarter decreasing $3 million from Q1 levels.
Turning to slide 17, and our updated financial guidance for 2023.
As Craig touched on in many of our peers have noted recently it appears that the improvement in the broader biotech market Sluggishness noted in our Q1 2023 call maybe slower than anticipated, reflecting the changes in our customer spending priorities and more stringent budgetary practices that are negatively impacting what was already a transitional year from.
I will do my best to discuss the changes to our full year guidance.
Since our last call we received updates from our large LSA license and supply agreement customers that resulted in less demand than we anticipated mostly for COVID-19 related clean cap.
This combined with many of our repeat product and technology customers delaying or canceling decreasing are forgoing purchases of our products and services, particularly for nucleic acid raw materials, Oligos and chemistry products have resulted in lower overall expectations for this segment. Additionally.
Additionally, the increased capacity across the industry combined with customers project rationalization and slower decision, making has impacted our 2022 revenues for the services part of this business.
Now overall, we are lowering our expecting range of total revenues for 2023 to between $300 million to $325 million at the midpoint. This is slightly over $100 million reduction in revenues for the year.
Let me breakout this reduced you in more detail.
We are reducing our estimate for COVID-19 related clean cap revenues down from 100 million to $65 million.
The $65 million is roughly 90% decline from 2022 levels to remaining portion of the $65 million for 2023 is all on noncancelable purchase orders that.
The $65 million for 2023.
<unk> related revenues under our supply chain agreement with Pfizer in biotech for 2023.
With $28 million recognized in the first half of 2023. This implies $37 million will ship in the second half split between $15 million in Q3 and $22 million in Q4, we.
We will continue to breakout revenue related to Covid clean cap for the remainder of 2023.
However, its clean cap continues to be adopted more broadly including for combination respiratory vaccines post pandemic will likely consider this as part of our base business for 2024 and beyond.
We expect to see our biologic safety testing business revenues this year in a range of $65 million to $70 million. This.
This business is currently seeing a leveling of demand in the 15 million to $18 million per quarter range or so <unk> seen since Q2 of 2022.
This lower range accounts for about $5 million $10 million of our lower revenue guidance.
This considers that China is not a growth region for this business as it has been in the prior years.
The remainder of the reduction in our overall guidance is tied to lower expectations for our nucleic acid production business, our nucleic acid production business, which excludes any estimated clean cap COVID-19 revenue demand is now anticipated to be in the range of $170 million to $190 million, which at the midpoint reflects an annual decline of about 15% from 2022 levels.
This is frankly, a disappointing reduction and our views for this segment a segment that has seen a growth CAGR of over 35% from 2018 to 2022.
But is reflective of the ongoing macroeconomic challenges and the impact of those challenges on our customers and their research and development budgets.
This lowered expectation represents an extended softness in demand from existing customers versus our view from last quarter at product related demand would recover in the second half of 2023.
Further our services business, which has been growing at faster than the overall segment CAGR in recent years is now anticipated to decline in 2023.
And service contracts and opportunities we expected to achieve a lot of this ship not controversial at the rate anticipated.
This is due to a combination of factors, but mostly from customers rationalizing program spend shifting programs to later dates and dynamics had the overall expansion of industry wide capacity, which has led to more companies competing for fewer service contracts in 2023, which has also slowed the timing of commitments.
Overall as Trey mentioned, we believe we have a unique combination of best in class products technologies qualities and capabilities to support customers and market needs and a market with very exciting long term growth drivers at least in 2023, and we are seeing a smaller overall revenue opportunity and that is reflected in our updated guidance, we will manage through this.
<unk> here, while we set ourselves up for the future a future that we strongly believe in.
With regards to the gating of the remaining 2023 revenues, we estimate the third quarter total revenues in a range of $75 million to $80 million, which includes $15 million of scheduled COVID-19 related clean cap revenues descent.
This implies our fourth quarter will be slightly higher or in the range of roughly $80 million to $95 million total revenues up sequentially from Q3, partially due to the $7 million in higher Covid clean cap revenues, which should total about $22 million in Q4.
As a result of the lower revenue expectations for 2023, we have updated our estimated earnings metrics. We now anticipate adjusted fully diluted EPS in the range of <unk> <unk> per share to <unk> <unk> per share and adjusted EBITDA between $70 million $80 million. Additionally.
Additionally, we expect the following additional financial expectations as listed on Slide 18 interest expense net of interest income between $16 million and $18 million depreciation and amortization between $38 million at $40 million stock based compensation, which we show as a reconciling item from GAAP to non-GAAP EBITDA.
34 million to $38 million.
This also includes an ads it fully converted share count of 252 million shares and an adjusted effective tax rate from 24%.
Further we see net capital expenditures to be in the range of $55 million to $65 million this year.
Now before I turn it back over to Trey I want to personally thank Karl for the honor of being as financial wing that for the better part of 15 years.
From our early days working together through a complex global blood screening collaboration to ensure the safety of the global donated blood supply to the development and launch of arguably the most successful America other diagnostic instrument ever at Panther.
Through the successful sale of Gen probe to Hologic.
And over the past six plus years building out <unk>, where our investments in the <unk> enabled by mrna technologies played a critical role in helping and a global pandemic.
Carl you have undoubtedly left a meaningful mark in the history of life science tools and diagnostics and I sincerely. Thank you for letting EPA small part of that journey.
Now back to track.
Thanks, Kevin.
So to wrap up on slide 20.
Be more pleased to be leading <unk>, while we are facing some near term headwinds I'm confident in our resiliency and our longer term opportunities as we continue to innovate in mrna and build our product portfolio and other high value areas.
Even at these post pandemic low levels, we're still a profitable company and generating solid cash flow.
We're putting our cash flow to work with organic investments in our facilities human capital and product innovation. We will also continue to look for opportunities for inorganic investment to bolster our market position and provide our customers with additional solutions.
We are committed to building a strong foundation for long term sustainable growth of our base business and we will continue to focus on operational excellence innovation and people as our three strategic pillars.
Carl Kevin Becky drew and I are now happy to answer your questions. So I'll turn the call back over to the operator, and we will open the line for Q&A.
I would like to remind everyone in order to ask a question press. This tie and then number one on your telephone keypad.
Your first question comes from the line of Mike <unk> from Goldman Sachs. Your line is open hey, good.
Good afternoon, and thanks for taking my questions maybe the first one just on <unk>.
The weakness in demand in the industry you guys talked a lot about sort of where some of the issues and demand we're emerging biotech in China.
I'm just curious on the inventory side, obviously, that's another dynamic in the industry.
Any commentary you would have in terms of customer inventory levels and any issues on that front or is it really just sort of the demand weakness that we've been witnessing throughout the sector.
Well I'll just note that.
It's more the latter is the general weakness across the sector.
But.
Both of our large customers, who are just customers not having or COVID-19 during 2023 Im sorry.
Their employees would improve.
The third quarter, we have been very small set of inventory.
The bigger factor for both OUI.
Understood.
Got it and then Kevin just one for you.
How should we be thinking about sort of normalized margins understanding there is a lot of dynamics here with the revenue declines, but also the high fixed cost, but just given the volatility we've seen in margins how it shut down.
You kind of help us from a modeling perspective think about normalized margins for this business, mostly focused on nucleic acid rather than BSG.
Yeah. Thanks, Matt Yeah, you're right I mean, certainly margins have bounced around a bit and are pretty much tied to the changes in revenues.
If you look at what we did in the first quarter up 35% EBITDA margin and then the decline in margins out of that 2 million to $9 million or roughly 12%, 13% range and relate to things. There you have the high variable contribution tied to our revenues, which are north of 75%. So that's roughly half of that on the loan.
We're at $10 million in revenue and then one of the dynamics that we havent seen or has been as transparent just because of our high revenue levels and spend the impact within the nucleic acid production segment on manufacturing throughput at inventory levels of that referenced and we had a favorable $3 5 million absorption variance in the first quarter as inventory.
Levels went up and we add manufacturing outlets there been unfavorable manufacturing variances in the second quarter of $3 $5 million. So the combined impact of about <unk>.
$7 million, there quarter over quarter and that was the remainder of the drop in EBITDA that you saw so we will continue to see those sort of variations that were a little bit masked by the Super high revenue levels, we had over the last 12 quarters or so.
But youll see that a little bit more apparent as manufacturing levels go up and down throughout the year I would say a better proxy for the margin prospectively as what you've seen over the last 12 months, that's around 22% EBITDA margin should see some leverage on that as we increase revenues and control costs over that base.
Your next question comes from the line of Conor Mcnamara of RBC capital markets.
Your line is open.
Great. Thanks for taking the question guys first off Carl Congrats on the retirement just to iterate reiterate Kevin's point you. It's been great working with you over the years and you've done a fantastic job between Panther in clean Tech com.
Got it.
The global pandemic. So thank you and best of luck.
Yes.
So one question. Please and one question for Kevin just if you think about the long term growth of end markets within the nucleic acid market.
No.
Six months ago, we were talking about a 20%.
Both market longer term do you think there is anything there.
Going on right now that has impacted the long term views of where this market can go and then Kevin on the financial side, just how much of the.
Revenue guide downloads are pushed out from 2023 to 2024 versus just kind of a <unk>.
Our conservative view on what demand is.
Given all the challenges what's going on in the industry right now thanks for the questions.
Yes, Thanks, Conor I think we all believe.
Very firmly that we are in the right segments with the right technologies.
<unk>.
Definitely a turbulent times in the marketplace generally.
We have a great deal of faith, though in the long term mid to high double digit growth rates of our target markets. It's not a matter of if they return to growth of wind.
And we are just trying to navigate the turbulence at this time before taking off again.
So far we haven't seen anything.
Or heard anything from customers that leads us to believe that this will be a long term.
The impact to those markets.
Yes, and on your second question Contra slightly more than $100 million of.
A decline in the revenue guide, 35% of that around $40 million was attributable to our services business and Thats, where you really see.
Some of this timing get pushed out a little hard to parse that $40 million decline from what we previously were forecasting to what were forecasting now.
Budget prioritization.
Pushed out.
And potentially other factors within that segment, but that is sort of the magnitude of that.
Services decline that we're seeing and certainly some of that has resulted to privatization and companies taking programs that are little more in line with certainly leads to slower decision, making in Nashville, pushout timing further periods.
Great. Thanks for that guys I appreciate it.
Thank you.
Your next question comes from the line of <unk>.
Of credit Suisse, Dan Your line is open.
Great. Thank you.
And congrats as well Carl to be able to retire.
Appreciate it.
So a couple of questions first off on the updated clean cap forecast.
I appreciate that.
Clothing clean cash forecast I appreciate the new forecast Israeli reflecting your firm orders in hand, but it's still a big ramp into the second half of the year compared to the first half.
It sounds like these are all take or pay obligations do.
Do you worry at all that by enforcing these obligations the inventory overhang for Covid clean cap is going to continue into 2024 or are there reasons why that wouldn't be a problem.
Yes, yes, Dan specifically I don't think we're forcing these obligations here. This year. This is really these are actually not related to advisor violin taxes or other customers in other regions and this is specifically our scheduled program with them to support.
The finalization of their products and the launch of their programs. So I think these are very tied to where our customers expected usages this year and.
We never know exactly what the uptake is going to be at the end of the quarter hour at the end of the year related business goes lower seasonal but as it relates to the $65 million. This year really tied to specific programs.
Our specific customer needs and I would consider them stocking per percent.
Understood. That's helpful clarification, and then my follow up are you able to speak to how the opportunity funnel is building for Flanders to.
More fully integrated drug substance for mrna.
Yes.
We are and.
As we as we released here to those lenders to building has.
Gained occupancy at this period, we continue to work on splitting that out.
But their commitments are being worked in the <unk>.
And I think I'll pass it to Becky to get a little bit more specific about that.
Yes.
Thats good reception.
Q.
Kennedy's housekeeping, we see the demand.
Continued.
Meet our milestones on hurricane disruption.
<unk> already made way through 2024.
Blind to continue some of that program.
Phase one material now for <unk>.
Service Center sales programs and clients.
And our clinical trials as familiar.
Yes.
Your next question comes from the line of questioning Charles I'll bet Catherine Your line is open.
Hey, guys. Thanks for the questions I guess first can you just give some initial customer feedback on clean cap.
What's been the mix of interest between existing and new customers have you seen any interest in genetic customers.
Yes. Thank you.
We are really thrilled with.
The early response to Kathryn six second half, we launched just last quarter I'll hand that one to drew currency more specifics.
Yes, Catherine has been it's been an exciting uptake for us customers.
Quite interested in that really runs the gamut from large vaccine companies to large pharmaceutical companies that are pursuing non vaccine applications. Two smaller mrna focused companies. So it's been pretty much across the season.
We've had a lot of customers come back for Reorders. After initial purchase so we're pretty excited about Lloyd's and so far.
Alright, great and Kevin you talked about your cost structure, a little bit you've made a lot of investments expanding capacity for nucleic acid production that you might not be filled in the timeframe you expected at the time of those investments are there any facility rationalizations that need to happen that bring down debt.
Given the lighter topline and any other cost actions that you're taking.
Yes, certainly I mean, I think our commitment to the facility footprint. We have is remains steadfast because we think that's the right thing right solutions capabilities for our customers long term and these are obviously multi year investments that are incredibly important I would say as it comes to best matching our expense structure.
Through our revenue structure that will.
It's something we actively manage I would say that we're going to continue to resource.
Flanders dosing as we see the demand in this thing is that he spoke to that will be how we finalize our late stage development, how we ramp up the labor how we move people from existing facilities to new facilities based on the mix of that revenue.
One is the range to the overall cost structure, yes, certainly we are already taking actions to minimize discretionary spend being very selective with our labor with how we access will look at supporting our base of business, but at the same time balancing that with the opportunity we still see and are very excited about and that continues to mean, we need the right commercial.
We also need the right innovation group is doing amazing work.
I would say that when you step back and you look at our cost structure as you know a lot of it is people and facilities, but even with that I would say our labor efficiency metrics.
When you define them as revenue per employee are still amongst the very highest in lifestyles tools and diagnostics that nearly half a million dollars per head of contribution so.
We are sensitive to and look to balance, but it's also something that set up.
A favorable attribute of our business model.
Your next question comes from the line of Jesse <unk> from Deutsche Bank, Jesse and your line is open.
Hey, good afternoon, everyone.
Where are you now with your our UO turnaround time, and then can you provide us with just an updated number for total clean cap.
For the year.
Okay.
Yes. Thank you so our UO mrna turnaround time is now in the.
In the weeks.
Usually four to six weeks and we have active programs to try to continue to cut that down as quickly as possible to really enable the entire discovery funnel in that space.
Sorry, what was the second part of the question.
Yes.
What what total cone cap outlook is for the year.
Total clean cap outlook.
Yes, I mean, you couldn't cap revenue.
So we've talked about this a little bit in the past.
Yes.
On a year to date basis clean cap revenues sitting at $56 million in that Covid pieces, a little over $27 million. There. So as drew mentioned very strong growth in the quarter.
Roughly 21% on a year to date basis, nonwoven clean gap's grown 16%, so really really strong growth on our <unk> franchise.
To date in indications that helps us.
Got it and then just a follow up on in terms of can you talk a little bit about the competitive landscape.
This year, we're benefiting at all from the improved throughput times.
Any difference from what Youre seeing from competition.
Competition here domestically and then.
In APAC.
Yes.
I'd say in APAC as well.
Yes.
Okay.
Domestic <unk>.
So there are a couple parts to that domestic <unk>.
Mrna is as competitive I would say there is likely more competition in the G&P space as people have as many players as you know build.
<unk> facilities and at.
At the same time the market is rationalizing programs as we've discussed many times. So I would say the competition is more in the.
Later phase GMP space.
APAC, specifically I don't think we've seen anything different.
Different.
There is a weakening marketing market environment, particularly in China as we've discussed.
Competitively I don't think that has changed from previous updates.
Your next question comes from the line of.
Go ahead Kevin.
From Morgan Stanley Your line is open.
Hey, guys, good evening and Carlson wrapping on the retirement here.
Maybe two.
Kick things off I, just wanted to ask you about <unk>.
The assumptions baked into the guide Kevin in terms of things like the current weakness in China continuing in the budget flush dynamic that you are assuming for the fourth quarter.
And then just the magnitude of the repeated Scott Steve apps through 'twenty three what drives your confidence that the outlook is now fully derisked. I mean is it supported by sort of bottom up more frequency of check ins with your customers have gone up anything else that you can point to to sort of address this air pocket in demand and enhance the near term visibility that you guys have.
Yes.
Yes, sure I'm happy to take that yes, I think as we look to the back half of the year on the numbers frankly are such that our range incorporates anywhere from the back half beyond the base business being down roughly 5% being up roughly 15% at the midpoint I think it's on a second.
Second half of the year, that's maybe about $7 million higher than the first half so about a 6% growth I think we are seeing.
Leveling out certainly our biologic safety testing business, but around this level for a while.
Were seeing some old customers that didn't order.
For the first half of the year starting to reorder, so thats a positive sign.
We are seeing in the order book coming into the quarter Thats pretty consistent with what we've seen before and much higher than where we were starting the second quarter. So that's another positive sign.
So that gives us some comfort that this is the right range for the second half of the year specific as it relates to China kind of across the business Thats about $59 million impact to the overall take down most of that was seen our biology safety testing business as we've been saying since the second quarter of last year, and we're not assuming that that is a growth region for us anymore.
I mean that was probably in the magnitude of a 25 ish million dollar a year business from ROI overall and growing a little bit it can obviously be substantially less than that in 2023.
Got it that's helpful.
And then one quick follow up the first part is really on biotech can you just talk about your current sort of exposure to smid cap biotech customers on a revenue basis and then.
Kevin.
A question for you on an EBITDA margin really I mean, I think <unk> clocked in at around.
The 13% range or the guidance, assuming a bump up to about 25% just walk us through the puts and takes there I know you mentioned somewhat of that.
The manufacturing variances and a swing associated with that et cetera, but just help us build a bridge from 13% to 25% in the back half. Thank you.
Yes, I'll handle this certainly the second part of that question.
As I spoke to you I really I think the right proxy for one of our first six months is around 22%.
Adding to a little bit higher than that for the full year, now, which assumes a little bit of margin increase in our C&D step the higher revenue levels in the second half of the year very high variable margin incremental COVID-19 revenues that we're going to see in the second half of the year.
As we flushed out a good deal of some of the overhead variances here in the second quarter at the risk of that being negative in the second half of the year is to minimize it as well. So he can take that along with the controlling costs and discretionary spend that we're certainly managing to match the revenue levels I think to the extent we have that.
At these ranges literally a comfortable margin for us for the full year.
Circling back on the exposure to the emerging biotech ethicon assets trade for now.
Sure. We obviously were continuing to monitor that as approximately 30% just to answer the question outright.
Revenue that can be set to come from emerging biotech depending on how you draw those lines.
That said we.
We are we are not seeing programs of significant size that are being pulled for funding necessarily.
The prioritization is more of the issue there.
But to answer the question directly we're at about.
30% the way, we classify small and mid cap.
Your next question comes from the line of Matt Larew, William Blair, Matt. Your line is now open.
Hi, this is actually modeling on Vermont.
I was just wondering I think that a large question I think you said $40 million.
Yes.
That guidance was coming from a decline in services revenue can you talk at all about the difference in margin profile for the services revenue versus the products revenue.
Yes, we don't really get into specific margins on a product by product basis, it's always a little bit above.
Our to do just because we do have the fixed cost structure and our people do move from pro farm.
Builds on the services side of the supporting product sales and other things that some of this is a little bit fungible.
So we don't specifically guide to that to kind of look at it on an overall segment basis more than anything else.
But I would say when we look at our overall revenues. The two things that are distinct one we've seen continue to see strong variable margins and consistent pricing across the product portfolio, which is a positive on the services portfolio. We do to take our current cost structure and <unk> did those products down in rental gross margin calculators to ensure we have the sort of.
Margins that we're looking to maintain and we still believe that we're at a competitive price point on our services and solutions and our products versus competition out there today.
Great. Thank you and then one thing I think we've heard from peers. This quarter is that some of the headwinds that originally were confined to that emerging biotech have now in terms of like pipeline relaxed utilization Conservatives and things like that are now spending more to large pharma is that something that you've experienced as well.
I'll take that.
I think that.
We've got a little.
A little bit of a different customer profile with either the large life sciences, others four of <unk>.
Sure.
Suppliers, what I think happened as we saw the bench on the funding and the resulting.
Higher to conserve capital as part of our customers, we saw a little bit later than it was apparent to some of the other players in the industry wide.
It would be pure speculation on my part, but I think a lot of RNA therapeutics.
Players were very positive, but wasn't the case preparing the broader market.
There was kind of this.
Winter coming from a funding point of view I think the trend among our emerging biotech customers and accelerated we saw the names with few of our customers in the paper.
Past quarter that we hadn't seen before.
So I do think that we're not immune from the broader questions on it.
Places like China.
Relatively speaking it was a smaller part of our business.
800 $900 million of revenues no it becomes more obvious.
Your next question comes from the line of John <unk>, John Your line is open.
Thanks, Carl Best of luck in retirement and Trey Congrats on assuming the.
Overall.
When you look at some of the demand headwinds you talked about there you kind of bucket it prior.
Organization is delayed capitalizations anyway, just to kind of further bucket that down and would you be willing to quantify what percentage or a dollar amount around the cancellations you've seen in the quarter or year to date.
Well I don't think that we've seen in the system.
<unk> solutions in the quarter.
We would prefer.
Recall allows.
I'm looking around the sooner we will see if anybody is shaking their head.
We've got a great answer for you.
Voids.
So.
I think the the biggest impact we have seen in the last two quarters, the superbowl surprised those against our prior forecasts.
To conclude really emerging boats.
There is.
Hundreds of willingness.
Doug Townsend significantly for us and I think it probably had.
Outsized impact if you will of a services business and so if you were looking for was the major drivers there.
I don't know, if <unk> and student loans.
Currently.
<unk>.
Thank you.
Thanks.
Multiple candidates in our pipeline.
Okay.
Pause.
Advancing their phase, one, which is where our TMT circumstances today as an offering and instead take candidates later phase all words click down investment there both announced people and Youre recharge.
And then in terms of things that that pipeline I think will come back.
That airplane.
More spread out game instead of taking five molecules through baseline staining pausing their baseline taking unchanged.
Three and keeping that funding.
Rich.
Rich.
Yes, I think that actually takes us perfectly to time thanks, everybody.
For your questions and I will pass it back to Jimmy.
Yes.
This concludes today's conference call you may now disconnect.
Yes.
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Yes.
Yeah.
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Okay.
Okay.
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