Q1 2024 Catalent Inc Earnings Call
Hello, all and welcome Chee catchments basketball to fiscal year, 'twenty 'twenty four earnings call.
My name is Lydia and there'll be your operator today.
If you'd like to ask a question during the Q&A you can do so quick question Star followed by the number one on your telephone keypad now.
I'll hand, you over to hoist <unk>, Vice President of Investor Relations to begin. Please go ahead.
Good morning, everyone and thank you all for joining us today to review catalysts preliminary first quarter 2024 financial results.
Joining me on the call are John <unk> Executive Chair of the Board Alessandro Maselli, President and Chief Executive Officer, and Matt I'm afraid of Itch, Senior Vice President and Chief Financial Officer.
During our call today management will make forward looking statements and refer to non-GAAP financial measures. It is possible that future results could differ from management's expectations, including as a result of the finalization of catalogs fiscal 2023 in the first quarter of fiscal 2024 financial statements. Please refer to slide two of the supplemental.
Available on our Investor Relations website.
Investor Doc catalog dot com for a discussion of risks and uncertainties that could cause actual performance or results to differ from what is suggested by those forward looking statements and slides three and four for a discussion of catalogs use of non-GAAP financial measures.
Please also refer to as catalogs annual report on Form 10-K for the year ended June 32022, as amended catalogs quarterly report on Form 10-Q for the three and nine months ended March 31 2023.
Our filings with the SEC for additional information on certain of 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 John for some brief opening remarks before handing it to Alessandro commentary for these two presenters is covered on slide five.
Thank you Paul good morning, and thanks for joining us today.
Before I turn the call over to Alessandro I wanted to share a few comments on our quarter and on our progress our management team and our strategic and operational review Committee have made over the past two and a half months toward achieving our goals.
As you saw in the earnings release and will hear further from Alessandro we have delivered a solid first quarter and are confirming our full year guidance.
Given the turmoil in many of our markets. We are pleased on both fronts.
In addition.
<unk> and his team have brought a renewed focus on cash flow and we are encouraged by already seeing benefits from improved working capital management and greater analytical rigor around capex spend thus far in the year.
I want to reiterate that we expect a catch up on our fiscal 2023 and first quarter 2024 SEC filings later this month.
We've been working tirelessly to finalize these documents over the last couple of months.
Matti will go into additional detail on this topic later in today's call.
Finally, I'd like to comment on the work underway by the Board's strategic and operational review Committee.
As you will recall, we formed the committee at the end of August to conduct a thorough review of our businesses strategies operations and capital allocation priorities with a view towards maximizing the long term value of the company.
Since then the committee has made progress identifying and evaluating a number of options to maximize long term value creation for shareholders.
We continue to work closely with Elliott as we thoroughly evaluate these strategic options and we look forward to sharing a more detailed update with all of you at a later date.
Let me wrap up by emphasizing that the entire catalyst team is working hard to execute against our strategic plans.
Order to improve performance and create value.
You'll hear today, we are confident in the value of opportunities that lie ahead and are pleased that our first quarter performance puts us on track to realize our 2024 plans with that I'd like to turn the call over to Alessandro.
Thank you John good morning, everyone.
I am proud of the work of the Covenant team has done to deliver a strong start to our fiscal year 'twenty four.
We delivered a solid financial performance in the first quarter.
<unk>, 5% non coffee revenue growth.
While also progressing on all fronts.
Our operational improvements.
I Echo Johns confidence in our plan.
And I am pleased studios.
Our fee Scout 24 guidance today.
Why did the macro headwinds that we started to call out in November of last year steel present.
The strength of our pipeline spanning fleet.
Allowing us to continue to guide to a needed to high teens revenue growth rate for this year when excluding coffee related revenue.
Key factors underpinning our confidence include.
Continued high demand for our gene therapy Saturday season.
Expanded exposure to GOP, one demand as we bring gap of more lines.
And a very strong rate of new approvals that we have.
<unk> seen in the pharma and consumer health segment in this calendar year.
We continue to address the under utilization at some of our new facilities.
Boston, our commercial efforts to accelerate the new business wins.
As a use our capital deployment in affected areas.
All the while focusing our capex on projects that leverage high demand areas.
We also need the measurable progress in implementing operational improvements in our biologics segment, resulting in favorable performance strength over the last few months.
Quarterly sequential 1400, the basis points improvement in EBITDA margin.
We are committed to demonstrating what we believe is our unrivaled ability to run the best drug development and manufacturing facilities in the award.
Both to our investors and our customers.
To help us achieve these goals.
Recently appointed the debit to make Catalina as the group President of our biologic segment.
Daily debt previously SVP of logs out of the Bioscience business. He is a seasoned and highly successful business leader.
With a record of developing winning strategies that drive growth and create significant value.
We are an agile by immediate.
Positive impact is already making on the business.
In biologics, we have seen the impact of operation on the enhancement and strong commercial demand on our financial results.
In the first quarter.
Our drug product business in <unk>, and our gene therapy business in BWI.
<unk> had a strong year over year and sequential growth.
As well as margin improvements.
As you know the.
<unk> serves the multiple programs with our largest customer so wrapped up.
As well as many programs for other customers.
Our pipeline of both gene therapies LC <unk>.
Including several programs in late stage.
One of which was the recently signed.
As a reminder, the late stage programs are generally insulated from softness in the biotech funding environment.
Our World Class team continues to ramp operations and work around the clock to meet select us demand.
And manufacturing goals.
<unk> recently confirmed their scale up plans for calendar 2024.
So let me got bought us.
And we expect revenue from desktop customers to grow approximately 65% that this fiscal year.
As we manufacture product for the U S market and the rest of the award to <unk> and <unk> partners.
Additionally, I'm very pleased with the progress we are making on our working capital initiatives, including the content assets.
Which Marty will provide additional details.
In Bloomington.
We continue to improve operational performance and we ramp up the assets needed to satisfy.
Demand across multiple new products, including the <unk>.
As a result of these multi sites progress we.
We expect to exit the fiscal 'twenty four with the more normalized pre fund any <unk> in the biologics segment.
Moving to pharma equal to meta health.
This segment delivered first quarter and in line with our expectations with the solid organic growth when excluding our consumer health business.
But have any growth in the <unk> is expected to decline in the first half of fiscal 'twenty four and then returned to growth in the third quarter.
This growth is driven in part by an impressive commercial wins in the first quarter.
Our new strategic contractor, we one of the leading consumer companies foot our gummy be offsetting.
This is in line with our strategy to leverage the <unk> brand to increase the penetration of the legacy <unk> business in the adult global consumer companies.
We need these contractor this important contract, while making progress on other exciting business development activities bolsters my confidence in our ability to achieve our goals for the BCH segment, the full months in fiscal 'twenty four and beyond.
Before I hand, the call to <unk>.
I would like to touch on some important and exciting updates about the biologics business on the commercial front.
Our exposure to the GOP one opportunity is rapidly growing.
We are now forecasting that the larger majority of our current and future Prefilled syringe capacity coming online in fiscal 'twenty forward through fiscal <unk> is expected to be booked soon.
Both of these exciting category of products.
Confirming our.
Our position as a leading CDN mowing diesel space globally.
We have plans to accelerate our investments in this area.
We see our existing sterile fill and finish facility in Bloomington and anatomy.
Including partnering with our customers.
We believe we are already beginning to see the tail winds from this category.
Just for reference.
In fiscal 'twenty four.
We expect revenues of less than $100 million from <unk> one programs.
Once all these line I just referred to are completed and running get scalar.
We anticipate that this product category to contribute well over half a billion dollars in revenue.
As you all know <unk> presents an enormous opportunity for growth in the coming years.
The major role that covenant will play in bringing these important innovation to market.
Especially so soon after our contributions during the Covid pandemic is a testament to our unique capabilities and positioning.
Catherine its board.
Our management team remains confident in the future of our company as we continue to make strides towards improving our operations and bringing our marching performance back to pre COVID-19 level with urgency.
While growing the exposure of the company in the most exciting areas.
The biopharmaceutical service industry.
We remain focused on delivering value for all our for all our shareholders by executing on automation to improve the lives of patients every day.
I will now turn it to Marty for a discussion of our Q1 financial results.
Thank you Alessandra.
I'd like to begin with an update regarding the status of both our annual report on Form 10-K for the fiscal year ended June 32023.
And quarterly report on Form 10-Q for the fiscal quarter ended September 32023.
While we have implemented improvements in our accounting and finance staffing and related closing processes.
As we noted in our notification of late filing on form <unk> 25 filed on Monday.
We were unable to file our 10-K and 10-Q on time.
We require additional time to complete procedures related to managements assessment of the effectiveness of over of our internal controls over financial reporting as of June 32023, and other closing procedures.
This has included procedures related to managements assessment of the measurement and timing.
Of a noncash goodwill impairment of approximately $700 million.
Which relates primarily to acquisitions in the company's consumer health and bio modalities reporting units and its pharma and consumer health and biologics segments, respectively.
Please note that for purposes of providing our preliminary first quarter fiscal 'twenty four earnings we have assumed that the noncash goodwill impairment will be included in our first quarter results.
We are also incurring substantial time to review other closing procedures supporting our 10-K and 10-Q for both reporting periods.
We expect to file the Form 10-K on or before November 27, and we expect to file Form 10-Q promptly following the filing of our 10-K.
Additionally, based on currently available information and subject to completion of our evaluation of the potential impairment charge as well as the preparation of our financial statements and assessment of our internal controls.
We do not expect any material change to the financial results to be included in Form 10-K compared to the financial information reported in the preliminary earnings release Cowen furnished to the SEC on form 8-K filed on August 29 2023.
We appreciate your patience as we work through and complete our closing procedures.
Moving on to our preliminary first quarter results, starting with the consolidated numbers on slide six.
Net revenue in the quarter was $982 million down 4% on a reported basis and 6% on a constant currency basis compared to the prior first quarter.
This decline is primarily attributed to the significant reduction in cogan revenue of approximately $85 million in the quarter as well as a one time $30 million licensing fee in the prior year.
This was partially offset by constant currency revenue growth in the rest of biologics of 11% and 5% and PCH.
The metrics acquisition, which is reported in the <unk> segment and closed in October of 2022 accounted for 2% growth on a consolidated basis.
Our first quarter, adjusted EBITDA decreased 38% to $115 million or a margin of 11, 7% versus margin of 18, 3% in the prior year quarter.
On an organic basis, our first quarter adjusted EBITDA declined 45% compared to the first quarter of the prior year, primarily driven by a decline in Coke Covid revenue.
I will speak further to the major drivers of these results in the segment commentary.
Adjusted net loss was $19 million or a loss of <unk> 10 per diluted share compared to adjusted net income of $61 million or <unk> 34 per diluted share last year rec.
Reconciliations from GAAP net earnings to each of adjusted EBITDA and adjusted net income are in the appendix.
Buyback.
Excluded from adjusted net income are the non cash goodwill impairments totaling $700 million adjusted.
I just reviewed.
Now I'll discuss our segment performance, where commentary around segment growth will be in constant currency.
As shown on slide seven.
First quarter net revenue and our biologic segment was $447 million or.
A 16% decrease compared to the prior year quarter.
The decline is primarily driven by significantly lower year on year Covid demand.
First quarter Covid revenue of approximately $100 million.
Represents a decline of approximately $85 million from the prior year period.
On a non COVID-19 basis biologics revenue in the first quarter was in line with the first quarter of 2023.
When excluding the one time $30 million licensing fee signed in the prior year non COVID-19 year on year revenue growth in this segment is approximately 11%.
This result was driven by double digit revenue growth in gene therapy, non COVID-19 drug product and drug substance offset by a decline in cell therapy.
The Bar chart on slide seven illustrates the biologic commercial and development revenue streams.
The classification of development versus commercial is driven by the contractual language, which does not always align with the regulatory status of a given product.
A large drop in development revenue in the first quarter had two primary drivers first the year on year decline in Covid revenue that has been designated a development revenue and second a large gene therapy product, whose revenue was treated as developed revenue a year ago is now treated as commercial revenue.
Moving to EBITDA.
<unk> segment first quarter, EBITDA was down $61 million year over year to $52 million.
But was up $64 million sequentially from a $12 million loss in the fourth in the fourth quarter.
The sequential improvement from the fourth quarter. The first quarter is primarily a result of improved productivity and schedule adherence and the BWI and Brussels facilities.
Margin was 11, 6% compared to 21, 5% recorded in the prior year and up 4500 basis points sequentially.
The year on year drop in EBITDA margin was primarily driven by Covid declines as well as underutilization at new modality facilities, including our cell therapy business.
We reduced our cell therapy cost structure during the quarter and expect improved performance in the second half of fiscal 2024.
Similarly in Bloomington, we have formalized a transformation project that will help drive margin improvement this year and in the future.
When combining these prudent actions and our projected increase in revenue growth, we expect our biologics segment to improve margins on a year over year on a year over year basis with a more pronounced impact as we exit the fiscal year.
Our non COVID-19 non <unk> biologics business is expected to grow in the low to mid teens in fiscal 'twenty four as we launch GOP one production.
And bring on incremental capacity and improve productivity.
Importantly, we have high visibility over this growth given the strong demand from customers.
As a result of our unique scale and capabilities and sterile fill finish we continue.
To install and qualify new pre filled syringe lines and our global network and are excited to have more preferred lines on order as part of our committed capex spend coming online in fiscal 'twenty five 'twenty six.
We believe this investment will drive a highly attractive return on capital for Catlin over the long term as we install and validate those lines in our existing facilities.
As shown on slide eight our pharma and consumer health segment generated net revenue of $535 million in.
An increase of $23 million or 5% compared to the prior year first quarter.
Segment, EBITDA of $101 million down $10 million or a 9% decline over the same period.
The segment's revenue growth was primarily driven by the prior year's acquisition of metrics.
On an organic basis. This segment declined 1% as growth in prescription products and clinical supply services was outweighed by softness in consumer health.
We expect consumer health to decline in the first half of fiscal 'twenty, four and return to year on year growth in the second half of the year in part due to the recently signed substantial contract with their Premier consumer Health company.
Adjusted EBITDA margin of 18, 9% was lower by 280 basis points year over year from the 21, 7% recorded in the prior first quarter.
The decline was primarily related to under absorbed capacity in the gummy network and the impact of a one time $10 million insurance benefit received in the first quarter of fiscal 'twenty three.
PCH has strong underlying fundamentals and continues to perform at a high level.
Slide nine discusses our debt debt maturities related ratios and Capex plans.
Our debt load remains well structured and allows for good flexibility. Our nearest maturity is not until 2027.
Our primary debt covenant is the ratio of net first lien debt over the trailing 12 months adjusted EBITDA.
The covenant requires this ratio to remain below six five times and.
In the September 30th actual level was three four times.
Catalysts overall net leverage ratio as of September 32023 was seven four times, a sequential increase from the fourth quarter at six four times.
Driven by the lower year on year last 12 months adjusted EBITDA.
Because the EBITDA portion of the net debt leverage ratio as calculated on an LTM basis. We expect this ratio to peak at the end of the second quarter due to the significant decline in Covid revenue on a year over year basis, and then rapidly improve in the second half of the fiscal year back to the June 32023 level.
Our adjusted EBITDA recovers to more normalized levels.
One of our top priority remains reducing our leverage.
And as we disclosed last quarter, we are taking a number of steps to achieve this.
Including reducing working capital ensuring that capex spend is aligned with our strategic initiatives with shorter payback periods, and maximizing EBITDA with revenue growth and cost structure alignment initiatives.
With these initiatives underway, including the recent Finalization of a contract amendment with one of our large customers in gene therapy, we expect to significantly improve our cash flow generation as we substantially reduce the level of contract assets.
We now expect free cash flow to be in excess of $100 million in fiscal 'twenty four.
Versus our initial expectation of mutual.
We continue to identify opportunities to drive further free cash flow generation for the year.
Our combined balance of cash and cash equivalents as of September 32023 was $209 million a decrease of $71 million from June 30 of 2023.
The decrease in cash was driven primarily by an increase in contract assets in the quarter related to the ramp up production to meet customer demand.
As of September 32023 contract assets had a balance of $543 million, a sequential increase of $107 million up $82 million year on year Importantly, we expect the contract asset balance to decrease going forward.
At September 30, we had one strategic customer a majority of whose business relates to our gene therapy platform that represented 30% of our one $4 billion in aggregate net trade receivables and contract assets.
We continue to can convert the contracted assets to accounts receivable.
And received timely payments from the customer.
As such we are very confident about the collectibility of our contract asset balances the reduction of which will accelerate as a result of the previously mentioned contract Amendment.
The same customer represented approximately 16% of consolidated revenue in the first quarter of fiscal 'twenty, four or approximately $155 million. We expect revenue contribution from this customer to also be approximately 16% of total consolidated revenue for the full fiscal year.
We have clear line of sight into this outlook given already committed orders.
Finally, capex in the first quarter was $84 million.
We continue to expect Capex in fiscal 'twenty four to be in the range of 8% to 10% of revenue representing approximately $400 million.
Please now turn to our financial outlook for fiscal 'twenty four as outlined on slide 10.
With a third of the fiscal year behind us.
We are confident in reiterating our fiscal 2000 and for guidance, which includes net revenue in the range of $4 three to $4 5 billion representing growth of 3% at the midpoint.
Adjusted EBITDA range from $680 million to $760 million and adjusted net income in the range of $113 million to $175 million.
Our underlying assumptions are largely the same with the exception that we now expect COVID-19 revenue of approximately $180 million.
$50 million more than our previous expectation of $130 million.
Roughly offsetting the coat revenue increase or unfavorable FX rates in the euro and British pound.
As a reminder, our.
Non COVID-19 business is expected to continue to deliver strong performance with full year revenue growth in the mid to high teens for the company.
This is driven by roughly 30% growth in our non COVID-19 biologics portfolio, including approximately 65% revenue growth from our largest customer.
Which at this point of the year is largely contracted.
Non COVID-19 non throughout the biologics segment growth is expected to be low to mid teens.
Driven by Tech transfer activities.
In PCH, we continue to expect mid to high single digit growth.
As we ramp up our non COVID-19 business and align our cost structure, we expect margins for the company and the biologics segment to recover towards historical annual EBITDA margins as we exit fiscal <unk> fiscal 'twenty four.
We forecast roughly two thirds of consolidated adjusted EBITDA to be generated in the second half of the year Eric.
As shared on our last call. The overall expected revenue split is more balanced with approximately 55% expected in the second half of 2024.
In closing our priorities for fiscal 'twenty four remain intact.
To improve our margins by supporting productivity and cost alignment plants.
To deliver incremental free cash flow by lowering the company's working capital intensity and maximizing commercial opportunities and finally to strengthen our internal controls and processes over financial reporting and forecasting.
With thorough careful analysis and disciplined execution of our cost structure, we're making steady progress against these initiatives and are optimistic in our continuously improving performance throughout fiscal year 2024.
Operator. This concludes our prepared remarks, I would now like to open the call for questions.
Thank you Dave.
A question followed by the number one if you'd like to ask a question and answer all your devices, Amit you'd likely when it joins anticipate maybe change your mind all your questions have already been on Julia question by question Star followed by the number.
Our first question today comes from Jeff Silber.
<unk> of Morgan Stanley Your line is open.
Hey, guys good morning, and thanks for the time here.
Alessandro one on <unk> for you to kick things off you've talked in the past of not baking in the label expansion for elevated into your forecast. So I think as you alluded to said they want to manufacture and dissipation of the unrestricted label ahead of FDA decision. So how should we think about the implications of that.
In terms of perhaps potential upside for you in your FY 'twenty four guide does the $700 million or so that you are baking in for sort of after the midpoint factor. This in light of your comments that I think you said, you're starting to get orders.
From now for that incremental production and then in terms of the potential downside to fiscal 'twenty five if the FDA doesn't allow for label expansion any any sort of framework that you can help us think through that dynamic here.
Sure, Hi, Hi, Hi, everyone.
This is a good question I would tell you overall.
That is the relationship with more than <unk> that is a lot of positive momentum into the relationship. The way you think about that.
Number one I want the full months really.
Our Q1 performance was really underpinned by a strong operation up a full month that our BWI facility, where we support the.
But even with these amounts have been even more the a shooting to that we add on the right path for monetization of the full months of standpoint, the contract amendment to that.
<unk> mentioned, which will really allow us now to normalize more.
The time to cash profile of <unk> booked on contract that we should in terms of what it used to go into that setting tool, but cash flow.
I think he also the DFM demur.
Demand that we've seen in the reason we're so so going to your question really look our job is to continue to leverage the capacity that we have deployed.
The suites with which we are supporting the cosmetic look here to now sustain that these very good the level of a full months, which is the one that will will allow us to satisfy these demands.
And in terms of your last part of your question Denzel view I will not speculate of course on the on the label expansion of FDA.
It's not my place to do so, but the Danville, but making model and working through your model.
I will remind you that as with these closing these are 50% of the revenues.
US through revenue the timing at a fairly low margin.
Our mid to high single digit margin that these added <unk> testing services, we buy on behalf of the customer so.
This could the I believe it can be helpful.
In modeling these out.
Got it that's actually helpful.
And then I wanted to ask one on just.
Ex Covid <unk> growth on a sequential basis.
Just doing some quick math here. It sounds like you guys had about $235 million in biologics revenue last quarter that went to about maybe 185 ish. This quarter and so can you just walk us through the moving pieces. There I know you gave color year over year, but just sequentially and I know you've got the fill finish capacity.
Utilization for Covid here did that play a role in this or was it sort of some of the cell therapy work declining and then on your comment on the significant G. L. P. One ramp over the next couple of fiscal years for you or any color on the slope of that increase and that the cadence at which you expect this new capacity to come online.
Yeah sure look I guess I'll call. It the GOP, one and then hand over to Maggie to give you some it but equally exciting Q1, but when it comes to GOP. One I would say for this fiscal year is fundamentally a cycling off the story right. The second half is really wet.
The commercial production is going to start the.
<unk> on the on some of the new assets.
I would also add to that as I said, we expect significant new capacity coming online that between fiscal 2014 fiscal 'twenty 30 seats.
And probably the way you should be thinking about these is totally that each of these given years.
We can have more than doubled the capacity that is going to be deployed against the GSD. One so any given year.
So there are a lot of lines did that already installed and they are being qualified as though some of them will come off the back end of this fiscal year full strength next year that Easter phasing to that next year is really going to be a full year's story not only H two.
And so I believe that assuming that there will be more than doubling the capacity available for these demand and the fact that we have a very strong visibility to the demand can be useful for you to understand that the ramp.
Yes, so Matt.
Yes.
So buying <unk> not <unk>.
<unk> revenue and then stripping out the $30 million licensing fee from the from the prior year quarter were up 11%. So I think I put that in the script and I think I've talked about that but maybe you didn't pick it up but when we can.
We can we can reconcile I was just talking about the sequential trends there Matt.
What happened in <unk> versus <unk> not year over year.
Oh beta so fourth quarter, so clearly R V.
BWI business has really kind of come has kept bounce back and in Brussels continued to improve and so those are the two primary businesses.
The wip in the gene therapy business with a ramp with our ramp up as I discussed in the script.
Obviously, our <unk> gene therapy businesses as well.
Got it thank you.
Our next question today comes from Nick Zarcone.
Luckily.
Your line is open.
Great. Thanks.
Just kind of want to dig in here on the.
The overall gene therapy franchise, and how big this is for you I know that you have you guys are always bucket. It is your maps and other drivers of indications and kind of be helpful. As you think about the rest of the gene therapy business outside of the strip.
Throughout the nine zero on our elevate as drug.
Hi, Thanks This is alessandro.
Look first of all let me clarify our protein business is not classified on the gene therapy, we call. It <unk> and thanks for the question because we end up being a very good year in into acceptance and I do believe that is a good momentum going forward there.
We had a lot of the seeding of exiting that business over the last several years.
And now it seems that the harvest tiny scanning.
A significant amount of our late stage program are heading toward commercialization and some of them very exciting.
He'd been acquired the <unk> muscle data extended the extended patient populations, so very exciting areas.
<unk> B will be a great contributor as we go forward in terms of the gene therapy business as I said that we have a pretty balanced portfolio I'm on threat.
As well, we have assembled our programs with them some of them very exciting.
But also that he is I've seen this on the good momentum there.
Some some program of getting to some Italy that include the clinical data.
Which made the customers multiple issue moving full steam ahead in that scaling up.
So look the biotech funding environment. It is what it is though we were the first <unk> to go.
It remains a little bit uncertain, but when you look at our own portfolio in our own pipeline.
I feel pretty pretty good about it.
Hum.
<unk> remains a little bit.
Where we have reviewed our outlook there we have our VSS that outlook.
And so it just because it might be said, we've taken the opportunity to really rebalance.
The.
Social there and this will be a driver of margin improvement going forward, because now we're going to suffer by much less under utilization and negative EBITDA, but the day or so.
Hopefully this gives you a little bit of call it out because of all the different sub segments.
Yeah that helps and then I guess on the biologics there's elevated pass through coming through here you have the <unk> depends.
Also with the Rep do you guys kind of called that out can you can you update like how much of the.
The business comes from the sourcing and then are you seeing a similar margin that you have in the past there or is this going to be elevated.
Like we saw with the Covid sourcing.
When you think when you think of the.
The biologics business and the pass through revenue.
<unk> has about a 50% pass through content and that's materials testing the balance of the businesses between <unk>.
15% to 20% is where it sits.
Perspective, and the margins are a little bit different margins are pretty low as we as we articulated on the <unk>.
I'll start articulated so.
Recipes and they are probably I would say mid to mid mid to.
Mid single digits to mid teen digits on the on the margins on the balance of the business by about 15% to 20%.
Just without the one other element of call up that attack product is very different from drug substance. So in general when it comes to material pass through.
Not the necessarily the materials are.
Less expensive, but most of the times they have both by the customers stopped by assets. So that he doesn't affect other avenues at that affect that margin.
Great. Thanks.
Our next question today comes from Dave Windley of Jefferies.
Your line is open.
Hi, Thanks for taking my question and I Hope you can hear me I'm in a hotel basement.
Can you hear me.
Good it sounds good to date.
Okay alright, thank you.
So my question is is it.
Maybe a follow on to Tejas earlier question, but a broader one.
The company.
Call it pre pandemic used to talk about the.
The diversity of the platform.
7000 products no one product.
Really makes up a substantial percentage of revenue doesn't move the needle necessarily and you're moving into a period, where now two products very substantially move the needle.
I guess, what I'm also thinking is that.
Again related to <unk> question <unk> has a label expansion kind of optionality element to it and the <unk> ones have.
<unk>.
<unk>.
Delivery of GOP, one data readouts coming out so how do you think about the concentration of those revenue streams in your business and risk mitigating that.
And the potential that both of them could see headwinds from developments in the pipeline. Thank you.
Yes sure so.
They have a couple of things.
First of all you are calling out a tool.
The key I would say dynamic in this deal at all that's truly <unk> being one and I I.
I feel very proud and excited that catheter into was able to such.
<unk> to debt. So I don't see that then has a 70 under negative tendencies is great and it's a.
It's something that can be applied across several therapeutic dynamics.
<unk> dynamics across the different geographies and so I would say is a little bit of a different.
Element the compared to the gene therapy program that you have mentioned with regard to <unk>.
So and so et cetera.
Youll also going forward.
Because of the different therapeutic areas the deepening potential indication expansion of indications of GOP want to I don't see that category to be.
A significant element of volatility so to speak.
Our jump that I believe is to continue to do a great job for our cost and I continue to believe that capacity on line that the rest will come pretty much as a consequence, I don't believe personally that thought.
We will be.
A significant competitor of injection for the time being.
What do you think about that in the current form like peptides the bioavailability.
It's not that the ISO that he has a lull of API, there that upside in South Africa showing gains.
How much more <unk> delivery versus Injectables. So I do believe that there's going to be for the time being any checkable story personally.
And with regards of the how we are approaching these it look for me. The important thing is that we understand the dynamics, we understand the market that we position ourselves a little bit in the middle of the range. We don't we don't expect that you know our projections.
Everything to be going in the right direction and leaving good that there is an upside and we position ourselves.
I would say prudent way when it comes to these dynamics so that we have.
A good set of different options to continue to grow the company in line with expectations.
That's great. Thank you for that.
Thank you our.
Next question comes from Justin <unk> with Deutsche Bank. Your line is open.
Alright, Thank you and good morning, everyone. So.
Just wanted to get a little clarity on some of the prepared remarks.
With respect to <unk> ones.
Thank you said.
I think you said 100 million. This year is that is that incremental.
Over and over next.
Over the last year or is that total.
And can you sort of give us a sense of what the order of magnitude was.
20 <unk>.
By 2023.
Then.
I think you said sort of a 500 million run rate number and is that is that sort of like the targeted exit rate.
In FY 2026 or is that.
Sort of it.
The contribution from incremental capacity coming online.
Then I think you said most of that you have firm orders for so you have protection for that he has some sort of take or pay arrangement.
Great questions. So first of all yeah look we said that the <unk> is going to be.
Below $100 million, we didn't see went out.
For sure one of the contributors of the non coffee the known threats that growth in biologics right. So because so far it has been a more extensive work and now it's becoming commercial look so first of all.
<unk> is contributing to our growth outlook and as I said is more on <unk> than on each one study. So he is also I think what you see is around for HD vest is H one.
With regards though but the long term outlook I've said.
That is going to be with a little bit of Alpha <unk>.
I gave a little bit of a call it on the timeframe and to be quite honest with you a question around the demand.
For these four these are franchise or the capacity because the constraining factor.
Rather than to the yard so it's going to be really depending on our ability to bring capacity.
As fast as possible we are seeing.
A very high level of interest and demand for these assets and release, one where capacity is going to be the constraining factor.
On the on all the fronts.
And I believe that the <unk> goes beyond the 2006 timeframe that we have we have highlighted here.
So all in all he is a very exciting space to be in.
Thank you and then just a quick follow up on the gene therapy front can you talk a little bit about the dynamics X Raptor I E.
Or are there other programs.
And in your pipeline that are that are advancing.
Through different stages.
And then with respect to that.
The top customer.
Are you ramping up.
Additional production throughout the year or is this just sort of.
Sort of a conversion and things in place.
With the existing outlook.
Yeah look.
The first part of the question I as I said, you might be pad remarks that the pipeline is healthy.
Both we've got additional programs with our biggest customer biggest customer, but also with other customers as I said.
We signed the veggies into another late stage program and the clinical data on that program and look very very exciting to sell into.
But on patients is it could be great. So it's also in line with our with our quarter body of patient first.
So I would define that the pipeline in the gene therapy is ALC and I will also tell you that in gene therapy, the capacity, it's easier to redeploy compared to other technologies normally in gene therapy, you have the suites by you have most of the units automobile unit. So.
So it's a very easy to reconfigure the capacity compared to other technologies visa for the way we have designed our facility.
We make them a very very fungible across different different type of products.
And with regards of the profile of the look.
We that is the physical capacity and that is the productivity that you can achieve.
Ramping right. So our physical capacity is fully deployed 40 stopped if we keep the but clearly we are not an ample productivity as you know we come up in a very difficult spot during the Springer because of some of the challenges we have disclosed and now we have a we have an exciting ramp. So I will tell you that we are ahead of the ramp.
With that in mind.
The beginning of this fiscal year, but they will continue to be progress as we go through the year. So the more we improve our.
Output the more demand, we will be able to satisfy our customers.
Today, we said that the.
The visibility on this demand is <unk> at this point of the year as multi shared.
Thank you Alexandra I appreciate the time.
The next question in the queue today comes from Jack Meehan of Nephron research.
Your line is open.
Yeah.
Thank you good morning.
First I was wondering if you could just elaborate on the factors that are leading the strategic review to take a bit longer at least versus what I was expecting last quarter. The word urgent we used multiple times and I was expecting some sort of update your can you just.
Maybe talk about.
Anything you can share thank you.
Hey, Jack this is John.
If you think about the committee.
We formed a couple of months ago, and we've got two new directors and two of our legacy directors plus plus myself on it.
I'd say the three top priorities of the activities.
The committee has been to focus on operational improvements along with Alexander on the team.
Focus on cash flow improvements.
And focus on capital structure improvements over time.
As you saw and heard in the comments Alexander the team.
Continue to drive operational performance and cash flow improvements.
And in a way that gives us a lot of confidence for the rest of this year. So.
The first two priorities were to get the company.
Back on track out of the surprise mode, which we've been in for the last several quarters.
Deliver on the commitments that the team's laid out I think they've done.
A heck of a job doing that as we start fiscal 'twenty four.
The committee along with our partners at Elliot.
Evaluating several strategic options to address the capital structure improvements over time.
With a sense of urgency we spent a heck of a lot of time.
Getting everybody up to speed on where we are it's an area, where we don't want a ready fire aim.
With the operational improvements.
And the cash flow improvements.
Sure.
We're out of what they have been perceived by some as crisis mode and in a position where we can thoughtfully.
Evaluate those options going forward in addition to the committee.
And the full board also known I spent a lot of time with with our partners at Elliot.
Evaluate those options.
And we don't have anything to announce today.
But as noted we will provide updates if and one specific decisions are made by the board. So I think the.
The near term operational improvements cash flow improvements you are commodity we've improved our free cash flow outlook for the full year.
And they've made some great moves along those lines as well as the operational improvements you are from Alessandro those are on track.
Capital structure over time, we will address it but.
We're not ready to.
To announce any decisions today, but we will do so.
Once the board and Alessandro team.
To make those decisions.
Okay I appreciate that feedback.
And a question for Matt on the GOP ones can you talk about the returns youre expecting on this additional pre filled syringe open this capacity youre, adding.
Having investors email me for a little bit more detail on that I know you said it would be attractive, but just any context would be great.
I really can't I mean, I think Alessandro laid it out we're in the stage of trying to book the book that business and so I think it would be.
It would be a good idea for me to disc.
<unk> disclosed the returns and kind of what we're looking at from a pricing perspective.
Can tell you that it'll be very attractive for cattle in the world.
I would also say that we have.
We have a calm figured that this franchise of wheat.
Lines of which up tween of each other so I'll, let her ability to continue to deploy default up across multiple lines on an accelerated fashion, because we just going to somewhat copy and paste. What we have learned in the first six months versus so.
You can expect that the vamp to revenues on the new assets coming online is going to be it's going to be faster and that's the number one factor that affects your return and the margin, but it might be said, we expect the margin to be attractive.
Attractive.
The other thing I'd say is from a ramp up perspective, I think the company has proven itself. If you look at what it did with Covid and the ramp up of Covid.
Being the Covid demand the company has a proven track record to ramp up quickly and ramp.
Pumping facilities quickly to deliver and I think leveraging that experience of the company.
The <unk> opportunity is significant.
Next question operator.
The next question comes from Jon <unk> of UBS. Please go ahead. Your line is open.
Good morning, and thanks for taking the question two questions here first one on on Covid, just any way to quantify what the Covid margin contribution wasn't the cover in the quarter and.
Koby came in quite a bit ahead of our expectations. You know you raised the guidance or any color on just the pacing there.
For the remainder of the year.
Co it'll have a.
Somewhat negligible impact in the back half of the year. So I think when it was going to come down to first half of the year as all experienced most of the corporate demand. There is some demand in the back half of the year and as for margins, that's not something that we've disclosed historically and that's something we wanted to disclose the margins on the Cobra business, but.
I would say that that's about as far as I can go from a color perspective, but cowen is becoming a less and less important part of the business for us.
I would just add look compared to American levels surely not asics nowadays attractive because the portfolio is more complex because they were locked so shlomo that goes what the volume is much lower.
No.
The cabinet the level of the margin from coffee that should be not the not even close to where the window into by many cat events.
Anytime.
Okay I appreciate it and your second question here also I guess on margins.
And you gave some color earlier on the margin.
I guess when you remove the raw material pass throughs, there would be just on the gene therapy, our drug substance business in general how do we think about the India removing other pass throughs, how do we think about the margin profile on gene drug substance versus fill finish and any differentials there.
Yeah.
So look.
I will tell you that across the board of the drug substance business to gene therapy protein mobs.
Archie now, particularly much in the same ZIP code, what you carve out the month either hospitals really why you have such a high body of us tool steel at all think it gets.
Lower but the on the on the services side.
I would say that that is steady to piggyback with alignment across the dock substance.
I would say the DUC draw that there is a little bit of a different dynamic where the marchand really defense being up very high volume.
It'll commercial industrial production system is very very depending on absorption right then and so the.
The margin itself of the products I would say of the products.
It's tricky.
I mean, he said not peak the range, but there are products.
The vaccine so the GSE wants that because of the volume they can drive a lot of absorption in our logo.
Marching up leased.
Thanks for taking the questions.
Yeah.
Our next question today comes from Matt <unk> of.
William Blair Your line is open.
Hey, good morning, Thanks for taking my questions and congrats on the nice update.
Just looking through the filings it seems like R&D on <unk>, it's been about four times as much as R&D on some of their other gene therapy programs. Just wondering based on this is it fair to assume that something like 75% of total revenue for you is tied to <unk> and then in terms of that <unk> spend is there any detail you can give us around.
What your fiscal 'twenty 'twenty four revenue outlook, that's tied Dell evidenced translates to from a dose perspective, I think there's quite a bit of uncertainty is still out there in terms of how much it cost to manufacture the annual or the actual gene therapy. So any context, there would be great. Thank you.
So.
Hey morning.
<unk> taken the first step.
So from an overall perspective, we disclose the.
As to Raptor.
Our revenue and you can get to the math if you leave the script, but it's about 90% of the revenue is.
As all of us So it's 9001.
The lions share by far the lion's share of our revenue comes from outside.
We do have other programs that are being developed or in development and and well.
We will begin to grow more rapidly as we go forward as far as doses in patients that's not something that we've commented on.
Thank you.
I'll start and I'll defer to you but.
We fill in order, we feel in order that were given by our customer and that customer or and that's our that's what we do now.
We started the market. We do look we do look around corners, and we do assess it but that's not but I think we're going to we're going to discuss today.
Well that's it.
Understood. Thank you just to clarify you said, 90% <unk>.
And 90%, Yeah, you can get to that miners.
Yeah.
Okay Perfect and then just following up a clarifying one you mentioned a couple of minutes ago that it's easy to reconfigure the gene therapy capacity and that capacity is pretty fungible I just wanted to confirm you're saying, it's easy to reconfigure for other gene therapy programs right and then while that may be the case, given some of the macro headwinds, we have seen which I think.
Most people would acknowledge I've had an outsized impact on the broader cell and gene therapy space. How should we think about your ability to backfill that capacity of sepsis label doesn't actually end up getting expanded thank you.
Yes look first of all.
<unk>.
I personally don't see these so that guys have buying at a dynamic.
You guys are the big things that extended the loan extended.
Not that I really liked it I believe that there is a spectrum there.
It is more than just binary.
That's been said.
Truly it's the most speak spark infrastructure not the suites.
And the suites are designed in a way that can serve a number of different processes. Both to define the processes of the amount of factoring units at that we seem to suites and they are mostly mobile. So you can recall <unk> dam.
In the pre heat bleaching easily so so fundamentally is one of those facilities that we had but the natural wood chip with the highest grade all but easiness to reconfigure your and to be redeployed towards other programs.
Should we need to do so at.
At the moment honestly I don't have any visibility that we have to do so because we remain focused working around the clock to satisfy the demands of select them.
Understood. Thanks, again for taking my questions and congrats again on a good quarter.
Our next question comes from Derik Debruin of Bank of America. Your line is open.
Hi, Good morning, Thanks for taking my question just a just one clarifying question to start with and I've got a couple of others. So what was embedded originally in your guide for 2024 for <unk>.
From a dollar amount and sort of like what's the incremental that's.
Here now just wanted to get some sort of masked a little bit.
All over the place so that's the first part.
From our original guidance today it remains unchanged.
It's unchanged so you'd already assumed that was going be a great. Okay. That's what I thought just wanted to make sure.
And how should we think about PCH margins progressing from here.
A bit lower than we thought in the quarter, how should we think about that moving.
PTH margins sequentially. It will go up through the year, another natural seasonality to the business model that they run in the business. They bring in an addition, we do have some cost structure initiatives going into P. C. H.
We also noted this new gummy contract that was won with it.
Very substantial contract that was the one that will launch in the third quarter and beginning of our run rate in the fourth quarter. So we do believe that we've got the opportunity to generate those margins on a sequential improvement basis.
Great and then just one final one so I'm looking at the consensus estimates for fiscal 'twenty five.
Roughly as you.
Increasing EBITDA by 35% so that's.
Call It a 16% margin at the midpoint of your current guide that's 21 ish percent for fiscal 'twenty five.
Is that sort of 500 basis points.
Gain and EBITA margins realistic for next year.
Where you see the business right now and I ask this is because I was certainly thinking the margin contribution on the <unk> business was going to be a lot higher than it actually turns out to be so just wondering any thoughts on how we should sort of think about EBITDA margin progression as we're exiting two.
2024.
We talked about our exit run rate.
<unk> more in line.
Our fourth quarter more in line with our historic average and so I think that's the best Guide post I can give you we're not going to give a 25 update today.
Or kind of look into look beyond beyond the four year here today for fiscal 'twenty fiscal year 'twenty four.
But I think that's a good guidepost to use if we get to an exit run rate that we talked about.
The benchmark the jump off.
And the one point I got it.
<unk> once again.
Our matching.
Reduction easier.
He's not to due to our portfolio shift to an operational location, which we have a shared the multiple times and as John said that we have.
We have a shifting these remarks, we are making.
Very good progress in addressing that and probably the progress he stepped up faster than our initial expectations. So.
When you combine these two factors.
You know you can make your own assessment.
Great. Thank you very much.
The next question today comes from Paul <unk> of Keybanc. Your line is open.
Hi, yes, thanks for the question.
Regarding <unk> on.
Next year Youre Alon is booked through your fiscal year ending June one portion of when does the second half of 2004 get booked.
Meaning when do we get your FY 'twenty five so rep. The book is it starting now what visibility do you have beyond June of 2024 on <unk>.
Yes.
We've discussed at a high level, we've had customer conversations around it but we've described how we actually book a production purchase Brooklyn, a rolling six month basis. So that's why we feel really confident about how 24 is going to finish and then think about disrupt readout in all started made comments to you on the script arena, where it's not maybe it's.
Mine areas. Some are thinking so I do think that that's the comments I can give you on it but.
We just facts specific we get the orders on a rolling six month basis.
Yeah.
Okay. As we were and then regarding brought us here.
Right.
As you work through this year, we will get we will get further orders that roll into 'twenty five.
Okay, and then regarding Brussels, you commented that that was improving is that due to the biotech demand as it GOP ones its cell therapy, once once making brussel improve.
So Brazil is a doctor other facility right and yes that is the GOP to Amanda Daddies and you'll see that these are public available information.
<unk>.
I believe that in general as we said before the <unk> is sitting on a very high level of demand, but because of that.
Posed in production for some time in the last piece Cuddyer right was a bigger drain on our matching last year.
Is it going.
Going back right. So he is fully utilized it because we have a backlog or to what he called it automates gonna take Canadian Diamond and yes that is.
A lot of GOP demand and I would say to the scientists performing really well.
Eating out.
Satisfying the demand.
Okay. Thank you.
Okay.
The next question comes from Eric Coldwell of Baird.
Please go ahead.
Thank you very much good morning, I wanted to hit on two topics. The first is coming back to the Covid revenue sorry, if I missed this but.
Did you comment on how the $100 million of Q1 revenue compared to your prior expectations of what was originally embedded in street guiding.
Our guidance and then what changed to drive that upside or <unk> the increase for the full year on the Covid side.
I think when we guided for Covid I think we took a fairly conservative assumption on COVID-19, not knowing where the season was going to go number one.
We don't provide as you know individual guidance from up from a quarter perspective, but I would say that it has come in stronger it'll come in strong in the first half as I mentioned is if not as important to the back half of the year from a COVID-19 perspective.
I'm, a coat revenue perspective, and what we're seeing today now as the season plays out this year, that's going to dictate demand at the end of the end of our fiscal year, our fourth quarter, our second quarter calendar year next year, and we would be able to have more visibility as we work through the tail end of the conference season here in our second quarter.
Calendar year fourth quarter.
I think the season for next year.
Okay, and then on the second topic on the Gummy Award.
Hoping we could get a little more on the nature of the award was that an expansion with an existing customer a new relationship with a new customer was that a competitive takeaway from external or internal manufacturing and.
Finally.
Are these new launches from the partner or you know maybe that ties back to.
Where the production is coming from that you have been awarded.
Any additional details on timing or sizing I know you said <unk> start, but it sounds like a pretty substantial deal for a segment. That's been challenged so I am surprised it hasn't gotten a little more attention today.
Yes.
Coming in market has been down and continues to trend down to the mining markets Syndicate continue though and this is a share of share gain.
This is new business for us from this customer.
It's an already existing product.
And you know what.
It's going to fit in perfectly into our network.
If at any SG&A per se on top of it and it fits into the existing gummy network that we have in the open capacity that we have so I'd say kind of what I'd say is a no brainer Scott.
Good margins for us.
For business perspective, it's got a very quick payback. So I think overall, it's a big way doesn't require much capex either to go in.
So that's pretty impressive.
Yeah.
Yeah.
Thank you.
Our next question comes from late two <unk> of J P. Morgan.
Please go ahead.
Hey, good morning, Thanks for fitting me in just one for me on PCH last year, you continuously flagged some of the inventory destocking consuming consumer discretionary spending headwinds. So can you walk us through or are you still seeing some of those headwinds impacting that business and then just to follow up on the earlier question around that.
And on the demand side, if we exclude that commercial win how should we think about growth in consumer this year. Thank you.
So look let me cover the first part of the question. It <unk> yet we enter as we said in the prepared remarks some of the some of the macro environment that we have.
In November last year, our field presence.
And and we continue to see some.
Prudent spend.
On the sides of our especially.
Especially the early stage strikes at the early stage customers, if RFA, preventing that progressing assets through the pipeline that given the biotech funding environment.
The consumer environment.
<unk>.
But not enough as it was before.
But you know the reason why we have in our on shelf.
Our excitement about the way we go to continue to grow the company on an ex <unk> basis.
Is twofold really right. So first of all is the pipeline alright. Thank PCH, we had a lot of products have been approved simultaneously.
Which which will drive a lot of.
Growth in our <unk>.
With the goal of commercial business and share gain.
We knew that over time, our existing relationship with the large consumer company, which would not be necessarily the nature of a market for big data.
Those customers because of the relationship we have with.
Our brand.
<unk> dot coming without so.
We have a little bit of a change that is better than the market because of these dynamics.
And and Thats why we are.
Confident about the ramp and the profile of the business as we go through the fiscal 'twenty four.
Our last question today comes from Sean Dodge of RBC capital markets. Please.
Please go ahead your line is open.
Hey, good morning, Thomas pillar, one for Sean Thanks for taking the question.
I apologize I got disconnected earlier.
But wanted to go back to the tech transfers in Bloomington.
Just consider these complete or are there still some hurdles you need to clear to get these into full production anymore.
Any more detail here would be helpful. Thanks.
Well first of all I never said the Bloomington right. So it's.
And we already said in previous calls that some of those relationship out extended and expand EBIT. So I would say that to now. This is something that is really touching all our network. When it comes to the steroid product and we feel pretty good about it because it's really the way we want to serve our customers with our <unk> approach in all of the site.
Sure.
Which gives us a lot of flexibility and a lot of optionality for customers is still facilities.
Is that a is that cost of the network and I guess I don't believe that those.
It takes time set activities could be deemed a largely.
You know.
Luxury done of course of the first line. So there will be more commingled additional lines, but as I said, it's much easier because these are like for like assets sent to the kind of answer.
And so yes, we are now going to start in the second half of the year in adopting got the commercial volumes have really giving you more supply to our customers.
Yeah.
Okay.
Thank you we have no further questions.
So I'll turn the call back over to key CEO Alessandro Maselli for any closing remarks.
Okay.
Thank you everyone for taking the time to join our call today.
We are pleased to have delivered the solid financial performance this quarter, while making operational improvements.
At the same time defense, a lot pipeline and new commercial wins increased our confidence in fiscal 'twenty guidance, which we have.
<unk>.
We remain focused on restoring good Cadillac historical margins, while driving a sustainable and profitable growth incur.
Increasing shareholder value and executing on our mission to improve the lives of patients every day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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