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spk11: Good day, ladies and gentlemen, and welcome to the AVID Bioservices second quarter fiscal 2023 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Tim Bronze of AVID's Investor Relations Group. Please go ahead.
spk10: Thank you.
spk03: Good afternoon, and thank you for joining us. On today's call, we have Nick Green, President and CEO, Dan Hart, Chief Financial Officer, and Matt Quitniak, AVID's Chief Commercial Officer. Today, we will be providing an overview of AVID Bioservices' contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended October 31st, 2022. After our prepared remarks, we will run into questions. Before we begin, I'd like to caution that comments made during this conference call today, December 6, 2022, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current belief of the company, which involves a number of assumptions, risks, and uncertainties. Actual results could differ from these statements, and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company's filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations, on our corporate website at avidbio.com. With that, I will turn the call over to Nick Green, AVID's President and CEO.
spk06: Thank you, Tim, and thank you to everyone participating today of iWebcast. Based on the company's performance during the first six months, we anticipate that fiscal 2023 will be another strong year for Avid. During the second quarter, the company recorded record revenues for any Q2 period, reflecting increases in both process development and manufacturing work. On the new business front, we signed multiple new customer agreements with both existing and new customers. contributing to our strong backlog. With respect to the company's facilities, we continue to make progress with our expansions, and at the same time, successfully concluding both our Franklin and Myford annual shutdowns. We remain on track to have the Myford expansion complete by the end of quarter one, calendar 2023. We also expect the new cell and gene therapy facility to come online mid-calendar 2023. And finally, To manage our growing business and capabilities, during the period, we added significant talent across a broad range of functions, along with some notable additions to the senior management team in operations, process development, and human resources. Matt and I will provide additional details on business developments and operations for the period, following an overview of our second quarter and first six months of fiscal 2023 financial results. And for that, I'll turn the call over to Dan.
spk07: Thank you, Nick. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details on our financial results are included in our press release issued prior to this call and in our Form 10-Q, which was filed today with the SEC. I'll now provide an overview of our financial results from operations for the quarter and first six months ended October 31, 2022. Revenues for the second quarter of fiscal 23 were $34.8 million, representing a 33% increase compared to $26.1 million recorded in the prior year period. For the first six months of fiscal 23, revenues were $71.4 million, a 26% increase compared to $56.9 million in the prior year period. For both the quarter and the year-to-date periods, the increase in revenues can primarily be attributed to increases in process development and manufacturing revenues as compared to the prior year periods. Notably, our second quarter process development revenues were at an all-time high, representing a year-over-year increase of 74%. Gross margin for the second quarter of fiscal 23 was 12%, compared to a gross margin of 35% for the second quarter of fiscal 22. Gross margin for the first six months of fiscal 23 was 19%. compared to a gross margin of 36% for the same period during fiscal 22. For both the quarter and six-month periods, the decreases in gross margins were primarily due to increases in costs associated with our growth of our business and our facility expansions. The primary drivers of these costs were increases in labor, overhead, and depreciation, which accounted for incremental decreases in margins of approximately 11% and 9% for the quarter and six-month periods respectively. split roughly 50-50 between our mammalian and cell and gene therapy operations. It is also important to note that the prior year's gross margins included benefits from unutilized capacity fees. Excluding all of these factors, our second quarter and year-to-date gross margins were in line with the same period the prior year. We expect the expansion-related costs incurred to date will continue to affect near-term margins In the coming quarters, we foresee incrementally incurring additional expansion-related costs in line with anticipated growth. Total SG&A expenses for the second quarter of fiscal 23 were $6.8 million, an increase of 36% compared to $5 million recorded in the second quarter of fiscal 22. SG&A expenses for the first six months of fiscal 23 were $13.2 million, an increase of 39% compared to $9.5 million recorded in the prior year period. The increases in SG&A for both the quarter and year-to-date periods were primarily due to increases in compensation and benefits-related costs, legal, accounting, and other professional fees. For the second quarter of fiscal 23, the company recorded a net loss of $1.2 million, or two cents, per basic and diluted share, as compared to a net income of $3.5 million, or six cents, per basic and diluted share for the second quarter of fiscal 22. For the first six months of fiscal 23, the company recorded net income of $400,000, or $0.01 per basic and diluted share, as compared to net income of $9.8 million, or $0.16 and $0.15 per basic and diluted share, respectively, during the prior year period. For the second quarter and the first six months of fiscal 23, the company achieved an adjusted EBITDA of $1.9 million and $8.1 million, respectively. Our cash and cash equivalents on October 31, 2022 were $77.3 million compared to $126.2 million on April 30, 2022. This concludes my financial overview. I'll now turn the call over to Matt for an update on commercial activities during the quarter.
spk09: Thanks, Dan. The second quarter was both busy and productive. We continue to see strong demand in the marketplace for Avid's current offerings, as well as interest in the cell and gene therapy capabilities online and coming online in the near term. Our expanded team continues to build visibility within the industry, regularly interfacing with potential as well as existing customers. We've seen an increase in client interaction through face-to-face meetings, as well as through our increased presence at trade show conferences. As a result, We continue to add to our client base. Our new business pipeline continues to be strong, and our proposal values and other leading indicators continue to develop in a very positive manner. During the second quarter, our team signed 26 million in net new project orders, bringing the total new business for the first six months of this fiscal year to $67 million. Our backlog at the end of the quarter was $147 million, representing a 23% increase compared to the backlog of 120 million at the end of the second quarter of fiscal 22. We expect to recognize the majority of our current backlog over the next 12 months. We are already starting to see the impact of the investments made earlier this year in our commercial team as it relates to the leading indicators we measure internally. We anticipate these opportunities converting into backlog as we bring on our new capacity and capabilities. Looking ahead, we believe that the momentum generated during the first half of the year will continue, and the team is ready to embrace the challenge and looking forward to a successful second half of the year. This concludes my overview of commercial activities. I will now turn the call back over to Nick for an update on operations and other achievements during the period.
spk06: Thanks, Max. I am pleased to report that our team continues to execute according to plan. Our business development team continues to fill our project pipeline on top of a significant year-over-year revenue growth. Our manufacturing team continues to produce and deliver on time while employing the highest quality standards. Our facilities and capabilities expansions remain on track, and we continue to invest in the talent required to ensure success across the business. This consistent execution has strengthened and expanded our customer base and significantly improved the company's financial position as compared to prior years. This is perhaps most evident through our revenue growth. In the first six months of fiscal 2023, our revenues of 71.4 million represent a 26% increase compared to the same prior year period. It is very important to note that this growth is not simply a result of expanding the company's core manufacturing business. During the second quarter, we had a particularly strong revenues from process development services. Specifically, revenues from PD during the second quarter of 2023 exceeded PD revenues from the first quarter by 37% and exceeded our prior high PD revenue mark by 23%. This is particularly encouraging as PD is where the majority of new customers and new projects are on board. and bodes well for the future growth of the business as a whole, and validates our decision to invest in further expansions of both capacity and capabilities in this key element of our business. As we look forward to the new calendar year and the new capacity we have coming online, we are excited to report that our recruitment of staff required to operate these facilities is progressing well. Our assets require high-quality, well-trained individuals, and in many cases, These must be brought in and trained ahead of time. As we forecast, these investments have impacted and will continue to impact our margins in the short term. This investment in personnel is essential to meet anticipated customer demand. What is particularly gratifying is as we have been making these investments, we have seen continued growth and a growing interest in AVID's offerings, further validating the decision taken almost two years ago to move ahead with Phase 2 of our expansion. With the expansions progressing to plan and coming online at the end of Q1 2023, we will be in a great position to start to consume this capacity, and at this stage, look forward to seeing positive margin development towards our longer-term targets. During the second quarter, we continue to make progress with our cell and gene therapy expansion. As we announced during quarter one, we have already launched the analytical and process development capabilities for this business which has allowed us to escalate our dialogue with prospective new customers. We are pleased to report that our first customer is already onboarding in this facility. With respect to the GMP suites for our cell and gene therapy business, construction continues on schedule, and we expect them to be completed by mid-calendar 2023. Based on discussions with prospective customers, we believe this timing will align well with our customers' needs to advance early projects into GMP suites. Likewise, our mammalian cell business capacity expansion is progressing according to plan. During the first quarter, much of the downstream equipment was positioned in the facility and validation of this equipment was initiated. During quarter two, we installed the upstream equipment. And as we stand today, the facility is mechanically largely complete and validation well underway as we remain on schedule or release of the operations during quarter one, calendar 2023. And finally, expansion of our process development capacity is also well underway. As we announced during quarter one, this PD capacity will provide additional space to onboard future customers, ultimately seeking to utilize the new manufacturing capacity. I am pleased to report that we remain on track to have all the current mammalian expansions complete by the end of quarter one, calendar 2023. During the quarter, we successfully completed both annual shutdowns in Mayford and Franklin alike. It is also worthwhile noting that our shutdown this year was extended slightly to accommodate tie-ins of certain services and the new central utilities plant. It is an incredibly busy time at Abbott. The company is transforming, expanding, and growing. And in order to manage this transformation, we recognize the need to bring on expertise and experience to manage and lead our growing workforce. As you've seen during the quarter, we've continued to strengthen our management team. In September, Avid promoted Michael Alston, Jr. to the position of Vice President of Operations. Mr. Alston was promoted from Avid's Director of Project Engineering, a role in which he led all of the company's ongoing facility expansions. Mr. Alston has more than 15 years of experience spying operational and capital management responsibilities, supporting GMP manufacturing, facilities, engineering, and environmental health and safety functions. Oksana Lukash also joins AVID as Vice President People. Ms. Lukash has more than 20 years of human resource experience with both established and entrepreneurial organizations across a range of industries. Prior to joining Abbott, Mr. Gash served as Vice President of People and Culture at Oncaside Corporation, a precision diagnostics company. In closing, I wish to again highlight our accomplishments in the first half of fiscal 2023. Our top line revenues remain strong. Our backlog is substantial and has grown 23% year over year. And given the demand we continue to see in the market, we expect it to continue to grow. As we approach full utilization of our current capacity and with additional capacity and services soon to come online, we expect this momentum to continue. For all of these reasons, I am pleased to report that AVID is increasing its revenue guidance for the full fiscal year 2023 from between 140 to 145 million to between 145 and 150 million. This concludes my prepared remarks for today.
spk10: And we can now open the call for questions. I'll present. Thank you.
spk11: As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Sean Dodge with RBC Capital Markets. You may proceed.
spk05: Yeah, thanks. Good afternoon. Maybe just starting with the macro backdrop, there continues to be a lot of concern around biotech funding, the extent to which that's affecting demand just kind of broadly. Nick, it sounds like client interest continues to be strong, but the $26 million you signed a new business in the quarter is lower than it had been running at. So I guess, is there anything notable you can share there around, are you seeing a change in in behavior, body language around spending, anything around delays and placing new work, reprioritizations, et cetera. Is this just new business can be lumpy quarter to quarter and this doesn't necessarily represent a trend or a theme?
spk06: Yeah. Hi, Sean. I think the latter point is really the overall overarching comment that I would make is that it is about the lumpiness quarter to quarter. We've talked about this before in terms of sometimes people We'll sign just before the quarter end, which is always great, and some people will sign just afterwards, which is not so great when it comes to reporting quarterly numbers. But if we look at the sort of backdrop behind that, we're very happy with the amount of interest and the demand, at least for Avid services, that we see in the marketplace. you know general trends in the marketplace do we do we see some of the smaller players who are more cash strapped than than others maybe uh uh doing a little bit more naval gazing and taking a little longer i think that's probably the case sometimes it's always difficult to to determine whether that's a macro uh impact as we only see a relatively small subset of everybody um but you know overall in general we wouldn't be raising guidance and uh if we weren't seeing continued strong demand. And I would highlight that, you know, we saw the same thing in the last quarter, the same quarter last year as we did in this one. It was a little lower, but again, there was no general inference of the strength of the market as we see. So we remain optimistic as far as the interest in AVID.
spk05: Okay, great. Dan, just on margins and trajectory over the next several quarters, I guess the question is are we pretty much at the bottom here? You talked about, you know, Myford Phase II is set to open very soon and the weight that the growth-related investments are adding to margins. As those facilities open and become revenue-producing, you know, I guess should the trajectory of margins, the direction of margins from here be upward or
spk07: Hey, Sean. Thanks for the questions. Good question. As far as looking forward, I'm still confident that we will see incremental margins as we start to fill new capacity and start to absorb some of the costs that we brought on. You know, we've invested aggressively through the second quarter in getting the folks in place and some other operational costs for the expansions and the standing up of the cell and gene therapy business. You know, going forward on the cost side, You know, we plan to make some further investments, but we're going to make that investment in line with the anticipated growth. So, essentially, you know, as we start to roll out the new capacity and start to fill that new capacity, we should be able to continue to move towards incremental margins and ultimately get to that margin goal that we've discussed in the past.
spk05: Okay. Great. Thanks again for taking the questions.
spk10: Thanks, Sean.
spk11: Thank you. One moment for questions. Our next question comes from Matt Hewitt with Craig Hallam Capital Group. You may proceed.
spk04: Good afternoon. Thank you for taking the questions and congratulations on the progress on building out the new capacity. Maybe the first one for me, as you talk to customers, well, I guess let's back up. You made a comment in response to one of the prior questions about some orders coming in late in the quarter, some coming in right after the quarter is closed. Can you talk about it? Has anything closed already this quarter?
spk06: Mark, I can't really talk about the next quarter as we just conclude the fire quarter. But again, I just go back. We've raised guidance. We've obviously brought in the labour ahead of the capacity coming online for a reason. We remain very optimistic regarding the the interest in the business that we see and again we we see lumpy quarters that we've had them in the past we have some lumpy good ones and we have some lumpy uh uh not so good ones it's not a it's not a trajectory of the uh of the overall business which i think is is pretty clear got it thank you for that and then maybe one of your peers had talked a little bit about not just um
spk04: kind of delays or dragging of the feet and signing new contracts, but even on the payment side, now looking at your DSOs for the quarter, I think I've come up with 54 for the DSO here in Q2, but are you seeing any of that from customers or are payments coming in as you would anticipate?
spk07: From our side, Matt, payments continue to come in as we would anticipate. I do see some more conversation than we've had in the past. But, yeah, as you can see with the DSO dropping, I think it's approximately 20 days or so from the prior quarter, you know, people are still paying.
spk04: Fantastic. And then maybe one last one, then I'll hop back into queue. But as far as your conversations with customers, both existing and new customers, as they look at this new capacity and the timelines for those that come on, are you hearing from those prospects, you know, some excitement in that, hey, this is going to work out perfectly with our internal timelines. Is anybody pushing you to maybe try and get something done a little bit faster? I guess just what are you hearing from your customers? Thank you.
spk06: Yeah, I mean, I think Matt alluded to that, and I'll let him add to any comments I make if you've got anything further, Matt. But, I mean, I think we've had some really good response to the facilities. It's been fantastic. really quite nice over the last few months, probably the last five or six months, if not more, to be able to tour people around without having to gown up and go and see every little bit of it and walk them around the flows and the like. And I think we've had nothing but good comments, positive comments, and people very happy that this sort of high-quality capacity alongside Avid's offering is going to be available shortly. So we're delighted to be standing that up in the very near future. I think, you know, Timing is pretty close to ideal. I mean, obviously, I think on the first phase expansion that we did last year with DSP2, our backlog actually hit our capacity in the same quarter we brought it online. So we'd love to do that again this next quarter coming up. And if we did that, then I don't think we could have timed it any better. So again, my summary would be lots of really good interest I'm just excited to have it online and then starting to fill it and then absorb some of those costs that we've invested in ahead of time and see that progression in margin. Matt, anything further on your side?
spk09: No, I think well said. I think it's accurate. A lot of client interest in the build-out and the additional space. And a lot of excitement and positive, really great feedback. We've had a number of clients come out and actually tour the site as was early on in construction and eager to get back and see how the progress is going and get engaged. So it shows very, very well. And there has been a lot of interest. So remain optimistic for sure.
spk04: That's great. Thank you very much.
spk11: Thanks, Mark. Thank you. One moment for questions. Our next question comes from Jacob Johnson with Steven, so you may proceed.
spk02: Hey, thanks. Good afternoon. As we think about kind of forward-looking KPIs, you know, I think backlog was a bit shy of what many of us expected, but you also had a record quarter in process development. Can you just talk about what that record quarter in process development could mean as we think about looking forward? And then just a related question, can you remind us kind of how much process development capacity you have today and maybe where you are in the PD capacity expansion on the biologic side?
spk06: The PD is, in my view, a really encouraging sign. I mean, when somebody transfers a project into the business, typically it will go in and we'll do some small-scale runs in PD. Depending on the client, obviously, we may do some work on their process or if the process is already well-developed. we're just basically sort of demonstrating what they've already told us, ready for moving it across into the manufacturing facility. So it's really the front end of the business where things are coming in. So to see those sort of revenues in there for me is a good indication that people are getting in. And then obviously we hope to see those people move from small to leader scales up to the larger 2,000 ultimately. So that to me is a really good indicator for to where the business is heading. And then in terms of the capacity, the 7 million this quarter is actually overcapacity. I think we've often talked about, you know, capacity is a little bit of a fungible number because it's not a perfect science. It can vary between certain different activities and whether you're doing campaigns and all that sort of thing. So we actually beat our capacity. We would have had our capacity down somewhere around 5 million for the quarter. and we hit seven. So that was really sort of a super quarter. In terms of where the capacity is going, so five million would give us 20 million a year annual. We are doing the expansion that comes on in quarter one as well. And that would give us then effectively 40 million or 10 million a quarter, you know, obviously give or take based on the super performance in the last quarter.
spk02: Got it. Thanks for that, Nick. And then just as a follow-up to maybe put a finer point on the gross margin discussion, I think cost of goods sold up sequentially, you call it out a variety of things, but it sounds like a lot of hiring. And I don't know if there's a way to quantify kind of the number of people you have and the revenue that would support, but could you just talk about maybe as we think about the journey of staffing up the various capacity expansions, how much you accomplished during this quarter and maybe how much is left to go going forward?
spk07: So, Jacob, so on the gross margin front, you know, as far as heads, you know, we ended the quarter of approximately 360 folks, which is up significantly over where we were last year. looking forward as far as how many heads do we need to bring in you know that's kind of a function of what the anticipated growth looks like and as we start to fill and you know backfill or add the specific needs that we see in the in the different groups Yeah, I think that's essentially kind of where we're at, why we see that we'll, as we start to fill these expansions and start to load some of that additional revenue within that capacity, we'll be able to absorb some of those costs as we move forward.
spk06: Yeah, and I think the other part I'd add as well, Jacob, is that you've seen the sort of costs come into the organization in different areas. For example, we started beefing up the commercial organization with additional BD representation. We also increased marketing and increased proposal writers and all those sort of things that are all on the front end with zero revenue associated with those. The initial BD calls, the marketing stuff, all of that doesn't get any revenue. So that certainly hits the margins in the short term. Again, I don't think we need very large numbers of increases in those areas to fill out those facilities so we don't need to repeat those as we go forward and that sort of goes then also through the organization as you start to bring in project management and things like that that have got to onboard they're using pd and then ultimately as we see going forward and i think this is where you'll see more of the growth as we go forward is in the more hands-on operational people where they're actually making the batches so What you've seen is the early investment and effectively the hit on margin is by standing up all the things that you need to get the business in. And then as we go forward now, then we'll start to just supply the people, which is kind of the variable cost associated with the manufacturer.
spk02: Got it. That's helpful context. Thank you, Nick and Dave.
spk11: Thank you. And as a reminder, to ask a question, you will need to press star one one on your telephone. Our next question comes from Paul Knight with KeyBank. You may proceed.
spk08: Nick, I didn't quite catch the number of process development revenues and how much that number was up in the quarter.
spk06: So process development revenues, I think, is about $7 million then?
spk07: $7.1 million for the quarter, and it was up 74% year over year.
spk08: Okay. And then is this in cell and gene therapy development or monoclonal or both?
spk06: It's in both, but primarily in monoclonal.
spk08: Okay. And I guess the question for Matt and Nanette is, what are customers responding to well? What's giving Avid the edge on some of the larger competitors today?
spk09: Yeah, I think the available capacity, I think the track record of success, the quality background, I think resonates very, very well. You know, I think our approach to dealing with clients is unique in that we're accommodating and flexible and a good partner to work with. So clients respond well to that. So a lot of active engagement for sure.
spk08: And Matt, what's your customer? Is it large biopharma, medium, small? Is there a profile that they like or they fit in your view?
spk09: At this point, it's all of the above, everything that you mentioned. We had brought on someone to manage key accounts for us six, nine months ago, and we're already seeing an impact there. always had already previously been engaged with the small and emerging biotechs, and that continues. So we're encouraged by the add each quarter of new client base, as well as additional work from existing client base.
spk08: Okay. And Nick, a question for you, and that is, can you talk to In your opinion, is there tilt-stilt-type supply in monoclonal manufacturing? And secondly, how is the supply chain for you in getting things brought online and produced?
spk06: Yeah, so I mean, I think when you, you know, you've always got to look at the mammalian capacity in some of the segments that you operate in. And when it comes to sort of commercial grade, high quality mammalian capacity, we still see plenty of shortage of capacity, I would say. We see lots of demand for what we're doing. And I think that's the only explanation you can have really for seeing the demand that we are doing. In terms of the supply chain itself, again, it's one of those things that just seems to continue to slowly get better. I wouldn't say it's perfect by any stretch of the imagination, so we still do scramble for things here and there. We are able to anticipate some customer demands, so we do find that customers will come here where there maybe is a shortage in the market. Unfortunately, we have actually have the various components available, so we can move quickly on that one. So it continues to get better, not where it needs to be, and still a little bit variable because it's not always in the same place where you see the shortage, which makes it difficult to manage. But again, quarter on quarter better than previous.
spk10: Okay, thanks.
spk11: Thank you, and I'm not showing any further questions. I would now like to turn the call back over to Nick Green for any closing remarks.
spk06: Thank you, operator, and thank you to everyone participating on today's call. In closing, I would like to emphasize our excitement as we draw closer to launching our new capacity and capabilities. This could not be possible without the hard work of our many talented employees who drive and take pride in AVID's continued success. Thank you again for participating on today's call and for your continued support of Harvard Bioservices.
spk11: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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