Catalent, Inc.

Good day and thank you for standing by. Welcome to the Catalan, Inc. Fourth Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Paul Serdez, Vice President of Investor Relations. Please go ahead, sir.

Paul Serdez Thank you, April. Good morning, everyone, and thank you for joining us today to review Catalan's fourth quarter and full fiscal year 2021 financial results. Joining me on the call today are John Cheminski, Chair and Chief Executive Officer, and Tom Castellano, Senior Vice President and Chief Financial Officer. In addition to reviewing our fourth quarter and fiscal year 2021 earnings release issued earlier this morning, I also refer you to our other press release issue today, announcing our agreement to acquire Patera Wellness, a leading developer and producer of gummy soft chew and lozenges for nutraceutical, functional, and botanical extract products. Please see your agenda for today's call on slide two of our supplemental presentation, which is available on our investor relations website at investor.catalan.com. During our call today, management will be making forward-looking statements and refer to non-GAAP financial measures. It is possible actual results could differ from management's expectations. We refer you to slide three for more detail on bold working statements. Slides four and five discuss CADLN's use of non-GAAP measures. Our just-issued earnings release provides reconciliation for the most directly comparable GAAP measures. Please also refer to CADLN's annual report on Form 10-K that will be filed with the SEC for additional information on the risks and uncertainties that may bear on our operating results, performance, and financial condition, including those related to the COVID-19 pandemic. Now, I would like to turn the call over to John Cheminski, whose remarks will cover slides 6 through 13 of the presentation.

Thanks, Paul, and welcome to the call. Fiscal 2021 was an extraordinary year for the entire world and for Catalan. During the year, we achieved truly significant results financially, operationally, and in terms of making a meaningful impact on our global community, including accelerating our capacity expansions and infrastructure, substantially expanding and deepening one of the best talent pools in the industry, intensifying our longstanding commitment to sustainable practices, and accelerating our growth strategy, all while delivering record financial results. We rose to the challenge of scaling our capacity to meet significant demand for vaccines and treatments to address the COVID-19 pandemic and are on track to deliver well over a billion COVID-19 vaccine doses this calendar year. We've also continued to develop and manufacture a broad range of other important medicine under difficult, unprecedented and rapidly changing global conditions. Our top priority throughout the pandemic has been to keep our employees safe, and we continue to be humbled by the dedication of the more than 17,000 members of our team around the world who have enabled us to grow the company and deliver for our customers and their patients during this tumultuous time. Through our shared experience navigating this pandemic, we've grown as individuals and as a company added substantial new capabilities, and strengthened partnerships that together enhance our ability to continue to develop and deliver products that help people live better, healthier lives. With that overview, I'll now provide a summary of our financials for the fourth quarter and full fiscal year, as well as operational highlights since our last earnings call. I'll then conclude my prepared remarks with an overview of the acquisition of Baterra Wellness, which we announced this morning. Our net revenue for the fourth quarter was $1.19 billion, increasing 25% as reported, or 22% in cost and currency, compared to the fourth quarter of fiscal 2020. When excluding acquisitions, as well as the divestiture of our Blofeld sealed business, which closed in March, organic growth was 26% measured in cost and currency. Our adjusted EBITDA of $348 million for the fourth quarter increased 30% as reported, or 27% in cost and currency, compared to the fourth quarter of fiscal 2020, which includes organic growth of 32% measured in cost and currency. Our adjusted net income for the fourth quarter was $209 million, or $1.16 per diluted share, up from $0.90 per diluted share in the corresponding prior year period. The biologic segment, given the continued high demand for drug product, drug substance, and viral-based offerings, was again the top contributor to Catalan's financial performance, with organic revenue growth of 66% and segment EBITDA more than doubling from the fourth quarter of last year. Our software and oil technology segment continued to experience some of the same pandemic-related headwinds in the fourth quarter, with net revenue down 1% over the fourth quarter of last year on a constant currency basis. However, margins improved year over year, and so is our outlook, as we're seeing business gradually come back and we expect a return to organic growth in fiscal 2022. Our oral and specialty delivery segment had organic net revenue growth in the mid-teens. After excluding the results due to the product in our respiratory platform that was voluntarily recalled last September, In OSD, like SOT, we're also seeing that certain offerings within that segment impacted by the pandemic are beginning to come back. And finally, our clinical supply services segment posted over 20% constant currency net revenue growth and strong margin compared to the fourth quarter fiscal 2020, a comparison period that included widespread disruption to clinical trials during global lockdowns as a result of the pandemic. For our full fiscal 2021, net revenue and adjusted EBITDA came in at record levels, driven by robust growth in our biologics business, which represented 48% of our net revenue in the year. Fiscal 2021 net revenue was $4 billion, and constant currency organic growth was 25% compared to the prior fiscal year. We estimate approximately 18 percentage points, more than $550 million of our organic growth last year was derived from the net impact of the COVID-19 pandemic. After factoring in the amount of net revenue generated from COVID-19 projects against opportunity costs and pandemic-related headwinds that were created in some of our service offerings. Adjusted EBITDA exceeded $1 billion, resulting in constant currency organic growth of 32% compared to fiscal 2020. We also increased our adjusted EBITDA margin to 25.5%, up 120 basis points from the 24.3% adjusted EBITDA margin at fiscal 2020. To meet our commitment to our customers and their patients, a number of Catalan facilities have been operating 24 hours a day, seven days a week for more than a year. At the same time, we've increased our workforce from 14,000 at the end of the last fiscal year to more than 17,000 today to meet our growing production volume. As we've said on past calls, COVID-19 has not only accelerated our strategic plans, but also accelerated returns on the strategic investments we've made, enabling us to put additional cash to work to continue to drive our long-term growth. Let me update you on some of these capacity and capability investments. As you know, our 950,000 square foot facility in Bloomington, Indiana, plays a critical role in the global vaccine production effort. Over the last year, we brought online two new vial filling lines now dedicated to the manufacturer of products for two of our COVID-19 vaccine customers. We're also qualifying a high speed syringe filling line at the site. This project was first announced in January 2019 and is expected to be operational in the next several months, in line with our original plan. Given the strong demand for biotherapeutic manufacturing, we will continue to invest in additional drug product and drug substance capacity at our Bloomington campus. Our 300,000 square foot facility in Anani, Italy, also continues to make significant contributions to the global supply of COVID-19 vaccines for multiple customers. The additional high-speed biofilling line we've accelerated for a vaccine customer is expected to be operational before the end of this calendar year. Last month, we announced a $100 million expansion project at our Anani facility to add biologics drug substance manufacturing capabilities to the site, establishing our first drug substance capacity outside of the U.S. to support the growing European market demand for biologics manufacturing supply. The initial phase of the expansion includes installation of two 2,000-liter single-use bioreactors within new purpose-built manufacturing suites, associated investments to support clinical development, and investments to support late-stage and commercial tech transfers. This initial phase will also include the installation of all the needed infrastructure for further expansion in the future. The initial bioreactors are expected to be operational for customer projects late in fiscal 2023. Later phases of the planned expansion contemplate creating 16,000 liters of total flexible manufacturing capacity, enabling 2,000 liter to 8,000 liter batches. Also in Europe, we announced last summer further investments in a facility in Limoges. France to create a European Center of Excellence for Clinical Biologics Formulation Development and Drug Product Field Finish Services. These investments are on track to be completed by the end of fiscal 2022. The modernization of the 56,000 square foot facility includes the installation of a high-speed flexible line capable of filling vials, syringes, or cartridges under isolator technology, as well as enhancements to its analytical and quality control laboratories. Our new center of excellence in Limoges will strengthen Catalan Biologics' global and European capacity and will also serve as a feeder for additional services at our Nanyi and Brussels facilities. Moving to our cell and gene therapy offerings, we continue to add both capabilities and related capacity. We entered the cell therapy market in February of 2020 and have rapidly built our infrastructure and capabilities. We recently completed the build-out of our GMP cell therapy suite in Houston, Texas, and have begun manufacturing for clinical supply. We're also progressing the build-out of our commercial-scale cell therapy manufacturing facility in Gosley, which is on track to open in late fiscal 2022. We also continue to identify inorganic opportunities to grow our cell and gene therapy platform. Recently, we acquired Wine Cell Therapeutics, a developer and manufacturer of GMP-grade human-induced pluripotent stem cells, or iPSCs. Importantly, iPSCs are an ethically-sourced substitute for embryonic stem cells and have shown significant promise in regenerative medicine for a wide range of therapeutic indications. Line Cell expands our existing custom cell therapy process development and manufacturing capabilities with proprietary GMP cell lines for iPSC-based therapies and enables us to offer the building blocks to scale iPSC-based cell therapies while reducing the barriers cell therapy innovators would otherwise face to gain entry into the clinic. In February, we entered into the plasmid DNA market through the acquisition of Delphi Genetics, also located in Gosselies, now part of our European Cell Therapy Center of Excellence, together with the launch of plasmid DNA development and manufacturing capability through an organic investment at a Rockville, Maryland facility. We've since further expanded our European Cell Therapy Center of Excellence on Agassiz campus with the acquisition of an additional 32,000 square foot facility. This facility provides us with the capacity for commercial scale plasma DNA manufacturing up to 500 liter scale. With the integration of plasma DNA into our overall cell and gene therapy offerings, choosing Catalan will allow customers to de-risk their supply chains and optimize their programs along the entire development pipeline. In gene therapy, viral vector manufacturing capacity continues to be in high demand with a growing number of gene therapy compounds currently in the industry's development pipeline, as well as for manufacturing viral-based COVID-19 vaccines. In fiscal 2021, we completed the build out of commercial scale manufacturing suites in the first building at our Maryland Gene Therapy Campus. To meet the increasing demand we see, we're now outfitting the adjacent building to include at least five additional CGMP suites, a project that remains on track for completion by this time next year. Before reviewing the Patera acquisition, I'd like to highlight our expanding corporate responsibility and ESG commitments and the additional progress we've made since our last update. As a leader in the growing CDMO industry, we understand the need to demonstrate our shared commitment, sense of urgency, and value in contributing to the long-term sustainability of the entire biopharma sector. In June, I shared our long-term sustainability plans at the Biopharma CEO Investor Forum, and I encourage you to watch the presentation on our IR website. Since then, we formalized a commitment to the science-based target initiative, joining a growing list of companies setting actionable science-based greenhouse gas emission reduction targets to limit global warming. This commitment includes calculating and reducing direct and indirect emissions, even as the company continues to evolve and grow. One of our first actions after making this commitment was to ensure that the energy we purchase for all our sites in North America, South America, and Europe, as well as the majority of our sites in Asia, is coming from renewable resources. As a result of our actions, 97% of our electricity usage across the enterprise is now procured from renewable energy sources such as wind, solar, hydro, and biomass, an achievement that will contribute to our overall greenhouse gas reduction efforts. We will incorporate our work on science-based targets into our annual ESG report for fiscal 2021, which we expect to publish in the first quarter of calendar 2022. While I'm very proud of the items I just mentioned and the many other items that have become part of Catalan's ESG progress over the last several years, there's still more work to do. For example, some of our top ESG goals for fiscal 2022 include continuing to improve employee diversity at all levels of the organization and meeting our commitment to be landfill free by the end of fiscal 2024. Now on to slide nine, we're pleased to announce our agreement to acquire Vitero Wellness. We've been seeking the right opportunity to expand our participation in the nutraceuticals and nutritional supplements markets for quite some time, leveraging the accelerated growth dynamics of the space. Matera is a leading developer and manufacturer of consumer-preferred gummies, soft chews, and lozenges for nutraceutical, functional, and botanical extract products. And they have four fit-for-purpose production facilities in the U.S., There is no question that Baterra is one of the leading independent suppliers in this high-growth, capacity-constrained portion of the market. Within the space, Baterra is well-known for its ability to partner with its customers to develop and manufacture a variety of high-quality delivery formats with differentiated flavors and superior consumer experience. It's clear to us that the specialized expertise that the team will be bringing on is unparalleled, and Baterra's customer relationships reflect that. The acquisition will enable Catalan, and specifically our soft gel and oral technologies or SOT segment to expand our substantial existing consumer health platform with the fastest growing wellness product offerings in this area and also expand our ready to market product library as well as provide a variety of packaging options to meet customer needs. We're excited to have this opportunity to strengthen our partnerships with our customers across gummies, soft chews and lozenges going forward. As part of today's announcement, we are also increasing our expectations for our long-term revenue growth rate for our SOP segment from 3% to 5% to 6% to 8% given the strength of our advanced offerings and product libraries and supported by the significant growth contributions that we expect from Batera. Moving to the transaction details, we've agreed to acquire Batera for $1 billion on a debt-free, cash-free basis, and we expect to close the transaction within the first half of this fiscal year. Today, the company generates approximately $150 million in sales, an attractive margin reflecting its premium offerings, and is growing at over 20% annually. We expect similar growth over the next several years. We plan to fund the acquisition with a combination of cash on hand, a partial drawdown of our revolving credit facility, and potentially the issuance of new debt, with the resulting net leverage ratio of approximately 3.1 times at close. Like in some of our other recent acquisitions, we expect significant deleveraging in the near to medium term following closing and expect to maintain ample firepower for further strategic M&A. From an earnings perspective, we expect the acquisition to be accreted to ANI per share in the first year after close and significantly accreted thereafter. At Catalan, we pride ourselves in our ability to bring in new talent and capabilities, and we're looking forward to seamlessly integrating Patera and welcoming its team of approximately 500 experienced and knowledgeable employees and formulators to Catalan. On the integration front, we've developed a detailed plan to support and accelerate Patera's in-flight growth plans and have already identified work streams and leaders for integration. Let me now share some additional capability information and market trends as covered on slide 11. As I mentioned, we've been seeking the right entry point into the nutraceutical, gummies, soft chews, and lozenges markets for some time. Importantly, Batera is one of the few at-scale independent manufacturers in the market today and is a market leader across all three categories. In addition to Batera's end-to-end solutions from development to commercial manufacturing and packaging, Batera has an extensive library of ready-to-market formulations to accelerate product launches for partner brands. Importantly, Batera has the ability to produce gummy formulations with both gelatin and plant-based technologies with kosher, halal, organic, and other certifications. Batera also produces soft chews and, in particular, soft chews using the cold process, which is ideal for protecting heat-sensitive ingredients. Our consumer health customers are constantly asking Catalan for new formats in addition to our product library. and specifically ask about gummies and other engaging formats for their nutritional supplement and nutraceutical product concepts. We view Batera as an innovation engine for emerging, high-growth brands, and we're excited to begin working with our customers in this area going forward. One of the reasons we're focused on investing in these areas is that we believe Batera is at the intersection of macro consumer health trends, with innovative delivery systems growing at roughly four times the pace of the traditional market. I would also note that about two-thirds of this capacity constrained market is outsourced today. While the market for traditional delivery systems remains large, the innovative segment's recent explosive growth has increased its portion of the nutraceuticals market to close to $17 billion today, measured at the retail level, more than doubling its market size over the last five years. And we expect the terror to grow in excess of the innovative market as a whole in the near to medium future. Finally, on this subject, I want to emphasize at Catalan, we always have room to add leading high-growth premium CDMO franchises to our business. Baterra is the latest example in our tradition of high-growth and earnings-accredited strategic M&A, and we're excited to begin working with Baterra's employees and customers. I'll conclude my opening comments by saying that Catalan prides itself on a track record of successfully identifying, acquiring, and integrating world-class businesses with leading manufacturing development capabilities. Over the last several years, we've transformed our portfolio, expanding capacity and capabilities across our service offerings. We're proud of the work we've accomplished. Our future has never looked brighter. As I look across our entire portfolio, I note again that we remain on track to meet or beat our goal of achieving 50% of our 2024 net revenue from our biologic segment. We continue to forecast long-term growth in that segment in the range of 10 to 15%. Based on our confidence in the growth we foresee across all of our segments, We're raising our projected consolidated long-term net revenue growth rate to 8% to 10% from the previous 6% to 8%, which we expect will be coupled with continued EBITDA margin expansion. We're confident in our trajectory and believe our announcement today is a testament to how our employees and partners have helped Catalan position itself for continued long-term growth. I'm now very happy to welcome Tom Castellano back to our earnings calls. As you know, Tom previously served as the company's investor relations officer through 2019 and was promoted on June 1st to CFO from his most recent role as global vice president of operational finance.