Catalent, Inc.

hello everyone and welcome to the catalan inc first quarter fiscal year 2023 earnings conference call my name is daisy and i'll be coordinating your call today if you would like to register a question ready for the q a session please press star followed by one on your telephone keypad i would now like to hand the call over to your host paul surdes vice president of investor relations to begin so paul please go ahead

Thanks, Daisy. Good morning, everyone, and thank you all for joining us today to review Catalan's first quarter 2023 financial results. Joining me on the call today are Alessandra Maselli, President and Chief Executive Officer, and Tom Castellano, Senior Vice President and Chief Financial Officer. Please see our agenda for today's call on slide two of our supplemental presentation, which is available on our investor relations website at investor.catalan.com. During our call today, management will make forward-looking statements and refer to GAAP and non-GAAP financial measures. It is possible that actual results could differ for management's expectations. We refer you to slide three for more detail on forward-looking statements. Slides four and five discuss Catalan's use of non-GAAP financial measures and our just-issued earnings release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Catalan's Form 10-Q that will be filed with the SEC today for an additional information on the risks and uncertainties that may bear on our operating results, performance, and financial condition. Now I would like to turn the call over to Alessandro Maselli, whose opening remarks will begin on slide six of the presentation.

Thanks, Paul, and welcome everyone to the call. We started the year with the solid results and positive momentum. As a strong cost and currency growth in excess of 25% in non-COVID-related revenues helped offset headwinds from lower COVID product demand, inflation, and unfavorable foreign exchange translation. First, I would like to highlight that the results in the first quarter were initially expected to include $54 million of revenues and adjusted EBITDA related to the resolution of take-or-pay contracts for fill and finish of the Janssen viral vector COVID-19 vaccine at our Bloomington and Anaheim sites. We agreed to an early termination of the contracts, which reflect the changing demand patterns for the COVID-19 vaccines in order to accommodate these long-standing significant customers as we set a new and strengthened framework for our growing partnership. We received the agreed payments on these settled contracts in October and now expect that recognition of the related revenue will occur in the second quarter of this fiscal year. The change in the expected timing of this revenue recognition was not a notable factor when we updated our fiscal 23 guidance, which I will cover in a few moments. Turning to our Q1 results, as shown on slide six, without including our revenues or adjusted EBITDA, the $54 million just discussed, we reported the first quarter revenue of $1,022,000,000 flat on a reported basis, or a 4% increase in cross-border currency compared to the first quarter of fiscal 22. While we also screwed acquisition and divestiture, organic revenue declined 1% measured in cross-border currency. Our first quarter adjusted bid at $187 million declined 26% as reported, or 24% on a constant currency basis compared to the first quarter of fiscal 22. When excluding acquisition and divestiture, the decline was 28%, measured in cost and currency. Turning to the business, as noted on slide 7, first quarter non-COVID organic cost and currency growth was more than 20%. The growth in our non-COVID business was driven by our cell and gene therapy offerings in our biologic segment, as well as our clinical development services in our pharma and consumer segment, which is starting to benefit from commercial synergies under the new organizational structure. As we have shared in the past, we have strategically reinvested the COVID-related returns over the past two years, which has helped to ensure we have the necessary growth levers in place to enable the future growth we are forecasting. And we will continue taking the action to keep us on a path of success. Slide eight provides a schematic timeline of substantial non-COVID related capacity we put in place during the last few years, including the new capacity that we expect to activate as fiscal 23 continues to unfold. As you can see, some of these growth drivers date back years, including our entry into cell therapy in February 2020, which was not expected to contribute meaningful revenue in its few years of ownership as we scale the business through internal investment and TACIN M&A, including for iPSCs and plasmids. We now have the right assets in place to drive future earnings growth through these new modalities. Other large expected contributors to our growth have been our organic investment to enhance our BWI gene therapy assets. A year ago, we brought online six additional SWIFTs. to bring the site's total to 10 suites, and now are running at high utilization rates. In addition, we are now opening a new building on the same campus containing eight more suites, which will progressively come online over the next 12 months as our client's pipeline progresses. Some of the other key investments we have made over the last few years include the drug product's range capacity that led to recent tech transfer wins, investments in additional single-use drug substance production capacity, and our entry into the gummy nutritional supplement market just over a year ago, among others. Laying on top of our organic growth drivers is the acquisition of Metrix contract services, which we closed on October 3rd, and is now accounted for in our updated guidance. This acquisition is just beginning to enable us to accelerate our existing plans to meet the increasing demand for fit-for-scale, high-potent drug manufacturing. Underlined growth in this business is the increasing number of pot and compounds in the oral solids market, particularly in the oral oncology pipeline. Adding pot and handling capabilities in fit-for-scale capacity through metrics represents a continuation of our strategy to maintain a balanced portfolio of offerings that closely matches the overall industry R&D pipeline, which includes a growing number of innovative small molecules that are complex to formulate or require specialized handling. Having explained why we continue to project solid long-term growth for Catalan, I will briefly highlight factors that have led us to a more conservative orientation towards fiscal 23 and the decision to adjust our guidance for the year, including changes to the market conditions since our last call and some updated outlooks received from customers, as well as other macroeconomic and sector-specific factors. The macro factors include the further deterioration of the overall economic landscape, particularly in Europe, with increased likelihood of a recession and further tightening of capital markets. We are also beginning to see anticipated further ripple effects from either inflation which is impacting consumer confidence and discretionary spending. We are now seeing signs of lower end market demand for nutritional supplements. In addition, we are experiencing delays in the delivery of the new coming manufacturing lines due to shortages of key components at our European suppliers. We have therefore adjusted our near-term growth assumptions for our consumer health offerings within our pharma and consumer health segment. While our biopharma and consumer health pipelines remain robust, we are starting to experience signs of cash-sensitive decisions by some of our customers. This is most evident in relationship to inventory levels for finished goods or the prioritization of their candidates as they progress through the pipeline. Our adjusted focus also reflects these new trends. Finally, after several years of elevated levels of capital expenditures, we have made the fiscally prudent decision to reface some of our CapEx spending plans for this year to maximize utilization, increase free cash flow, and reload our balance sheet. Some of the capacity we initially factored into our initial fiscal 23 guidance will now be delayed into fiscal 24, but this refacing will not impact our long-term growth targets. To respond to the urgent patient demand for vaccines and therapies during the pandemic, we significantly increased our direct and indirect cost base for the past two years, negatively impacting our operating efficiency. Given the new conservative approach, the management team has been working diligently on plans to optimize the cost structure of the organization and recover our historical productivity levels. Many of these actions are already in flight and all are expected to be operationalized by the end of this calendar year. This is also reflected in the revised guidance. While we are taking the prudent step of adjusting guidance as we navigate the exit from the pandemic, I want to be clear that our underlying business still displays significant areas of strength, as some examples. we continue to focus strong growth for our overall non-COVID business. Our Zytis business continues its historic record performance. Our gene therapy business has proven out the thesis we lay out when we initially acquired the Paragon Bioservices. And our overall funnel of new non-COVID opportunities is at record high. Shifting gears, I would like to address the FDA audits over the summer that led to 483 observations. Quality and compliance are central to everything we do, and we invest constantly to assure the strength of our quality systems and the quality of our operations. And that quality is constantly audited. In fiscal 22, our facility was subject to approximately 750 inspections, including more than 50 from FDA and other drug regulators around the world, as well as hundreds of customer audits and audits by our own. independently managed internal audit staff and their outside consultants. So regulators' inspections occur routinely, and all of us, regulators, customers, and Catalan, are all working to assure that patients receive timely, safe, efficacious, and quality medicines and vaccines. We did so routinely despite the challenges of the pandemic as we provided vaccines to many millions of people around the world, and we will continue to do so. With that said, the regulatory compliance landscape is always evolving, including what is considered best practice. And so we take all observations we receive seriously and respond to them in a holistic and complete way. We believe that our responses by our Bloomington and Brussels teams will comprehensively address the recent FDA observations and have already deployed all necessary resources to implement the changes to which we have committed in a timely manner. To close this topic, and I want to highlight these, while there are some near-term negative P&L effects as we address these observations, the overall related remediation costs are not a notable factor in our revised full-year outlook. To close my remarks, We continue to be excited about the breadth of our offering and their ability to meet customer needs, which will deliver meaningful growth even in a less favorable microeconomic environment. With the sharp drop in COVID-19 vaccine demand, we pivoted to alternative future growth drivers early in the pandemic cycle and are starting to see the fruits of those investments. We remain deeply focused on executing our mission to develop, manufacture and supply products that help people live better and healthier lives, while enhancing value for our shareholders. Now, I would like to turn the call over to Tom.