Catalent, Inc.

Good morning and welcome to the Catalan Inc third quarter fiscal year 2023 earnings conference call. My name is Carla and I will be coordinating your call today. During this call you can register a question by pressing start followed by one on your telephone keypad. I will now hand you over to your host Paul Suarez, Vice President of Investor Relations to begin. Please go ahead.

Good morning, everyone, and thank you all for joining us today to review Catalan's third quarter 2023 financial results. Joining me on the call are Alessandro Buscelli, President and Chief Executive Officer, and Ricky Hopson, Interim 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. Please refer to slide two of the supplemental presentation available on our investor relations website at investor.catalan.com for discussion of risks and uncertainties that could cause actual performance or results to differ from what is suggested by those forward-looking statements. And look to slides three and four for discussion of Catalan's use of non-GAAP financial measures. Please also refer to Catalan's Form 10-K-A and 10-Q 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. Now I would like to turn the call over to Alessandro Buscelli, whose opening remarks will begin with slide five of the presentation.

Thank you, Paul, and welcome, everyone. I want to thank you for your patience as we finalized our Q3 results. It was important for us to conduct a thorough review of our financial situation during a particularly complicated period for the company. Today, I'll provide additional detail on that process and that continued progress towards returning Catalan to its historical levels of performance and margins. On the May 19 call, we provided our revised outlook for the company after a deep dive analysis that primarily focused on our biologic segment, which, as we noted during the call, had generated much of the noise we have experienced over the last several months. Since then, we have diligently continued our work towards addressing the issues we have experienced with our forecasting rigor and disciplines. With the benefit of those additional insights, it became necessary to update our outlook for fiscal 23, which I will discuss in more detail in a few moments. As I shared on May 19th, the operational COVID cliff caused a number of unforeseen challenges as we responded to the shifting global vaccine demand. At the same time, we continue to grow our non-COVID business, including progressing towards the transition of late-stage gene therapy products to commercial supply. This progress triggered an in-depth evaluation of the future accounting treatment for this new type of contract, including how we would recognize revenues, all of which Ricky will later explain in more details. As I also mentioned on our last call, in conjunction with the changes in our financial leadership, we conducted an independent third-party balance sheet review at the two largest sites in our biologic segment, Bloomington and BWI. Again, this balance sheet review reaffirmed the overall soundness of our financial record keeping, including our contract asset balances. As expected, we recorded a few accounting adjustments in Q3 at Bloomington, the largest of which was raw material write-offs and an increase to our inventory reserve of roughly $55 million related to certain raw materials and components, procure the safety stock to minimize pandemic related supply chain shortages. We also corrected that $26 million revenue recognition error related to the fourth quarter of fiscal 22. The error relates to a contract modification involving a Bloomington customer that we failed to reflect as such in the quarter. Separately, given our lower growth expectation for our consumer health business, we finalized the accounting for a goodwill impairment of $210 million. Finally, we also reviewed the significant items in our accounting for the first and second quarters of fiscal 23. and confirmed the soundness of that accounting. Overall, these critical financial reviews and analysis required us to delay completing our third quarter reform 10 until today. We also needed this additional time to prepare an amendment to our annual report on Form 10 for the fiscal year ended June 30, 2022, in order to address the $26 million revenue recognition error. I will note that, due to the discovery of this error, we also re-evaluated the effectiveness of our internal control over financial reporting as of the end of fiscal 22, and identified a material weakness in our internal control framework, or ICFR, as of that date, related to our failure to detect the Bloomington revenue recognition error. please refer to the amended 10-K for a more detailed description of this material weakness. As noted in the amendment, management has restated its assessment of our ICFR and our disclosure controls and procedures to indicate that they were not effective as of June 30, 2022, because of this material weakness. Our independent registered public accounting firm Ernst & Young has also stated its opinion on our ICFR as of June 30th, 2022. However, Ernst & Young's report on the consolidated financial statements remain unchanged and continues to state that our June 30th, 2022 financial statements present fairly in all material respects the financial position of the company at the june 30th 2022 and 2021 and the results of its operation and its cash flow for each of the three years in the years in the period ended the june 30th 2022 in conformity with gap during this time we also began to implement plans to straighten our internal control processes to ensure these issues are not repeated including through some of the personal changes we discussed on our last call. Before I end the call to Ricky to review our Q3 numbers, let me provide some brief updates. I will begin at the three sites, Bloomington, Brussels and BWI, that we called out as having operational challenges on our last call. We continue to see productivity improvements in Bloomington and Brussels since our last updates. Both sides are on the right path, but given the significant disruption from remediation efforts and the COVID operational cliff, more work and time are needed before we return to our previous margin levels. We are also focused on improving our cost structure. For example, in Bloomington, we recently implemented organizational changes aimed at regaining efficiencies and focused on the site supervisory and management levels. In BWI, the operational challenges had been resolved before our May 19th call. Since then, we have continued to ramp up our production levels and we currently see strong operational performance at the site following downtime at the end of Q3 and the beginning of the fourth quarter. Our production level is now where we want it to be from an operational standpoint and our financial performance will eventually follow these operational improvements. Nonetheless, gene therapy revenues are expected to be lower in Q4 compared to Q3 due to the lower utilization rate and work needed to restore previous operational levels. The second half of fiscal 23 also reflects some matching issues in our biologic segment particularly with respect to our significant investments in new modalities, including the cell therapies and plasmids. We're also taking actions in these areas. For context, we believe all these assets will create a great value for innovator and patients over time. However, our expectation earlier in the year for significantly higher revenues related to these assets in fiscal 23 turned out to be not what we are currently experiencing. As a result, these service offerings currently have a very low level of absorption and utilization and are running below break-even levels, creating an impact of several hundred basis points on EBITDA margin in our biologic segment. As we mentioned on our last call, I attribute these issues to a combination of items. including our optimistic forecasting and macro-related items like biotech funding, but also our go-to-market strategy. We are actively addressing all aspects of this imbalance. I expect we will substantially be able to address these issues over the next few quarters as we correct our cost base and we see some small signs of recovery in biotech funding. In the PCH segment, we continue to expect both revenue and EBITDA to increase sequentially from the third quarter, but now not as strongly as previously expected. As a reminder, the fourth quarter is our seasonally stronger quarter, particularly in PCH, as we execute on demand at higher levels before we perform maintenance shutdowns in the summer months. We attribute the change to more rigorous forecasting and delays in fulfilling demand, which include delays resulting from logistical issues with the clients' applied active pharmaceutical ingredients. These lower PCH expectations is the primary reason for our updated guidance. Now let me speak for a moment about our efforts to manage enterprise-wide costs and cash in order to return our company to its expected profitability levels. We discussed on May 19th that we have developed another cost reduction plan intended to drive margins more aligned to our historic levels, with a goal of doubling our previous commitment to $75 to $85 million of analyzed run rate savings. This includes cost eliminated through the completion of irrigation activities in both Bloomington and Brussels, We expect the impact of these activities to be roughly $100 million in fiscal 24, when combined with the savings from the first program announced in November. In addition, we are limiting new CAPEX as a consequence of the extensive build-outs we have already completed. We are also actively evaluating our current portfolio to ensure we have a suite of businesses that achieve sustainable, profitable, capital-efficient growth that delivers superior shareholder returns. Finally, let me address some investor concerns that we heard by reminding everyone that we disclosed on May 19th nine different inspections over the last six months, noting that several had no observation at all. and others had a few Form 483 observations, each. But we were confident then, and remain confident now, that we can and will address all of these observations with corrective and preventative actions that will meet the FDA's standards. In closing, I want to reiterate that Katalin continues to be a great company. with strong fundamentals, a large, growing global market, and a significant customer demand. We are committed to remaining our customers' number one CDMO partner, and I'm pleased to note that we've seen strong customer retention over the past few months. We have made significant progress in addressing our operational and forecasting challenges, and we have the right strategy in place to achieve the performance levels you expect from Caverant. I'll now turn it to Ricky for a discussion of our Q3 financial results. Thank you, Alexander.