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.

Okay, starting on slide six. Net revenue in the quarter was $1.04 billion, down 19% on a reported basis, or a 17% decrease on a constant currency basis, compared to the third quarter of fiscal 2022. When we exclude the impact of acquisitions and divestitures, Organic revenue declined 19%, measured in constant currency. Our third quarter adjusted EBITDA decreased 69% to $105 million, or 10.1% of net revenue, versus 26.6% in the prior year quarter. On a constant currency basis, our third quarter adjusted EBITDA declined 68% compared to the third quarter of the prior year. I will speak to the major drivers of these declines in the segment commentary. Adjusted net income was negative $17 million, or negative $0.09 per diluted share, compared to adjusted net income of $188 million, or $1.04 per diluted share, in the third quarter a year ago. Reconciliations from net earnings, the nearest gap measure, to each of adjusted EBITDA and adjusted net income are in the appendix to the slide deck. Excluded from adjusted net income is a goodwill impairment of $210 million on an asset tax basis in our consumer health business, which includes the Patera business that we acquired in October 2021. Now let's discuss our segment performance, where commentary around segment growth will be in continent currency. As shown on slide seven, Q3 net revenue in our biologic segment was $475 million. This was a decrease of 32% compared to the third quarter of 2022. The decline is primarily driven by significantly lower year-on-year COVID demand. As previously disclosed, the third quarter of 2022 was the company's strongest quarter for COVID revenue. While in the third quarter of this year, COVID revenue declined approximately 68% to $120 million. Included in the $120 million was an unusually high level of component sources, which carries a single digit margin as we finalized a one time settlement for COVID related raw materials totaling $35 million. In February, we have forecasted that COVID revenues were expected to be more than $600 million in fiscal 23, an expectation we maintain. However, the quarterly phasing of this revenue is different than our comments suggested in February, where we expected Q4 to be higher than Q3. In Q3, we recorded more COVID revenue than expected due to the resolution of certain outstanding pay and component sourcing arrangements. With our third quarter year-to-date COVID revenue of approximately $560 million, our Q4 COVID expectation is now substantially reduced. Our long-term COVID take-home payments agreements are now concluded, and in fiscal 24, COVID volumes will be tied to more standard ordering arrangements based on rolling forecasts, including binding periods, which are typical arrangements in our business. Finally, we continue to plan for a significant year-on-year reduction in COVID revenue in fiscal 24. Non-COVID growth in biologics in Q3 was approximately 11% year-on-year. Our core gene therapy business has been the strongest source of growth for Catalan year-to-date and grew double digits in Q3, but well below our expected growth for the reasons we outlined on the May 19th call. I would also like to draw your attention to the movements in our biologics commercial and development revenue streams, where the classifications are driven by contractual language, which is not always aligned with the regulatory status of a given product. The large drop in development revenue had two primary drivers. The year-on-year decline in certain COVID revenue that had been designated as development revenue. And second, in the third quarter in fiscal 2023, we started producing product under an updated gene therapy contract, which changed the product classification from development to commercial. In addition, the third quarter of fiscal 2022, there was also a large COVID program designated as commercial that concluded that quarter. Moving to EBITDA, the segment's EBITDA margin was 1.1% compared to the 31.1% recorded in the third quarter of fiscal 2022. Items that adversely impacted net revenue and segment EBITDA include productivity issues and higher than expected costs and accounting adjustments in Bloomington, productivity issues and higher than expected costs in Brussels, ERP implementation and unforeseen operational challenges that led to the under absorption at BWI and low levels of absorption and utilization across our cell therapy and plasmid assets, where optimistic planning drove accelerated investments and the revenue is not being generated as quickly as expected. The accounting adjustments during the quarter were largely due to the reserves or write-offs of raw materials in Bloomington, totaling approximately $55 million that we purchased at our own risk as safety stock during the pandemic. This alone impacted segment margin by more than 1,100 basis points. The other accounting adjustments identified through the independent balance sheet review were all immaterial in nature and essentially netted out close to zero. As shown on slide eight, Our farmer and consumer health segment generated net revenue of $563 million, an increase of 1% compared to the third quarter of fiscal year 2022. Segment EBITDA down 10% over the same period. The segment's revenue growth was primarily driven by the recently acquired metrics business, which contributed 4 percentage points to the segment's top line and 5 percentage points to adjusted EBITDA. The organic PCH business continued to see increased revenue in clinical supply services, whilst commercial revenues continued to face headwinds, with the most notable driver being high-end nutritional supplements, including our gummy operands. A softened consumer demand continued to create underabsorption. In addition, the segment also faced continued supply chain issues related to a top product, which is in the process of being resolved. and lower demand related to some other high margin pharmaceutical products. The segment's EBITDA margin of 22.3% was lower by roughly 290 basis points year over year from the 25.2% recorded in the third quarter of fiscal 2022. Year over year margin decline was a result of unfavorable product mix across the segment and cost inflation. Segment nine shows our debt related ratios, and capital allocation priorities. Our debt load, which we now intend to reduce more aggressively, remains well structured and permits good flexibility. Our nearest maturity is not until 2027. Our most rigorous debt covenant is the ratio of first lien debt divided by the last 12 months of adjusted EBITDA, with the threshold being 6.5 times. This compares to our March 31st actual level of 2.2 times. Catalyst net leverage ratio as of March 31st, 2023 was 4.9 times, an increase when compared to December 31st, 2022 at 3.8 times, which was driven by the lower year-on-year adjusted EBITDA in Q3. Because the EBITDA portion of the net leverage ratio is calculated on an LTM basis, we expect our net leverage ratio to continue to move higher in the coming quarters, peaking in Q2 of fiscal 24, and then improving in the second half of the fiscal year. This is largely driven by a comparison that includes the $440 million of COVID revenue and related EBITDA generated in the first half of fiscal 2023. Our combined balance of cash, cash equivalents, and marketable securities as of March 31, 2023, was $252 million. a decrease of $218 million from December 31st, 2022, primarily driven by negative free cash flow in the quarter, as well as a $50 million revolver repayment. Note that our cash balance on March 31st was approximately $300 million, even after accounting for another $10 million repayment on the revolver. As discussed on May 19, but worth repeating, My top priorities for positive cash generation and allocation of capital, which will support our efforts back towards our net leverage target of 3.0 times, include greater utilization of our asset base, completion of essential in-flight CapEx projects that we believe will generate positive returns in the near to medium term, activities that will reduce our cost base, and contract negotiations to reduce our cash conversion cycle. I would now like to discuss our contract assets, which as of March 31st, 23, had a balance of $505 million, a sequential decrease of $8 million, and an increase of $64 million from June 30th, 2022, our prior fiscal year end. This increase was primarily driven by gene therapy programs, for which the cash conversion cycle is longer given the duration of manufacturing and release testing process. which can take multiple quarters from start to finish. Also related to contract assets, the revenue account in treatment for complex products with long production cycle times will continue to be recognized on a percentage of completion basis when contract terminology determines our work relates to commercial activity. Note that as previously mentioned on this call, in the third quarter there was a change in classification from development to commercial of a large gene therapy program With the support of independent third-party experts, we also conducted a comprehensive review of the related contract and determined that the arrangement required an analysis under GAAP guidance for both leases and revenue within our financial reporting. Based upon this analysis, we concluded the provisions of ASC 842 leases will apply to a portion of this arrangement, and accordingly, the accounting was finalized. This change in accounting has no effect on our fiscal 23 guidance, nor do we expect this change to have a material impact on our fiscal 24 results. At March 31st, we had one strategic customer, a majority of whose business relates to our gene therapy platform. That represented 23% of our $1.56 billion in aggregate net trade receivables and contract assets. unrelated to our balance sheet, but to provide further transparency on our customer concentration, we have two customers in the biologic segment that each represented 11% of consolidated net revenue during the three months ending March 31st, 2023. These same two customers, one of which is primarily a drug product customer and the other of which is primarily a gene therapy customer, represented 9% and 5% of net revenue effectively in the three months ending March 31st, 2022. Finally, we continue to expect our fiscal 23 CapEx to be approximately $550 million. When considering the billions of dollars of CapEx investments we have already made in the business, in fiscal 24 we expect to be able to reduce our CapEx to only the most critical projects, leading to substantially lower level of spend. And please turn to our financial outlook for fiscal 2023 as outlined on slide 10. As Alessandro mentioned, we are adjusting our guidance primarily to account for lower sequential growth assumptions in our pharma and consumer health segment. As you know, my highest priorities in my first month as interim CFO were related to the challenges in our biologic segment and overseeing the substantial work needed to report our third quarter results. Now that we have spent more time on PCH, we are in a better position to align our guidance with our performance. We now expect fiscal 23 net revenue in a range of $4.25 billion up to $4.325 billion. Note that we previously expected PCH to be flat organically for the full year, but now expect organic revenue to decline in the lower single digits. We now expect adjusted EBITDA in a range from $700 million up to $750 million. We now expect adjusted net income in a range from $169 million up to $210 million. Our assumed tax rate remains 27% to 29% for the full year. Providing some additional clarity on our segment performance in the second half, we expect Q4 margin in our PCH segment to improve against the margin levels reported in the third quarter and our biologic segment margin to remain depressed in the fourth quarter as we continue to manage through the operational healing process and ramp up production through the back half of Q4 into the first quarter of fiscal 24. We are working diligently through our fiscal 24 budgeting process and look forward to presenting fiscal 24 guidance during our August call. Operator, this concludes our prepared remarks and we would now like to open the call for questions.

Perfect, thank you. So to remind you, if you would like to ask a question, please press star followed by one on your telephone keypad. Alternatively, if you have chosen to revoke your question, you can press Start followed by 2 to remove this. When preparing for your question, please ensure your phone is unmuted locally. Our first question comes from Jacob Johnson from Stevens. Your line is now open. Please go ahead.

Hey, thanks. Good morning. Maybe, Ricky, starting off where you just left off, just on 4Q, There's a few moving pieces in the biologic segment this quarter. Some of that strength, it seems like COVID was seasonally stronger in 3Q than you expected, but you all said the $55 million inventory charge. Given COVID could be lighter in 4Q, should we expect biologics revenues to be down sequentially in 4Q? And then if you'd like to give us any other detail on the margin front there. And then maybe just a longer term question on biologics. Alessandra, I think you mentioned that that more work and time are needed to return biologics to historical profitability levels. Can you just talk about that timeline and how much of this can be accomplished by cost savings and then how much of it is just kind of incremental margin on revenue growth? I'd be curious within that, just kind of the incremental margin on COVID rolling off and then kind of the non-COVID work coming on. I know that's a lot, but thank you.

Yes, Jacob, I'll take the first part of that question and specific to your Q4 comment. You're right, the $55 million impact in Q3 will not be repeated in Q4. The operational productivity challenges that we saw in Q3 dwindled into Q4 as well. what I would say is that the improving operational performance doesn't always translate into an immediate financial impact. And that's why we continue to expect to see those depressed margins in Q4 when we compare that back to Q3. But your comment around the sizable reduction in COVID revenue from Q3 which was, as I said, $120 million. And if you do the math, the Q4 numbers, they're about $40 million. We would expect to see some decline in revenue in Q4 versus Q3 overall for the segment.

Yeah, and to your second part of the question, which is a great one, by the way, look, when you look at what is the work to be done in biologics, You can really look at the three areas of intervention here. The first one is regaining productivity at a couple of locations which have been significantly disrupted by a couple of events, one remediation and two correcting the course after a significant shift of the portfolio. uh following the the colleague cliff so uh we are making good progress there as i said in my remarks we started to see some first progress season in in in this quarter from an operational standpoint and again we will continue to work over the next period to address those productivity issues, measured primarily as the ability to deliver up time on the production lines. The second one is really aligning the headcount to the new mix. That takes some time, right? So you need to do that responsibly, respectfully, and taking into consideration always the potential turmoil that these activities can generate. So we are doing that very, very thoughtfully. We know what the end point needs to be, but we don't want to rush into it to make sure that the business stays in control. So maybe this could delay a little bit the full margin recovery, but it's the right thing to do in order to continue to deliver service to our customers. And finally, this is an element which we have quantified a little bit more during this call. It's really addressing those additional sites and assets which we have added to pursue new modalities. We have quoted the cell therapies and plasmids. Look, the reality is that in a different world or with the different expectations, this site would have registered revenues faster than what we are seeing. The reality is now clear to us in terms of what could be an achievable revenue ramp there. And now we are aligning our cost structure and cost investment to those new outlook of revenues. And these assets, which are now diluted, significantly diluted to the segment, our plan is to bring them more short-term, in good order, not to affect the margin of the segment. So I would say these are the three items. The timeline of the three items is different, so that's why it's not very easy to point you to a specific date. But hopefully our understanding and plan gives you the confidence that over time we're going to get back there. um also i will add there's a final comment look at the end of the day uh the pricing and the margin of the business it's the same that we experienced even before the pandemic so there is no reason that we cannot bring this segment back where it needs to be okay thanks for that and then just for my my follow-up you know these glp-1 drugs have been a key focus

investors over the last several months um i believe you support at least one of these as we think about kind of you know back back filling the the covet roll off how how large an opportunity do those therapies represent for catalan well number one i believe it's uh is an exciting uh space for all the industry uh to start with uh clearly um very large patient population so with the

the need for premium dosage forms so this is in the in the real the the strength place to the strength of catalan we have a Normally, we have high-speed lines with the large capacity and with the under-isolator technology, so really matching the need. So this is one of the most interesting areas for us, actually one where we play a significant role today, and we want to work hard to play an even more significant role going forward.

Got it. Thanks for taking the questions.

Our next question is from Tejas Savant from Morgan Stanley. Your line is now open. Please go ahead.

Hey, guys. Good morning. Maybe I'll start with one on the gene therapy side as well. Ricky, could you just update us on conversations with customers around some of those working capital efficiency initiatives you had alluded to on the last call, particularly as they relate to that intrastep testing process and tweaking some of those invoicing triggers? And Alessandro, any color you can share, perhaps at a qualitative level, on the fiscal 24 implications of perhaps an age-restricted label for Sarepta's drug here? Thank you.

All right, so first part, I guess I'm going to take both, if you don't mind, Ricky. So look, on the first part, as we said in the previous call, we are addressing the substance of the problem here, which is to shorten these testing timelines, and it's going to take some time to do that. I believe that we have a very collaborative relationship with some of those customers, and so they are very much listening to our position here, and they've been receptive to some of our requests. So again, I believe that as we get into the rhythm here, our cash flow generation from these modalities will improve over time. With regards to your second question, I'm going to stay short on making specific comments on regulatory processes that are currently still ongoing. I will tell you that our We continue to work hard to make sure that as we have secure supply in the short term, we also make sure that the supply is available for the future, reminding you that clearly, given the long timeline of this process, at any point in time, you're really looking at what is the potential demand of the product down the road. So there is not necessarily a strict correlation of short-term event to manufacturing plans because you're manufacturing for something that is happening a few quarters down the road from a market standpoint.

Got it. That's helpful. And then a quick two-parter on the quality side of things, guys. On BWI, are the costs associated with the recent 483 that was disclosed fully contemplated? Is there any color you can share on what the observations were related to, and is it fair to say the remediation is now complete? And then same question on Bloomington. It sounds like the May 12th inspection, you did not get a 483. So does that mean that the observations that were noted in the prior 483 that had been already upgraded to VAI status are now essentially considered fully resolved?

So, look, first of all, I would relate to one comment that I've done many times. You know, regular inspections are the reality of our business. So, you know, and and so correlated so to speak cost or if you like activities correlated them are part of our normal business model there are times in which for a number of different reasons there is a concentration of inspections at one specific location because it's very important because there is a lot of you know there is a lot of going on and this was the case in january february march with regards to our gene therapy facility now it's is public information has been published we received three inspections at those locations we are uh very uh pretty pretty satisfied with the outcome which we have addressed as we always do um with regards of your second question or second part of your question look the reality is that you know you don't have to see these any inspection necessarily correlated to the previous one any inspection is an inspection it's all right sometimes you get inspected as on an annual basis, and this is true for the most critical sites. Sometimes because there is a PAI, a pre-approval inspection, so there is one review, one specific product that triggers another inspection, and inspections really need to be seen on their own merit. Once you get a BAI classification out of an inspection, it means that the corrective actions that you have submitted are already deemed to be satisfactory or you wouldn't get that classification. So the correlation is not something that is normally there between those inspections that are probably sometimes triggered by different type of events.

Got it. Very helpful. Thanks, guys. Appreciate the time.

No worries.

Our next question comes from Dave Windley from Jefferies. Your line is now open. Please go ahead.

I was hoping to ask a few quick ones. First of all, on the $100 million of cost takeouts that I think you're targeting for the next fiscal year, you mentioned, I think, including the remediation costs. So I wanted to make sure I understood kind of what you're targeting and the nature of those costs. and maybe if the $100 million does include remediation costs from 23, a dollar value of those?

Hey, David. It's Ricky here. Yes, the $100 million is the number that we had confirmed on the May 19 call. I would say that we've made some good progress on taking actions on that number. There was a an announcement where we reduced the headcount at our Bloomington facility. The supervisory level, the manager level, that certainly will help contribute towards that number and then of course additional actions are underway expected to be implemented before the end of this this month. Those remediation costs are confirmed. They are part of the $100 million, but I don't have the detail to be able to give you that number right now.

Okay. Kind of relatedly, on the fourth quarter of this year, guidance for the kind of, I guess call it guidance for biologics margin continuing to be moderate, so the $55 million won't repeat. I just want to understand, you didn't really kind of give us a range or a number there at just a little bit over break-even in the third quarter. Are you suggesting somewhere around break-even for the fourth quarter, even though the $55 million is worth 1,100 basis points?

Hey, Dave. Alessandro here. I'm just going to tell you, you know, and I'm going to pass to Ricky to more specific. Look, the way you need to see in terms of dynamic, normally in our business, you know, an operational event tends to have a delayed impact on financials because of the way it works. You know, you manufacture and the long lead time brings you that you're missing revenues in the next quarter. and so on. Some of the operational challenges that we have quoted for Q3 don't necessarily have the direct impact on the financial of Q3, but they have some impact also on Q4, and as well as we have quoted again that our PWI production challenges really affected the back end of Q3 and the beginning of Q4. So there are elements of what we have shared, which are across the two quarters. Enrique, more specifics around that?

That is the driver for the continued depressed margin that we expect to see in Q4 versus Q3, predominantly out of BWI, where We previously announced the operational challenges associated with ERP implementation. Implementation impacted the end of Q3, continued into the start of Q4. Much more confident and happy with where the business is right now, but that didn't take place until the early May timeframe. And the operational rigor that is in place now will eventually translate to more financial rigor in the first quarter of fiscal 24.

Okay, and just the last quick one, the $26 million correction to the fourth quarter of 22, I'm understanding that you ran that through the fiscal 23 financials, I think specifically the third quarter. And so that is also something that is negatively impacting this year, will not repeat next year. And then lastly, that was what you planned to do as of the last update, so the treatment of that was not new to this update. Is that all correct?

Hey, Dave, Ricky again. Sorry if I've created confusion on that point in the past. No, to be very clear and specific here, the $26 million error we opened up our fiscal 22 financial statements and corrected that error during that period. So we've revised our financial statements for fiscal 22, and that $26 million is reflected in the 10-KA that will be filed today. So that means that that $26 million of revenue in adjusted EBITDA has zero impact on our fiscal 23 financial statements.

Got it. Okay. That's what I would have assumed, but I thought I heard differently in the remarks. So thank you for clarifying.

Okay. Thank you, Dave.

Our next question is from Luke Sergot from KeyBank Capital Markets. Your line is now open. Please go ahead.

Awesome. Thanks. I'm on Barclays now. So a couple here for me. So I think what everybody's trying to do is just figure out the 24 jump-off point for EBITDA. I know you're not going to give official guidance here, but we have a pretty wide range across the street from 700 to 900. So if you're adding up all these one-timers that don't exist, You know, is it better to think about the jump off or EBITDA target for next year closer to that 700 or closer to that 900? Anything directionally to tighten up the range would be helpful.

Yeah, look, it's tough for me to give you some specifics around that. We tried to articulate how we're starting to think about fiscal 24, and you're still working through those numbers ourselves. We've clearly got a headwind next year when it comes to COVID. The number that we've set this year is slightly more than 600 and it's going to be a significant headwind next year, although tailwinds do exist with some of the cost actions that we've mentioned that we've taken, some of the one-timers that we don't expect to repeat and some of the growth that we expect in the business. Luke, I can't really give you too much more specifics than that other than those are the big headlines that I'd be factoring into your model.

All right. That's fair. And then my second one here, when you guys gave the update in May, what changed between now and then that caused you guys to reduce another $25 million from the four-year guide? Can you talk about what the review was there and where that came from?

So look, as we said, as I said in my remarks, look, and again, I get Ricky giving specific, but I level, we really wanted the task that was assigned to Ricky in, honestly, by the time we were in May, it was a short time frame, it was only five weeks since I asked him to step in, was to really rebuild the forecasting engine of the company that clearly was showing signs of not being where I've been with the company for 13 years, and it's always been one of our strengths. And it was clearly not where it used to be, and Enrique has been a long time with the company, so I asked him to look into it, and he really did. You know, by the 19th, he did what he had to do for biologics, which was our priority, given the noise that we were seeing there. And then he applied himself to biologics. PCH segment. I believe that the mandate was to make sure that the risk profile of our forecasting was where we wanted to be at this point in time of our journey. And given where we've been in the last few quarters, so we have now somewhat a different approach to this profile of our forecast. And so when Ricky went deep into it and did the deep dive, I believe he felt that this was the most appropriate thing to do at this point in time. Ricky, can you give more details about it? No, that's right, Alessandro.

You know, it's been a lot of time that's been spent by myself and the finance team on the independent balance sheet review, the accounting complexities of the large gene therapy contract that I talked about in my remarks, the impairment around the consumer business. And we spend a lot of time looking at the forecast and really digging deep into the forecast, predominantly around our biologic segment. But look, when we scratched away at the surface on PCH and dug a little, we realized that the risk profile wasn't where we expected it to be. and some of the operational execution assumptions that we had put into our model were optimistic, and thus led us to take the decision that this needed tweaking further, and the reduction that we see of $25 million in revenue and $25 million EBITDA is primarily related to the PCH change.

All right, great. Thank you.

Thank you.

Moving on, our next question comes from Sean Dodge from RBC Capital Markets. Please go ahead.

Yep. Yep, thanks. So maybe on the ERP delay at the Harman's campus, it sounds like with all of that now having been fixed, Ricky before, I think he said he expected to be able to recover all of the revenue related to that delay in fiscal 24. Is there any more detail you can give us now or some rough bookends on how much revenue is shifting related to that? I guess how much of the guidance revisions we've seen now for fiscal 23 is more just timing issues on the gene therapy side that you'll pick up in fiscal 24.

Yeah, Sean, I can't sit here today and give you more specifics on 24. I'm still working through that myself. It wouldn't be, I think, the prudent thing for me to do to share any numbers associated with 24. All I would say is I would confirm what we said back then and what we're saying now is that the ERP implementation did create operational challenges. certainly in the March and April timeframe. We believe that is behind us now. We've had a very good operational performance in the month of May and see that continuing in June. And the challenge with the business is operational performance doesn't translate to financial performance immediately. We will see that come through in the first quarter of fiscal 24. But in terms of giving you any specifics around numbers, I can't do that right now, Sean.

Okay. And then, Alessandro, I think you said in your prepared remarks that you're starting to see some small signs of improvement on the biotech funding front. I was just wondering if you could maybe elaborate a little bit more on what you're seeing there. It sounds like the trajectory's kind of maybe inflected a little bit positively.

Yeah, sure. Look, we have a number of internal metrics that we follow. The first one is our funnel of opportunities in terms of how many leads and contacts we are receiving from this specific segment of our customer base. That's one side of it. The other one is the number of quotations that we are issuing internally. And thirdly, the amount of business that we sign. And in the last three months, all these three indicators started to show some small initial rebound. Again, it's one where it's a wait-and-see game for us because we've been several times wrong in assessing this space. As a reminder, most of our new modalities are really exposed to the biotech industry and funding as such. There are some initial signs which we have seen. Hopefully those signs will consolidate and strengthen up in the second half of the year, but be mindful that these are signs of recovery from a low level. The path to get back to the level of activities that we've been experiencing 18 months ago, I believe is still not short. But yeah, I mean, it's a first sign which gives us more optimism around the future.

Okay, great. Thank you again.

Our next question comes from Jack Meehan from Nephron Research. Your line is now open. Please go ahead.

Thank you. Good morning. My first question, are there any updates you can share in terms of where Catalan stands in terms of the search for a permanent CFO, just internal versus external candidates, and when do you expect to conclude that?

So Jack, that's a great question. I believe that, you know, this is one of those decisions which we want to do right. So we are taking our time to make sure that we land on the right decision. In the meantime, I'm just going to say that I'm very happy with the work that RIGI has done, not only in bringing us in relatively, and I know this doesn't feel like that, but in relatively good order in being here today. It feels good to be able to file our Q&A and to be able to conclude our thorough and deep review of our financial statements and we are satisfied with the work that has been done and to be frank also with with the outcome, which is not ideal, but, you know, surely, you know, we are in a good position today. So Ricky has, number one, done a great job there. It's also through his historical knowledge of the company, I believe, has brought back the focus in the right balance of risk profile. I'm pretty happy with that. So all to say that while we continue to search and we continue to progress very well, I would say we're not necessarily in a rush because we are well covered here.

Got it. And then as a follow-up, I was wondering just on the topic of debt load reduction, would you consider any divestitures to move faster in terms of getting the leverage back in line with targets?

You know, that's a great question, Jack. As we said into the script, of course, we are looking at the portfolio of assets. The great news is that our balance sheet gives us flexibility, meaning that it gives us the optionality of wanting to do stuff as opposed to having to do stuff, so we can think about the timing and we can think about the right transaction here. At the end of the day, for us, it's always important to respond to the fundamental question, who is the best owner for an asset? There are times in which the best owner is Kadai, there are times where the best owner is someone else, and there are best, you know, and some probably of our segments of our industry, of our companies maybe, Can create more value for shareholder on a standalone basis These are all things that are being evaluated and the fact to be in the position to have optionality It is a good position to be And we are progressing well with our evaluations in discussions with our board it's a very productive and constructive conversations going on and I hope that soon we're going to be able to discuss these in more detail details as we finalize our plans.

Excellent. Thank you.

Our next question comes from Derek Debrin from Bank of America. Your line is now open. Please go ahead.

Great. Thanks for taking the question. This is Mike Ruskin on for Derek. First, I want to touch on your comments on CapEx and sort of the capacity that you need or don't need. You had indicated in the prepared remarks that, you know, you're pulling back on CapEx a little bit given, you know, the mismatch between your capacity now and the revenues where the business are, some of those aggressive assumptions and modeling, et cetera. Any call you can provide on sort of like how far ahead you are in terms of CapEx or maybe put in other ways, you know, where is your capacity now versus where do you think you'll need it to be? Are you a year ahead, two years ahead in terms of business plan and capabilities and that?

So, look, that's a great question. It's a little bit, you know, one where I would provide you a little bit more granular outlook across the different offerings of the company because the answer to your question is different. I will tell you overall, we shared during our May 19th update, which we stand by, that the capacity we have currently in the company and the one that we are completing to build with our CapEx plan is capable of delivering, in our estimate, $6.5 billion of revenue. So we look at where our guidance is that today there is quite a runway in front of us. uh clearly there are areas of the business which uh well the ramp to fill this capacity is going to be a little bit slower this is a really the comment around the the bio modalities the new modalities uh you know so terribly plasma that we now need to um you know accept the fact that the the the ramp there for a number of combined reasons is going to be slower um there are other areas to be honest with you where you know in thrill feel and finish feel and finish for syringes know we we cannot build capacity fast enough the capacity because of some of the dynamics so we also have discussed earlier in the q a session that is a huge demand for those assets and so those assets you know i i would say we are not ahead we are probably in line if not behind so we need to accelerate as well as in our anxieties offering where We cannot satisfy a very big demand that is in face of us. So there are areas of the business where we're going to really double down and continue to invest and continue to accelerate the current investment, trying to find the best possible solution to bring capacity online. And there are other areas of the business where the work is more to mitigate the costs that we are carrying from an operational standpoint to optimize, you know, return on capital. But I will tell you, overall, the $6.5 billion number is a number where we feel pretty good about it. It's going to take some time, of course. It's not going to happen overnight, nor that we can get there over time. And surely, as we look into the future, we will be planning for sustainable growth. This gives me the opportunity also to say that clearly, in the last two years before this one, we grew in the 20%, 30% range, which for a company like us, it's is very hard to cope with, and we are now suffering a little bit of the consequences of that hypergrowth. And going forward, I believe that we have now a plan that is more sustainable, stable, and will avoid another fiscal 23 for us.

And Mike, if I could just add, Alessandro, just in fiscal 24, just to kind of repeat what we said on our main 19 core, you know, My priority is absolutely going to be on free cash flow, cash generation. And next year, CapEx as a percentage of revenue will be less than this year. This year's trend into about 13% right now. And we're expecting with maintenance CapEx, compliance CapEx, and the completion of our current in-flight programs, some of which Alessandro just mentioned, we're expecting to be in the high single digits for fiscal 24.

Yep. Thank you. Thanks. And then maybe two quick ones just to wrap things up. One is on the COVID numbers. I mean, you talked about some specific details for fiscal 3Q that contributed to the 120 million, but you're only pointing to 40 million in 4Q. I'm just wondering, is that a clean number? Are there any put and takes we should be aware of? And just, you know, is that a reasonable jumping off point for next year, that 40 million in fiscal 4Q? And then the other loose end is on the the um you know unexpected supply chain issues in pch i just want to share correctly do you say that's already cleaned up or are you in the process of working through those supply chain issues just the timing on that you know if that resolved or not thanks the yeah the supply chain issues um they are close to resolution expecting to be fully resolved in the first quarter of our fiscal 24. that was for the um

That was for the supply chain product issue in PCH. And then to your first point on COVID, I would just stand by what we said, Mike. It's going to be a significantly lower number in 2024 when I think about the $600 million that we've recognized here in fiscal 23.

Great, thanks.

The next question comes from Max from William Blair. The line is now open. Please go ahead.

Hey, good morning. Thanks for taking our questions. Just wanted to follow up on your comments about productivity improving in Bloomington and Brussels, but needed some more time. I guess we're still having some trouble understanding the operational COVID cliff at the facility. So just hoping you can give us some more detail around what exactly is going on there. Is it as simple as just not having the right people in place to validate new lines? Is it a matter of not knowing how to prioritize the work and use the lines you already have running? And maybe what are some tangible things that you need to do still in order to improve productivity moving forward? Thank you.

Yeah, sure. Look, you know, as much as we want to simplify the output of a production site in units, the reality is that the product mix does matter. And the COVID vaccine is a product mix which, if you like, is as simple as it gets. You have one product, one presentation in billions of doses. The reality of the pharmaceutical industry and our reality has never been like that. We normally produce several products on the same line in different formats for different markets. And so it is a completely different mix and different significant volumes. Normally, in our industry, it's normal to transition from one product to another. It just doesn't happen that there is one product going from zero to billions of doses and back to millions of doses in the space of 24 months all in. So when you're looking at sterile fill-and-finish processes where to train people it requires six to nine months, you can understand that the hysteresis of the system in terms of reacting to our data stimulus and re-reacting to the opposite stimulus is very, very hard. And it's one where the playbook was never written in our industry. I also would say that when you think about the COVID revenue cliff of $700 million, which for the overall company is somewhat 15% of the revenues, right? So when you think that really those revenues were concentrated in a couple of locations, you can understand that the percentage of change at those locations changed. is well above that, and so is the disruption. So this is about retraining people, changing over lines for different formats, moving the products from one asset to another asset, from one suite to another suite, doing work like transfer, doing technical work to get new products online. So the level of complexity is very, very high, and it's one where, you know, surely, the amount of challenges we could be facing was not well understood. And again, this is not an excuse, but this is a very unique situation in our industry, which was never done before and I hope never repeats.

Got it. Very helpful. Thank you. And then just following up, I don't think you've talked about the tech transfers today, last quarter, or when we spoke in May, I think you talked about those coming online here in the back half of the calendar year. Do you have any update around timing for when those tech transfers can be completed? And what does the ramp up look like once those new programs are brought online? Just trying to get a sense for how much revenue could come from these programs in fiscal 2024. Thank you.

Yeah, sure. So, look, the ramp, once some of the, you know, last hurdles also, you know, the stability and validation and others are, it could be pretty steep. And surely the Some of those products are in very high demand and market. So, I mean, the body language we're receiving from our customers is that they're going to take whatever we can make. So it's going to be more depending on our ability to fully operationalize and being very productive by a level of efficiency, a level of uptime and throughput, rather than the demand constraining us.

Okay, and just to be clear, this program's still on track in terms of the timing when we have those lines validated and up and running?

Pretty much it's the same that we shared the last call, yes. So we're going to be seeing these ramps happening, you know, in the second half of this calendar year.

Thank you.

Our last question comes from John Sauerbeer from UBS. Please go ahead.

Good morning, and thanks for taking the question. I appreciate the color on the updated fiscal 23 guidance and the TCH impact. On last month's call, you did mention that you expect TCH to return to gross in fiscal 24. Can you confirm if that's still the case?

Yeah. Hey, John. This is Ricky here. Yeah. I would simply say, yeah, with the analysis that we've done so far and the opportunities ahead of ourselves on that particular segment of PCH, it would be a fair conclusion to draw that growth is expected from this segment next year.

Got it. Appreciate that. And then just some follow-ups here on gene therapies. Can you remind us how many customers you're currently serving there? And then, you know, beyond Sarepta, you know, what would be the next near-term, you know, opportunity from a commercial product standpoint? And then, you know, I think you mentioned in May delaying some of the expansion on some of the suites there. Can you remind us how many suites you expect to have online actually in fiscal 23 and then how many you're going to add in fiscal 24?

Yeah, look, number one, we don't provide the significant numbers of customers that we serve or whatever. Clearly, because of the size and the attention on Sarepta specifically, and the level of disclosure that we have to do, they have to do, this is a unique situation, but we are pretty conservative. And to be honest, we're respectful of our customers in disclosing those type of information. which normally we cannot disclose also because of our contractual terms with them. I will tell you that the pipeline is healthy. We have a number of programs. We also believe that the fact that we are serving a large near commercial program is acting as a catalyst for our facility, which is commercially approved. And so this is a business that is, again, set aside some of the ramp-up challenges that we have experienced. It's a business that we are pretty happy with the performance and the pipeline and also the dynamics of the market. And surely some events in the future can act as a further catalyst of optimism here. So in terms of the number of suites, look, we have a lot of capacity there. It's a large site. It's one of the largest of the world. We keep expanding it. So we don't believe that capacity is going to be our problem there. We are building enough runway for key programs to grow and to even grow further as we look into the future of this space.

And if I could sneak in one more here at the end, I'm just not sure if I heard it, but are you confirming still that $6.5 billion of capacity number, and would you be able to provide what are the assumptions on utilization there?

Yeah, normally, look, again, you know, I say for my previous comment, it's hard to characterize that as, you know, painting everything with the same brush, so to speak, because it's a is very different at any point in time. I believe that 75% is a fair assumption. It's somewhat to the sweet spot of our industry, right? So where you have enough utilization to drive the margin and cash flow, and you have enough flexibility to absorb the peaks of demand. So this is what we plan for, and this is what you should be assuming in terms of our target utilization across the board. And clearly, this will be an average of peaks and valleys always.

Great. Thanks for taking the questions.

No worries.

We have no further questions at this time. With that, I will hand over to Mr. Maselli for final remarks. Please go ahead.

Thank you, everyone, for taking the time to join our call, your questions, and your continued support to Catalan. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.