Operator:

Hello all, and welcome to Catalent's First Quarter Fiscal Year 2024 Earnings Call. My name is Lydia and I'll be your operator today. [Operator Instructions]. I'll now hand you over to your host Paul Surdez, Vice President of Investor Relations, to begin. Please go-ahead.

John Greisch:

Thank you, Paul. Good morning and thanks for joining us today. Before I turn the call over to Alessandro, I want to share a few comments on the quarter and on the progress our management team and Strategic and Operational Review Committee have made over the past two and half months toward achieving our goals. As you saw in the earnings release and we'll hear further from Alessandro, we have delivered a solid first quarter and are confirming our full-year guidance. Given the turmoil in many of our markets, we are pleased on both fronts. In addition, Matti and his team have brought a renewed focus on cash-flow and we are encouraged by already seeing benefits from improved working capital management and greater analytical rigor around CapEx spend thus far in the year. I want to reiterate that we expect to catch up on our fiscal 2023 and first quarter 2024 SEC filings later this month. We've been working tirelessly to finalize these documents over the last couple of months. Matti will go into additional detail on this topic later in today's call. Finally, I'd like to comment on the work underway by the Board Strategic and Operational Review Committee. As you will recall, we formed a committee at the end of August to conduct a thorough review of our businesses, strategies, operations and capital allocation priorities with a view towards maximizing the long-term value of the company. Since then, the Committee has made progress identifying and evaluating a number of options to maximize long-term value creation for shareholders. We continue to work closely with Elliott as we thoroughly evaluate the strategic options and we look forward to sharing a more detailed update with all of you at a later date. Let me wrap up by emphasizing that the entire Catalent team is working hard to execute against our strategic plans in order to improve performance and create value. As you will hear today, we are confident in the value of opportunities that lie ahead and are pleased that our first-quarter performance puts us on track to realize our 2024 plans. With that, I'd like to turn the call over to Alessandro.

Matti Masanovich:

Thank you, Alessandro. I'd like to begin with an update regarding the status of both our annual report on Form 10-K for the fiscal year ended June 30, 2023 and quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2023. While we have implemented improvements in our accounting and finance staffing and related closing processes, as we noted in our notification of late filing on Form 12b-25 filed on Monday, we were unable to file our 10-K and 10-Q on time. We require additional time to complete procedures related to management's assessment of the effectiveness of our internal controls over financial reporting as of June 30, 2023, and other closing procedures. This has included procedures related to the management's assessment of the measurement and timing of a non-cash goodwill impairment of approximately $700 million, which relates primarily to acquisitions in the company's Consumer Health and Biomodalities reporting units in its Pharma and Consumer Health and Biologics segments, respectively. Please note that for purposes of providing our preliminary first quarter fiscal '24 earnings, we have assumed that the non-cash goodwill impairment will be included in our first quarter results. We are also incurring substantial time to review other closing procedures supporting our 10-K and 10-Q for both reporting periods. We expect to file the Form 10-K on or before November 27, and we expect to file Form 10-Q promptly following the filing of our 10-K. Additionally, based on currently available information and subject to completion of our evaluation of the potential impairment charge, as well as the preparation of our financial statements and assessment of our internal controls, we do not expect any material change to the financial results to be included in Form 10-K compared to the financial information reported in the preliminary earnings release Catalent furnished to the SEC on Form 8-K filed on August 29, 2023. We appreciate your patience as we work through and complete our closing procedures. Moving on to our preliminary first quarter results. Starting with the consolidated numbers on Slide 6. Net revenue in the quarter was $982 million, down 4% on a reported basis and 6% on a constant currency basis compared to the prior first quarter. This decline is primarily attributed to the significant reduction in COVID revenue of approximately $85 million in the quarter as well as a one-time $30 million licensing fee in the prior year. This was partially offset by constant currency revenue growth in the rest of Biologics of 11% and 5% in PCH. The Metrics acquisition, which is reported in the PCH segment and closed in October of 2022, accounted for 2% growth on a consolidated basis. Our first quarter adjusted EBITDA decreased 38% to $115 million or a margin of 11.7% versus margin of 18.3% in the prior year quarter. On an organic basis, our first quarter adjusted EBITDA declined 45% compared to the first quarter of the prior year, primarily driven by a decline in COVID revenue. I will speak further to the major drivers of these results in the segment commentary. Adjusted net loss was $19 million or a loss of $0.10 per diluted share compared to adjusted net income of $61 million or $0.34 per diluted share last year. Reconciliations from GAAP net earnings to each of adjusted EBITDA and adjusted net income are in the appendix into the slide deck. Excluded from adjusted net income are the non- cash goodwill impairments totaling $700 million I just reviewed. Now I'll discuss our segment performance, where commentary around segment growth will be in constant currency. As shown on Slide 7, First quarter net revenue in our Biologics segment was $447 million, a 16% decrease compared to the prior year quarter. The decline is primarily driven by significantly lower year-on-year COVID demand. First quarter COVID revenue of approximately $100 million represents a decline of approximately $85 million from the prior year period. On a non-COVID basis, Biologics revenue in the first quarter was in line with the first quarter of 2023. When excluding the onetime $30 million licensing fee signed in the prior year, non-COVID year-on-year revenue growth in this segment is approximately 11%. This result was driven by double-digit revenue growth in gene therapy, non-COVID drug product and drug substance, offset by a decline in cell therapy. The bar chart on Slide 7 illustrates the Biologics commercial and development revenue streams, where the classification of development versus commercial is driven by the contractual language, which does not always align with the regulatory status of a given product. The large drop in development revenue in the first quarter had 2 primary drivers

Tejas Savant:

Hey guys, good morning and thanks for the time here. Alessandro, one on Sarepta for you to kick things off. You've talked in the past of not peaking in the label expansion for ELEVIDYS into your forecast. Sarepta, I think, as you alluded to, said they want to manufacture in anticipation of the unrestricted label ahead of that FDA decision. So how should we think about the implications of that in terms of perhaps potential upside for you in your FY '24 guide? Does the $700 million-or-so that you're baking in for Sarepta, the midpoint, factor this in, in light of your comments that I think you said you're starting to get orders from Sarepta now for that incremental production. And then in terms of the potential downside to fiscal '25 if the FDA doesn't allow for label expansion. Any sort of framework that you can help us think through that dynamic here?

Tejas Savant:

Got it, that's actually helpful. And then I want to ask one on just ex-COVID, ex-Sarepta growth on a sequential basis, just doing some quick math here. It sounds like you guys had about $235 million in Biologics revenue last quarter. That went to about maybe $185-ish million this quarter. And so can you just walk us through the moving pieces there? I know you gave color year-over-year but just sequentially and I know, you've got the fill-finish capacity utilization for COVID here. Did that play a role in this or was it sort of some of the cell therapy work declining? And then on your comment on the significant GLP-1 ramp over the next couple of fiscal years for you here, any color on the slope of that increase and at the cadence at which you expect this new capacity to come online?

Matti Masanovich:

So I think so Biologics non-COVID revenue and then stripping out the $30 million licensing fee from the prior year quarter, we're up 11%. So I think I put that in the script. And I think I talked about that but maybe you didn't pick it up. But we can reconcile the quarterly...

Matti Masanovich:

So fourth quarter. So clearly, our BWI business has really kind of come -- has bounced back and then Brussels continued to improve. And so those were the two primary businesses, with BWI being the gene therapy business, with our ramp-up as I discussed in the script, it -- obviously, our BWI gene therapy business is well up.

Operator:

Our next question today comes from Luke Sergott of Barclays. Your line is open.

Alessandro Maselli:

Hi, Luke, thanks. This is Alessandro. Luke, first of all, let me clarify our mAbs protein business is not classified under the gene therapy, we call it the drug substance and thanks for the question, because we are having a very good year in drug substance and I do believe there is good momentum going-forward there. We had a lot of seeding happening in that business over the last several years and now it seems that the harvest time is coming with a significant amount of late-stage program heading toward commercialization, some of them very exciting, have been acquired by big pharma. So they've extended patient population. So very exciting areas for us, drug substance and I will be -- believe will be a great contributor as we go forward. In terms of the gene therapy business, as I said, that we have a pretty balanced portfolio. Number one, with Sarepta as well, we have several programs with them, some of them very exciting. But also, there is -- I've seen some good momentum there. Some programs getting some early, very good clinical data which made the customers more bullish in moving full steam ahead in scaling up. So Luke, the private funding environment, it is what it is. We were the first one to call it out one year ago, still remains a little bit uncertain. But when you look at our own portfolio and our own pipeline, I feel pretty good about it. The cell therapy story remains a little bit one where we have reviewed our outlook there. We have reassessed our outlook. And so as Matti said, we take an opportunity to want to really rebalance the absorption there. And this will be a driver of margin improvement going forward because now we're going to suffer by much less underutilization and negative EBITDA impact there. So hopefully, this gives you a little bit of color across all the different subsegments.

Matti Masanovich:

When you think of the Biologics business and the pass-through revenue, Sarepta has about a 50% pass-through content, and that's materials and testing. The balance of the business is between, I would say, 15% to 20% is where it sits from a pass-through perspective. And the margins are a little bit different. Margins are pretty low, as we articulated on the -- as Alessandro articulated on the Sarepta piece. And they're probably, I would say, mid-single digits to mid-teen digits on the margins on the balance of the business, of that 15% to 20%.

Luke Sergott:

Great, thanks.

Dave Windley:

Hi, thanks for taking my question. I hope you can hear me, I'm in a hotel basement. Can you hear me?

Alessandro Maselli:

You sound good, Dave.

Alessandro Maselli:

Yeah, sure. So Dave, a couple of things. First of all, you're calling out two of the key, I would say, dynamic of our industry overall, surely GLP-1 being one. And I feel very proud and look excited that Catalent was able to have such an exposure to that. So I don't see that necessarily under negative terms. It's great and it's something that can be applied across several therapeutic dynamics -- therapeutic areas, has dynamics across different geographies. So I would say it's a little bit of a different element compared to the gene therapy program that you have mentioned. With regards of -- so -- and so it's such that you're also going forward, because of the different therapeutic areas, the different potential indication, extension of indications of GLP-1s, I don't see that category to be a significant element of volatility, so to speak. Our job there, I believe, is to continue to do a great job for our customer and continue to bring the capacity online, and the rest will come pretty much as a consequence. I don't believe personally that oral will be a significant competitor of injection for the time being. I -- when you think about that, in the current form, like peptides, the bioavailability is not that high so there is a lot of API there. There are studies out there that are showing a much more API you need in the oral delivery versus injectables. So I do believe that it's going to be, for the time being, an injectable story personally. And with regards of how we are approaching this, look, for me, the important thing is that we understand the dynamics, we understand the market, that we position ourselves a little bit in the middle of the range. We don't expect in our projections everything to be going in the right direction, and leaving that as an upside. We position ourselves in a, I would say, prudent way when it comes to these dynamics so that we have a good set of different options to continue to grow the company in line with expectations.

Operator:

Thank you. Our next question comes from Justin Bowers of Deutsche Bank. Your line is open.

Alessandro Maselli:

Great questions. So first of all, yeah, look, we said that this year, it's going to be below $100 million. We didn't say $100 million. And this, for sure, one of the contributors of the non-COVID, non-Sarepta growth in Biologics, right? So because so far, there's been a more tech transfer work and now it's becoming commercial work. So first of all, it is contributing to our growth outlook. And as I said, it's more an H2 story than an H1 story. So it's also helping with what you see as a ramp, H2 versus H1. With regards of the long-term outlook, I said that it's going to be well over $0.5 billion. I gave a little bit of color around the timeframe. And to be quite honest, with your question around the demand, I see for this franchise, the capacity as the constraining factor rather than the demand. So it's going to be really depending on our ability to bring capacity as fast as possible. We are seeing a very high level of interest and demand for these assets, and really is one where capacity is going to be the constraining factor on all the fronts. And I believe that the runway goes beyond the '26 timeframe that we have highlighted here. So all in all, it's a very exciting space to be in.

Alessandro Maselli:

Yeah. Look, first part of the question, as I said in my prepared remarks that the pipeline is healthy both with the additional program with our biggest customer but also with other customers. As I said, we signed recently another late-stage program, and the clinical data on that program looks very, very exciting. So -- and impact on patients is -- it could be great. So it's also in line with our core value of patients first. So I would define the pipeline in gene therapy as healthy. And I will also tell you that, in gene therapy, the capacity, it's easier to redeploy compared to other technologies. Normally, in gene therapy, you have suites, but you have most of the units are mobile units. So it's very easy to reconfigure the capacity compared to other technologies, at least for the way we have designed our facility. We make them very, very fungible across different type of products. And with regards to the profile of this. Look, we -- there is the physical capacity and there is the productivity that you can achieve. We are ramping, right? So our physical capacity is fully deployed, fully staffed, fully equipped. But clearly, we are a ramp of productivity. As you know, we come from a very difficult spot during the spring because of some of the challenges we have disclosed, and now we have an exciting ramp. So I will tell you that we are ahead of the ramp that I had in mind at the beginning of this fiscal year, but there will continue to be progress as we go through the year. So the more we improve our output, the more demand we will be able to satisfy for our customers. As we said, the visibility on this demand is pretty high at this point of the year, as Matti shared.

Operator:

The next question in the queue today comes from Jack Meehan of Nephron Research. Your line is open.

John Greisch:

Yeah, Jack, this is John. So if you think about the committee that we formed a couple of months ago, and we've got two new Directors and two of our legacy Directors plus myself on it. And I'd say the three top priorities of the activities of the committee have been to focus on operational improvements, along with Alessandro and the team, focus on cash flow improvements and focus on capital structure improvements over time. As you saw and heard in the comments, Alessandro and the team continue to drive operational performance and cash flow improvements in a way that gives us a lot of confidence for the rest of this year. So I think the first two priorities were to get the company back on track out of the surprise mode which we've been in for the last several quarters and deliver on the commitments that the team's laid out. I think they've done a heck of a job doing that as we start fiscal '24. The committee, along with our partners at Elliott, are evaluating several strategic options to address the capital structure improvements over time with a sense of urgency. We spent a heck of a lot of time getting everybody up to speed on where we are. It's an area where we don't want a ready, fire, aim. And with the operational improvements and the cash flow improvements, we're out of what may have been perceived by some as crisis mode and in a position where we can thoughtfully evaluate those options going forward. In addition to the committee and the full Board, Alessandro and I spend a lot of time with our partners at Elliott evaluating those options and we don't have anything to announce today. But as noted, we'll provide updates if and once specific decisions are made by the Board. So I think that the near-term operational improvements, cash flow improvements you heard from Matti, we've improved our free cash flow outlook for the full year and then made some great moves along those lines as well as well as the operational improvements you heard from Alessandro, those are on track. Capital structure over time, we'll address it. But we're not ready to announce any decisions today, but we'll do so once the Board and Alessandro and team make those decisions.

Matti Masanovich:

I really can't. I mean, I think Alessandro laid it out, we're in the stage of trying to book that business. And so I think it wouldn't be a good idea for me to disclose the returns and what we're looking at from a pricing perspective. So -- but I can tell you that it will be very attractive for Catalent overall.

Matti Masanovich:

Something thing I'd say is, from a ramp-up perspective, I think the company has proven itself. You look at what it did with COVID and the ramp-up of COVID and meeting the COVID demand. The company has a proven track record to ramp up quickly and ramp up its facilities quickly to deliver. And I think leveraging that experience of the company into the GLP-1 opportunity is significant.

Operator:

The next question comes from John Sourbeer of UBS. Please go ahead, your line is open.

Matti Masanovich:

Yeah, COVID will have a somewhat negligible impact in the back half of the year. So I think it's going to come down. The first half of the year is when we'll experience most of the COVID demand. There is some demand in the back half of the year. And as for margins, that's not something that we've disclosed historically, and so we wouldn't want to disclose the margins on the COVID business. But -- so I'd say that -- that's about as far as I can go from a COVID perspective. But COVID is becoming a less and less important part of the business for us.

John Sourbeer:

Thanks, appreciate it. And second question here also, I guess on margins, and you gave some color earlier on Sarepta margin, but I guess when you remove the raw material pass-throughs there, just on the gene therapy or drug substance business in general, how do we think about the -- and you remove the other pass-throughs, how do we think about the margin profile on gene, drug substance versus fill/finish and any differentials there?

John Sourbeer:

Thanks for taking the questions.

Max Smock:

Hey, good morning. Thanks for taking our questions and congrats on the nice update. Just looking through Sarepta filing, it seems like R&D on ELEVIDYS has been about four times as much as R&D on some of their other gene therapy programs. Just wondering if, based on this, is it fair to assume that something like 75% of total Sarepta revenue for you is tied to ELEVIDYS? And then in terms of that ELEVIDYS spend, is there any detail you can give us around what your fiscal 2024 revenue outlook that's tied ELEVIDYS to translates to from a dose perspective? I think there's quite a bit of uncertainty still out there in terms of how much it cost to manufacture the annual -- or the actual gene therapy. So any context there would be great. Thank you.

Matti Masanovich:

So from an overall perspective, we disclosed the Sarepta revenue, and you can get to the math, you can read the script, but it's about 90% of the revenue is ELEVIDYS, so it's 9001. So it's the lion's share, by far the lion's share, of the revenue of Sarepta. We do have other programs that are being developed and are in development, and we'll begin to grow more rapidly as we go forward. As far as doses in patients, that's not something that we've commented on. And I don't think it's -- and Alessandro, I'll defer to you. But we fill an order that we're given by a customer. And that customer -- or that's our -- that's what we do. Now we study the market, we do look around corners, and we do assess it. But that's not something that I think we're going to discuss today.

Max Smock:

Understood. Thank you. Just to clarify, you said 90% ELEVIDYS?

Max Smock:

Yeah. Okay. Perfect. And then just following up a clarifying one, tou mentioned a couple of minutes ago that it's easy to reconfigure the gene therapy capacity and that capacity is pretty fungible. I just wanted to confirm, you're saying it's easy to reconfigure for other gene therapy programs, right? And then while that may be the case, given some of the macro headwinds that we've seen, which I think most people would acknowledge have had an outsized impact on the broader cell and gene therapy space, how should we think about your ability to backfill that capacity if Sarepta's label doesn't actually end up getting expanded? Thank you.

Max Smock:

Understood. Thanks again for taking my questions and congrats again on a good quarter.

Derik De Bruin:

Hi, good morning. Thanks for taking my question. Just a -- just one clarifying question to start with and I've got a couple of others. So what was embedded originally in your guide for 2024 for Sarepta from a dollar amount, and sort of like what's the incremental that's here now? Just wanted to get some math a little bit all over the place. So that's the first part.

Derik De Bruin:

It’s unchanged. So you'd already assumed that was going -- great. Okay. That's what I thought, just wanted to make sure. And how should we think about PCH margins progressing from here? A little bit lower than we thought in the quarter. How should we think about that moving?

Derik De Bruin:

Great. And then just one final one. So I'm looking at the consensus estimates for fiscal '25. The Street roughly has you increasing EBITDA by 35%. So that's, call it, a 16% margin at the midpoint of your current guide, that's 21-ish percent for fiscal '25. I mean, is that sort of 500 basis point gain in EBITDA margins realistic for next year, given where you see the business right now? And I ask this because I was certainly thinking the margin contribution on the Sarepta business was going to be a lot higher than it actually turns out to be. So just wondering any thoughts on how we should sort of think about EBITDA margin progression as we're exiting 2024.

Alessandro Maselli:

And the one point I can reiterate once again, our margin reduction this year is not due to a portfolio shift, it's due to an operational dislocation which we have shared multiple times. And as John said, we have shared in these remarks, we are making very good progresses in addressing that. And probably the progress is faster than our initial expectations. So when you combine these two factors, you can make your own assessment.

Operator:

The next question today comes from Paul Knight of KeyBanc. Your line is open.

Matti Masanovich:

Yeah. I think we've discussed, at a high level, we've had customer conversations around it. But we discussed how we actually book production. So our production is booked on a rolling six-month basis. So that's why we feel really confident about how '24 is going to finish. And as we think about the Sarepta readout, and Alessandro made comments to his view on the Sarepta readout, where it's not maybe as binary as some are thinking. So I do think -- that's the comment I can give you on it. But we -- just fact-specific, we get the orders in on a rolling six-month basis. As we work through the year, this year -- so as we work through this year, we'll get firmer orders that roll into '25.

Alessandro Maselli:

So Brussel is a drug product facility, right? And yes, there is a GLP demand there, it's no secret, it's a public available information. Clearly, I believe that, in general, as we said before, the site is sitting on a very high level of demand because that has been posed in production for some time in the last fiscal year, right, was a big drain on our margin last year. And it's going back, right? So it's a fully utilized because we have backlog to recover on, it's going to take significant time. And yes, there is a lot of GLP demand. And I would tell you that the site is performing really well in satisfying the demand.

Operator:

The next question comes from Eric Coldwell of Baird. Please go-ahead.

Matti Masanovich:

I think when we guided for COVID, I think we took a fairly conservative assumption on COVID, not knowing where the season was going to go, number one. But we don't provide, as you know, individual guidance from a quarter perspective. But I'd say that it's come in stronger -- or it will come in strong in the first half. As I mentioned, it's just not as important to the back half of the year from a COVID perspective, from a COVID revenue perspective in what we're seeing today. Now as the season plays out this year, that's going to dictate demand at the end of our fiscal year, our fourth quarter, or second quarter calendar year next year. And we would be able to have more visibility as we work through the tail end of the COVID season here in our second quarter and calendar year fourth quarter. And I think it will dictate the season for next year.

Matti Masanovich:

Yeah. The gummy market has been down and continues to trend down, the markets continue down. This is a share gain. This is a new business for us from this customer. It's an already existing product and it's going to fit in perfectly into our network. We don't know have to add any SG&A per se on top of it, and it fits into the existing gummy network that we have and the open capacity that we have. So it's a kind of what I'd say is a no-brainer. it's got reasonably good margins. From a business perspective, it's got a very quick payback. So I think overall, it's a big win. Doesn't require much CapEx either to go in. So it's pretty impressive.

Operator:

Our next question comes from Rachel Vatnsdal of JP Morgan. Please go ahead.

Alessandro Maselli:

So look, let me cover the first part of the question in terms of the headwinds. As we said in the prepared remarks, some of the macro environment that we have highlighted in November last year are still present and we continue to see some prudent spend on the side of our -- of especially early stage, right, the early-stage customers are very prudent in progressing assets through the pipeline, given the biotech funding environment. The consumer environment is still not as it was before. But the reason why we have in our own shop, excitement about the way we going to continue to grow the company on an ex-COVID basis is twofold really Right. So first of all, is the pipeline, right, in PCH? We had a lot of products been approved, some very recently, which will drive a lot of growth in our pharmaceutical commercial business and share gain. Right. We knew that over time, our existing relationship with the large consumer company, which were not necessarily the natural market for Sarepta, those customers, because of the relationship we had with Catalent and our brand will end up coming with us. So we have a little bit of a trend that is better than the market because of these main dynamics in PCH. And that's why we are confident about the ramp and the profile of the business as we go through the fiscal '24.

Thomas Kelliher:

Hey, good morning. This is Thomas Kelliher on for Sean. And apologies if these were covered, I got disconnected earlier. But I wanted to go back to the just tech transfers in Bloomington. Should we just consider these complete, or are there still some hurdles you need to clear to get these into full production? Any more detail there would be helpful. Thanks.

Operator:

Thank you. We have no further questions in the queue. So I will turn the call-back over to CEO, Alessandro Maselli for any closing remarks.

Operator:

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

Operator:

Good morning, ladies and gentlemen. And welcome to the Catalent Incorporation Fourth Quarter Fiscal Year 2023 Earnings Conference Call. My name is Glen. I will be the operator of today’s call. At this time, all participants will be in a listen-only mode. [Operator Instructions] I will now hand you over to your host, Paul Surdez, Vice President of Investor Relations to begin. Paul?

John Greisch:

Thank you, Paul. Good morning and thank you for joining us. As I am sure you have seen by now, we issued two press releases this morning, our preliminary fourth quarter earnings release and the release announcing several initiatives reflecting our ongoing commitment to strong corporate governance and shareholder value creation, including the appointment of four new independent directors to the Board, two of whom were nominated by Elliott. The new directors are as follows; Steven Barg, Global Head of Engagement at Elliott Management, one of Catalent’s largest shareholders; Michelle Ryan, Former Treasurer at Johnson & Johnson; Frank D'Amelio, recently retired Chief Financial Officer of Pfizer; and Stephanie Okey, Former Senior Vice President and Head of North America, Rare Diseases, and U.S. General Manager, Rare Diseases at Genzyme. We have also established a new strategic and operational review committee of the Board to conduct a review of our business, strategy and operations, as well as our capital allocation priorities in order to maximize the long-term value of the company. The committee’s charter provides more detail about the scope of our review and is included in the Form 8-K filed this morning. In addition, I was named Executive Chair succeeding Marty Carroll as Board Chair. The Board and I are very appreciative of Marty’s leadership and look forward to his continuing contributions as an ongoing Board member. As Executive Chair, I will be working closely with Alessandro and the team to drive improved operational performance and execute on the shareholder value creation initiatives announced today, as well as Chair the Strategic and Operational Committee. The second press release also notes that we entered into a cooperation agreement with Elliott. This agreement addresses the matters I just discussed and contains customary provisions for an agreement of this type, including a standstill voting commitments and confidentiality provisions. Elliott shares the Board’s confidence in Catalent’s leading position as a key partner for the biopharmaceutical industry and is committed to working with us to drive shareholder value. We look forward to providing an update to the market on the work of, and ultimately, recommendations by the strategic and operational review committee following our reviews. We believe that these initiatives will improve Catalent’s positioning for long-term growth and success. We will be acting quickly and taking decisive action to strengthen operational performance, enhance profitability and create value for all stakeholders. I am personally excited to be partnering with Alessandro and the management team to drive profitable, sustainable and capital efficient growth, along with long-term shareholder value as we move forward. We are all very pleased to be working collaboratively with Elliott to accomplish these shared goals together. With that, I would like to turn the call over to Alessandro and Matti to discuss our recent performance.

Matti Masanovich:

Thank you, Alessandro. I am very happy to be part of the Catalent team and contributing to the meaningful impact our company has on helping people live longer healthier lives. In my first two months at Catalent, I have been deeply focused on bolstering our internal finance team and improving our financial processes to position Catalent for long-term success. I look forward to meeting many of our investors and analysts in the coming weeks. Starting with the consolidated numbers on slide seven. Net revenue in the quarter was $1.1 billion, down 17%, both on a reported basis and on a constant currency basis compared to the prior fourth quarter. Mergers and acquisitions had minimal impact on our results. Our fourth quarter adjusted EBITDA decreased 61% to $139 million or a margin of 13% versus a margin of 27.8% in the prior year quarter. On an organic constant currency basis, our fourth quarter adjusted EBITDA declined 65% compared to the fourth quarter of the prior year, primarily driven by a decline in COVID demand. I will speak further to the major drivers of these results in the segment commentary. Adjusted net income was $16 million or $0.09 per diluted share, compared to adjusted income of $195 million or $1.08 per diluted share last year. Reconciliations from GAAP net earnings to each of adjusted EBITDA and adjusted net income are in the appendix of the slide deck. Excluded from net income are non-cash asset impairments totaling $85 million on an after-tax basis. These non-cash impairments couple several assets in both of our business segments. The largest non-cash impairment is related to the partially constructed Biologics development and manufacturing facility near Oxford, U.K. Now let’s discuss our segment performance. Our commentary around our segment growth will be in constant currency. As shown on slide eight, fourth quarter net revenue in our Biologics segment was $406 million, a decrease of $239 million or 37% compared to the prior fourth quarter. The decline is primarily driven by significantly lower year-on-year COVID demand. Fourth quarter COVID revenue declined approximately $180 million to approximately $65 million. Our COVID work is no longer focused on take-or-pay arrangements and is now tied to more standard ordering arrangements based on rolling forecasts with binding periods, which are typical arrangements in our business. On a non-COVID basis, Biologics revenue in the fourth quarter declined 16% versus the fourth quarter of 2022. In the fourth quarter, our drug product and drug substance offerings, excluding COVID and cell and gene therapies, each grew double-digit year-on-year. However, with our core gene therapy business -- however, while our core gene therapy business was the strongest source of growth for Catalent in the first three quarters of fiscal 2023. In the fourth quarter, gene therapy revenue was down over the prior fourth quarter. This was in line with our expectations and a result of production issues outlined on our third quarter earnings call in June. As you can see on the bar chart, there were notable movements in our Biologics commercial and development revenue streams, where the classification of development versus commercial is driven by contractual language, which does not always align with the regular status -- regulatory status of a given product. The large drop in development revenue in the fourth quarter has two primary drivers; first, year-on-year decline in COVID revenue that have been designated as development revenue; and second, a large gene therapy product whose revenue was due to the development revenue a year ago is now treated as commercial revenue. When looking at the full year for Biologics, COVID related revenue declined over 50% from $1.3 billion in fiscal 2022 to approximately $625 million in fiscal 2023. Non-COVID Biologics revenue increased by approximately 12% across the full year. Moving to EBITDA. The Biologics segment fourth quarter EBITDA was down $206 million to a loss of $12 million. Margin was negative at 2.9%, compared to the positive 30% recorded in the prior fourth quarter. The drop in EBITDA was primarily driven by the COVID declines and resulting underutilization, as well as underutilization at new modality facilities. We are working to align our costs in these areas to be in line with demand and expect margins to improve on a year-over-year basis primarily in the second half of the fiscal year. As shown on slide nine, the Pharma and Consumer Health segment generated net revenue of $662 million, an increase of $19 million or 3% compared to the prior year fourth quarter, with segment EBITDA of $187 million, down $11 million or a 6% decline over the same period. The segment’s revenue growth was primarily driven by the October 2022 acquisition of Metrics, which contributed 4 points to the segment’s topline growth and 5 points to the change in adjusted EBITDA. On an organic basis, the segment declined 1% as growth in Clinical Supply Services was more than offset by continued supply chain challenges related to a top product and a decline in prescription product revenue. EBITDA margin of 28.2% was lower by 260 basis points year-over-year from the 30.8% recorded in the prior fourth quarter. The decline was primarily a result of lower organic volume, unfavorable product mix and cost inflation. Slide 10 discusses our debt, debt maturities, related ratios and CapEx plans. Our debt load remains well-structured and permits us good flexibility. Our nearest maturity is not until 2027. Our primary debt covenant is the ratio of net first-lien debt over the trailing 12 months adjusted EBITDA. The covenant requires this ratio to remain below 6.5 times, and at June 30, the actual level was 2.8 times. Catalent’s overall net debt leverage ratio as of June 30, 2023, was 6.4 times, a sequential increase from the third quarter at 4.9 times, driven by the lower year-on-year LTM adjusted EBITDA as measured at fiscal year-end. Because the EBITDA portion of the net debt leverage ratio is calculated on an LTM basis, we expect this ratio to move higher, ultimately peaking at the end of the second quarter due to a significant decline in COVID revenue on a year-over-year basis and then improving in the second half of the fiscal year, back to current levels as our EBITDA improves. We expect to be free cash flow neutral in fiscal 2024. Reducing our leverage is our top priority. This is being achieved by maximizing EBITDA through continued revenue growth, improved utilization, better productivity and continued cost structure alignments. At the same time, we are focusing on a number of opportunities to deliver incremental free cash flow in 2024 above and beyond our current guidance. These incremental opportunities include. First, working capital, which includes accounts receivable, inventory and contract assets at June 30th was over $2 billion. We have a significant opportunity ahead of us to reduce working capital and drive free cash flow for the company. Our initial focus will be on reducing the accounts receivable balance of over $900 million, reducing our inventory balance of over $700 million and reducing our contract asset balance of over $400 million. Our goal is to drive sustainable improvement in these categories to deliver incremental free cash flow, while simultaneously working to restore our historical EBITDA margin. Second, we will ensure all CapEx spend is either aligned with our core values of patient first, quality, safety and compliance or contributes to key strategic initiatives with shorter more appropriate payback periods. And finally, with our newly created Strategic and Operational Review Committee of the Board, we plan to continue to evaluate our strategy and portfolio. These activities to enhance cash generation, balanced with returning to a more normalized EBITDA margins should improve our overall net debt leverage. Our target for our overall net debt leverage remains less than 3 times. Our compliant -- our combined balance of cash, cash equivalents and marketable securities as of June 30, 2023 was $280 million, an increase of $78 million from March 31, 2023, therefore, a $50 million partial paydown of our revolver that we were able to make in the quarter. The increase in cash was driven by strong cash collections in the quarter. I would now like to discuss our contract assets, which as of June 30, 2023, had a balance of $436 million, a sequential decrease of $69 million and flat year-on-year. We are working with key customers to further reduce this balance through more favorable contract terms that are more aligned with our manufacturing timelines. At June 30th, we had one strategic customer, a majority of whose business relates to our gene therapy platform that represented 20% of our $1.4 billion in aggregate net trade receivables and contract assets. We are confident that our contract asset balance is fully collectible. The same customer was less than 10% of total revenue in the fourth quarter, but represented nearly 10% of our revenue for fiscal 2023, compared to approximately 5% in fiscal 2022. Finally, CapEx in fiscal 2023 was $601 million or 14% of revenue. In light of the significant capital investments we have already put into the business, we are reducing CapEx in fiscal 2024 by more than 30% to a range of 8% to 10% of revenue. Now please turn to our financial outlook for fiscal 2024 as outlined on slide 11. We expect our 2024 net revenue in the range of $4.3 billion to $4.5 billion, representing growth of 3% at the midpoint. This includes COVID revenue of approximately $130 million, a roughly $500 million decrease from 2023. Our non-COVID business is expected to continue to deliver strong performance with full year revenue growth of approximately 15% to 20%. This is driven by roughly 30% growth in our non-COVID Biologics portfolio, primarily driven by significant growth from our largest customer, as well as completion of tech transfer activities. In PCH, we expect mid-to-high single-digit growth. Current FX rates, which we use in this forecast are forecasted to have a positive impact of 1 percentage point to 2 percentage points on our revenue. We project that inorganic revenue, which reflects one remaining quarter of the Metrics acquisition will not have a meaningful effect. We expect adjusted EBITDA in the range of $680 million to $760 million. While this is a slightly wider range than usual, as Alessandro mentioned earlier, this is reflective of our new more conservative approach to forecasting. These temporary low margin levels anticipated for 2024 reflect our low facility utilization as our reliance on COVID revenue declines. As we ramp up our non-COVID business and align our cost structure, we expect margins to recover towards historic levels as we exit fiscal 2024. We expect the margin of our Biologics segment to improve modestly as we move sequentially from our 2023 fourth quarter to the first quarter of 2024 and progressively improve through the year, with a more pronounced ramp in the second half. In addition, given historical -- the historically seasonal nature of our PCH business, where revenue and EBITDA generation is the lightest in the first quarter and more weighted to the back half of the year, combined with our expected productivity ramps later in the year, we forecast roughly two-thirds of our consolidated adjusted EBITDA to be generated in the second half of the year. While this is more back half weighted than most years, the overall expected revenue split is more balanced with approximately 55% expected in the second half of 2024. We expect adjusted net income in the range from $113 million to $175 million. Adjusted net income growth in fiscal 2024 is being impacted by all of the items affecting adjusted EBITDA, as well as the following items. First, an expected effective tax rate in the 25% to 27% range, compared to 25.5% in fiscal 2023. Second, an increase in interest expense due to rising interest rates. Though, as a reminder, with our rate hedge in place, nearly 70% of our debt is effectively fixed rate. And finally, increased depreciation expense due to substantial investments we have previously made. I’d now like to share an update regarding the status of our filing of our fiscal 2023 Form 10-K. As we continue to improve our accounting, finance staffing and related processes, and we continue to bolster our internal finance resources, some additional steps remain to finalize our 10-K. This will not allow us enough time to file for all of our closing procedures, excuse me, this will not allow enough time for all of our closing procedures to be completed today. Therefore, the completion of our financial statement closing processes and subsequent filings with the SEC will require more time extending beyond today’s deadline. Tomorrow, we plan to file a notification of late filing on Form 12b-25. Our team is working expeditiously to finish the 10-K within the 15-day grace period permitted by the Form 12b-25 filing. We do not expect any change to the numbers we have released today. We appreciate your patience. To close, I want to summarize with you my top priorities as Catalent’s CFO, which are partnering with Alessandro to improve our margins by supporting productivity and cost alignment plans, to delivering incremental free cash flow by reducing the CapEx and the working capital intensity of the business, and finally, strengthening our internal controls and processes over financial reporting and forecasting. All of these priorities are within our control. Operator, this concludes our prepared remarks. We will now open up the call for questions.

Tejas Savant:

Hey, guys. Good morning and thanks for the time here. Maybe Alessandro and Matti, can you just help us build a bridge from the $715 million or so in 2023 EBITDA to $720 million in 2024. You called out COVID assumptions is about $130 million, but could you clarify the contribution from Sarepta that you are assuming at the midpoint here, it sounds like you are expecting very substantial growth there given your 30% non-COVID Biologics growth assumption. So any sort of color versus the $425 million you generated this year would be great? Thank you.

Matti Masanovich:

Yeah. So you asked about going from the $714 million of EBITDA 2023 to our -- I will go to the midpoint or approximately midpoint to $720 million. Obviously, as Alessandro pointed in his comments and my comments, we are seeing COVID demand down year-on-year of approximately $0.5 billion and that has a high margin profile attached to it and it leaves behind cost that we have action. So there’s a saving down or from an EBITDA perspective related to that down volume. We are replacing that down volume, as we mentioned, with one of our largest customers in gene therapy, it should be up year-on-year. We talked about some -- one of our facilities that Alessandro mentioned is doing better, which is Brussels and some of the performance underlying Brussels is doing better, as well as Bloomington during the quarter. So those are primarily the biggest pieces and we have got the Biologics other piece, which is growing at a very rapid rate year-over-year.

Tejas Savant:

Got it. That’s helpful.

Tejas Savant:

Got it. Yeah. Makes sense. And then my next question really is around the strategic review that’s underway. Any color you guys can share around sort of the anticipated time lines for that to be completed and then understanding that there’s a few moving pieces here in terms of the balance sheet initiatives you spoke about, Matti, do you currently anticipate having the need to raise capital either via equity or debt or do these anticipated working capital improvements and the cut in CapEx, et cetera, mean that you feel pretty confident that you wouldn’t need to pull that lever?

John Greisch:

Yeah. This is John Greisch. I will take the first part of that question. Firstly, Alessandro, the team, the Board, we all look forward to working and partnering with Elliott towards achieving our shared goals that we talked about in our prepared comments. The agreement between the company and Elliott is really designed with the primary intent of enhancing long-term shareholder value. And specifically to your question, the mandate included in the charter of the strategic and operational review committee is to review our businesses and strategies with the objectives of; one, improving our operational performance; two, strengthening the financial profile of the company along the lines of some of Matti’s comments around portfolio assessment; and three, maximizing the long-term value for our shareholders. We have got our first meeting of the committee in September. We have obviously been doing a lot of work ahead of that anyway and some of our Board appointments are part of that, the two nominated by Elliott, as well as two nominated from a search that we had been conducting. So I think over the next few months, it’s hard to put a specific time line on it. I think it’s going to come down to Alessandro’s proposal that he and the management team will bring to the committee and to the Board. But certainly by our next earnings call, we should have some traction to speak to you about and we are acting with a sense of urgency, not just at the committee level, but Alessandro and his team to address all of the initiatives and come up with the actions appropriate to drive and maximize long-term value for our shareholders.

Tejas Savant:

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

David Windley:

Hi. Thanks. I will start with the first question, just a slight follow-up to Tejas. With the -- for Mr. Greisch, the strategic review, you mentioned the first meeting in September. Could you tell us when you would expect to be in a position to report out findings of the committee or plans as a result of the committee? What approximate time frame would you put on that?

David Windley:

Okay. Thank you for that. From a -- for Alessandro and Matti, Matti, congrats on the new seat. On guidance, you have commented both in prior calls and today about trying to improve the accuracy or the conservatism in your guidance. I wanted to maybe understand practically how you are doing that, but maybe more specifically to look at the PCH segment outlook in a mid-to-high single-digit growth rate on that, which quite honestly seems pretty optimistic. The environment, the comments by some of your peers on demand, the potential for a slowing economy, all seem like they would point to a more conservative assumption there and so, I guess, I would ask kind of substantiate that the way you are going about guidance this time around is more conservative than the mistakes that were made in the past? Thanks.

Matti Masanovich:

Yeah. I think that’s fair everything you just said, Alessandro. I mean, I think, at the end of the day, going to a ground up forecast, looking at it, looking at, pulling out any stretch that’s in there, pulling out any items that just don’t have a business or a plan behind it, I think, that’s the critical nature of the forecast and getting on it sooner. It will allow us to identify pockets of underutilization sooner and then we would get after that, get after those pockets of higher utilization. So I think that’s what’s really driving it.

Operator:

Thank you. Our next question today is from the line of Jacob Johnson from Stephens. Jacob, your line is open.

Alessandro Maselli:

Look, Bloomington is a launch pad for many new therapies, hands down, has always been and will always be. Sometimes some of the reasons why it’s in the news for inspections more than other facilities, because of that reason, because there is a lot of PIA work going on, there are a lot of launches, a lot of launches that are also requiring those inspections. Sometimes the timing is a challenging one and you need to work through these situations. We continue to be pleased about the pipeline, we have assets which are very heavily utilized, we have been sharing all along that we are seeing a significant demand in prefilled syringes and so that capacity is very highly utilized. And I believe that, overall, we are at the -- not only at the pipeline, but also some of the franchises where we expect to play a major role, one of the biggest one being a GLP-1. It’s something that we have been investing on and investing in for a few years, now coming to fruition and we are very excited about the opportunity coming from that specific therapeutic area, which we expect to be a very dominant one in years to come.

Alessandro Maselli:

Yeah. Look, first of all, you always need to start from the clinical promise and the successes that you see in the clinical trials for some of these therapies and I have to say that the last few months have been exciting in these areas, right? So these are areas which we believe will continue to drive a lot of growth into the industry, also areas that have an incredible promise of having a significant impact on patients and meeting unmet needs. So, surely, strategically, these are areas where we need to stay in and we need to stay in with the purpose of being a significant player with a significant market share. All being said, we need to be realistic around what is the curve of growth of these areas, which we don’t expect to be linear. This is going to be more looking like an exponential curve in our opinion, with a little bit lower start, partly due to funding, partly due to the industry figuring out the manufacturing processes, which are positioning these therapies also for financial sustainability and when all of these will come together, this is going to be a great growth engine for the industry and for sure for Catalent. In the meantime, we need to understand the growth profile and we need to adjust the cost structure, making sure that we can mitigate those short-term margin impacts as we go forward. But, overall, I believe that we need to avoid to jeopardize the long-term opportunity here.

Operator:

Thank you. With our next question comes from Jack Meehan from Nephron Research. Jack, your line is now open.

Alessandro Maselli:

Well, look, first of all, the reason why I am speaking about the GLP-1 category and not necessarily specific product is because, as you know, as a company policy, an agreement with customers, we never really speak specifics of customers or products. I would tell you that overall, in fiscal 2024, we are going to start to see the fruits of the growth in this area. But even more so, we are going to see that in the -- in fiscal 2025 I believe and I do believe that the second half of fiscal 2024 and surely to fiscal 2025 are going to start to gain inflection point for this category as more assets will come to fruition to accelerate manufacturing and increase volumes and output. So we are very excited, we are very committed to our customers and we have a lot of confidence that this will be a significant contributor to the future growth story of Catalent.

Alessandro Maselli:

So, look, I will take a little bit of the question. I will let John to close it out. As we said, the Consumer Health market, as highlighted, that some of our peers is going through a little bit of a correction both from an inventory level standpoint to preserve cash and the consumer discretionary spend, which is probably orientating towards a more less expensive dosage forms. That being said, from a commercial standpoint, we have disclosed at the time of the acquisition in the portfolio of customers of these assets, there were not a significant presence of the big consumer of companies with the biggest brands. And we are pretty pleased with the progress that our commercial team has done in building the relationship and penetrating these different segment of the market, which was not present at the time of the acquisition. Of course, nothing efforts overnight in our industry, so it will take some time, but we believe we are close to sign some additional work in business with some of these blue-chip companies, which will drive additional growth in this area. Now that being said, as we -- as John mentioned, we are exploring all the potential strategic options under the table to make sure that we streamline the portfolio of the company and we accelerate the shareholder value creation, and as such, all options are on the table.

Jack Meehan:

Understood. Thank you.

Sean Dodge:

Yeah. Thanks and good morning. So maybe going back to the guidance one more time. The significant growth you are expecting from the gene therapy customer, how dependent is that on the EMBARK data that will come out later this year? How big of a swing factor does that have the potential to be for you all if that readout, good versus bad and how are you handicapping that for the purposes of the guidance?

Alessandro Maselli:

Yeah. Look, that being said…

Alessandro Maselli:

I -- that being said, I just want to make one other point, right, which is, as we said many times, the fact that we are -- as we should, I -- mentioning explicitly and transformative one specific customer, it doesn’t mean that, the relation we did with that customer is only related to one program, and in fact, I am happy to share that the relationship with that specific customer is across several different programs. Some of that closer to full approval, some of them a little bit earlier in the pipeline, but we are pretty pleased about that pipeline.

Alessandro Maselli:

Sure. Look, first of all, I just want to give a shout to the Bloomington team, because it’s always coming to the news as of late for some of these challenges, but this is the one facility that has played an incredible role during the pandemic serving the United States and the world with an incredible effort of producing billions of vaccine doses, which have saved millions of lives. And I just want this not to be lost from our memories, because it’s easy to move on from this. So the Bloomington team is a team that has accomplished an historical mission, which will never be taken away from them. That being said, clearly, the work has changed now and the work is a little bit different, and as such, you need the different skills and talent. And since the beginning of the year, as you said, we have made several changes, both in our -- in the site leadership where we have a new general manager there, as well as in several leadership positions at the site and above the site, including our quality function. And we are very pleased with the progresses and sustainable progress that this team is driving, looking at not only at cost reductions, but also driving the customer excellence and services, because at the end of the day, in the long-term, what really matters is to make sure that we deliver on our customer’s expectations and we continue to serve patients. So changes have happened, have been progressed over the last three months, four months, I would say, and we have the confidence that we have now in place the leadership for this new phase of the site, which is more launching new products and therapies as opposed to do one-only product in a pandemic setup.

Operator:

Thank you. With our next question comes from John Sourbeer from UBS. John, your line is now open.

Alessandro Maselli:

So, look, when you think about where we want to put the sweet spot of utilization of this company and where we are going to get the most of our operating leverage and we believe that the range of utilization you want to achieve in this business between 70% and 80% of utilization across the Board of your assets. You translate in what that utilization in our current footprint can translate, it is $6.5 billion. So, of course, you noticed, this is predicated and keep being in the right therapeutic categories, having the right pipeline and winning the right amount of business, all of which we are working very actively in. So the potential of our network is that one and I guarantee you we are going to do everything that we possibly can to continue to fill our facilities and to get to that level of utilization which generates healthy levels of cash flows.

Alessandro Maselli:

Well, look, we have seen a very good progress from that facility. So we are pleased with we are -- what we are already seeing. I believe that some of the lines for some very critical product have recorded record output in the last few months. So pretty pleased with what we are doing there and I believe that Brussels is on the right trajectory, and as we go through the first part of the year, which is a little bit slower also because of preplanned vacations and shutdowns at these facilities and we look into the second half of the year, we are going to continue to see progress and we are going to continue to see Brussels returning to ARPU level first and then margin as a consequence. We need to remind ourselves that this facility, we have all the demand we want, because we are still catching up some of the demand of coming from the experience and we expect in the second half of the year, this facility to really come back where it needs to be.

Operator:

Thank you. With our next question comes from Justin Bowers from Deutsche Bank. Justin, your line is now open.

Alessandro Maselli:

Well, sure. Look, at the moment, where we stand today, there is a significant amount of revenues that we are recording in our Biologics segment, which are translating in very little EBITDA levels and this is not the function of having the different market, different product mix or different product, is a function of the things that we have discussed in terms of underutilization of productivity improvement. So there is a significant opportunity for us to continue to work on these programs and revenues and returning those revenues and contributing to the bottomline. Our layer, which is very sensitive to the bottomline. So as we work through fiscal 2024 and we enter fiscal 2025, as we shared with the normalized margins, we have a line of sight to EBITDA returning to what we expect it to be, and as such, that leverage will take care a little bit of itself. I also believe that Matti will be absolutely focused on our $2 billion of working capital with all the initiatives that he has highlighted and looking at the progress is that he has already accomplished in the last few weeks since he’s joined, I am very confident that there would be a significant change in that area of our business, driving short-term cash flow. But also repositioning the company going forward as we continue to grow the topline for less need of capital to be infused into the company to operate. So it is a pretty simple playbook, grow the EBITDA, you use working capital and improve cash flow.

Alessandro Maselli:

So, first of all, I believe that, the way I would respond to the first part of your question, there is nothing that is not in our control or that would prevent us to get back to the historical margins level in Biologics, nothing. The product mix is the same, the pricing is the same, equipments are the same and it’s a pretty healthy space to be in. So we will get there, it’s a matter of work and time. The second part of your question, we will over time try to carve out the other respiratory vaccine work from the pure COVID work, right? It’s more appropriate, because we believe that, these are less pandemic -- it’s less pandemic related to EBITDA and so the simple answer to your question is no.

Operator:

Thank you. With our next question comes from Derik De Bruin from Bank of America. Derik, your line is now open.

Matti Masanovich:

It’s Matti. We are highly confident in getting to the cost savings number and in the overall cost sooner than that when we get to it from $25 million to $150 million to $170 million that Alessandro outline, which is the cumulative cost savings against the baseline. It’s really got hard actions behind it. So if you think about what’s been done at the company, it’s headcount related, taking down significant numbers of heads, both in the corporate section, as well as some of the underutilized facilities. So we have got that. We do have more work to do, and as we talked about earlier, the Strategic Review Committee will look at -- will be looking at capacity as well, at utilization as well and will be looking -- will be taking it a step further. So there could be more to come.

Alessandro Maselli:

Sure. Look, I do believe that early-stage, it’s one part of the equation. The other part of the question is that, as we continue to have good success in bringing assets to commercialization and we build our track record of commercializing products in new modalities and now this is track record is increasing, we believe we will become and we are becoming also the partner of choice to take on assets, which maybe have been early-stage elsewhere and we are going to be able to be the partner of choice to transition them into combination. So more specifically engaging also in the later clinical phases, which is in fact, possible. So we believe that our market share in that specific stage is significant but will become even more significant as a result of our track record. So, again, we believe that our growth in that will be both coming from our continued focus on the commercial team in winning these early-stage assets, which is a little bit of the nature of it, but also being very surgical in going after the opportunity in late-stage as this pipeline matures and position ourselves as a partner of choice for commercial assets.

Operator:

Thank you. With our next question comes from Max Smock from William Blair. Max, your line is now open.

Alessandro Maselli:

So, what I said is that, look, the reality is that for GLP-1 there is a large amount of demand that they need capacity to be satisfied, right, across the Board, and our job as a CDMO is to bring this capacity as fast as possible online to satisfy that demand. We are trying to do everything we can possibly can across all our facilities and I believe we are pleased that almost all our therapeutic facilities are in some way in different ways involved with this therapeutic area, which, as I said, is one that will be very exciting for the years to come. So we are happy about our role, our role will increase as a result of additional capacity coming online and will be very much spread across the network.

Alessandro Maselli:

Yeah. Look, so -- look, in any way, the readout from the study is going to be an important event from us, not only from a business standpoint, but from a patient-first standpoint. So that is in fact a big deal for us. I don’t want that to be underestimated. I do believe that you need to always think about the lens of this process and how this process is really, if you like, whatever happens today is going to have an impact that delayed in time. But clearly, as you think about our growth into the future, that it is an event that will be important to us, one that we are going to be observing with a lot of attention.

Operator:

Thank you. With our next question comes from Rachel Vatnsdal from J.P. Morgan. Rachel, your line is now open.

Alessandro Maselli:

Sure. Sure. First of all, look, and we said all along, PCH has some macro driven dynamics primarily related to the Consumer Health, where consumer discretionary spend is really what can drive end market demand that we have been pretty open and forthcoming about this in the fall of last year. But when you think about the rest of the footprint of PCH is in large commercial approved pharmaceutical product or products that are late-stage and due to be approved. So the way you need to think about the dynamics in that business is less macro related and more pipeline related. And as I said, last year was a disappointing one, because of some of the assets we had in the pipeline, which were expected to drive growth on top of the base business were a little bit delayed. We have been open about how we were getting those approvals, a dozen of them did happen in the last six months, and as such, they are now launching, they were building stock, we are producing commercial volumes. So that’s the other dynamic. There is the specific product for which we have resolved the supply chain disruption and now we do have primary materials to be able to deliver that important product, and as always happens in this case, is after one year of suspension, not only you serve the end market demand, but you also doubled down on inventory deals. So there is an inflated demand in the short-term. And finally, we are pleased with the way we are winning business in our early-stage there as well. So across the Board, I believe that PCH is posed for a good year. When you look at the year over the horizon of the last two years, it’s really where it needs to be, mid-to-single digits, clearly because last year was kind of flat. This year looks a little bit higher, but this business is performing now as we expect it to perform.

Alessandro Maselli:

Sure. Look, as you can -- I have been always pointing out that the data set of our customers, especially our existing customers in terms of evaluating the current performance is a little bit wider. So -- and as we shared in the script, just to point one example or one side, that you have a CRL, which makes to the news and you have an inspection ending up with the Form 483 [ph] observations in Anagni that does it make it to the news. And we are sharing now that today just for the very purpose of providing a little bit of a more balanced view, which is up to get from the external world, but surely is one that our customers get real time. So when you think about some of those challenges, one, the perspective is a little bit different and the set of information available is already different. According to our quality agreements, we do share with our customers all our regulatory outcomes, include both the ones that are impacting their products and the one that are not impacting the products to provide a perspective on the overall compliance profile of the company. And with regards to the other news, of course, me and the rest of the management team are on the front line all the time and providing perspective of the news that have been coming up in the recent months, including the ones that are coming up today and we are going to be -- is always transparent providing perspective but also reassuring customers that Catalent has been here for decades and will be here for decades to come.

Tim Daley:

Great. Thank you. So, first off, I just wanted to follow up on an earlier answer to the last of today’s many GLP-1 questions. So, Alessandro, I think, you said that, all your sterile facilities are involved in GLP-1 projects in some way. So could you just update us on the global count of sterile fill finish lines currently offering commercial scale and what percent of those have prefilled syringe and/or cartridge capacity?

Tim Daley:

Got it. No. That’s really helpful. And then my second one here is on free cash flow generation efforts. So, Matti, you called out the inventory balance as the second priority in working capital opportunities behind accounts receivables. So appreciate muted capacity utilization is likely inflating the balance here. But given supply chain and supplier lead times have normalized, why haven’t we seen inventories come down already or why is that not higher in the packing order in terms of working capital initiatives?

Tim Daley:

Great. Got it. Thanks for the time. Appreciate it.

Alessandro Maselli:

Thank you. I’d like to thank everyone on the Catalent team for their commitment to our customers and patients, as showcased by the delivery in partnership with our customers Sarepta Therapeutics of the first dose of LFDs gene therapy to a young child in the U.S. who’s suffering from DMD, making a historical milestone in the promise of treating these terrible condition. We remain focused on leading Catalent towards sustainable and profitable growth and increasing the shareholder value and I believe that actions announced today has placed us on a clear path to doing so. Thank you everyone for taking the time to join our call and your continued support of Catalent.

Operator:

Good morning and welcome to the Catalent, Inc. Third Quarter Fiscal Year 2023 Earnings Conference Call. My name is Carla and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Paul Surdez, Vice President of Investor Relations to begin. Please go ahead.

Alessandro Maselli:

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 our continued progress towards returning Catalent 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 Biologics segment, which, as we noted during the call, had generated much of the noise that we have experienced over the last several months. Since then, we have diligently continued our work towards addressing the issues that we have experienced with our forecasting rigor and discipline. With the benefit of those additional insights, it became a necessary to update our outlook for fiscal 2023, which I will discuss in more details in a few moments. As I shared on May 19 the operational COVID-cliff closed 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 will 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 Biologics segment, Bloomington and BWI. Again, this balance sheet [review their firm the] [ph] overall [soundness] [ph] 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 component procured a safety stock to minimize pandemic related supply chain shortages. We also corrected a $26 million revenue recognition error related to the fourth quarter of fiscal 2022. 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 our – 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 2023, and confirmed that the soundness of debt accounting. Overall, this critical financial reviews and analysis required asset to delay completing our third quarter Form 10-Q until today. We also needed this additional time to prepare an amendment to our annual report on Form 10-K 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 reevaluated the effectiveness of our internal control over financial reporting as of the end of fiscal 2022, 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 these material weakness. As noted in the amendment, management has restated its assessment to our ICFR and our disclosure controls and procedures to indicate that they were not effective as of June 30, 2022 because of these material weakness. Our independent registered public accounting firm, Ernst & Young, has also restated its opinion on our ICFR as of June 30, 2022. However, Ernst & Young’s report on the consolidated financial statements remain unchanged and continues to state that our June 30, 2022 financial statements present fairly in all material respects, the financial position of the company at the June 30, 2022 and 2021. And the results of its operation and its cash flow for each of the three years in the period ended June 30, 2022, in conformity with GAAP. During this time, we also began to implement plans to strengthen our internal control processes to ensure these issues are not repeated, including through some of the personnel changes we discussed on our last call. Before I hand the call to Ricky to review our Q3 numbers, let me provide some brief updates. I will begin at the three sites, Bloomington, Brussels, 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 update. 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's supervisory and management levels. In BWI, the operational challenge is as 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 wanted 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 Q3, compared to – in Q4 compared to Q3 due to the lower utilization rate and work needed to restore previous operational levels. The second half of fiscal 2023 also reflects some margin issues in our Biologics segment, particularly with respect to our significant investments in new modalities, including cell therapies and plasmids, and 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 2023 turn out to be not what we are currently experiencing. As a result, these service offerings currently [have] [ph] very low level of absorption and utilization and are running below breakeven levels, creating an impact of several 100 basis points on the EBITDA margin in our Biologics 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, and 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 PCA segment, we continue to expect both the revenue and EBITDA increases 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 client supplied 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 19 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 of $75 million to $85 million of annualized run rate savings. This includes cost eliminated through the completion of remediation activities in both Bloomington and Brussels. We expect the impact of these activities to be roughly $100 million in fiscal 2024, 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 have, by reminding everyone that we disclosed on May 19, nine different inspections over the last six months. Noting that several had no observation at all, and other had a [few] [ph] Form 483 observations each. But we were confident then as being confident now that we can and will address all of these observations with corrective and preventive actions that will meet the FDA's standards. In closing, I want to reiterate that Catalent continues to be a great company with the strong fundamentals, a large growing global market, and a significant customer demand. We are committed to remaining our customers' number 1 CDMO partner, and I'm pleased to note that we've seen a strong customer retention over the past few months. We have made significant progress in addressing our operational and forecasting challenges. We have the right strategy in place to achieve the performance levels you expect from Catalent. I'll now turn it to Ricky for a discussion of our Q3 financial results.

Operator:

Thank you. [Operator Instructions] Our first question comes from Jacob Johnson from Stephens. Your line is now open. Please go ahead.

Ricky Hopson:

Yes. Jacob, I'll take the first part of that question then specific to your 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. And 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, there were about $40 million. We would expect to see some decline in revenue in Q4 versus Q3 overall for the segment.

Jacob Johnson:

Okay. Thanks for that. And then just for my follow-up, you know, these GLP-1 drugs have been a key focus for investors over the last several months. I believe you support at least one of these. As we think about, kind of, you know, backfilling the COVID [roll-off] [ph], how large an opportunity do those therapies represent for Catalent?

Jacob Johnson:

Got it. Thanks for taking the questions.

Tejas Savant:

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 [intra-step] [ph] testing process and tweaking some of those invoicing triggers. And Alessandro, any color you can share perhaps at a qualitative level on the fiscal 2024 implications of perhaps an age restricted label for Sarepta’s drug here? Thank you.

Tejas Savant:

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, sort of 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 12 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] [ph] status are now essentially considered fully resolved?

Tejas Savant:

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

Dave Windley:

Hi. 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 cost. 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 2023, a dollar value of those?

Dave Windley:

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 – 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 breakeven in the third quarter. Are you suggesting somewhere around breakeven for the fourth quarter, even though the 55 million is worth 1,100 basis points?

Ricky Hopson:

No, I mean, that is the driver for the continued depressed margins that we expect to see in Q4 versus Q3, predominantly out of BWI, where we previously announced the operational challenges associated with the ERP implementation impacted at 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 time frame. And the operational rigor that is in place now will eventually translate to more financial rigor in the first quarter of fiscal 2024.

Ricky Hopson:

Hey, Ricky again. Sorry, if I've created confusion on that point in the past. Now, to be very clear and specific here, the $26 million [error] [ph], we opened up our fiscal 2022 financial statements and corrected that error during that period. So, we've revised our financial statements for fiscal 2022, and that $26 million is reflected in those, in the 10-K/A that will be filed today. So that means that, that $26 million of revenue and adjusted EBITDA has zero impact on our fiscal 2023 financial statements.

Ricky Hopson:

Okay. Thank you, Dave.

Luke Sergott:

Awesome. Thanks. I'm on Barclays now. So, a couple here for me. So, I think what everybody is trying to do is just figure out the 2024 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] [ph]. So, if you're adding up all these one-timers that don't exist, 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.

Luke Sergott:

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 full-year guide? Can you talk about what the review was there and where that came from?

Ricky Hopson:

That's right, Alessandro. It's been – a lot of time has 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, you know we spend a lot of time looking at the forecast and really digging deep into the forecast, predominantly around our Biologics segment. But look, when we scratched [away the] [ph] 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 we're optimistic and thus led us to take the decision that this needed tweaking further in the reduction that we see of 25 million of revenue and 25 million EBITDA is primarily related to the PCH change.

Operator:

Thank you. Moving on. Our next question comes from Sean Dodge from RBC Capital Markets. Please go ahead.

Ricky Hopson:

Yes, Sean, I can't [sit here] [ph] today and give you more specifics on 2024. 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 2024. 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 time frame. 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 2024, but in terms of giving you any specifics around numbers, I can't do that right now, Sean.

Alessandro Maselli:

Yes, 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 have – 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; and thirdly, the amount of business that we signed. 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 [prong] [ph] in assessing this space. As a reminder, most of our new modalities are really exposed to the biotech industry and funding as such. But yes, I mean, there are some initial signs, which we have seen. Hopefully, that will – those signs will consolidate and start-up in the second half of the year, but be mindful that these are signs of recovery from a low level. So, the path to get back to the level of activities that we've been experiencing 18 months ago, I believe this is still not short, but yes, I mean it's the first sign, which gives us more optimism around the future.

Operator:

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

Alessandro Maselli:

So Jack, that's a great question. I believe that we – this is one of those decisions, which we want to do right. So, we are taking up 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 Ricky has done not only in bringing [indiscernible] in relatively and I know this doesn't feel like that, but a relatively good order and being here today, it feels good to be able to file our Q and K, 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 the outcome, which is not ideal, but it should be – we are in a good position today. So Ricky, has, number one, done a great job there. Is also through his historical knowledge of the company, I believe that has brought back the forecast in the right balance of risk profile. 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.

Alessandro Maselli:

That's a great question, Jack. As I always said into The Street, of course, we are looking at the portfolio of assets. The great news is that our balance sheet gives us the flexibility, meaning that gives us the optionality of wanting to do stuff as opposed to have 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 the fundamental question, who is the best owner for an asset? There are times in which the best owner is Catalent, there are times where the best owner is someone else that are best, and some, probably of our segments or our industry of our companies, maybe can create more value for shareholders on a stand-alone basis. These are all things that are being evaluated and the fact to be in the position to have optionality 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 compositions going on. And I hope that soon, we're going to be able to discuss these in more details as we finalize our plans.

Operator:

Our next question comes from Derik De Bruin from Bank of America. Your line is now open. Please go ahead.

Alessandro Maselli:

So, look, that's a great question. It's a little bit – 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 would tell you, overall, we shared during our May 19 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, the $6.5 billion of revenue. So, when you look at where our guidance is that today, there is quite a [indiscernible] of us. Clearly, there are areas of the business, which – [where] [ph] the ramp-up to fill this capacity is going to be a little bit lower. This is really the comment around the bio modalities, the new modalities. So, [indiscernible] that we now need to accept the fact that the ramp there for a number of combined reasons is going to be lower. There are other areas, to be honest with you, we're in [real] [ph] fill/finish for syringes, we cannot build the capacity fast enough, the capacity because of some of the dynamics. So, we also have discussed earlier in the Q&A session, there is a huge demand for those assets. And so those assets, 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 Zydis offering where we cannot satisfy a very big demand that is in face of others. 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, they're trying to find the best possible solution to bring capacity online and there are other areas of the business were to work is more to mitigate the costs that we are carrying from an operational standpoint to optimize the return on capital, but I would tell you, the 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 in order 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 very hard to cope with, and we are now suffering a little bit of the consequences of those – of that hyper growth. And going forward, I believe that we have now a plan that is more sustainable, stable, and we'll avoid another fiscal 2023 for us.

Mike Ryskin:

Yes. 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 puts and takes we should be aware of? And just, is that a reasonable jumping off point for next year, that 40 million in fiscal 4Q? And then the other we spend is on the unexpected supply chain issues in PCH. I just want to make sure I heard correctly, did 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, if that resolved or not? Thanks.

Mike Ryskin:

Great. Thanks.

Max Smock:

Hi, 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 trying to – 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.

Max Smock:

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 when we spoke in May, I think you talked about those getting – coming online here in the back half of the calendar year. Do you have any update around timing for when those tech transfers could 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.

Max Smock:

Okay. And just to be clear, this program is still on-track in terms of the timing, when we have those lines elevated up and running?

Max Smock:

Got it. Thank you.

John Sourbeer:

Good morning and thanks for taking the question. I appreciate the color on the updated fiscal 2023 guidance and the PCH impact. On last month's call, you did mention that you expect PCH to return to growth in fiscal 2024. Can you confirm if that's still the case?

John Sourbeer:

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 beyond Sarepta, what would be the next near-term opportunity from a commercial product standpoint? And then I think you mentioned in May, delaying some of the expansion on some of the suites there. Could you remind us how many suites you expect to have online actually in fiscal 2023 and then how many you're going to add in fiscal 2024?

John Sourbeer:

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?

John Sourbeer:

Great. Thanks for taking the questions.

Alessandro Maselli:

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

Operator:

Hello, everyone, and welcome to the Catalent, Inc. Second Quarter Fiscal Year 2023 Earnings Conference Call. My name is Emily, and I'll be moderating your call today. [Operator Instructions] I will now turn the call over to our host, Paul Surdez, Vice President of Investor Relations. Please go ahead, Paul.

A - Alessandro Maselli:

Thank you, Paul, and welcome, everyone to the call. Before turning to our results for the quarter, I want to address the Bloomberg news report that appeared over the weekend, but only to say that as a matter of policy, we do not comment on market rumors. With that topic out of the way. Our second quarter results met our expectations and have strengthened our forward momentum for our strategic plans, highlighted by expanded collaborations with strategic partners, significant new business wins in our drug product and gene therapy offerings, renewed business development in [indiscernible] and exceptional demand for our world-leading Zydis fast-dissolve technology. As we pass the midway point in fiscal '23, I would like to first look back at the past six months. Our non-COVID business continued to shower strength, as we grew organic constant currency net revenue above market at approximately 12% despite softness in nutritional supplement demand. We brought online new capacity to support areas of market with anticipated high demand, particularly of prefilled syringes, viral vector manufacturing and Zydis. We executed our plans to meet the increasing demand for fit-for-scale, high potent drug manufacturing through the acquisition of Metrics. We are very pleased with its overall performance out of the gate, including the recent FDA approval of two new high-potent drugs that Metrics is manufacturing. Broadening our lens. Since the beginning of 2022, Catalent has been a manufacturing partner for a total of seven new approvals across our -- FDA approvals across our network. In addition, we touched approximately 50% of all FDA approvals through that time through our critical -- clinical supply, analytical support and early development service offerings. We have agreed and announced an extended partnership with the two of our largest customers. All of these validates our strategy of providing to our partners a comprehensive portfolio of services underpinned by our operational excellence track record, which together position Catalent to be the partner of choice to maximize the potential of their pipelines and allows us to continue to increase our share of the most valuable molecules in the CDMO market. Looking forward, I'm very excited to be leading Catalent in the next chapter of our journey. We have a clear mission to help people live better, healthier lives. At an investor conference last month, I discussed several aspects of Catalent that should excite everyone about our premier place in the market and the growing opportunities in front of us. Among other things, I noted the continuing growth of our total addressable market, which you can see on Slide 6. Our strategic investments have materially expanded our total addressable market and will provide us with greater future growth opportunities. Since fiscal '17, we have invested over $7 billion to enable accelerated growth in exciting segments of the CDMO market, and those moves have expanded our opportunities. In fiscal '19, we addressed a $35 billion market. After our thoughtful diversification, including investment in technology, capacity and new capabilities, today, we address a $70 billion market as an active and scaled player in many of the largest, fastest-growing segments in our space. Looking ahead to fiscal '26, we anticipate our addressable market growing another 40% to $100 billion across the markets in which we operate, and we are incredibly well positioned to continue to increase our share in these markets over time. Now moving on to the highlights of the second quarter. As expected, our second quarter results compared to the prior year period were negatively impacted by the lower year-on-year demand for COVID-related products. However, notably, revenue from COVID products grew sequentially as we were the primary U.S. fill and finish site for a pediatric booster vaccine that received emergency use authorization during our Q2. Net revenue of $1.15 billion was down 6% on a reported basis or a 2% decrease on a constant currency basis compared to the second quarter of fiscal '22. When we exclude the impact of acquisition and divestitures, our organic revenue declined 4% measured in constant currency. I would like to call out that our organic non-COVID revenue grew approximately 4% in the quarter in constant currency, including double-digits growth in our Biologics segment. This is a slower growth they realized in the first quarter because we prioritized the launch of the pediatric booster and COVID-related work at our Bloomington facility. We expect consolidated non-COVID revenue growth for the remainder of the fiscal year to be more in line with the Q1 levels, which was more than 20% on a constant currency organic basis, as we address our large backlog of non-COVID work, particularly in our gene therapy and drug product offerings, and our PCH business returns to growth. Our second quarter adjusted EBITDA of $283 million declined 9% as reported or 6% on a constant currency basis compared to the same quarter of fiscal '22. When excluding M&A, the organic adjusted EBITDA decline was 7% when measured in constant currency. Moving to Slide 8, I would like to cover some data regarding our COVID-related revenue that we addressed during the recent public webcast. Our revenue guidance assumed an approximate $750 million decline in COVID- related revenues from approximately $1.3 billion in COVID revenue we recorded in fiscal '22. We're actually tracking slightly better than previously reported with approximately $450 million in COVID revenue recorded in the first half of the fiscal year and expected additional demand in the fourth quarter to prepare for a seasonal COVID vaccine in the fall, which is expected to result in fiscal '23 COVID revenues that is more than $600 million. Having said that, given the expected new seasonality of the product, we expect a minimal revenue contribution from COVID products in Q3, resulting in a decline of COVID-related revenue of nearly $350 million when compared to the third quarter of fiscal '22, which was our peak COVID quarter. Moving on, we continue to position ourselves as the industry partner of choice across the pharma, biotech and consumer health sectors. Our position has been further validated by two significant strategic partnership expansions. First, we will be extending and expanding our manufacturing partnership with Moderna, which will see Catalent support the manufacture of multiple Moderna products in multiple formats across our North American and European biologics drug product network. Catalent will continue to provide the drug products fill and finish services and production capacity for Moderna's COVID-19 programs. In addition, there are plans to extend the non-COVID-19 programs such as, two non-COVID-19 programs such as flu and RSV vaccines from our manufacturing site in Bloomington, Indiana, as well extending the partnership to support Moderna from our state-of-the-art European facility in Anagni, Italy. We look forward to our strengthened long-term relationship in helping Moderna advance its robust mRNA pipeline. Second, we recently expanded our existing manufacturing partnership with Sarepta. Catalent will be the Sarepta's primary commercial manufacturing partner for its leading gene therapy candidate for the treatment of Duchenne muscular dystrophy, which has May 29 PDUFA date. The agreement was also created mechanisms for Catalent to support multiple gene therapy candidates in the Sarepta pipeline for limb-girdle muscular dystrophy. To meet increasing demand for maturing gene therapy pipelines from Sarepta and other customers, we are ramping up additional suites at our BWI campus later this year. Critical to our business in building strong partnership with our customers is our quality and regulatory track record. Quality and compliance are central to everything we do and our strong quality management system continues to be a differentiator for Catalent with several strong recent regulatory inspection results. In addition to enhancing our strong quality performance, our management team and I have a renewed focus on improving efficiency across the organization and free cash flow generation, as demonstrated by our recently executed restructuring activities. Tom will share additional details on these activities in a moment. I will also walk you through our fiscal '23 guidance ranges, which are unchanged from our November call. On Slide 9, we cover our recent progress in ESG areas. We have a strong commitment to ESG and corporate responsibility at Catalent. And we will soon publish our fiscal 2022 corporate responsibility report which shows our continued progress in this area. We have developed our CR strategy to align to our patient-first culture, enhancing our inclusive culture, which drives our commitment to operational and quality excellence. Our CR strategy is focused on three main pillars

Operator:

[Operator Instructions] Our first question today comes from Jacob Johnson with Stephens. Please go ahead, Jacob.

Tom Castellano:

Sure. Jacob, thanks for the question. Look, I would say we did see, as we mentioned on the call, non-COVID organic growth in the first half of the fiscal year at about 12%. It was down in the second quarter in comparison to where we saw in first quarter levels. However, as we get into the second half of the year, we have line of sight, which is very typical at this point in time to have strong visibility to adjust the remaining five or six months that we have in the fiscal year from those volumes, so expecting to see non-COVID growth in the second half more in line with what we saw in the first half, again, in that 20% range, and that will bring our full year non-COVID-related growth to be in the mid-teens as I mentioned on the call. I think we continue to be very bullish on the demand profile we see around gene therapy programs as well as on the drug product side of the business. Those would be the main contributors that we would see to the change in organic non-COVID-related growth in the second half of the year, and we were able to still hold our guidance range and pull back around the assumptions on the PCH side of the business, where, as we mentioned, we continue to see some pressures, particularly when it comes to discretionary spend on the gummies and, I would say, just Nutraceutical products across both Softgel and gummies in the second half of the year. You did mention FX that is, I would say, a modest tailwind for us here. But given where we are in the year and only the modest weakening of the dollar we saw in comparison to the euro and GBP, not a significant uplift there. I would say, as you think about the range that we have out there for the full year guide, I think it really comes down to execution in terms of where we land fits in the range. As I said, at this point in time, we typically do have very strong visibility to the demand profile across the business and it comes down to execution across our network. And we've certainly, I would say, built in some natural hedge just based on the normal execution-related hiccups you can see in this business when you operate 55 sites across the globe.

Alessandro Maselli:

Sure. Look, first of all, I would say that our relationship with Moderna, it goes back many, many years. So we started to work with them when they were at the very beginning of the journey in 2015-2016. So, we are very, very pleased how this relationship has grown and continuous to grow into the future. I believe that with regards to the vaccine, we are keeping that network to be in the best position to serve what is going to be a seasonal product going forward. So that, on one hand, we can search capacity across our network in multiple sites. And at the same time, maintain a level of efficiency and productivity, which is important to us, right? And this is the best way to do it when it comes to seasonal demand. On the other hand, very, very excited about participating to these promising new platforms, we continue to support them, both on the clinical side, but also preparing across different formats for what the market might require. So, we are very excited about this relationship. We've always been in partnership with them, and we are very pleased that this relationship will continue to grow as in the next few years.

Unidentified Analyst:

This is [Sam] on for Luke. Just a couple of questions here. With a couple of quarters left in the fiscal year, what gets you guys to the low to high end of the EBITDA guidance range? Does Sarepta factor in there with their approval? We can just start off there.

Unidentified Analyst:

That's helpful. And then on a follow-up. So the top line guide implies a bit of a step down. What got materially worse? And is that kind of split between PCH and Biologics? And that also implies a 4Q step-up outside of historical norms, is that just from COVID? Any color around that would be helpful.

Operator:

Our next question comes from Dave Windley with Jefferies. Please go ahead, Dave.

Tom Castellano:

Yes, Dave, it's a great question and one that we continue to wrestle with and work through internally here. I would say there's various different ways that we can address in the event that we do see the Sarepta product essentially moving to commercial, though the scenario that you laid out, which would be a movement from percent completion as it's done on the development cycle to batch release upon commercialization is certainly one of those alternatives. There are other alternatives as well that would align to U.S. GAAP and ASC 606 guidance around revenue recognition. And we are pursuing those and looking at those with our auditor -- in conjunction with our auditor EY to ensure that we have the best possible scenario as outlined. In the situation in which you highlighted, if we were to move to batch release being driving the recognition and the cycle time remains as long as it is from that production cycle, it wouldn't relate -- it would create a period of an air pocket, as you mentioned, from a revenue standpoint. And I think that's the piece that we essentially need to continue to look at. So as we know more around this and come to determination, one, whether or not that commercial approval is granted in that late May time period, again, being outside of our control, obviously, we'll communicate more to The Street around this. I would say, regardless of what happens on May 29, the impact to us in fiscal '23 is minimal, if at all, right? Because what we will have at that point in time is the majority of revenue that we would be recognizing in that June time period being batches that are essentially already in flight that have essentially kicked off while the product was still considered a development product. So, many moving pieces around this, Dave, I think you're asking the right questions. These are the types of things we're looking at internally. And when we come to a determination on exactly what that revenue recognition profile is going to look like for this particular product, given the binary event associated with the approval where we will ensure that that's properly communicated so that you all understand how to model it.

Alessandro Maselli:

Sure. Look, this is a great question, and thanks for asking it. So look, first of all, I would say, as you said, 483s are not uncommon in our industry, especially in some type of manufacturing operations, surely sterile operations are the one that the CDs to happen more frequently. Just to be clear, we don't plan for 483s. So we work very hard across our quality management system, with our leadership, with our people, with our operational excellence expectations to avoid this 483 to the extent as possible. However, it's -- these are public information. You see that there is a share of those inspections, which will result in 483s. This is true for all the players into the industry. And it's as important as try to prevent them, but even more important, how you respond to those observations in a thorough, extensive and holistic way committing to corrective actions. And some of those corrective actions, actually, most of them yields to an improved operation on the other end of them. So that's one part of the answer. The other part of the answer, which I want to stress, is that as we signaled many times, Catalent receives regular inspections all the time. Now in this couple of cases happen to be, as you said, more visible, but there are inspections all the time. And we are pretty pleased with our track record of inspections, both from share and ratio of the ones resulting in 483s, but also looking at the number of observations that are normal in those 483s. So look, I know it's been an element of noise in the last few months, but given that the outcome of those inspections you're referring to, plus the ongoing track record on the further inspections we received, we feel pretty confident about our quality management system and our operational excellence.

Max Smock:

I just wanted to touch on funding dynamics. I know last quarter, you pointed to some cash conscious decision- making from customers on the biologics side. Just curious if your conversations really have changed here at all given some of the positive developments in the market, and what are customers telling you about their conviction and their ability to go out and raise funds? And how does that compare to when we spoke this time -- or at the end of last year?

Max Smock:

That's good to hear. And then just a quick follow-up for me around the Brussels facility. I know last -- in fiscal year 2022, it was closed down obviously for six months. Just wondering if there's any way or any detail you can provide that helps us think about the margin tailwind in fiscal 2022 from that factory being online for the full year?

Operator:

Our next question comes from Paul Knight with KeyBanc. Please go ahead, Paul.

Tom Castellano:

So, I would say, Paul, we're seeing pockets of improvement. And again, we order many different components and inputs for the various different types of products that we manufacture across our Biologics and PCH segments. I would say there are areas of improvement, but there are certainly areas especially on the PCH side of the business, where we do continue to see some challenges from a supply chain standpoint that factored into our decision to continue to remain, I would say, slightly elevated or elevated from an inventory standpoint. We were very specific to say that in the short term, this is going to be a tailwind opportunity for us when we have the comfort in being able to pull back on some of those higher levels of inventory are more likely to be a meaningful contributor to free cash flow in '24 than I would say it is in '23; although, as we get into the back half of the year, we should see some modest improvement.

Paul Knight:

And then last question would be, you had mentioned at the beginning, Alessandro, the fill/finish market, very good. And what are the dynamics creating these positive trends in fill/finish and I believe you're at top one, two, three in the world?

Operator:

Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.

Tom Castellano:

Sure. Tejas, I think your point is spot on. Certainly, we will see COVID in that range, as you mentioned, the $150 million-plus after a minimal contribution in Q3 that will certainly drive part of the margin story. But I was also very specific in discussing the ramp-up of the major gene therapy program, as we've talked about being late in the third quarter here and having a full quarter of ramped contribution to us from a fourth quarter standpoint, and given the operating leverage, you can see from the utilization of assets there as well as the just novel attractive margins that you see related to the gene therapy side of your business, and Biologics overall you can see that step-up. I would say from a non-COVID standpoint, if you were to strip out COVID out of all of our quarters, you would see a seasonality profile that very closely mirrors what our historical seasonality has been pre-COVID, which is that step up in -- with the second quarter versus Q1 levels, then a step up to Q3. But then ultimately a significant ramp in Q4 ahead of the summer months and some of the, I would say, downtime that we see across our customers and across our customers' networks as well as our own network related to normal maintenance-related activities that you see in the summer months there and taking up sites off-line. So, that's certainly all contributing to that significant step-up we see in the fourth quarter.

Alessandro Maselli:

So, look, for the Bettera one, this is a market we are looking at very, very closely. The overall BMS market has decreased in fact, in 2022. So, we are really trying to get together with our customers, with our biggest customers to try and to understand a little more. The fundamental dynamics about this market have not changed, meaning that there is a tendency of people to go to self or preventative medicine, so to speak. However, you want to call it, and surely gummies is our preferred dosage form. So the fundamentals are there. Clearly, the market is going through a correction both because of the end market demand, which has contracted in 2022 and because of destocking for cash considerations. So, we have seen surely be clearly a disappointing trend in the last few quarters. We expect this to continue through our fiscal year. But at the moment, there are signals that at some point in the later part of this calendar year, the correction of inventory could go out, we will be back serving the end market demand. With regards of the 2024, it's a little bit too early to have any consideration about it. So, as we're going to continue to walk through the fiscal year, we're going to keep you updated about this. But I would say that we continue to be excited about the partnerships we have with the key customers going into the future.

Sean Dodge:

Yes. Tom, you mentioned the $75 million to $85 million of headcount-related savings. But then said there could be some additional beyond that, that could be in the tens of millions of dollars from other efficiency and I think you said procurement initiatives. Is there any more kind of detail you can share on the timelines for the latter? When do you expect the benefits from the other efficiency and procurement initiatives begin to accrue?

Sean Dodge:

Okay. And just to clarify, you said about half of that annual run rate you expect to capture in the second half of your fiscal '23. It looks like some of these headcount reductions took place after the beginning of Q2, was there any amount of these savings reflected in this most recent -- your fiscal second quarter?

Operator:

The next question comes from Justin Bowers of Deutsche Bank. Please go ahead.

Tom Castellano:

Yes, Justin, we really didn't highlight any material change to the non-COVID Biologics growth. I would say it's very similar to what was assumed and what we saw as part of our last guidance. The real change that offsets the call, the pullback on the PCH side is the over performance of the COVID portfolio. As we mentioned, COVID was originally assumed to be approximately $550 million of revenue for us in our prior guidance. And based on the orders that we have now related to our fourth quarter as our customer ramps up for the fall booster season, we now expect COVID revenue to be more than $600 million in the year. So, it's really the COVID revenue that's offsetting the pullback on PCH.

Alessandro Maselli:

Yes. Look, let me ask this from the latter part of your question. So yes, additional suites are coming online as we speak in the -- as we have already shared. The level of utilization is ramping -- will be ramping up in the next few quarters, right? So I believe that in Q3, you're going to see a little bit of a balanced impact because, yes, you're ramping up, but you also -- the utilization, but you're also ramping up the cost associated with adding and training the people that are required for these new suites. As we said, we remain very optimistic around the gene therapy demand and viral vector manufacturing going forward, not only with Sarepta, but across the spectrum of our clients, it's a pretty good space for us. With regards to the tech transfers, these tech transfers continue to progress. Of course, there are several programs at the same time progressing. And I would say that they -- we are pleased with the kind of program we're transferring in. And surely, these programs will continue to contribute to our drug product growth into the future.

Derik De Bruin:

Can we talk a little bit about the Sarepta contract? I'm just sort of curious, is that contemplated and sort of like the ramp-up contemplated in your original fiscal '23 guide or is what you're seeing now more incremental to what you had originally expected?

Alessandro Maselli:

Yes. I just want to say that the partnership with Sarepta goes -- is a little bit wider than these only programs. So, they have some capacity that we dedicate to them into our Harmans facility, and they can allocate different programs, both clinical and preparation for commercial as they see their internal plants developing. So that is more than just DMD here.

Alessandro Maselli:

So look, number one, I would tell you that we never assume a business going forward to grow at the top end of any range. So we didn't assume in our story there, the 20% assumption for sure, right? So we tend to be pretty conservative on these forecast because, as you know, things may change in these markets. So that's the first consideration. The second consideration I would say in terms of the PCH story, there is much more to PCH just regarding the gummies. When you look at the demand we are seeing that was in my remarks around Zydis dosage form is just exceptional demand. And I used the word exceptional, not by chance or mistake, we are seeing the demand that is far exceeding capacity. So we are building capacity as fast as we can. We're going to be opening soon in North America, not very soon, but sometimes in the next few quarters a North America facility for Zydis because we need an additional facility. We have installed recently -- last year, we have installed an additional line in Zydis, we are working on a number of operational excellence programs to debottleneck capacity there. But there are some very, very visible products, which are growing very fast in the Zydis format. So that is one area that is surely contributing to the growth story of PCH. And let me remind you that's one of the most profitable business of the current network should be over and above some other businesses, even considering Biologics. And with regards of the other parts of PCH, look, clearly, PCH, especially in the pharmaceutical supply is very much dependent on the timing of some approvals and the timing of some of -- and the launch of some of these approvals. So, it tends to be a little bit lumpy at times. But when you look at in the three to five years' horizon, that is a business that is a very exciting pipeline to support growth.

John Sourbeer:

Just with the increase in the COVID guidance in that greater than $600 million in strength in 4Q, any one you could provide some color on what the endemic COVID runway looks here even beyond fiscal '23? And what should we -- how should we think about this long term?

Alessandro Maselli:

I'm going to add one comment to this one. Look, the fact that we are bringing online more assets into the network surely will contribute to the ability of running an endemic business with better productivity and profitability.

Tom Castellano:

Yes. I wouldn't say there's any change to that. We continue to work on about 150 development programs across that part of the business. That's what has justified further capacity expansions within that space. And I would say not only we're pleased with the number of programs we work on, on the gene therapy side of the business but also the progression and maturity of those that continue to move from earlier phase to a later phase. And obviously, the Sarepta relationship and program or programs is just one example of that. So again, feel very good about the growth prospects and opportunities in this business.

Evan Stover:

Just one for me because as John asked one of mine, but this is a cleanup. Last quarter, you said you had some efficiency initiatives that were in flight and in your last updated guidance, so I just wanted to be perfectly clear that 75 to 85 of efficiency actions that you kind of noted today. Is that, that prior program or is that incremental addition -- an additional cost savings to your guide today?

Operator:

Our final question comes from Jack Meehan of Nephron Research. Please go ahead, Jack.

Tom Castellano:

Sure. So Jack, I think we've said in Alessandro's comments that one of the things we needed to do was prioritize a COVID-related program related to the emergency use authorization of the pediatric COVID vaccine over non-COVID-related revenue out of our Bloomington facility. I'm not going to be in a position to tell you what our non-COVID growth would have been in the second quarter. If we weren't prioritizing that program, but that certainly had a significant impact and why we were only able to achieve 4% non-COVID growth in Q2 and 12% non-COVID growth in Q2 for the Biologics business. But it's not necessarily the same assets and lines that are being utilized, but it's certainly the same operations and quality folks that we have in terms of putting in the time and efforts around releasing of batches. So, that certainly played into why we had a depressed non-COVID-related growth in the second quarter. So, I think returning in the third quarter back to non-COVID levels that we have seen through the first quarter of the year is what I would consider to be normal course or a low bar based on what we've been able to show. And again, the uptick in COVID-related revenue that we expect to see in the fourth quarter is really offsetting the pullback on the PCH side of the business, where we continue to experience headwinds, particularly in consumer health.

Tom Castellano:

Yes. I think your numbers are probably close. Maybe I'd say it's a little bit on the high side in terms of the Q4 contribution, but again, not materially different, I would say, three things like point to one, the COVID-related revenue here is going to be sizable. As we've already talked, as we've already talked about, the ramp-up on the gene therapy side of the business related to a major customer program that we've talked about here, new capacity that's going to be coming online in the third quarter. It's going to be utilized. This is going to be by far the strongest gene therapy contribution we've ever seen in the fourth quarter. So very difficult to compare that to historical years where we weren't seeing gene therapy contributions to the levels that we'll see here around the business. But third area that I would say I would factor in and then just a normal level of seasonality that we see around the PCH side of the business around Q4, heading into the summer shutdown period is another item to take into consideration here. Lastly, I would say the Brussels dynamic for us in the prior year, if you're looking at this and certainly, I would say, a headwind that we had in the prior year. So the natural lift up that we'll see here for the fourth quarter that was a business that was shut down or a facility that was shut down for us, that will be up and running here as well. So, I think all of those things factor into the margin profile we expect to see in the fourth quarter. And lastly, I would say I'd just reiterate that this was -- that the demand is there, right? The level of visibility that we have to volume or demand for the second half of the year and even the fourth quarter is high and it comes down to the levels of execution that we're able to deliver upon across our network of sites.

Alessandro Maselli:

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

Operator:

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.

Operator:

Hello everyone and welcome to the Catalent Inc. First Quarter Fiscal Year 2023 Earnings Conference Call. My name is Daisy and I'll be coordinating your call today. [Operator Instructions] I would now like to hand the call over to your host Paul Surdez Vice President of Investor Relations to begin. So, Paul, please go ahead.

Alessandro Maselli:

Thanks Paul and welcome everyone to the call. We started the year with solid results and positive momentum as a strong constant currency growth in excess of 25% in non-core 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 of the -- 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 Anagni sites. We agreed that on determination of the contracts, which reflect the changing demand patterns for the COVID-19 vaccines in order to accommodate these long-standing and significant customer as we set a new and strengthened framework for our growing partnership. We received agreed payments on these settle contracts in October and now expect the debt 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 2023 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 $1.22 billion flat on a reported basis or a 4% increase in cross currency compared to the first quarter of fiscal 2022. While we also exclude acquisition and divestitures, organic revenue declined 1% measured in constant currency. Our first quarter adjusted EBITDA of $187 million declined 26% as reported or 24% on a constant currency basis compared to the first quarter of fiscal 2022. When excluding the acquisition and divestitures, the decline was 28% measured in constant currency. Turning to the business as noted on slide seven, first quarter non-COVID-19 organic constant currency growth was more than 20%. The growth in our non-COVID was driven by our cell and gene therapy offerings in our Biologics 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 last -- 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 time lines 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 investments and taken 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 has been our organic investment to enhance our BWI gene therapy assets. A year ago, we brought online six additional suites to bring the sites 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 clients' pipeline progress. Some of the other key investments we have made over the last few years include the drug product syringe capacity that led to recent [indiscernible], investments in additional single-use drug substance production capacity and our rent into the gaming nutritional supplement market just over a year ago among others. Laying on top of our organic growth drivers is the acquisition of Metrics Contract Services which we closed on October 3. It 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. Underlying the growth in this business is the increasing number of potent compounds in the oral solids market, particularly in the oral oncology pipeline. Adding the port and handling capabilities in fit-for-scale capacity through Metrics that 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 a solid long-term growth for Catalent, 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 anticipate further repo effects from either inflation, which is impacting the 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 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 forecast also reflects in these new trends. Finally, after several years of elevated levels of capital expenditures, we have made the fiscally prudent decision to rephase some of our CapEx spending planned for this year to maximize utilization, increase free cash flow as we load our balance sheet. Some of the capacity we initially factored into our initial fiscal 2023 guidance will now be delayed into fiscal 2024, but this rephasing 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 interest 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, as we cover 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 signed significant areas of strength as some examples. We continue to forecast strong growth for our overall non-COVID business. Our Zydis business continued its historic record performance. Our gene therapy business has proven out that the thesis we lay out when we initially acquired the Paragon Bioservices and our overall funnel of new non-COVID opportunities is at a record high. Shifting gears, I would like to address the FDA audits over the summer that led to Form 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 2022, 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 as regulators customers and Catalent 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 observation we see seriously and respond to them an holistic and complete way. We believe that our responses by our Bloomington and Brussels teams will comprehensively address the recent FDA observations and they've 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 this. 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 drive meaningful growth even in a less favorable macroeconomic 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.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Luke Sergott of Barclays. Luke, please go ahead. Luke, please kindly unmute your line and please proceed with your question.

Operator:

Of course. Our next question comes from Tejas Savant of Morgan Stanley. Tejas. Please go ahead.

Alessandro Maselli:

So thanks Tejas for the question. Alessandro here. I will cover quickly part of it and then I'll hand over to Tom. Look as you see in the first quarter, we recorded a non-COVID growth as we expected in the range of 20% plus and we expect this to continue through the year. Tom, would you like to give a little bit more details?

Tejas Savant:

Got it. That's super helpful. And then as sort of an unrelated follow-up. Alessandro, two questions, one on the quality front and one on your CapEx decision to trim the spending outlook here. So, on the quality front you noted that both Brussels and Bloomington are now operational. So, can you just share any update, particularly in terms of your confidence in your ability to ramp manufacturing for customers at the site, irrespective of what happens with some of these 483 letters that you've received and the activities you're taking to address them as well as any sort of customer conversations around future projects. Has any of this noise had any impact on that? And second on CapEx, with the decision to pull back CapEx here a little bit given the macro, can you just talk to us about your ability to continue to meet demand at least over the near term given the push out to fiscal 2024?

Tom Castellano:

And I'll just add Tejas in the near-term really the only two CapEx projects that we have that I would say would have an impact on our fiscal 2023 year the decision to delay both related to Oxford and Princeton. Those are now expected to come online during fiscal 2024 and contribute revenue in that period versus in the current fiscal year.

Operator:

Thank you. Our next question is from Sean Dodge from RBC Capital Markets. Sean, your line is open. Please go ahead.

Tom Castellano:

Yes, Sean. I would say this is not just the dynamic we're seeing in Europe. We're seeing it across both I would say our European and US-based customers. I did say that this is a dynamic that is crossing both our Pharma and Consumer Health and Biologics segments. I would say on the Pharma and Consumer Health side, it's more related to commercial products and consumer health products. And I think it's really driven by cash decisions. I believe that our customers are making in terms of how they're managing their supply chain. And it's not just tied to smaller customers either. I mean I think our approach as a large company, in terms of looking at things from a more conservative cash flow position is exactly what we're seeing from some of our customers do as well as they look to manage working capital and supply chain in this macroeconomic backdrop. So, much more across the board, both large and small customers, and also across biologics and the Pharma and Consumer Health. The only other thing I'll add is related to the examination of the pipeline and progression of their pipeline and some of the slowdown we're seeing there, that's more attributable to the biologics side of the business. But again, I wouldn't say, it's only tied to smaller customers. We're seeing some larger customers that may not be in Phase 3, but in more earlier, Phase 1 and Phase 2 programs, just looking to slow play them as they navigate through the macroeconomic environment.

Tom Castellano:

There's been no change I would say with regards to the assumptions around those tech transfer programs. They continue to be a meaningful contributor to us in the fiscal year. There are several of those that will be ramping on through the fiscal year here. So, we're not going to quantify those Sean, in terms of what their contributions. We don't talk about individual customers or products. And so, I would just say that that continues to be a driver of improved capacity utilization as well as revenue growth as we get into the second half of the year.

Sean Dodge:

Okay. Great. Thanks again.

Operator:

Thank you. Our next question is from Dave Windley from Jefferies. Dave, your line is open. Please go ahead.

Tom Castellano:

Sure Dave. So I would say, the derisking approach we've taken, and the more conservative approach we've taken to guidance here, really spans both PCH as well as our Biologics segment. I wouldn't necessarily say, it's overly weighted towards the PCH side of the segment, I think where we're seeing the bulk of the impact to PCH is related to the consumer confidence, discretionary spend, given the macroeconomic inflationary environment that we're seeing that has a more immediate impact, particularly on the pharma – sorry, on the consumer health side of the business, the gummies business but also just – I would say the softgel business associated with OTC and consumer products. I mentioned in my earlier responses, I think it was Tejas, about 25% to 35%, I would say of the revenue call down was related to that consumer confidence or consumer spend dynamic that again is more impactful around the PCH side of the segment. But the remainder though is really just in terms of positioning of our customers across both large biologics side as well as the PCH side, and their cash-sensitive decisions and just slow down in overall pace around new programs that we're seeing again on the PCH and biologics side. So its part of that is on the PCH side again that in addition to the consumer spend gets you to probably, a little less than half of the impact being on the PCH side of the business and the rest of it being on the large molecule side.

Tom Castellano:

I would say, it doesn't change materially, Dave. And we have said that, the tech transfer programs are going to be meaningful contributors in the second half growth in part of the second quarter, but into the second half growth as they really start to ramp. We have said that, those are drug products related and tied to our sterile fill finish assets on past quarters. The comments we made around the first quarter and some of the growth that we've seen on the gene therapy and cell therapy side is expected to continue. So that is a business that saw strong performance in the first quarter grow throughout the fiscal year as well.

Dave Windley:

Excellent. That's helpful. My last question is around kind of general margin bridge, I guess goes back to Tejas' question a little bit, but you're taking revenue down as you said more conservative. We would normally expect some decrementals in a high fixed cost business. So that is a baseline expectation, you also have remediation costs related to the quality issues that you raised in your remarks, inflation and other things that are challenges. Your margin forecast for the new guidance is essentially the same as the old guidance. So, I'm looking for help on the cost levers that you're able to pull to mitigate the decremental on the revenue drawdown?

Dave Windley:

Okay. Great. Thank you.

Unidentified Analyst:

Hi. Good morning. This is Amy on for Julia. Thank you for taking our question. So I have a follow-up on the CapEx, the slowdown of the CapEx. Could you tell me a little bit about which capacity or areas that you guys are cutting down? Like, is this a reflection of financial prudence or are you concerned about overcapacity. And the topic related to that is, can you also add more colors on the pushout of the Princeton and Oxford plants into 2024?

Unidentified Analyst :

Thank you. I have one question and then we'll hop off. Can you share some visibility about the non-COVID based business ramp into the 2023 under new guidance, especially in the biologics sectors? Like what percentage of the revenue will come from customers that stick around after COVID and what supports your confidence into the rest of the year the second half of the year? Thanks.

Unidentified Analyst :

Thank you.

Derik De Bruin :

Hi. Good morning. So I've got a few here. Can you just elaborate a little bit more on what you mean by the slowdown in pacing the starting programs? I would assume, it's not still finished. We did more drug substance and then on the consumer side just what you're seeing? Just a little bit more color around what exactly and where it's been impacted?

Derik De Bruin :

Okay. And a couple of just housekeeping questions. So what is given the new debt and the increased interest rates, what is your expectation for net interest expense for the year? How big is your macro sensitive, which you would consider macro sensitive portion of the business particularly on macro side?

Derik De Bruin:

Okay. And do you feel like you've appropriately de-risked, COVID enough, the COVID exposure for this year?

Derik De Bruin:

Okay. Thank you.

Max Smock:

Hi. Thanks for taking my questions. Just the first one for me here, you've called out a number of factors really behind the reduced guide for this year. But one of the things we haven't touched on is the ability for you to change over from COVID to non-COVID work and whether or not that factored into the results in the quarter as well as your outlook for the year. So just trying to get a sense for, whether or not this transition has maybe been a little harder than you expected or it's part of the issue here, or if you've been able to kind of make that shift in line with your expectations?

Max Smock:

Got it. Yeah. That's helpful. So as a follow-up I mean one of the things you mentioned last quarter was that non-COVID growth benefited a little bit from some backlog going to the system related to some projects that maybe had suffered a little bit as you prioritize coronavirus. Just wondering, if there's any way to quantify whether or not this had an impact in the quarter? And if so, is it -- is the backlog now largely work through, or should we expect this kind of to be somewhat of a tailwind I guess of the business throughout fiscal 2023.

Max Smock:

I’ll leave it there. Thank you.

Justin Bowers:

Good morning. Just on the settlement you described. Is that a good kind of quarterly run rate that we should assume with the exception of kind of like the true-up that you're going to have in 2Q? And then the comments on reduced utilization is that – how does that split between Biologics and PCH. It seems like it's more weighted to PCH. And then on PCH what's kind of like lead time for lots of discretionary? And I'll stop there. Thank you.

Paul Surdez:

Next question, please.

Unidentified Analyst:

This is Mac on for Jacob. Just a quick question for me. As it relates to your cell and gene therapy business, I think you have at least one commercial customer and another potentially coming. How should we think about the size of a given commercial cell and gene therapy customer or looking at it in another way, what is the potential revenue capacity of suite at BWI?

Alessandro Maselli:

So I just would add a more helicopter view. We believe that our BWI asset within suite will be one of the largest if not the largest viral vector factoring assets out there. And that clearly is going to be a meaningful contributor of our growth story in the next few years given also the strength of the pipeline that we're seeing with the customers progressing to late stage and potential approval.

Operator:

Thank you. Our next question is from John Sourbeer from UBS. John, your line is open. Please go ahead.

Alessandro Maselli:

Yeah, sure. Look I do believe that we have been successful in levering the price as appropriate. Clearly it's not a one size fits all around the different offerings. There are different market positions. Clearly on your more commercial business where you have long-standing contracts and there are mechanisms and relationships and so forth. It tends to be more easier and more aggressive stand on the other places where you are competing to win business you really need to be careful around where the market is going. But we have a very good pulse of what are the areas of opportunities and we are doing everything we can on every other opportunity there to make sure that we offset as much as we can at the inflationary pressure that we are seeing.

Operator:

Thank you. Our next question is from Jack Meehan from Nephron Research. Jack, your line is open. Please go ahead.

Tom Castellano:

So look I wouldn't say we've seen much in the way of cancellations in the current quarter here. That wasn't an impact of the results in first quarter. I would say we've seen a handful of cancellations as we think about the remainder of the fiscal year, but I wouldn't necessarily say it's any different than what we're seeing what we've seen historically. I would say though the overall progression of not things that are being canceled but just the pace in which customers are willing to move is where we're seeing the slowdown. So this isn’t programs that are at are being necessarily canceled, but certainly a slowdown and that slowdown both on the pharma and consumer health side as well as the biologics side was what was contemplated in the more conservative view of guidance.

Operator:

Thank you. Our next question is from Evan Stover from Baird. Evan, your line is open. Please go ahead.

Alessandro Maselli:

Well look I would refer to Tom more on the specifics. I can tell you that you don't have to look at these only on the market event standpoint, right? There are at times a full compounding effects of one is the end market and the other one is the stock levels. And there are temporary demand -- our demand is the combination of the entity mark and how much inventory our customers want to carry about each individual offering. And clearly when there is more uncertainty and surely the orientation towards the end market demand that tends to be a little bit lower than is surely in a capital tight market as we are running today there is more a conservative approach, how much inventory you want to carry. So these are -- the inventory piece is a temporary effect that tends to balance off in a few months period because at some point once the destocking has happened you really serving the end market demand. But I believe these are the two effects that compounded probably explain better the dynamic around your question.

Luke Sergott:

Great. Thanks for sneaking me in. So as you think about the -- can you guys give us a sense of the guidance methodology and how you guys factor in potential approvals from some of those cell and gene therapy businesses? And then can you give us a sense of -- or just give us a size of the business of cell and gene therapy and how that's been growing?

Alessandro Maselli:

Maybe I add just one comment in terms of adding additional color to the dynamics here. You need to think about the potential commercial approval not only is a dynamic to serve the commercial approval, but there is also a dynamic that precedes that is a more launch stock build-out which you do normally for sizable approvals on which we have a little bit more confidence around what the impact could be.

Alessandro Maselli:

So with that said, I would like to wrap up the call. I guess we are done with questions. So thanks everyone for taking the time today to join our call and for your continued support of covering. Thank you everybody.

Operator:

Good morning. Thank you for attending today's Catalent, Inc. Fourth Quarter Fiscal Year 2022 Earnings Call. My name is Forum, and I will be your moderator for today's call. All lines will remain muted during the presentation portion of the call with an opportunity for public and private questions and answers at the end. [Operator Instructions] It is now my pleasure to pass the conference over to our host, Paul Surdez, Vice President of Investor Relations. Mr. Surdez, please proceed.

Alessandro Maselli:

Thanks, Paul, and welcome, everyone, to the call. Fiscal 2022 was another extraordinary year for Catalent. During the year, we achieved the strong results both financially and operationally, while also making a positive impact on our global community by delivering our mission to develop and deliver products that help people live better and healthier lives. Some are top highlights since July 2021 include

Operator:

Absolutely. [Operator Instructions] Our first question comes from the line of Tejas Savant with Morgan Stanley. Tejas, your line is now open.

Tom Castellano:

Yes. Sure, Tejas. So thanks for the question. Yes. So your numbers are spot on in terms of FX, we did talk about FX impact of 3 to 4 points on revenue in EBITDA. We do see a little bit more of an impact to the to the bottom line from FX than we do it in the top line just given the geographic I would say mix of earnings there. So the – I would say the EBITDA impact to FX is more towards the top of that range, where the revenue impact I would say is more towards the low to the mid-point of that range. So figure somewhere between a half a basis point difference between revenue and EBITDA there. Other items, I did mention in my comments that we do have remediation efforts continuing in Brussels here into our fiscal 2023 that obviously is reflected into our guidance for sure. From a COVID standpoint, we mentioned in our prepared remarks that we have taking a two-thirds haircut to the volumes we saw in fiscal 2022, in our fiscal 2023 guidance that’s further de-risking from what was assumed as part of our May comments on our third quarter call here. And just given that decrease in volume and the absorption impact related to running at high levels of utilization on COVID dedicated lines, there is a relatively impact – relative impact to our overall margin profile as of – as a result of that. Supply chain and inflationary pressures, I would say continue to be a challenge. And in some cases, even I would say more of a challenge now than they were in terms of how we’ve talked about this in the past, we’ve seen more supply chain impacts to our SOT Segment specifically more recently around our ability to get our hands on active ingredients and other key inputs related to consumer health volumes, so that will play a role into the a little bit of the margin story here. And then just from an inflationary standpoint, I mean, look, just given the environment we’re in, we’re looking at impact related to wages that are probably about 2 times what we would’ve seen in a normal year, and that doesn’t take into account what we’re seeing on just the material side of things as well, obviously, where we’re able to pass those off to customers, we’re doing that, we’re going after price, where we can as well to help offset some of these pressures. But giving all of these moving pieces here to be sitting in a position on a constant currency basis where we are seeing modest margin improvement is a pretty good position to be in and what I would consider the most challenging macroeconomic environment, I’ve seen in my career. Lastly, I would just say we continue to be on track from a long-term margin target year Tejas, although, we’re not going to see the margin expansion of a 100-plus basis points like we’ve seen over the last several years. We remain committed to our 28% EBITDA margin by – I’m sorry, by our 30% EBITDA margin by fiscal 2026.

Alessandro Maselli:

Sure, sure. Look, this is very simple in many ways although not easy as it’s required a little bit of organizational adjustment. Look, when you look at the percentage of our customers, which are buying more than one service from Catalent, this is still a relatively low percentage. And when you look at where the customer base is going with the more and more customers, which are more on the small side, the biotech type of customers, clearly they have the need of way more than just one service out of Catalent. And there is an opportunity there to significant increase the share of existing customers, which and the new customers will enjoy more than one service out of a Catalent offering. In the past, our previous organization was creating some internal barriers from that web, both from a go-to-market strategy from an execution standpoint. And by combining all of these together, three those barriers have been removed. There are incentive plans allowing people to benefit from across cross offering wings. And we are already seeing since the onset of these new organizations, some very good trends in these regards. So with regards of the increased guidance for this segment, look, we have made the rights investments in the gummy business. We already said that this gummy business is growing significantly above the average of this segment. We also have expanding and resolved some bottleneck we have in the capacity on the complex or solid the business in North America, which were constraining in the past little bit growth was a self constrained. We did have demand, that we see demand. And we couldn’t really enjoy the whole demand that we were seeing there. And lastly, the fact that we are now both organically and inorganically opening up our offering to high potent, which is the fastest growing sub segment of oral solid, primarily driven by oncology pipeline. All of that combined really has an impact on the expected growth rate of these segments. So in many ways, these are – these were things in the making over the last two years unlocked by these new organization.

Operator:

Thank you for your question. Our next question comes from the line of Luke Sergott with Barclays. Luke, your line is now open.

Tom Castellano:

So Luke, I would maybe just start here by saying, I don’t know that there’s a significant variation around COVID volume to the low end here, I would say, the levels that we’ve taken COVID volume down is reflective of contractual obligations that we have with key customers and decreasing at two-thirds from where we were in fiscal 2021, puts it down to a relatively much smaller, smaller level than it has been contributing in the past. I would say, that’s not an assumption that I would say is really the variability here in terms of the guidance range. Now there’s obviously if we see any significant increases here related to COVID demand that can factor into the high end or outside on the high end of the range. But I wouldn’t say that there’s material swing and the assumption around COVID throughout the range of guidance. I would say, the real variability here in terms of our range is just a lot of the supply chain related challenges that we saw. And are we going to have any difficulty in getting our hands on materials there. As I mentioned, the midpoint of the range assumes that the macroeconomic environment we’re in today remain steady, if that were to get worse, that would be more of a potential impactor to the – to getting us towards the lower end of that range versus any further movement on the COVID side, which as I said, we feel pretty good around and is a pretty much a firm outlook here based on contractual obligations.

Luke Sergott:

All right. Great. And then just a quick follow-up on that. So I mean, you guys are talking about the offsets coming from all the capacity expansions that you’ve done in Bloomington and Indianapolis, and then the suites coming on in Princeton and elsewhere. Can you just help us think about when there’s – these supply chains – is there a particular indication that it’s hitting hardest or is it just broad-based? And then can you give us a sense of how you’re thinking about these easing?

Tom Castellano:

Yes. And I would just add to that, Luke, as I highlighted earlier in my comments to Tejas, a lot of the supply chain challenges that we’ve been seeing more recently have been impacting our SOT business and particularly on the consumer health side. So not geared towards those large molecule biologic assets that you are referencing, yes.

Operator:

Thank you for your question. Our next question comes from the line of Julia Qin with J.P. Morgan. Julia, your line is now open.

Tom Castellano:

Sure. So look, I would say, with the de-risking here from a guidance standpoint, you broke up a little bit during the second part of your question, Julia, so I’ll do my best here to answer it. But in terms of the first part, we did mention that we are seeing the base business here growing in excess of 25% in the fiscal year. That’s going to be a significant offset to the two-thirds reduction in COVID related volume that we have in our fiscal 2023 guidance. And that does contemplate growth across all of our technology offerings. I would say, from a biologic standpoint, we are seeing X growth – X COVID growth on the drug product side. But obviously, cell and gene therapy is a significant contributor to the fiscal 2023 growth story. That was a business that was not significantly impacted by COVID related demand, our drug substance business out of both Madison and Bloomington as well as capacity that we’ll be bringing online in Europe as a result of the Oxford facility. That was another business that is obviously not significantly impacted by COVID related demand that we will be seeing growth from in fiscal 2023. I think there may have been a part of your questions around COVID therapeutics in here. I would say, COVID therapeutics are not a significant growth driver as we’ve talked about. The bulk of our COVID related revenue has been from more vaccine related revenue. And in terms of – I think the second part of your question was related to supply chain challenges and what the impact there is. And I think we’ve talked about that already mostly impacting our – the consumer health side of the business in terms of inflationary pressures. We are seeing wages up two times to what they would be in a normal year, as well as seeing increases for many suppliers on the vendor side. And then we’re looking to be active in terms of being able to recoup that through our customers where our contracts give us the ability to, as well as, I would say, driving off cycle price increases where we’re able to from customers to ease that impact. But again, despite all of those challenges, we are looking at modest margin expansion at the midpoint of our fiscal 2023 guidance on a constant currency basis.

Alessandro Maselli:

Sure. Look. Clearly, we don’t give very short-term indications of guidance by single segment. But in terms of answering broadly to your question, we are already seeing the transition of that segment accelerating towards the new growth that we have projected as I said, that is driven. If you look at the factors that I did mention, which are behind that acceleration some of them were already in play in the last couple of years, right? So the addition of the gummy business will be completely organic this year. There is only one quarter where it’s going to be inorganic. So not only now we have a full ownership of the asset, but we are very much accelerating on expanding capacity to meet the high demand in that area. Our expansions and acceleration on complex are all solid North America as well has been quite executed well by the team and is coming available for executing on programs, which we have secured over the last few years. And I would say in general, there is a continued to rebound our consumer product with specifically cough and cold categories and so pain relief which is another area where we are seeing significant demand. If anything there we’re trying to overcome some supply challenges. So when you look at all of these dynamics, which I did mention these are dynamics that have been in play already in the last few quarters and coming to fruition. On top of that, we are confident that they accelerated commercial synergy. So we are going to enable with the new organization will allow to further accelerate these growth.

Operator:

Thank you. Our next question comes from the line of Jacob Johnson with Stephens. Jacob, your line is now open.

Alessandro Maselli:

Yes, sure. Look, as you pointed out, it’s quite remarkable, the capacity that we have added and with the remaining execution that we’re going to do, what I can tell you is that by continuing on that execution and the plan we have in the last next 18 months – 18 to 24 months, we are very well positioned to deliver our fiscal 2026 target, if you like. So in many ways we have already created a significant amount of the capacity that once getting utilized that will deliver the fiscal 2026 target. So probably this is giving you a little bit of quantitative measure of the capacity being created. But another way to look at that, look, when it comes to drug product, we’ve been primarily focusing complementing the offering with the syringes on top of vials. And when it comes to drug substance we’ve been just doing expansion, identifying our production, production schedule. And when it comes to gene therapies, will be essentially going from a 10 suites to 18 suites in BWI. So this again gives you a little bit of a measure of what is the potential of this capacity going forward.

Alessandro Maselli:

Look, the transition is mostly seamless, meaning that is happening in parallel. One thing that is happening is that mostly the lines in which we are transferring new products, we’ve been transferring and onboarding new programs are lines which were built in parallel of the COVID lines. We always wanted to have the possibility to serve new customers and new programs, while still leaving enough capacity to satisfy the COVID vaccine demand, which in many ways is still not totally predictable, although we’re now getting to a much better visibility on it. So I would tell you that the transition has been pretty seamless. You don’t have to think about these like stopping vaccine and starting something new, but is mostly things that are happening on different formats and on different production lines. With regards of some of the ones that are in fact going to be served out of the current COVID vaccine lines, which are going to – remember, on the entirety of the current of all vaccine supplies made in vials for some of these programs to a large extent we can onboard them and validate them on the line, while still making the vaccines. So it’s a kind of phase in phase out type of dynamic as opposed to having a gap in between.

Operator:

Thank you for your question. Our next question comes from the line of Derik De Bruin with Bank of America. Derik, your line is now open.

Tom Castellano:

So I’ll start here. Alessandro feel free to jump in. So I’ll start with your last question first, Derik. Look, we’re not in a position at this point to give guidance around fiscal 2024. And I think there’s still a lot to understand in terms of what the macro environment looks like today and what that – where that heads over the next year. What I have said is we’re absolutely on track and continue to be confident about our ability to deliver on the 30% EBITDA margin target for fiscal 2026. In terms of the organic revenue growth on a segment by segment basis, I would say, that’s not something we’ve talked about here, specifically we did make comments in our prepared remarks that we’re seeing 25% business – a 25% growth across our business excluding COVID demand. I think you can do some math and come based on disclosures we’ve made here as well as based on customer concentration related disclosure, that will be in our 10-K and be able to estimate in a pretty tight demand what the COVID-related impact is here. And I would say, as you take that into consideration, it’s very difficult to have a two thirds related volume headwind on COVID and be able to see growth within biologics, including that in the 10% to 15% range. So, I think you can maybe take from that where we are there, and from a SOT, OSD basis, we’ll obviously be reporting those out as our Pharma and Consumer Health segment starting in next quarter. And that is a business that’s growing outside of here in 2023 guidance that 6% to 10% long-term outlook here, obviously considering we’re seeing 25% growth across the business on the next COVID basis.

Derik De Bruin:

Thank you.

Jack Meehan:

Thank you. Good morning. Wanted to kind of continue along that line of questioning as it pertains to the guide. Is there any help you can provide around seasonality? You talked about some of the seasonality of the business this year, just help with pacing in terms of maybe expectations, especially anything for the first quarter would be helpful.

Jack Meehan:

Great. That’s helpful. And then on metrics. So, you disclosed the over $90 million of trailing sales with the supply agreement, what’s the annualized revenue contribution we should expect upon close?

Alessandro Maselli:

I would just add one comment more general. One reason why we do like the space. So prescription on a solid is that you normally have a pretty good visibility on the revenue. So for a fairly good horizon, given the prescription nature of the business and the strength of the pipeline.

Operator:

Our next question comes from the line of Paul Knight with KeyBanc. Paul, your line is now open.

Alessandro Maselli:

That’s a great question. I believe, we are in a pretty good place. I look, we’ve been always very happy about our sales machine, which has been producing consistent organic growth over the last four, five years I would say. Here is more in terms of making sure that when one of our sales rep engages with the customer, and we do have relations with the customer, we take the full advantage of the relationship and try to offer more than just one service. So, I would say that look, the, I cannot point to a specific percentage of completion of the plan, but we are pretty advanced in what we are trying to implement here. Our basics and foundations, so our sales machine remain very, very strong and what they drove, really success in the last few years and is, this is the way you need to see is not a revolution, but an enhancement of the good market strategy so that we can unlock value where the value was blocked by our internal barriers.

Alessandro Maselli:

Yes. Yes, sure. Look, I believe that on the Biologics side that we’re allowed to remain pretty much the same that was before, that's really not what is driving at this increase. We remain very bullish on the Biologics story at 10% to 15%. What is driving the overall increase in the growth expectation from the company is if you like the assets, which were a little bit behind in the growth story of the company, dragging down the overall growth rate perspective for the company, which were more in the small molecule side and very fashioning of the small molecule footprint, we were able to implement through the pandemic, which went a little bit under the radar. I understand that during the pandemic, everything that was making the news was related to biologics, vaccines and so on. But we were working very, very hard in the background in addressing some of the gaps we had in the small molecule portfolio to enable faster growth there. And I will point out again, primarily in the consumer health, getting on top of these very high demand the dosage form of gummies and soft chews, which is again, is a significant contributor to that acceleration the fact that we've been investing organic and in our Kentucky facility, in our Florida facility, which are serving the complex, oral solid market in the United States, which is very, very healthy at this point in time, as well as leveraging some of the dynamics in the consumer health after an initial period of if you like a crisis at the beginning of the pandemic came back pretty, pretty strong. So it's more on the PCH side that you need to see the increase, we have increased 200 basis points of the top end on the PCH side compared to the past. And this is really what is driving our most, more comfortable outlook about the company and really putting us in a comfortable position to raise our long-term guidance for the organization.

Operator:

Thank you for your question. Our next question comes from the line of Dave Windley with Jefferies. Dave, your line is now open.

Alessandro Maselli:

David, we hadn't disclosed exactly what the contribution was there. We did point to the fact that it was a significant driver of margin profile. So I think if you were able to do that math and triangulate something in that range, I think that's directional.

Tom Castellano:

Yes, look, I think it's – I think you're right. We did mention both here. We mentioned that with the declining COVID-related revenue that we will see the component sourcing dynamics start to normalize here in the year. And then obviously in talking about some of the margin pressure opportunities here, we talked about the – we've talked about the absorption related items driven volumes. I would say, the point of referencing the component sourcing piece is really more material for the Biologics segment than I would say it is for the company overall. Meanwhile, the absorption piece does have a more meaningful impact on the company overall here that they've just given the fact that we're talking about dedicated capacity that was running at very high levels of utilization and being replaced, whether on the same asset or in other assets that we've brought online during that period here. I'm not quantifying each of those for you, but I would say they essentially offset each other. But there's probably a little bit more impact to the bottom line here from an absorption standpoint just as we start to ramp up other assets that we brought online during the COVID pandemic that are – I would say, slow on the uptake here, right? You don't plug in a new syringe line and be operating at 85%, 90% utilization and start to see that full absorption, right? There's a ramp up period here that we see that takes into consideration. But I would say, the fact that we're in, again, in a position where we are seeing modest margin expansion despite a lot of these moving pieces and challenging macroeconomic environment is something we're pleased with and we're obviously going to look to maximize the margin expansion opportunity that we have here in fiscal 2023 on our path towards the 30% by fiscal 2026.

Dave Windley:

So the last question I wanted to ask is around your long-term growth and the raise guidance there. So 2023 will start off. I don't know if we want to think about a four-year period since you do have 2026 targets in the public, maybe a four-year period is a reasonable period to think about you're starting that four-year period a couple points lower than the long-term guide. Should we think about this as a kind of a midpoint 10% CAGR target where at some point over that horizon you'll grow faster than the 10%, or do you think of it as getting to 10% after fiscal 2023? Thanks.

Dave Windley:

Thank you. That's great.

Operator:

Thank you for your question. [Operator Instructions] Thank you. Our next question comes from the line of Christine Rains with William Blair. Christine, your line is now open.

Alessandro Maselli:

Well, look from our perspective we've been pretty pleased with the approvals that have been impacting our pipeline and we see further opportunities going forward. So look, it's a little bit not necessarily the macrodynamic of the approvals that happens out there significantly impacts Catalent. It depends – it's very discreet, right, and very, very much focused on some products. But I am going to tell you, we've been seeing some good success of the products in our pipeline in the last few quarters.

Alessandro Maselli:

Okay.

Justin Bowers:

Thank you, and good morning. I'll keep it jiffy with call running long. But just in terms of the new capacity specifically, UK and Princeton when does that really start coming online in the fiscal year? And then by year-end what percentage of the capacity will be have built out with respect to the footprint of those facilities?

Tom Castellano:

Yes. And I'll just add Justin to that related to Oxford specifically. This was a pivot for us here in terms of building out capacity for European drug substance originally in our Anagni facility, and then we were able to accelerate that with the acquisition of Oxford. So our original drug substance plan didn't have revenue contribution until probably midway through our Fiscal 2024 year, if not later. And as Alessandro said, as a result of this acceleration through what we've – what we acquired as well as the capacity we're deploying in that site, we would be in a position to be able to see revenue contributions laid in Fiscal 2023.

Operator:

Thank you for your question. Our next question comes from the line of John Sourbeer with UBS. John, your line is now open.

Alessandro Maselli:

Yes.

Alessandro Maselli:

So look I believe that the first – before the summer we didn't see significant moves in the evaluations and so forth. As if the space was still waiting to factoring the new reality of multiples into the assets. I believe we are still – we are starting to see some early signs of a more, catching up with the, the current environment, especially when it comes to cost of capital and macro economical uncertainty of the next couple of years, as well as private funding. So I believe that as we move in the next few quarters, I do expect some correction there. I will add though that the premium assets in our space are still kind of expensive because they have a pretty good strategic prospecting front of them. So I believe it's a little bit of a mixed back. I would tell you that of course multiple can constitute an odd dollar, but for Catalent is probably never only an evaluation of multiple and primarily our financial evaluation, more of a strategic evaluation? And how we're going to make sure that when we add an asset to Catalent, we can also accelerate growth and generate synergies out of these, and not only enable more growth out of Catalent, while we can also accelerate growth into these. This is what we believe formatics. We believe that by inserting, there is a premium asset in our much larger commercial engine we'll accelerate pipeline, creation and tech transfers. On the other end, we expect that this offering – completing this offering in downstream high-potent capacity will create additional opportunities for some of our assets, which are more early stage, which didn't have necessarily a downstream capacity prior. So matrix is a squarely in the definition of that in terms of M&A. Catalent is always having a pretty healthy portfolio of M&A opportunities as we explore the market. And whenever we see an opportunity to accelerate growth and expand margin through what I just described, we definitely are interested in exploring the debt opportunity.

Operator:

Thank you for your question. Our next question comes from the line of Sean Dodge with RBC Capital Markets. Sean, your line is now open.

Alessandro Maselli:

Sure. Look as I said on the commercial side, most of the foundations were already there. We needed to tweak a little bit, our incentive plans and so forth to make sure that we drive the right behaviors and remove some artificial P&L internal barriers, which were not really, enhancing our opportunities to sell across a portfolio offerings to our customers, which by the way, we'll buy them anyway, either from us or from others so better, they buy all of them from us. So on that side, I don't believe that there will be, any cost impact on the commercial side of the house. We did point towards that this organization is a little bit linear in terms of management and surely enables us to drive operational excellence across the board more effectively that we used to do before, sharing some best practices and surely, avoiding some duplication where you think about, for instance managing a program, which is both giving the customer formulation development, clinical material and at the same time distributing the clinical trials for their own trials. Clearly there is some synergy there in the way you manage this project close while before you had to manage different PCC slides. When in fact you had the different slides, which as I said, was not as common as could have been. So clearly in that regards, we see an opportunity here to continue to drive operational excellence and efficiency and linear approach. So bottom line is that yes, we do expect that these, this not only to drive accelerated top line growth, but also provide us a little bit of productivity and efficiency.

Sean Dodge:

Okay. That's clear. Thank you.

Evan Stover:

Hey, thanks. Appreciate it. Just one for me, obviously I wanted to relate the long range CapEx outlook to your updated long range kind of revenue growth plan today. We're at the point where we've doubled the revenue growth goal since the IPO, can you talk about how that would relate to CapEx after we get past kind of the bolus of projects? That's elevating the number higher here, what that equates to a longer run percent of your revenue spent on CapEx, because you're kind of getting to the point on your long range revenue plan, where it feels like some of this higher CapEx is structural rather than transitory. So anything you can provide on a longer range settling of that number would be helpful.

Tom Castellano:

Yes, I think it's a great point, Evan. And I think we historically have been spending capital at the clip of somewhere between 8% to 10% we were at that time somewhere between a 4% and 6% grower, maybe 4% and 8% tops and with the capital that we've deployed over the last couple of years into biologics. I think it's been pointed out to me that many of our peers that are more heavily Biologics weighted than we are spending something like 20%, 25% of revenue. Look, I think Alessandro's points here around what we're seeing on the pharma and consumer health side of the business being less capital intensive, but yet seeing the growth is accurate. This year we've talked about spending something in that 13% to 15% of range. I don't think that a normal year for us is 8% to 10% any longer given the mix shift of assets we now have in the portfolio, it feels like the normal for us. Now, just given how much maintenance we have across 50 plus rooftops, feels more like about 10%. So we do need to get back down to that 10%. I don't know that we get there exactly next year, but we'll obviously get some more specifics around how this phase is out, but I would expect 13% to 15% this year, probably a step down from that level of next year. Probably not quite to the 10% normal run rate, but then thereafter getting close to, if not at that 10%. And that being the new sort of base CapEx level of deployment to expect.

Operator:

Thank you for your question. This concludes our Q&A session for today's call. I will now pass the call back to Alessandro Maselli for any closing remarks. Thank you.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.

Operator:

00:05 Hello and welcome to the Catalent, Inc. Third Quarter Fiscal Year 2022 Earnings Conference Call. My name is Katie and I'll be coordinating your call today. [Operator Instructions] 00:21 I'll now hand over to your host, Paul Surdez, Vice President, Investor Relations to begin. Paul, please go ahead.

John Chiminski:

01:49 Thanks Paul, and welcome everyone to the call. I'm pleased to report that the positive momentum we built in the first half of our fiscal year continued in the third quarter. Our financial results were driven by strong continued growth in our biologics segment, with additional support from our other service offerings, including our consumer-preferred gummy dosage forms for nutritional supplements which act as an additional growth engine for the company. 02:19 Our strong performance in the third quarter coupled with continued momentum has enabled us to increase our fiscal 2022 guidance for the third time this fiscal year which Tom will review later in the call. 02:33 Regarding financial performance, our revenue for the third quarter was $1.27 billion, increasing 21% as reported or 23% in constant currency, compared to the third quarter of fiscal 2021. When excluding acquisitions and divestitures, organic growth was 20% measured in constant currency. Our adjusted EBITDA of $339 million for the third quarter increased 24% as reported or 26% on a constant currency basis compared to the third quarter of fiscal 2021. 03:10 When excluding acquisitions and divestitures, organic growth was 26% measured in constant currency. Our adjusted net income for the third quarter was $188 million or $1.04 per diluted share, up from $0.82 per diluted share in the corresponding prior year period. Our biologics segment was again the top contributor to Catalent's financial performance as it experienced organic net revenue growth of 30%, driving an EBITDA increase of $41 million over the third quarter of last year. These strong results came from across our broad base of service offerings within our biologics segment and were driven in part by COVID vaccine demand. Demand remains strong in the segment, including a notable increase from several of our large gene therapy customers for viral vector manufacturing. 04:09 Given the high utilization of our biologics assets, as well as projections for continued demand in the years ahead, we continue to take all organic and inorganic actions to increase our footprint in drug product, drug substance and cell and gene therapy. Alessandro will walk through our latest developments in a few minutes. 04:32 In our Softgel and Oral Technologies segment, our complex oral solids offerings continued to recover from the pandemic related headwinds as we had anticipated, and results from this segment were again further enhanced by the acquisition of Bettera. Organic growth was very strong at 14% as year-over-year demand for both prescription and consumer health products, recovered nicely over the same period last fiscal year. 05:00 Inorganically we received another boost from the recently acquired Bettera business, which adds more than 20 percentage points of net revenue growth to this segment. The acquisition is performing even better than we initially expected, and we're investing an additional capacity to meet the high demand for gummy formats from our consumer health customers. 05:24 Our Oral and Specialty Delivery segment reported 4% organic net revenue growth, driven by early phase development offerings. With the divestiture of our Blow-Fill-Seal business in March of 2021 now annualized, it will no longer negatively impact reported growth beginning in the fourth quarter of this fiscal year. Future growth in this segment will be aided by recently completed expansions of our nasal capabilities in RTP and oral solid dose GMP manufacturing suites in Kansas City, as well as strong growth from commercial products in our Zydis fast result dosage format. 06:01 Due holistically Catalent remains well positioned to continue delivering strong financial performance and growth, and we remain committed to providing patients around the world with lifesaving and enhancing treatments. 06:14 I'll now turn the call over to Alessandro who will review various operational highlights from the quarter, including recent acquisitions and capital expenditure projects.

John Chiminski:

15:03 Thank you, Alessandro. As detailed in slide eight, in March we released our third Annual Corporate Responsibility Report covering our progress in environmental, social and governance matters during fiscal 2021. At a high level, we've made significant progress in key ESG areas over the past year, such as carbon emissions, diversity and inclusion and community investment and continue to shape our sustainability focus in alignment with our core business strategy. 15:37 Beginning with people, fiscal 2021 was a record-breaking hiring year for Catalent as we on-boarded more than 4000 colleagues, while keeping their safety and well-being at the forefront of our efforts. In addition, we expanded employee resource groups and diversity among our leadership. Our employee resource group net worth now comprises more than 45 chapters across eight global communities and continues to grow, thrive and positively impact our inclusive culture. 16:13 On the environmental front, we met our goal to reduce our indirect carbon emissions by 15%. This success was primarily the result of our transition to renewable electricity resources as well as continuous improvements through on-site engineering, equipment and facilities management. We've also set new science-based targets to reduce Scope 1, that is direct and Scope 2 indirect emissions by 42% by 2030 and committed to no residual active pharmaceutical ingredient in our wastewater above the predicted no-effect concentration, thus taking a leadership position in the industry from a sustainability perspective. The fiscal 2021 Corporate Responsibility Report also includes our first ever Taskforce for Climate Related Financial Disclosure or TCFD reporting underscoring our progress and commitment to best-in-class sustainability practices. 17:23 Third is our focus on communities, fiscal 2021 was a milestone year for philanthropic giving at Catalent as we distributed more than $1.2 million to support COVID-19 relief efforts, stem education and organizations that support patients in underserved communities. In addition, since the Russian invasion of Ukraine earlier this year, Catalent and our employees have donated to over 45 non-governmental organizations supporting humanitarian and refugee support efforts in Ukraine and Eastern Europe. 18:05 As I prepare to transition to my new role as Executive Chair, I can't help but reflect on and be proud of the substantial progress we've made in corporate responsibility, particularly in the last five years. This evolution was achieved by staying true to our values and at the same time advancing and delivering real life solutions for people and the environment. While we're delighted by the progress we've made, we know our work in this area is far from done and we will continue to enhance our efforts that have put us at the forefront of corporate responsibility in the CDMO industry. 18:47 Before turning the call over to Tom, I'd like to make a few comments on the overall health of our business before Alessandro begins as CEO on July 1. Given our growth history and trajectory, increased profitability and proven success with strategic execution, including the transformation of the company over the last few years as we've grown our biologics segment and further diversify our portfolio, I'm proud of where Catalent stands today and the people who got us here. Catalent offerings are not only balanced, they also closely match the industry's R&D pipeline. We have never been in a stronger position in the dynamic growth markets we serve. 19:34 Now it may already be understood, but I nevertheless like to make clear that this will be my last earnings call as I transition to the position of Executive Chair of the Board. I certainly appreciate the many interactions I've had with you over the years, but importantly, I am not going away and will continue to discharge important responsibilities in my new role. I look forward to continuing my work in close partnership with the Board, Alessandro and the rest of our talented team, while contributing to the ongoing success of Catalent. 20:11 To reiterate from prior comments, there is no better person suited to take this company forward than my long-term colleague and friend Alessandro, and he has my full confidence. 20:23 I'd now like to turn the call over to Tom, who will review our financial results for the third quarter and our updated fiscal 2022 guidance. Thomas Castellano 20:33 Thanks, John. I'll begin this morning with a discussion on segment performance, where commentary around segment growth will be in constant currency. I will start on slide nine with the biologics segment. To highlight the company's transformation over the last few years, we will see that the segment represented 55% of our net revenue growth -- net revenue in Q3 of this fiscal year compared to 52% in Q3 of fiscal 2021 and 33% in Q3 of 2020. 21:01 Biologics net revenue in Q3 of $698 million increased 30% compared to the third quarter of 2021. This robust net revenue growth was driven organically by broad-based demand across the segment, most notably for COVID-19 related programs, which were only ramping-up in the third quarter of last year. The segments EBITDA margin of 31.1% was up 20 basis points sequentially over the second quarter of this fiscal year, but down year-over-year from 33.1% recorded in the third quarter of fiscal 2021. 21:38 The year-on-year decline is primarily driven by costs arising from the remediation efforts at our Brussels site. In addition component sourcing revenue, which represents more than 25% of total COVID vaccine revenue was higher this quarter compared to the prior year quarter. As we discussed in the past, component sourcing is where we source materials, components and other supplies for our customers and these activities come with two opposing dynamics, increased revenue, but margins well below the segment average. Looking to the next couple of quarters, we expect the biologics segment revenue growth rate to gravitate towards its normalized growth rate of 10% to 15%. 22:22 Please turn to slide 10, which represents results from our Softgel and Oral Technologies segment. Softgel and Oral Technologies net revenue of $324 million increased 37% compared to the third quarter of fiscal 2021 with segment EBITDA increasing 29% over the same period last fiscal year. The October 1 acquisition of Bettera contributed 23 percentage points to SOT net revenue growth and 13 percentage points to segment EBITDA growth during the quarter. 22:56 Inorganic EBITDA was adversely affected in the current quarter by a one-time accounting adjustment for inventory valuation as at the time of the acquisition. Excluding this one-time charge, operational performance on the Bettera entities continues to meet our expectations and remain a key driver for margin expansion for the SOT segment and the company overall. The organic net revenue increase was driven by growth in both prescription products and consumer health products, particularly in cold, cough and over the counter pain relief products. 23:33 Side 11 shows the results of the oral and specialty delivery segment. At the factoring out the net impact from the divestiture of our Blow-Fill-Seal business and the acquisition of the Acorda's spray drying assets, both of which annualized in the third quarter of this fiscal year, net revenue grew 4% and segment EBITDA was up 64% over the third quarter of last year. The top line growth was primarily driven by elevated demand for early phase development programs. 24:04 EBITDA margin improvement was driven by favorable revenue mix, as well as a favorable comparison to our third quarter of fiscal 2021, when we booked charges related to a customer’s September 2020 voluntarily recall of a respiratory product. 24:20 As shown on slide 12, our clinical supply services segment posted net revenue of $101 million, representing 3% growth over the third quarter of fiscal 2021, driven by growth in our manufacturing and packaging service offerings in North America. Segment EBITDA grew 14% with favorable product mix, driving the performance. As of March 31, 2022 backlog for the segment was $529 million, unchanged from $529 million at the end of last quarter and up 8% from March 31, 2021. The segment recorded net new business wins of $111 million during the third quarter, compared to $137 million in the third quarter the prior year. The segment's trailing 12 month book-to-bill ratio is 1.1 times. 25:15 Moving to our consolidated adjusted EBITDA on slide 13, our third quarter adjusted EBITDA increased 24% to $339 million or 26.6% of net revenue, compared to 26% of net revenue in the third quarter of fiscal 2021. On a constant currency basis, our third quarter adjusted EBITDA increased 26%, all of which is organic compared to the third quarter of fiscal 2021. 25:46 As shown on slide 14, third quarter adjusted net income was $188 million or $1.04 per diluted share, compared to adjusted net income of $148 million or $0.82 per diluted share in the third quarter a year ago. 26:05 Slide 15 shows our debt related ratios, and our capital allocation priorities. Catalent's net leverage ratio, as of March 31, 2022 was 2.6 times below our long-term target of 3.0 times. This compares to net leverage of 2.8 times on December 31, 2021 and the reported net leverage ratio of 2.3 times on March 31, 2021. Our combined balance of cash, cash equivalents and marketable securities as of March 31, 2022 was $880 million compared to $915 million as of December 31, 2021. 26:48 Moving on to capital expenditures, we now expect CapEx to be approximately 13% to 14% of our fiscal 2022 net revenue, compared to our previous expectation of 15 % to 16%. The key factor for this change include our higher than previously expected net revenue, combined with some supply chain related delay and longer lead times for some of our capital projects. To be clear, new CapEx associated with our recent acquisitions, most notably for our new biologics facility in the UK is already contemplated in our new guidance. 27:28 Of course our elevated CapEx is temporarily impacting free cash flow, but we expect CapEx to return to a more normal 8% to 10% range in the next few years. Note that our free cash flow has also been negatively impacted in the last two years by our strategic decision at the onset of the pandemic to increase inventory levels, which continue to allow us to have the inputs we need to meet our supply obligations to our patients and customers in a timely manner. When we feel the time is appropriate and are more comfortable with the stabilization of our supply chains, we'll begin to reverse course, which will have a future positive effect on free cash flow. 28:10 Now we turn to our financial outlook for fiscal 2022 as outlined on slide 16. Following a strong third quarter and a solid outlook for the remainder of the fiscal year, we are raising both the low and high-ends of our financial guidance ranges. We are also tightening the range, since there is just one quarter remaining in the fiscal year. We now expect full fiscal year net revenue in the range of $4.8 billion to $4.9 billion, representing growth of 20% to 23% versus our previous estimate of $4.74 million to $4.86 million. We project that net revenue growth from M&A will continue to be 2 percentage points to 3 percentage points, principally driven by the acquisition of Bettera. 28:58 For full-year adjusted EBITDA, we expect a range of $1.265 billion to $1.305 billion, representing growth of 24% to 28% over fiscal 2021 compared to our previous estimate of $1.25 billion to $1.30 billion. Note, that the continued strengthening of the US dollar against both the Euro and British pound is expected to negatively impact our adjusted EBITDA by an additional $3 million in the fourth quarter of the fiscal year, the effect of which has once again been absorbed into our new financial guidance. 29:38 Also absorbed in guidance is approximately $8 million of expected costs in the fourth quarter with little or no associated revenue for the cell therapy facility acquisition in Princeton and the biotherapeutics facility acquisition in the UK. We expect full year adjusted net income of $665 million to $705 million, representing growth of 21% to 28% over the last fiscal year, compared to our previous estimate of $650 million to $700 million. We continue to expect our consolidated annual effective tax rate to be 23% to 25%. 30:20 Finally, I'll close by reiterating Alessandro's comments on our initial estimate at the top line for fiscal 2023, which projects growth in line with our publicly announced long-term organic constant currency net revenue growth rate range of 8% to 10%. Among the factors we've considered in formulating this estimate are increased utilization of recent investments across the company, including those highlighted earlier this call, organic growth through current assets, a shift of some of our fungible biologics assets currently producing COVID vaccines to other customer projects, including recently signed large commercial tech transfer programs and as a risk mitigation fact there, assuming a considerable decline in revenue from our COVID-19 product programs. 31:18 Operator, this concludes our prepared remarks and we would now like to open the call for questions.

Tejas Savant:

31:48 Hey guys, good morning and appreciate the time here. So, Tom, I appreciate the color on the organic constant currency growth for fiscal 2023. Is there any way you can quantify perhaps the percent decline in COVID contributions you are baking in at this stage? And how are you thinking about overall EBITDA margins trending heading into next year in light of the COVID revenue coming out, as well as some of the other near-term factors you flagged weighing on biologics margins here?

Tejas Savant:

34:22 Got it. That's helpful. And a quick follow-up, specific to biologics Tom and Alessandro and John, feel free to chime in as well. Do you anticipate meaningful headwind to fiscal 2024 revenue? The context for the question is, there has been some investor sort of concern around one of your key COVID vaccine customers leveraging this new fill finish partnership they signed with one of your competitors? Or put another way, I mean, what underpins your confidence that you can navigate and grow through this dynamic, not just in the context of your fiscal 2026 targets, but also a little bit more near-term perhaps in fiscal 2024?

Tejas Savant:

36:33 Thanks guys. I appreciate the time.

Luke Sergott:

36:46 Great, thanks for the questions. Can we talk a little bit about pricing, what you guys are seeing on the raw material side? And how you are thinking about the 8% to 10% guide, how much of pricing is baked into that?

Luke Sergott:

38:23 Okay, great. And then follow-up here is just, I mean, you guys have done five deals in the last six weeks or something like that. Can you talk about how advanced some of these facilities are? Any additional CapEx needed to bring them up to speed? Are they all under partial coverage for the sterilization? And then more broadly, how does that change your mix going considerably from drug substance and drug product, assuming that all of them are up to full capacity utilization?

Luke Sergott:

40:54 Great. Thank you.

Jacob Johnson:

41:05 Hey, thanks, good morning. And John, congrats on all the accomplishments over the years. Maybe just first following up quickly on Luke's question, on these recent acquisitions in the biologics segment, it sounds like there quasi organic investments buying facilities that were underway or already built. Can you just talk about the revenue contribution from those deals and how we should think about that maybe over the next 12 to 18 months?

Thomas Castellano:

42:34 And Jacob, I'll just add here, as Alessandro mentioned, there is a very small certainly a material revenue contribution that will come from the Princeton asset, there'll be no revenue in fiscal 2022 associated with the UK asset. And as I noted in my comments around our revised fiscal 2022 guidance, there is a significant amount of cost that we were inheriting as well as continuing to invest in here that is absorbed in our fiscal 2022 guidance, that was approximately an $8 million headwind between the two deals at the EBITDA line that's included in our new fiscal 2022 guidance and we'll give more specificity around the contributions of these two additional sites as part of fiscal 2023, when we update our guidance, we'll provide more specificity around our guidance in the August call.

Alessandro Maselli:

43:47 Yeah, sure. Look we have commented on this a few times. And the reality is that, our pipeline is stronger, but is also maturing. So there are assets that are transitioning to later stages of the pipeline and those assets going in later stage you do require a much higher quantities of viral vectors which drive growth. This is pretty normal in assets, which are primarily serving clinical work at this point in time. I believe the profile of the customers is more skewed to need to large organizations in the later stage and we also have a good pipeline in earlier stage, which we're progressing.

Operator:

44:47 The next question comes from Julia Qin. Please go ahead. Julia.

Alessandro Maselli:

45:23 Yes, sure. Look, clearly we are investing heavily in this area, we see significant demand in front of us. I believe there are two factors here. Number one, when you look at the pipeline and the expected bigger products which are going to be going commercial in the next few years, a significant share of these products are relaying on stellar presentations, so to speak. So which primarily is going to be prefilled syringes. So that's one dynamic. 45:57 The other dynamic is more of our technological one as regulatory expectations continue to increase there will be much more demand in products going towards under isolative technology, which of course, will continue to move the demand that works for these more modern a higher containment assets and with the better reassurance and this dynamic as well is going to be a significant one going towards the asset we've been building over the years. 46:28 The last dynamic in fill and finish is about the localization, where we continue to see significant opportunity there and there will be products that will continue to require localizing activities that increases stability and shelf life. And as such, as I described that we are investing also in this area. So there are a number of different dynamics in the pipeline itself, the movement towards under regulated technology and localizing of -- product requiring localizing which are surely creating a significant tailwind for our demand in fact in the drug product besides what we experienced in buyouts in the last couple of years. 47:10 With regards to drug substance, I'm going to tell you, we always look at our assets in that area to be very tangible and very redeployable if you like, across the different modalities. In particularly, this is very true for the new facility in Oxford where we plan to be able to serve out of that facility across several different modalities including messenger RNA, classic mammalian cells and others. The facility was intentionally designed and built to be able to serve across many different modalities. And that's why it was so attractive to us.

Alessandro Maselli:

48:16 Sure. Look, there are some customers where we have -- we don't call it a supply relationship, we call them the partnerships, which means that, with these customers we've a portfolio approach where we offer them a capacity across all the pipeline that they are coming through. So on one end, we've a visibility on that pipeline, on other end they have a visibility on the capacity we create and we have some contractual arrangement they created the opportunity on both sides to continue the collaboration in a productive way going forward. 48:53 I believe that the base to all of these is there is very strong and successful relationship that has been created during the pandemic. We've been together in very difficult times, providing significant relief to the world in terms of vaccination and that has spread the relationship to a level that makes us feel comfortable about the future prospects with these partners.

Operator:

49:24 The next question comes from Sean Dodge from RBC Capital Markets. Please go ahead.

Thomas Castellano:

50:05 Sure. Luke, as I -- I'm sorry, Sean. As I said in the, in the prepared remarks, margin expansion is something we continue to be very focused on, we are on track towards our ‘24 and ‘26 long-term outlooks and we went out of our way to specifically call out the Bettera business as being one of the drivers of the margin expansion opportunity. As you rightfully pointed out here, we do have line of sight to this business operating at margins or closer to that of biologics, let’s say, we're in only our second quarter here with the Bettera business as part of the Catalent portfolio and it's already tracking at an EBITDA margin that is north of what we see from our SOT segment overall. 50:58 In terms of the phasing of the margin expansion opportunity there, I would say we continue to be in early innings. As I said, this is only the second quarter that this business has been part of the portfolio and I think through operational efficiencies running the sites more Catalent like as well as further operating leverage from continued and improving higher levels of utilization within that business, that is one of the key drivers that would help drive the margin expansion. 51:32 The pricing dynamic in this business also remains extremely robust. That's another contributor to the potential increase in the margin profile here. And when we highlighted a 28% EBITDA margin in fiscal ‘24, the total business was not part of the Catalent portfolio at that time. So this just gives us even more confidence in being able to deliver on that 28% by 2024 and then ultimately to 30% or so that we've talked about by fiscal ’26. And we'll give more specificity around the margin profile of the business in fiscal 2023. But as I said, from the 26.6% we're at today, continue to have line of sight to 28% by 2024.

Thomas Castellano:

52:33 Look, it is a very dynamic picture, because there is the physical capacity and the staff capacity. And out of the gate, we could surely free up additional capacity and serve more demand through increasing our ship partners, our staffing levels and surely through applying what we call the capital way, which is our operational excellence if you'd like, a playbook to these assets where applying these to changeovers and reducing downtime, improving efficiencies and yields we will be able to unlock some additional capacity. In the mid-term, there are ongoing significant investments in terms of additional lines, which will create significant additional capacity. These investments are ongoing well underway. Some of them actually started under previous ownership, which will continue to give us enough capacity to serve the high demand we are seeing in that area.

Operator:

53:42 Our next question comes from Dave Windley from Jefferies. Please go ahead.

Thomas Castellano:

54:11 So, Dave I think we're not in a position to provide fiscal ‘23 guidance at this stage at the segment level, given how early in the process we are. As I said in my remarks, we're already speaking around next year at a much earlier point than we ever have historically. That being said we've clearly laid out four or so key drivers of the fiscal ‘23 revenue growth of 8% to 10% including increased utilization of recent investments across the company, if you talked about on this call that are very much biologics focused . 54:52 In addition, we also called out a shift from some of our fungible biologics assets currently producing COVID vaccines to other customer projects, including recently signed large-scale commercial tech transfer programs. Those two bullets, specifically are related to the biologics segment. That being said, I'm not going to quantify the growth range of that, we'll give more specificity around that again as we give more clarity around our fiscal ‘23 year and a full guidance as part of our August release. But I think that color should be enough here around some of the assumptions around biologics next year.

Alessandro Maselli:

56:05 So, first of all, Alessandro here. I would tell you, we are pleased with the progresses and incredible work done by our teams in addressing the 483. As we stated in previous calls, 483s need campus by definition and some of those campus require the facility to be both in terms of manufacturing, because they are more invasive and require intermediate changes and some others don't. So I would say that our progress in terms of addressing those requiring intermediate changes and manufacturing tools have progressed well. 56:45 As described in our prepared remarks, we have restarted manufacturing operations which is good, especially for patients, but at the other end we continue to work diligently on all our cap plan on that. With regards of the margin, I'll pass over to Tom.

Dave Windley:

57:44 Okay, helpful. Thank you.

John Sourbeer:

57:56 Good morning and congrats on the quarter. I know you aren't quantifying the COVID revenue dollars, but I guess have you started to see any of that drop off in COVID revenues currently? And is this reflected at all in the fiscal 4Q guidance? And then as there is a continued shift to lower dose vials, any way to think about the cadence of that drop in fiscal 2023?

John Sourbeer:

59:43 Got it. And I guess just as a follow-up on the preliminary guidance for next year, any way to think about what is baked in on cell and gene therapy and Paragon and as this becomes a more of a meaningful driver to maybe pick-up some of that decline in COVID revenues, anyway to comment on how Catalent portfolios growing maybe in-line with some of the market growth rates?

John Sourbeer:

61:01 Thanks for taking the question.

Justin Bowers:

61:13 Thank you. Good morning and appreciate all the detail in the prepared remarks. I was just hoping to understand some of the tech transfer projects you have underway. Is that rescue work or new sponsor or existing sponsor projects? And what type of modalities or technologies in – are there any considerations we should take into account in terms of timing or duration for switching lines?

Justin Bowers:

63:09 Okay. And then, as a follow-up, in terms of the 2023 growth outlook, is there a way to help us understand how much of that is coming from existing capacity versus some of the new capacity coming online? And then with the EBITDA headwinds that you called out in the fourth quarter, how does that phase out over the next few quarters?

Thomas Castellano:

64:52 And with regard to the cost related headwinds we see at both of these acquisitions that have been announced, Justin, it's difficult for me to give you any more specifics around what the contributions will look like in the next year, other than to say, I would not expect the combined two facilities to get to a positive EBITDA next year. I do think there will be a negative burn associated with that this. But we'll give a lot more again specificity around the individual contributions here as part of our full guidance in August.

Operator:

The next question comes from Jack Meehan from Nephron Research. Please go ahead. Jack.

Alessandro Maselli:

66:12 Look, I said that there is a lot of dynamics out there. But I'm going to tell you, we still see some dynamics with our customers and we took the trend and decided that in terms of giving an update on our current outlook on fiscal, today we decided to mitigate the risk of those revenues in our guidance. That being said, there is -- in the next few months, some of those dynamics will get clearer and some of them could get clearer during the summer. We will continue to provide updates on this one as we get into our next call, which is in August.

Jack Meehan:

67:15 Great. And as a follow-up, Tom, CapEx for the year, just the aggregate revenue dollars are lower, it's like $650 million at the midpoint versus closer to $750 million previously. Can you just talk about, or maybe some of the projects going a little slower than you might have thought previously. And just any thoughts on level of CapEx in 2023? I know it's early, just would be helpful.

Alessandro Maselli:

68:58 Yes, I would add to this one. Look, it is true that you're seeing a CapEx numbers per se, which is lower, but I would put us back on the comment before that some of these acquisitions have really that we have announced are really need to be seen as an accelerated CapEx deployment in terms of organic growth. So as Tom referred to there are some areas of the supply and with regards of the building material [Technical Difficulty] opportunity. And we took a little bit of a pause in our spending in Anagni and trying to understand [Technical Difficulty] productive and a more stable cell lines in a shorter timeframe and this is what our technology providing them. So the, the pipeline is very, very robust, is driving the growth. So we are pleased with the Madison assets. 70:21 But I would also would like to remind the significant investments we are doing Bloomington drug substance, we've essentially doubled the capacity there which combined with our Oxford new facility is significantly increasing the reach of Catalent into the drug substance and in general, new modalities.

John Chiminski:

70:53 Thanks, operator and thanks everyone for your questions and for taking the time to join our call. I'd like to close by highlighting a few key points. The trajectory of Catalent remains as strong as ever. This demonstrated by our ability to increase our fiscal ‘22 guidance for the third consecutive time this fiscal year and by our ability to confidently provide robust projected growth targets out to fiscal 2026. Including expected net revenue growth in fiscal 2023 in-line with our long-term growth target range of 8% to 10%. 71:36 So far this fiscal year, we've been able to achieve an impressive level of success due to our highly talented employee base, the continued execution of our long-term strategy rooted in a patient first culture and best-in-class sustainability and delivering for our customers and their patients when they need us most. In addition, we remain encouraged by the positive growth trends across the CDMO industry, as well as the prospects for the investments we've made in other therapeutic areas and modalities, which provide a foundation for Catalent to continue expanding and enable us to pursue new opportunities for partnership. 72:20 Catalent remains the global leader in enabling its health care partners to optimize product development, launch a full lifecycle supply for patients around the world. Further, the broad diversity of our products as well as our substantial scale and expertise in development, sciences, delivery technologies and multi-modality manufacturing continue to make us the industries preferred partner. 72:51 I firmly believe that we have the right people, leadership, processes, technologies and long-term strategy in place to help our customers and we're proud to see how our work continues to improve the lives of millions. Thank you.

Operator:

Hello and welcome to today's Catalent Incorporated Second Quarter Financial Year 2021 Earnings Call. My name is Bailey and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for question and answers at the end. [Operator Instructions]. I would now like to pass the conference over to Paul Surdez, Vice President of Investor Relations. Paul, please go ahead.

John Chiminski:

Thanks, Paul. And welcome everyone to the call. Catalent's strong start to fiscal 2022 continued in the second quarter. Our financial results were driven by continuing strong growth in our biologics business, with additional support from our other business segments, as we work with our customers to deliver thousands of different products that help people live better, healthier lives. The recent addition to our offerings of consumer-preferred gummy dosage forms for nutritional supplements through the acquisition of Bettera added another growth engine on top of our robust organic performance. The strong second quarter, along with continued momentum in the business, has led us to again increase our fiscal 2022 guidance, which Tom will review later in the call. Our net revenue for the second quarter was just over $1.2 billion, increasing 34% as reported or 35% in constant currency compared to the second quarter of fiscal 2021. When excluding acquisitions and divestitures, organic growth was 32%, measured in constant currency. Our adjusted EBITDA of $310 million for the second quarter increased 39%, both on an as reported and constant currency basis, compared to the second quarter of fiscal 2021. When excluding acquisitions and divestitures, organic growth was also 39%, measured in constant currency. Our adjusted net income for the second quarter was $163 million or $0.90 per diluted share, up from $0.63 cents per diluted share in the corresponding prior-year period. The Biologics segment, driven by continued high utilization of our drug product assets, was again the top contributor to Catalent's financial performance. The segment experienced organic net revenue growth of 59%, driving an EBITDA increase of more than $60 million over the second quarter of last year. Our legacy offerings in our Softgel and Oral Technologies segment continued to experience the recovery from pandemic-related headwinds that we had anticipated, and the segment results were further enhanced by the acquisition of Bettera. Organic growth was very strong as year-over-year demand for both prescription and consumer health products recovered nicely over the same period last fiscal year, a quarter that included pandemic lockdowns. Though net revenue is now higher than compared to the pre-pandemic second quarter of fiscal 2020, there are still a few headwinds and challenges driven by the ongoing pandemic, with pockets of demand still not at historic levels. However, we're pleased that our base business, strong growth in product development, and robust prescription drug pipeline are more than overcoming some of the headwinds that still exist. In addition to our positive organic performance, we received a strong boost from the first quarterly contribution from Bettera, which added more than 20 percentage points of net revenue growth to the segment. The Bettera acquisition was an important factor in leading us to raise this segment's long-term net revenue growth rate to 6% to 8% and improving its margin profile. The acquisition is off to a better-than-expected start, and we're seeing high interest in gummy formats from our consumer health customers. Our Oral and Specialty Delivery segment also saw continued organic net revenue growth after facing headwinds in fiscal 2021. As with Softgel and Oral Technologies segment, there are improving market dynamics across our Oral and Specialty Delivery segment. These dynamics are most notable this quarter in our early phase development offerings in rising demand for orally delivered Zydis commercial products. Finally, our Clinical Supply Services segment posted high-single digit net revenue and EBITDA growth compared to the second quarter of fiscal 2021. As highlighted last quarter, we opened new CSS facilities in San Diego, California and Shiga, Japan in the first half of this fiscal year and expect them to be long-term growth drivers for the segment. On our last several calls, I've detailed our capital expenditure projects across the company, most notably in support of our biotherapeutics and cell and gene therapy offerings. I'm very proud of our team's ability to navigate the challenges presented by the pandemic, including those presented by the global increase in cases related to the Omicron variant to keep these critical growth projects on track. With no change to the timeline or scope of these projects, we thought it would be helpful to give you an update on the progress of our OneBio service offering, which we first announced in June of 2019. OneBio combines our drug substance and cell line development with our drug product and clinical supply services to help reduce development timelines, risk and complexity for our customers to get their therapies to patients, all uniquely with one CDMO partner. Since we introduced this initiative, we've signed more than 20 development programs, creating an additional feeder channel for our commercial pipeline. Since originally launching as an early stage offering, specifically for preclinical or Phase I programs, we've now expanded the offerings to support late stage programs based on customers' needs. We now have several Phase II and Phase III programs in progress or signed. We also recently completed the first OneBio customer cGMP batch using our new small scale filling line that we acquired in Bloomington in September 2020. We continue to see interest from existing and potential customers who are looking for a single proven partner to help them reduce development timelines, risk and complexity, and getting their therapies into the clinic and to patients faster. And this is, of course, not limited to our biotherapeutics customers. We have a longstanding history of optimizing the successful development of small molecules as well and recently launched a new service in our Oral and Specialty Delivery segment called Xpress Pharmaceutics that is designed to accelerate the development of old drugs for Phase I clinical trials. Our team will integrate formulation development and provide on-demand clinical manufacturing, regulatory support and clinical testing, guided by real-time clinical data to reduce the time potentially by half to complete first-in-human clinical trials. I'd now like to make a few comments regarding our CEO transition plan announced last month. Catalent is in a strong position, given its growth history and trajectory, its increased profitability, and its proven success with strategic execution, including the transformation of the company over the last few years as we've grown our Biologics segment and further diversified our portfolio. Catalent's offerings are not only balanced, they closely match the industry's R&D pipeline. After my 12 years at the helm, it makes sense to refresh Catalent's leadership, particularly when the board agrees that we have a top industry leader in Alessandro to advance Catalent seamlessly. I'm very proud of, and impressed with, our board for overseeing such a thoughtful and thorough succession planning process. Alessandro is uniquely positioned to lead a complex CDMO like Catalent. He started off at the site level over a decade ago, worked his way up to larger sites, then ran multiple sites, rose up to become our Senior VP of Operations, and eventually became an integral part of our leadership team in his role as our President and COO. Over the last three years, Alessandro has been running Catalent to a significant degree, having ownership for all of our business units, go-to-market strategies and technical operations. He has worked hand-in-hand with me on developing and executing our strategy, and has been pivotal in all our decisions regarding acquisitions and post-acquisition integrations. With that said, I'd now like to turn the call over to Alessandro, who will walk you through our recently announced long-term financial targets. Alessandro?

Thomas Castellano :

Thanks, Alessandro. I'll begin this morning's discussion on segment performance where commentary around segment growth will be in constant currency. I will start on slide 9 with the Biologics segments. To highlight the company's transformation over the last few years, you'll see that the company represented 52% of our net revenue in Q2 of the fiscal year compared to 44% in Q2 of fiscal 2021 and 31% in Q2 of 2020. Biologics net revenue in Q2 of $638 million increased 60% compared to the second quarter of 2021, with cell therapy acquisitions adding 1 percentage point of growth. This robust net revenue growth was driven organically by broad-based demand across the segment, most notably for COVID-19 related programs. The segment EBITDA margin of 30.9% was up 60 basis points sequentially over the first quarter of this fiscal year, but was down year-over-year from the record level of 33.5% recorded in the second quarter of fiscal 2021, which is primarily attributable to mix. Most notably, an increase in component sourcing, as well as costs associated with our continued investments in cell therapy business. As we discussed in the past, component sourcing is where we source materials, components and other supplies for our customers, and it comes with two opposing dynamics – increased revenue, but with margins well below the company average. In Q2 of last year, as we readied the additional capacity we were building, we were not yet manufacturing at large scale and, therefore, had a much lower contribution from component sourcing versus today's levels. Looking to the back half of the year, as we discussed last quarter, we expect the Biologics segment revenue growth rate to decelerate in the second half of fiscal 2022 as we begin to compare against the higher levels of COVID-19 related production that started in the back half of fiscal 2021. Also, in the back half of the year, we expect the EBITDA margin for Biologics to be impacted by costs associated with corrective and preventative actions we are taking in response to the regulatory observations out of our Brussels site. These remediation efforts will include a voluntary temporary shutdown as the replaced equipment and revalidated facility have been factored into our updated fiscal 2022 guidance, which I'll review in a few moments. Please turn to slide 10 which presents the results from our Softgel and Oral Technologies segment. Softgel and Oral Technologies net revenue of $329 million increased 36% compared to the second quarter of fiscal 2021, with segment EBITDA increasing 73% over the same period last fiscal year. The October 1 acquisition of Bettera contributed 22 percentage points to net revenue growth and 30 percentage points to EBITDA growth in the segment during the quarter. The organic net revenue increase is driven by growth in both prescription products and consumer health products, particularly in cough, cold and over-the-counter pain relief products. Segment EBITDA increased 507 basis points from the second quarter a year ago, with organic volume growth and the addition of the margin accretive Bettera business each contributing to the margin expansion. Slide 11 shows the results of the Oral and Specialty Delivery segment. After factoring out the net impact from divestiture of our blow-fill-seal business and the acquisition of Acorda spray drying assets, organic net revenue grew 5% and segment EBITDA was up 24% over the second quarter of last year. The top line growth is primarily driven by elevated demand for early phase development programs. You may recall that, a year ago, we called out lower demand for early phase development programs as a result of pandemic-related lockdowns, so this bounce back is another strong indicator of a return to pre-pandemic activity levels. Organic net revenue growth was driven by demand for early phase development programs and orally delivered Zydis commercial products. EBITDA margin improvement was driven by organic net revenue growth, as well as favorable comparison to our second quarter fiscal 2021 when we booked charges related to a customer September 2020 voluntary recall of a respiratory product. As shown on slide 12, our Clinical Supply Services segment posted net revenue of $99 million, representing 7% growth over the second quarter of fiscal 2021 and segment EBITDA growth of 9% over the same period. These increases were driven by growth in our manufacturing and packaging and storage and distribution offerings in North America. As of December 31, 2021, backlog for the segment was $529 million compared to $515 million at the end of last quarter and up 18% from December 31, 2020. Segment recorded net new business wins of $114 million during the second quarter compared to $118 million in the second quarter in the prior year. The segment's trailing 12 months book-to-bill ratio is 1.2 times. Moving to our consolidated adjusted EBITDA on slide 13. Our second quarter adjusted EBITDA increased 39% to $310 million or 25.4% of net revenue compared to 24.5% of net revenue in the second quarter of fiscal 2021. On a constant currency basis, our second quarter adjusted EBITDA also increased 39% compared to the second quarter of fiscal 2021. As shown on slide 14, first quarter adjusted net income was $163 million or $0.90 per diluted share compared to adjusted net income of $114 million or $0.63 per diluted share in the second quarter a year ago. Slide 15 shows our debt related ratios and our capital allocation priorities. Catalent's net leverage ratio as of December 31, 2021 was 2.8 times, below our long-term target of 3.0 times. This compares to a pro forma calculation of 3.0 times at September 30 which reflects both the Bettera acquisition we completed on October 1 and the debt we issued on September 29 in connection with the acquisition, and the reported 2.6 times at December 31, 2020. From here, we will naturally delever absent any further M&A activity as our adjusted EBITDA continues to grow, providing us with significant flexibility to continue to pursue organic and inorganic growth opportunities. Our combined balance of cash, cash equivalents and marketable securities as of December 31 was $960 million compared to approximately $1 billion also on a pro forma basis for the Bettera acquisition we reported as of September 30, 2021. Moving on to capital expenditures, we continue to expect CapEx to be approximately 15% to 16% of our fiscal 2022 net revenue expectations, driven primarily by growth investments in our Biologics segment. Now we turn to our financial outlook for fiscal 2022 as outlined on slide 16. Following the strong second quarter and solid outlook for the remainder of the fiscal year, we are raising both the low and high end of our financial guidance ranges. We are also tightening the range since there are just five months remaining in the fiscal year. We now expect full fiscal year net revenue in the range of $4.74 billion to $4.86 billion, representing growth of 19% to 22% versus our previous estimate, $4.62 billion to $4.82 billion. We project that net revenue growth from M&A will continue to be 2 to 3 percentage points, principally driven by the acquisition of Bettera. We continue to project organic net revenue growth in each of our segments for the fiscal year to be within or above the long-term growth range we have previously disclosed for each segment. For full-year adjusted EBITDA, we expect the range of $1.25 billion to $1.30 billion, representing growth of 23% to 27% over fiscal 2021 compared to our previous estimate of $1.225 to $1.295 billion. Note that the continued strengthening of the US dollar against both the euro and the British pound is expected to negatively impact our adjusted EBITDA by approximately $10 million in the second half of the fiscal year, the effects of which has been absorbed into our new guidance. We expect full-year adjusted net income of $650 million to $700 million, representing growth of 18% to 28% over the last fiscal year compared to our previous estimates of $630 million to $695 million. We continue to expect our fully diluted share count on a weighted average basis for fiscal 2022 to be in the range of 181 million to 183 million shares. This projection counts our formerly outstanding Series A convertible preferred shares, as if all were converted to common shares in accordance with their terms. Finally, we also continue to expect our consolidated effective tax rate to be between 23% and 25% for fiscal 2022. Operator, this concludes our prepared remarks and we would now like to open the call for questions.

David Windley:

I was hoping to ask two. My first one is around Biologics revenue. Tom, you called out that COVID-19 programs were a big driver there. In a conversation we had in December, you talked about COVID – management considers COVID to be in base. And then the base, you expect to be able to grow 10% to 15% over the long term. Could you give us a little more color about how much COVID contributed to the quarter, anything you can tell us there and how you believe that will kind of pace out over the coming years that will allow you to continue to grow that segment 10% to 15%?

Alessandro Maselli:

Covering the second part of your question a little bit more in detail, across all the offerings in Biologics, we still have a number of assets which are not used for COVID response, which are in high demand and will continue to be expanded in capacity over the next three years. It is in drug substance, in gene therapy, cell therapy, and drug product specifically with regard to our prefilled syringes. So, we feel comfortable that we have enough assets which will come online with very good demand profile, which will continue to help growing the business at projected rates.

Alessandro Maselli:

Look, we are not providing here any specific updates about the timeline to these. I can only share that we have deployed a significant amount of resources, internal and external experts, as in my comments to these. I can confirm that we're only going to restart this facility where we are satisfied, meeting with the highest standards of quality and compliance. The investment is ongoing. It did require some engineering changes to the ash filtration system, which are ongoing. But I will fall short from providing the specifics about this one. With regards of your second question and on the 483s in this specific facility, we take all these observations very, very seriously, some of them are more related to the procedures or some practices that can be corrected with the ongoing production. Some others, like in this case, rise to a point where you need to stop production for a period of time to implement some changes, especially when it comes to facilities that have been running for a while. So, I believe that the response of the company has always been very, very thorough in collaboration with all the regulatory agencies. For each of those we've been in contact, we have responded that and we have brought those observations to our conclusion with the satisfaction of regulators.

Tejas Savant:

Just to follow-up on Dave's line of questioning there. It sounds like the financial impact from the shutdown is fairly manageable. But have you seen any issues in terms of your ability to participate in new RFPs or your win rates? And then, can you just walk us through your ability to absorb the impact by moving customer projects to elsewhere in the network from Brussels?

Thomas Castellano:

' And in terms of your question, Tejas, related to the financial impact, this goes back to one of the core strengths of the company, which is the diversification of the portfolio. We operate over 50 sites across the globe, manufacturing over 7,000 products across 1,000 different customers. So, the size of Catalent's battleship, if you will, gives us the ability to absorb these types of normal course challenges that come up from time to time when you operate in a highly regulated space. So, the answer to your question, we have been able to absorb this. We said from the start that this was not a material, financial contributor, or impact for the company. And I think that's seen by the robust guidance we put forth here for the remainder of the fiscal year.

Thomas Castellano:

That's a level of granularity, Tejas, that we don't disclose. We don't talk about contribution from individual plants across the network. We did want to just highlight the fact that we will see some additional costs here as a result of the remediation efforts that will have an adverse impact in the margin profile of the business in the second half of the year, primarily in the third quarter. However, as I said, that's all already contemplated in the robust guidance that we put forth.

Jacob Johnson:

Maybe a question on the drug product side. Obviously, there's been a good amount of benefit from COVID there. I think, as Tom mentioned, you have contracts that run into next calendar year. But if and when those dedicated lines free up potentially for other customers, are you already in discussions with what's called non-COVID customers about that capacity?

Jacob Johnson:

Maybe just one follow-up. In your updated investor presentation, you have this slide on where the biopharma industry could go in the next five years. I think you highlights some things like gene editing, oncolytic viruses, red blood cell therapeutics. Are those capabilities you can serve today or are those areas that maybe we should consider for inorganic growth at Catalent?

Operator:

Our next question comes from Luke Sergott from Barclays.

Thomas Castellano:

First, I would say the FX headwinds are not having an impact on the margin profile of the business. We're seeing the strengthening dollar impact, both the top and bottom line at similar levels here. So, no impact related to that. We are assuming, as you mentioned, over 100 basis points of margin expansion at the midpoint of the range. We're certainly seeing the Bettera contribution help pull off the margin profiles in the SOT business. We mentioned that's a business that our EBITDA margins are operating closer to that of Biologics than that of the SOT business where it is today. But also the recovery efforts that we're seeing in terms of moving closer to pre-pandemic levels within SOT and OSD and there's the corresponding increase in utilization levels we're seeing in those facilities as a result of those volume upticks are contributing to the margin expansion profile that we're seeing in that business. Biologics is the only segment where we saw some margin pressure, and that's really primarily attributable to the mix issue and the component sourcing dynamic, which I talked about in detail through my prepared remarks. And I would expect that the margin profile of Biologics continues to be a modest drag for us in the second half of the year, especially now with the inclusion of the remediation related costs associated with the 483 out of the Brussels facility. And the CSS business, I would say, it's a margin accretive business. We continue to see EBITDA levels that are growing faster than the top line in that business. And I would expect that dynamic to contribute in the second half of the fiscal year as well. So, it really comes down to the inclusion of Bettera and the recovery within SOT and OSD that are going to help drive the margin profile higher here for us and offset some of the headwinds we're seeing within Biologics.

Alessandro Maselli:

Some of the areas that would be obvious to you, all the areas of biomanufacturing clearly is in high demand. Just let me remind you that, in that area, we serve both commercial products, but also the R&D pipeline. In those, the new modalities, the pipeline is not only increasing that we show in our presentation, but it's also maturing, meaning that more and more assets are moving to the later stage. And when it comes to CDMO services specifically, there is more opportunity for us to generate revenues in the later stage of the pipeline as opposed to the early stage of the pipeline. So, that's for sure is creating some interesting dynamics to us. I will tell you the clinical service business, it's been an interesting one because, yes, there were a couple of dynamics during the pandemic where some studies were closed or slowed down because of the inability to recruit patients and patient go into clinics. But on the other hand, you had the large studies for vaccine which offsetted, for us, the effect. Now, this is a little bit going backward, but the studies are picking up steam again. So, we are seeing very, very good commercial wins in that area, which are a good proxy for the future revenues to invest in those businesses. There is still a little bit of a lingering effect, I would say, of the pandemic around the consumer health business. This is primarily with the Q2 commentary. Although I have to tell you that in the last few weeks, we've seen some good movement there with some historical products, large products and brands that we serve in consumer health which are going back to historical demand. And in fact, in some cases, regaining a little bit of stock will create a temporary effect of increased demand. So, with regards to our pharmaceutical services in filling more the small molecules, look, we are very, very mindful and purposefully serving small molecules, not making the volume play, but the technology play, moving after those diseases and unmet needs which are still being targeted by small molecules. And that is an area that not only today is giving us, especially for our early stage assets, good demand, but we see that trends are continuing into the next few years.

Sean Dodge:

On Bettera, that was an area you all previously talked about it being a likely continued investment focus in terms of adding new capacity at some point. John mentioned that the strong client interest in gummies kind of right out of the chute here. Any updated thoughts you can share around when you might begin investing and expanding across Bettera's footprint?

Sean Dodge:

Maybe on capacity utilization more broadly. You had said before there were a number of facilities that were operating 24 hours a day, 7 days a week to meet commitments. Is this still the case? And is that happening across a lot of your footprint? Is it more prevalent in any one particular segment? And then, in those situations, how does that affect margins? I guess you'd have fixed costs you're leveraging, but I'd imagine you have to do things like offer shift premium, so your variable costs are probably higher too?

Operator:

The next question comes from John Kreger of William Blair.

Thomas Castellano:

We've talked about an elevated level of CapEx. Obviously, in fiscal 2022, we'll be spending about 15% to 16% of sales, as we mentioned in the prepared remarks. That's closely aligned to what we spent in the prior year as well. To remind folks, I would say the more normal levels of capital spend for us is somewhere in the 8% to 10% of sales basis annually. I don't know that we get back to that level in the fiscal 2023 year, but I would expect us to start to gravitate more closely to that. So, I think we remain elevated above the 8% to 10% levels within the next one to two years, but probably not quite at the 15% to 16% level. So, we're not assuming in our plan that 15% to 16% of sales, John, is the new normal level of CapEx spend that we will be spending annually. However, it will likely stay above the 8% to 10% for the next several years.

John Kreger:

Maybe just one last thing to clarify along the same lines. I think, in the past, you've told us you weren't really interested in investing in large-capacity biologic drug substance production. Is that still your thinking?

Alessandro Maselli:

The only thing I would add there, John, is look, our job is to try to figure out not only where there is demand, but where, over time, the balance of supply versus demand is growing. And we do believe that, in the sub-5,000 liters, there is more opportunity that the supply versus demand profile will stay healthy for a longer time for CDMOs.

Derik de Bruin:

A couple of questions. So, first of all, just to close the loop on the 483, is the plant shut down? Are there still lines operating? Just to get a sense of the impact?

Derik de Bruin:

John, you talk a little bit about your cell and gene therapy expansion in that market. Where is the industry in capacity today, number of projects? We get a lot of questions from investors trying to dig into this a little bit more and it's not there. It doesn't seem to be there. And I think any sort of like general comments on profitability versus some of the other biologics. Could you just sort of talk a little bit broader about where you are in that market, where you are in the expansion, where the overall market is?

Alessandro Maselli:

One point I'm going to add is a little bit clarifying the profiles of customers, right? So, while in the early stage services that we provide, we tend to have, in the mix, much more biotech customers, which, as John clarified, don't have internal capacity and the desire on CDMOs to progress assets through the clinics. And the support we provide goes well beyond just the manufacturing clinical material with additional services and everything that is required by the CMC. But when it comes to more late-stage assets, we have a very good mix also of large clients which are interested in our capacity, which are less depending, so to speak, of external funding because they have already commercial products out there. We feel good about the overall dynamics, but we also feel good about the mix of the customers that we serve.

John Sourbeer:

I guess I just have a question here on the guidance. Given the strong top line performance in the quarter, can you talk about any conservatism you have baked in in the second half of the fiscal year on the base biologics or vaccines? And anything else to highlight there outside of the Belgium facility on any changes in assumptions in the second half?

John Sourbeer:

I guess just maybe to follow up on Derik's question on the cell and gene therapy. I think you recently provided some color that, 2021, these were growing around 25% year-over-year. Any directional guidance or color you can give us on how these look for 2022 in growth rates?

Operator:

The next question comes from Evan Stover from Baird.

Thomas Castellano:

Your back-of-the-envelope math is correct. I will say, longer term, we view the margins of this business as being closer to Biologics, as I mentioned. This is the first quarter in which we operated the asset. That deal closed for us on October 1. There were several, I would say, integration-related costs that we needed to deploy into the business. This was a business that was not operated at the levels of a public company. A lot of back office-related, I would say, investments we needed to make here to align it to Catalent. But as we sit here and think about the business and the potential that we see here, not only do we see very robust levels of growth in the 20-plus-percent range, but there's improvements that we can make, given our expertise in terms of running manufacturing facilities to these assets that will help drive further margin expansion down the road here. So, I would say that the mid-20% range that we saw here, give or take a couple of hundred basis points in either direction, is probably the near-term view there. But like we said, we do have line of sight to this business contributing EBITDA margins very close to that of the Biologics segment.

Evan Stover:

On free cash flow, always dangerous to look at a quarter or even a half of a year, but you were negative for the first half of the year. Is there any change to your guidance for, just broadly speaking, some positive free cash flow in fiscal 2022? Has that changed at all with Brussels and maybe some other items that you'd like to address?

Operator:

The next question comes from Jack Meehan from Nephron Research.

Alessandro Maselli:

Look, I believe that we've got to make sure that we factor into the picture of the vaccines the global demand and not only the Western world. Some of your comments around preferred vaccine are surely applicable to the rest of the world. There is still a significant number of countries which are probably relying more on less obvious vaccine, given the ability to supply enough quantities. And so, I would tell you, we haven't seen a significant softening of demand across the board on any of the vaccines that we serve. With regards of therapeutics, we have a number of them. We continue to serve them. And those are the ones that more – depending on the variant of interest and the different mutations, will continue to be updated as the times go by. We do expect that, on the therapeutic front, there will continue to be ongoing demand to try to protect the ongoing population which will just not get vaccinated.

Alessandro Maselli:

No, look, it's going to come down. There is no doubt about it. The settings there for the vaccine are going more toward physicians and GPs. And again, I need to caveat my response with the Western world, meaning the countries which have the higher vaccination rates during the pandemic should be now have different settings for administration of vaccines. And we are already doing several projects to either grow to lower counts per vial, but also to previous ranges, which will be, by definition, a single dose presentations. So, the move is going directly in that direction.

John Chiminski:

Maybe one last comment. We've made this before. It's important to note that Catalent is not paid on a dose level, we're paid on a fill, whether it's prefilled syringe, whether it's a vial, whether it's 14 doses, 5 doses per vial, we're paid for that vial. So, in some sense, when you move down to fewer doses per vial, the economics for us can be flat to improving depending on where it's going. So it's just something I'm continuing to mention.