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..

Good morning everyone, and thank you all for joining us today to review Catalent's third quarter 2023 financial results. Joining me on the call are Alessandro Maselli, Catalent’s President and Chief Executive Officer; and Ricky Hopson, Interim Chief Financial Officer.

During our call today, management will make forward-looking statements and refer to non-GAAP financial measures. It is possible that future results could differ from management's expectations.

Please refer to Slide 2 with a supplemental presentation available on our investor relations website at investor.catalent.com for a discussion of risks and uncertainties that could cause actual performance or results to differ from what is suggested by those forward-looking statements and look to Slides 3 and 4 for a discussion of Catalent's use of non-GAAP financial measures.

Please also refer to Catalent’s Form 10-K/A and 10-Q that will be filed with the SEC for additional information on the risks and uncertainties that may bear on our operating results, performance, and financial condition. Now, I would like to turn the call over to Alessandro Maselli, whose opening remarks will begin with Slide 5 of the presentation..

Thank you, Paul, and welcome everyone. I want to thank you for your patience as we finalized our Q3 results. It was important for us to conduct a thorough review of our financial situation during a particularly complicated period for the company.

Today, I'll provide additional detail on that process and 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..

First, the year-on-year decline in certain COVID revenue that had been designated as development revenue; And second, in third quarter in fiscal 2023, we started producing product under an updated gene therapy contract, which changed the product classification from development to commercial.

In addition, the third quarter of fiscal 2022, there was also a large COVID program designated as commercial that concluded that quarter. Moving to EBITDA, the segment's EBITDA margin was 1.1%, compared to the 31.1% recorded in the third quarter of fiscal 2022.

Items that adversely impacted net revenue and segment EBITDA include productivity issues and higher than expected costs and accounting adjustments in Bloomington; productivity issues and higher than expected costs in Brussels, ERP implementation and unforeseen operational challenges that led to the under absorption at BWI; and low levels of absorption and utilization across our cell therapy and plasmid assets, where optimistic planning drove accelerated investments and the revenue is not being generated as quickly as expected.

The accounting adjustments during the quarter were largely due the reserves or write-offs of raw materials in Bloomington, totaling approximately $55 million that we purchased at our own risk as safety stock during the pandemic. This alone impacted segment margin by more than 1,100 basis points.

The over accounting adjustments identified through the independent balance sheet review were all immaterial in nature and essentially netted out close to zero.

As shown on Slide 8, Our Pharma and Consumer Health segment generated net revenue of $563 million, an increase of 1%, compared to the third quarter of fiscal 2022 with segment EBITDA down 10% over the same period.

Segment's revenue growth was primarily driven by the recently acquired Metrics business, which contributed 4 percentage points to the segment's top line and 5 percentage points to adjusted EBITDA.

The organic PCH business continued to see increased revenue in Clinical Supply Services, whilst commercial revenues continued to face headwinds, the most notable driver being high-end nutritional supplements, including our [indiscernible] offerings, a softened consumer demand continued to create under absorption.

In addition, the segment also faced continued supply chain issues related to a top product, which is in the process of being resolved and lower demand related to some other high margin pharmaceutical products.

Segment's EBITDA margin of 22.3% was lower by roughly 290 basis points year-over-year from the 25.2% recorded in the third quarter of fiscal 2022. Year-over-year margin decline was a result of unfavorable product mix across the segment and cost inflation. Segment 9 shows our debt related ratios and capital allocation priorities.

Our debt load, which we now intend to reduce more aggressively, remains well-structured and to commit good flexibility. Our nearest maturity is not until 2027. Our most rigorous debt covenant is the ratio of first lien debt divided by the last 12 months of adjusted EBITDA, with the threshold being 6.5x.

This compares to our March 31 actual level of 2.2x. Catalent’s net leverage ratio as of March 31, 2023 was 4.9x, an increase when compared to December 31, 2022 at 3.8x, which was driven by the lower year-on-year adjusted EBITDA in Q3.

Because the EBITDA portion of the net leverage ratio is calculated on an LTM basis, we expect our net leverage ratio to continue to move higher in the coming quarters, peaking in Q2 of fiscal 2024 and then improving in the second half of the fiscal year.

This is largely driven by a comparison that includes the $440 million of COVID revenue and related EBITDA generated in the first half fiscal 2023.

Our combined balance of cash, cash equivalents, and marketable securities as of March 31, 2023 was $252 million, a decrease of $218 million from December 31, 2022, primarily driven by negative free cash flow in the quarter, as well as a $50 million revolver repayment.

Note, that our cash balance on March 31 was approximately $300 million even after accounting for another $10 million repayment on the revolver.

As discussed on May 19, but worth repeating, my top priority is for positive cash generation and allocation of capital which will support our efforts back towards our net leverage target of 3.0x include greater utilization of our asset base, completion of essential inflight CapEx projects that we believe will generate positive returns in the near to medium-term, activities that will reduce our cost base and contract negotiations to reduce our cash conversion cycle.

I would now like to discuss our contract assets, which as of March 31, 2023 had a balance of $505 million, a sequential decrease of $8 million and an increase of $64 million from June 30, 2022, our prior fiscal year-end.

This increase was primarily driven by gene therapy programs for which the cash conversion cycle is longer given the duration of manufacturing and release testing process, which can take multiple quarters from start to finish.

Also related to contract asset the revenue accounting treatment for complex products with long production cycle times will continue to be recognized on a percentage of completion basis. When contract terminology determines our work relates to commercial activity.

Note that as previously mentioned on this call, in third quarter, there was a change in classification from development to commercial of a large gene therapy program, with the support of independent third-party experts we also conducted a comprehensive review of the related contract and determined that the arrangement required an analysis under GAAP guidance for both [thesis] [ph] and revenue within our financial reporting.

Based upon this analysis, we concluded the provisions of ASC 842 leases will apply to a portion of this arrangement, and accordingly, the accounting was finalized. This change in accounting has no effect on our fiscal 2023 guidance nor do we expect this change to have a material impact on our fiscal 2024 results.

At March 31, we had one strategic customer, a majority of whose business relates to our gene therapy platform that represented 23% of our $1.56 billion in aggregate net trade receivables in contract assets.

Unrelated to our balance sheet, but to provide further transparency on our customer concentration we have two customers in the Biologics segment that each represented 11% of consolidated net revenue during the three months ended March 31, 2023.

These same two customers, one of which is primarily a drug product customer and the other of which is primarily a gene therapy customer, represented 9% and 5% of net revenue, respectively in the three months ended March 31, 2022. Finally, we continue to expect our fiscal 2023 CapEx to be approximately $550 million.

When considering the billions of dollars of CapEx investments we have already made in the business, in fiscal 2024, we expect to be able to reduce our CapEx to only the most critical projects leading to substantially lower level of spend. Please turn to our financial outlook for fiscal 2023 as outlined on Slide 10.

As Alessandro mentioned, we are adjusting our guidance, primarily to [attack] [ph] the lower sequential growth assumptions in our Pharma and Consumer Health segment.

As you know, my highest priority is in my first month as Interim CFO were related to the challenges in our Biologics segment and overseeing the substantial work needed to report our third quarter results. Now that we have spent more time on PCH, we're in a better position to align our guidance with our performance.

We now expect fiscal 2023 net revenue in a range of [$4.225 billion up to $4.325 billion. Note, that we previously expected PCH to be flat organically for the full-year, but now expect organic revenue to decline in the lower single digits. We now expect adjusted EBITDA in a range of – from $700 million, up to $750 million.

We now expect adjusted net income in a range from $169 million, up to $210 million. Our assumed tax rate remains 27% to 29% for the full-year.

Providing some additional clarity on our segment performance in the second half, we expect Q4 margin in our PCH segment to improve against the margin levels reported in the third quarter and our Biologics segment margin to remain depressed in the fourth quarter as we continue to manage through the operational healing process and ramp up production through the back half of Q4 into the first quarter of fiscal 2024.

We are working diligently through our fiscal 2024 budgeting process and look forward to presenting fiscal 2024 guidance during our August call. Operator, this concludes our prepared remarks and we would now like to open the call for questions..

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

Hey, thanks. Good morning. Maybe, Ricky, starting off where you just left off, just on 4Q, there's a few moving pieces in the Biologics segment this quarter. You know, some of that strength, it seems like COVID was, you know, seasonally stronger in 3Q than you expected, but you also had the $55 million inventory charge.

Given COVID to be lighter in 4Q, should we expect Biologics revenues to be down sequentially in 4Q? And then if you'd like to give us any other detail on the margin front there? And then maybe just a longer-term question on Biologics.

Alessandro, I think you mentioned that more work and time are needed to return Biologics to historical profitability levels.

Can you just talk about that timeline and how much of this can be accomplished by cost savings and then how much of it is just, kind of incremental margin on revenue growth? And I'd be curious within that, just kind of incremental margin on COVID rolling-off, and then, kind of the non-COVID work coming on. I know there's a lot there. Thank you..

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..

Yes. And to your second part of the question, which is a great one, by the way, look, when you look at what is the work to be done in Biologics, you can really look at the three areas of interventions here.

The first one is, regaining productivity at a couple of locations which have been significantly disrupted by a couple of events, one remediation and two correcting the course after a significant shift of the portfolio following the COVID-cliff. So, we are making good progress there.

As I said in my remarks, we started to see some first progresses in this quarter from an operational standpoint. And again, we will continue to work over the next period to address those productivity issues. Major primarily has the ability to deliver uptime on the production lines.

The second one is really aligning the headcount to the new mix that takes some time, right? So, you need to do that responsibly, respectfully, and take into consideration always the potential turmoil that these activities can generate. So, we are doing that very, very thoughtfully.

We know what the end point needs to be, but we don't want to rush into it to make sure that the business stays in control. So, maybe this could delay a little bit to the margin – the full margin recovery, but this is the right thing to do in order to continue to deliver service to our customers.

And finally, this is an element, which we have quantified a little bit more during this call, it's really addressing those additional sites and assets, which we have added to pursue new modalities, we have quoted the cell therapies and plasmid.

Look, the reality is that in a different world or with the different expectations, these sites would have registered revenues faster than what we are seeing. The reality is now clear to us, in terms of what could be an achievable revenue ramp there and now we are aligning our cost structure and cost investment to those new outlook of revenues.

And these assets, which are now dilutive, a significant dilutive to the segment, our plan is to bring them more short-term in good order not affected the margin of the segment. So, I would say these are the three items. The timeline of the three items is different.

So, that's why it's not very easy to point you to a specific date, but hopefully, our understanding and plan gives you the confidence that over time we're going to get back there. Also, I will add there's a final comment.

Look, at the end of the day, the pricing and the margin of the business, it's the same that we experienced even before the pandemic. So, there is no reason that we cannot bring this segment back where it needs to be..

Okay. Thanks for that. And then just for my 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?.

Well, number one, I believe it’s an exciting space for all the industry to start with. Clearly, very large patient population. So, with the need for premium dosage forms. So, this is in the real – the strength – placed to the strength of Catalent.

We have a high – normally we have high speed lines with the large capacity and with the [indiscernible] technologies. So, really matching the need. So, this is one of the most interesting areas for us. It should be one where we play significant role today, and we want to work hard to play an even more significant role going forward..

Got it. Thanks for taking the questions..

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

Hey, guys. Good morning. Maybe I'll start with one on the gene therapy side as well.

Ricky, could you just update us on conversations with customers around some of those working capital efficiency initiatives you had alluded to on the last call? Particularly as they relate to that [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..

All right. So, first part, I guess, I'm going to take both to – if you don't mind, Ricky. So, look, on the first part, as we said in the previous call, we are addressing the substance, right, of the problem here, which is to shorten these testing time lines, and it's going to take some time to do that.

I believe that we have a very collaborative relationship with some of those customers. And so, they are very much listening to our position here, and they've been receptive to some of our requests. So, again, I believe that as we get into the rhythm here, our cash flow generation from these modalities will improve [over time] [ph].

With regards of your second question, look, I got to say short-term specific comments on regulatory processes that are currently still ongoing.

I will tell you that our – we continue to work hard to make sure that as we have secured supply in the short-term, we also make sure that the supply is available for the future, reminding you that clearly, given the long time line of this process at any point in time, you're really looking at what is the potential demand of the product down the road.

So, there is not necessarily a strict correlation of short-term event to manufacturing the plans, because you're manufacturing for something that is happening a few quarters down the road from a market standpoint..

Got it. That's helpful. And then a quick two-parter on the quality side of things, guys.

On BWI, are the costs associated with the recent, 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?.

So, look, first of all, I would relate one comment that I've done many times. Regular inspections are the reality of our business. So – and so correlated so to speak cost or if you like, activities correlated them are part of our normal business model. There are times in which for a number of different reasons.

So, there is a concentration of inspections at one specific location because it's very important because there is a lot going on, and this was the case in January, and February, and March with regard to our gene therapy facility, now is public information has been published. We received three inspections at those locations.

We are very pretty satisfied with the outcome, which we have addressed as we always do. With regards to your second question or second part of your question, look, the reality is that – you don't have to see these – any inspection [necessarily corelated] [ph] to the previous one and inspection is an inspection, it's alright.

Sometimes you get inspected as – on an annual basis, this is true for the most critical sites, sometimes because there is a PAI , pre-approval inspection. So, there is one review of one specific product that triggers another inspection and these inspections really need to be seen on their own merit.

Once you get a PAI classification out of an inspection, it means that the corrective actions that you have submitted that already deemed to be satisfactory or you wouldn't get that classification. So, the correlation is not something that is normally there between those inspections that are probably sometimes triggered by different type of events..

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

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

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?.

Hey Dave, it's Ricky here. Yes, the 100 million is the number that we had confirmed on the May 19 call. I would say that we've made some good progress on taking actions on that number. There was an announcement where we reduced the head count at our Bloomington facility. The supervisory level [Technical Difficulty] towards that number.

And then, of course, additional actions are underway expected to be implemented before the end of this month. Those remediation are costs confirmed. They are part of the $100 million, but I don't have the detail to be able to give you that number right now..

Okay. Kind of relatedly, on the fourth quarter of this year, guidance for – the kind of, I guess, call it, guidance for Biologics margin continuing to be moderate. So, the $55 million won't repeat.

I just want to – 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?.

Hey Dave, Alessandro here. I'm just going to tell you, [indiscernible] and then going to pass to Ricky to more specific. Look the way you need to see in terms of dynamic normally, in our business, an operational event tends to have a delayed impact on financials because of the way it works.

You manufacture and the long lead time brings you that you're missing revenues in the next quarter and so on.

So, some of the operational challenges that we have quoted for Q3 don't necessarily add the direct impact on the financial of Q3, but they have some impact also in Q4 and as well as we have quoted again that our BWI production challenges really affected the back end of Q3 and the beginning of Q4.

So, there are elements of what we have shared, which are across the two quarters and Ricky more specific [on that] [ph]..

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..

Got it. Okay. And then just the last quick one. The $26 million correction to the fourth quarter of 2022, I'm understanding that you ran that through the fiscal 2023 financials, I think, specifically the third quarter.

And so, that is also something that is negatively impacting this year will not repeat next year? And then lastly, that was what you plan to do as of the last update. So that wasn't – the treatment of that was not new to this update.

Is that all correct?.

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..

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

Okay. Thank you, Dave..

Our next question is from Luke Sergott from [KeyBanc Capital Markets] [ph]. Your line is now open. Please go ahead..

Awesome. Thanks. I'm on Barclays now. So, a couple here for me. So, I think what everybody 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..

Yes. Look, tough for me to give you some specifics around that. We tried to articulate how we're starting to think about fiscal 2024, and we're still working through those numbers ourselves. We clearly got a headwind next year when it comes to COVID.

The number that we've said this year is slightly more than 600, and it's going to be a significant headwind next year, although tailwinds do exist with some of the cost actions that we've mentioned that we've taken, some of the one-timers that we don't expect to repeat, and some of the growth that we expect in the business.

So, Luke, I can't really give you too much more specifics than that other than those are the big headlines that I would be [factoring into your model] [ph]..

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?.

So, Luke, look as we said – as I said in my remarks, Luke, and I get – Ricky gave specific [at high level] [ph], we really wanted the task that was assigned to Ricky in – honestly, by the time we were in May, was a short time frame because it was only 5 weeks since I have been to step in was to really reveal the forecasting engine of the company that clearly was showing signs of not being where I've been with the company for 13 years and has always been one of our strengths.

And it was [great and not] [ph] where it used to be and Ricky has been a long time with the company. So, I asked him to look into it. And he really did. By the [2019] [ph], he did the work yet to do for Biologics, which was our priority given the noise that we were seeing there.

And then he applied himself to PCH segment, I believe that the mandate was to make sure that the risk profile of our forecasting was where we wanted to be at this point in time of our journey and given where we've been in the last few quarters. So, we have now somewhat a different approach to this profile of forecast.

And so, when Ricky went deep into it and did a deep dive, I believe he felt that this was the most appropriate thing to do at this point in time.

Ricky, can you give more details about it?.

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..

Alright, great. Thank you..

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

Yes. Thanks. So, maybe on the ERP delay at the Harmans campus, it sounds like with all of that now having been fixed. Ricky, before, I think you said you expected to be able to recover all of the revenue related to that delay in fiscal 2024.

Is there any more detail you can give us now or some rough bookends on how much revenue is shifting related to that? I guess how much of the guidance revisions we've seen now for fiscal 2023, is more just timing issues on the gene therapy side that you'll pick up in fiscal 2024?.

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..

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

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..

Okay, great. Thank you again..

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

Thank you. Good morning.

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

So Jack, that's a great question. I believe that 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..

Got it.

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

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..

Excellent. Thank you..

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

Great. Thanks for taking the question. This is Mike Ryskin on for Derik. First, I want to touch on your comments on CapEx and sort of the capacity that you need or don't need.

You had indicated in the prepared remarks that you're pulling back on CapEx, a little bit given the mismatch between your capacity now and the revenues where the business are some of those aggressive assumptions and model and et cetera.

Any color you can provide on, sort of like how far ahead you are in terms of CapEx or maybe put in other ways, where is your capacity now versus where do you think you'll need it to be? Are you a year ahead, two years ahead in terms of business plan and the capabilities in that?.

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..

And Mike, if I could just add, Alessandro, just in fiscal 2024, just to kind of repeat what we said on our May 19 call, my priority is absolutely going to be on free cash flow, cash generation. And next year, CapEx as a percentage of revenue will be less than this year.

This year's trended to about 13% right now, and we're expecting with maintenance CapEx, compliance CapEx and the completion of our current in-flight programs, some of which Alessandro just mentioned, we're expecting to be in the high single digits for fiscal 2024..

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..

Yes, the supply chain issues, they are close to resolution expecting to be fully resolved in the first quarter of our fiscal 2024. That was for the – that was for the supply chain product issue in PCH. And to your first point on COVID, I would just stand by what we said, Mike.

It's going to be a significantly lower number in 2024 when I think about the 600 million that we've recognized here in fiscal 2023..

Great. Thanks..

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

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..

Yes, sure. Look, as much as we want to simplify the output of our production site in units, the reality is that the product mix does matter. And the COVID vaccine is a product mix, which, if you like is, as simple as it gets. You have one product, one presentation in billions of doses.

The reality of the pharmaceutical industry and our reality has never been like that. We normally produce several products on the same line in different formats for different markets. So – and so it is a complete different mix and significant volumes. Normally – in our industry is normal to transition from one product to another.

It just doesn't happen that there is one product going from zero to billions of doses and back to millions of doses in the space of 24 months all-in. So, when you're looking at syringe fill/finish processes where to train people, it requires 6 months to 9 months.

You can understand that the strategies of the system in terms of reacting to our data stimulus and re-reacting to the opposite stimulus is very, very hard. And it's one where the playbook was never written in our industry.

I also would say that when you think about the COVID revenue cliff of $700 million, which for the overall company is somewhat 15% of the revenues, right? So, when you think that really those revenues were concentrated in a couple of locations, you can understand that the percentage of change at those locations is well above that.

And so, is the disruption. So, this is about retraining people, changing over lines for different formats, moving the products from one asset to another asset from one suite to another suite, doing [work transfer] [ph], doing technical work to get new products online. So, the level of complexity is very, very high.

And this is one where surely, the amount of challenges we could be facing was not well understood. And again, this is not an excuse, but this is a very unique situation in our industry, which was never done before, and I hope never repeats..

Got it. Very helpful. Thank you. And then just following up, I don't think you've talked about the tech transfers today. Last quarter 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..

Yes. Sure. So look, the ramp, once some of the last hurdles also, the stability and validation and others are to be pretty steepened. And surely, the some of those products are in very high demand end markets. So, I mean the body language receiving from our customers is that they're going to take whatever we can make.

So, is going to be more depending on our ability to fully operationalize and being very productive by level of efficiency, level of uptime and throughput rather than the demand constraining us..

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?.

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

Got it. Thank you..

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

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?.

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

Got it. Appreciate that. And then just some follow-ups here on gene therapies. Can you remind us how many customers you're currently serving there? And then 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?.

Yes. Look, number one, we don't provide significant numbers of customers that we have or whatever. Clearly, because of the size and the attention on Sarepta specifically, we – and the level of disclosure that we have to do, they have to do, this is a unique situation, but we are pretty conservative.

And to be honest, we’re respectful – our customers in disclosing those type of information, which normally we cannot disclose also because of our contractual terms with them. I would tell you that the pipeline is healthy. We have a number of programs.

We also believe that the fact that we are serving a large near commercial program is, I think as a catalyst for our facility, which is commercially approved. And so, this is a business that is, again, set aside some of the ramp-up challenges that we have experienced is a business that we are pretty happy with the performance and the pipeline.

And it's also the dynamics of the market. And there's surely some events in the future can act as a further catalyst of optimism here. So, in terms of the number of suites, look, we have a lot of capacity there. It's a large site. It's one of the largest of the world. We keep expanding it.

So, we don't believe that capacity is going to be our problem there. We are building enough runway for key programs to grow and to even grow further as we look into the future of this space..

And if I could sneak in one more here at the end.

I'm just not sure if I heard it, but are you confirming still that 6.5 billion of capacity number? And would you be able to provide what are the assumptions on utilization there?.

Yes. Look, again, I say for my previous comment, is up to characterize that as painting everything with the same brush, so to speak, because it's very different at any point in time.

I believe that 75% is a fair assumption, is somewhat to the sweet spot of our industry, right? So, where you have enough utilization to drive the margin and cash flow and you have enough flexibility to absorb the peaks of demand, so this is what we plan for and this is what you should be assuming in terms of our target utilization across the board.

And clearly, this will be an average of [indiscernible]..

Great. Thanks for taking the questions..

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

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

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