Reserve Petroleum Q4 2023 Earnings Call Transcript

There are 12 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Catalans Incorporation 4th Quarter Fiscal Year 2023 Earnings Conference Call. My name is Glenn. I'll be the operator of today's call. At this time, all participants will be in listen only mode. I will now hand you over to host, Paul Suttas, Vice President of Investor Relations to begin.

Operator

Paul?

Speaker 1

Good morning, everyone, and thank you for joining us today to review Catalon's Q4 2023 financial results. Joining me on the call are John Greisch, Executive Chair of the Board Alessandro Miceli, President and Chief Executive Officer and Matti Masanovich, Senior Vice President and 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 of the supplemental presentation available on our Investor Relations website at investor.

Speaker 1

Caddoant.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 Slides 34 for a discussion of Catalent's use of non GAAP financial measures. Please also refer to Catalent's fiscal 2022 Form 10 ksA and 3rd quarter fiscal 2023 Form 10 Q 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 John Greich for some brief opening remarks, which are covered on Slide 5. Thank you, Paul. Good morning and thank you for joining us.

Speaker 1

As I'm sure you have seen by now, we issued 2 press releases this morning. Our preliminary 4th quarter earnings release and a release announcing several initiatives reflecting our ongoing commitment to strong corporate governance and shareholder value creation, including the appointment of 4 new independent directors to the Board, 2 of whom were nominated by Elliot. The new directors are as follows: Stephen Bard, Global Head of Engagement at Elliott Management, one of Catalent's largest shareholders Michelle Ryan, former Treasurer at Johnson and Johnson Frank D'Amelio, recently retired Chief Financial Officer of Pfizer and Stephanie Oakey, former Senior Vice President and Head of North America Rare Diseases and U. S. General Manager Rare Diseases at Genzyme.

Speaker 1

We've 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 ks 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.

Speaker 1

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.

Speaker 1

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're 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.

Speaker 2

Thanks, John. My opening remarks will relate to Slide 6 of our presentation. As we said in May, this fiscal year was very disappointing, largely as a result of the COVID revenue and operational clips we have discussed. Additionally, as we previously explained and as our peers have also more recently disclosed, The pharma services industry is facing a macro driven pressure, primarily from the effects of lower biotech funding, Slower and more cautious decision making by customers and lackluster consumer discretionary spend. We are acting urgently to mitigate all these impacts, reducing costs at underutilized facilities, bolstering our commercial efforts to accelerate new business wins and slowing our capital deployment in affected areas.

Speaker 2

We're also making progress on the operational improvements in our Biologics segment that we outlined for you in the spring. From this perspective, we see fiscal 2023 as a year of transition and fiscal 2024 as a year of improvement that will create the foundation for long term sustainable value creation. I will spend my opening remarks reviewing our strategic, operational and financial progress. First, we have the right strategy in place to achieve the performance levels you expect from Covalent. This includes continuing to change our leadership team by bringing new strengths, skills and fresh perspectives to bear To ensure we have the industry best talent on our management team, in June, we appointed Mehdi Masanovich as our new Chief Financial Officer.

Speaker 2

Mehdi is a proven finance leader with deep experience growing and driving the profitability at public Global Manufacturing Companies. He most recently served as a Chief Financial Officer of Tenneco Automotive until it was acquired by Apollo. Previously, he was the Chief Financial Officer at Superior Industry International and General Cable Corporation. It's great to have the benefits of Mali's fresh perspectives at Kaverant and to have Mali join us on this call. John and I also want to thank Ricky Opson for In addition, in August, we announced the appointment of Liza Volley as our new Chief Human Resources Officer.

Speaker 2

Liza joins Katarim from Integra Life Sciences, a global medical technology company. Lisa has more than 25 years of experience, achieving organizational results, building robust talent pipelines and creating an inclusive and engaged workforce for a variety of multinational public companies. As you can see, we are putting a profound emphasis on assuring we are recruiting and retaining the top talent at Calvert and making great progress on rounding out our core leadership team, including my top priority, which is to fill the Biologics President role, a search which is nearing completion. 2nd, our operational performance as a whole has shown improved trends over the last few months. While we see meaningful evidence of that the 4th quarter will be a bottom for our Biologics performance, More work and time will be needed to return to our previous margin levels.

Speaker 2

Our goal remains to exit fiscal 2024 with the company wide operating margins closer to our historical levels. Encouragingly, operational improvement has been particularly evident in our gene therapy offerings. As previously discussed, the startup phase of our ERP implementation caused underutilization at PWI in the beginning of Q4. As we expected, this challenge has led revenues at the site to Deep in the Q4 from the Q3. However, as a result of our focus on rapid operational improvement, Productivity levels at the site are in line with our high standards and revenue at the BWI is growing sequentially into the Q1 of fiscal 2024.

Speaker 2

Speaking of gene therapy, we could not be prouder All our gene therapy teams bought the tower manufacturing center of excellence in Maryland as well as the tower packaging facility in Philadelphia As they closely partner with our customer, Sarepta Therapeutics, to deliver the 1st commercial dose of its Duchenne muscular dystrophy gene therapy to a 5 year old patient that was a day away from turning 6 and aging out of the program. This outcome is a perfect example of our patient first mindset We are thankful to Doug Ingram, Sarepta's CEO, for visiting our manufacturing team this month to celebrate this important patient milestone with our employees. At Brussels and Bloomington, We've also seen some progress in our operational execution. Of the two sites, Brussels has been trending better With this outlook getting closer to historical levels. At the Bloomington, our customer received a complete response line set in June related to an FDA inspection that occurred in May and was still open at the time of the PDUFA date.

Speaker 2

We work closely with both the customer and the FDA to bring the inspection to closure as quickly as possible And we are pleased that the FDA recently approved the customer's product as well as another product produced on the same line. Aside from the specific issues at Brussels and Bloomington, Our values always put the patient first. And this was evident in the Bloomington over the summer, where we prioritized everything needed to bring the FDA inspection that occurred in May to a successful closure. While these activities had some impact on our anticipated productivity improvements at the site and led to increased costs in the Q1 of fiscal 2024, There were the right move for Calyvant, for our customers and our patients, given they led to extremely rapid and positive outcomes for our customers' products. We continue to expect complete the tech transfer activities related to large programs at Bloomington during fiscal 2024 and enter fiscal 2025 with the more normalized margins.

Speaker 2

Catalent's overall inspection track record remains as strong as ever with the 14 Successful regulatory inspections in the last few months, including an FDA inspection at our Serral Field finished facility in Nanania, Italy that resulted in 0 observation and no Form 483. Our Pharma and Consumer Health segment is expected to grow revenue in the mid to high single digits in fiscal 2024. Product approvals, including a dozen of new approvals since January, are expected to contribute to year on year growth. In addition, supply chain issues related to one of our top products have recently been resolved and new production orders are underway. Finally, our Consumer Health business, which fell short of expectation in fiscal 2023 has been leveling out.

Speaker 2

From a financial perspective, Despite our assumption of a significant incremental COVID reduction and previously mentioned continued the biotech funding softness, We see a resilient top line for the fiscal year, including double digits non COVID Revenue growth. While we are pleased with our top line momentum, our utmost focus will be on improving our EBITDA margin, financial forecasting and cash flow generation, which will lead to enhanced shareholder value creation. For example, We previously announced 2 separate cost reduction plans during fiscal 2023 and we already realized approximately $40,000,000 of cost savings in the back half of fiscal twenty twenty three. We expect a total of over $100,000,000 in incremental savings in fiscal 2024 as the effects of our plan continue to bear fruit. When completed, the annualized run rate savings from these plans are expected to be in the range of $150,000,000 to $170,000,000 We also embedded the mechanisms in the company, including our lean program called the Catherine Way, designed to deliver better operational consistency, increased level of utilization, reduced waste and greater efficiency.

Speaker 2

We'll keep you appraised on our progress regarding announced savings plan and new cost initiatives in the coming quarters. Turning back to the overall Biologics segment. As you will recall from June, we disclosed that our Biologics margins were being impacted by significant investments with that we made at our facilities operating in new modalities, including cell therapies and plasmids just before the start of the period of reduced biotech funding. While we continue to believe all of these assets will create Great value with time for innovator and patients as well as the shareholders, our prior expectation for high growth related to these assets in fiscal 2023 did not materialize. As a result, these facilities are now experiencing a lower level of utilization and are running below breakeven levels leading to a decrease of several 100 points in the EBITDA margin of our Biologics segment We continue to actively address all aspects of this imbalance to maximize our ability to effectively leverage These assets and deliver value to all stakeholders in the near term.

Speaker 2

Most importantly, Our advanced capabilities continue to garner substantial commercial interest, positioning the company for long term Sustainable growth. As a result, once utilization normalizes, we continue to expect the Biologics segment to return to its historical EBITDA margin. Regarding our forecasting process, We have been working hard to improve our rigor and discipline, including embedding the greater conservatism in our future assumptions. More work remains, but under Mehdi's guidance, we are implementing plans to strengthen our forecasting and internal control processes. Given the extensive footprint we have built over the last several years and our focus on improving our margins.

Speaker 2

We're also reducing our CapEx in fiscal 2024 to around 8% to 10% of sales And we expect to maintain this lower level of CapEx intensity over the coming years as we grow into our existing footprint. With that, I would like to close by saying that our Board, management team and I While striving to create value for all of our stakeholders, we are taking the decisive actions to bring our operational performance consistently to levels we achieved across the company prior to the pandemic. Finally, as John mentioned earlier, I look forward to working more closely with him as an Executive Chair I want to welcome to our Board the 4 new members announced today. I am looking forward to working with them as well as Elliott to drive long term shareholder value for our investors. I continue to have the utmost confidence and optimism in the Catalent's leading market position, long term opportunities and growth prospects as the industry's essential partner.

Speaker 2

We know what needs to be done to deliver the level of financial performance that we all expect and we are doing so. I will now turn it to Mali for a discussion of our Q4 financial results and the details of our fiscal 2024 guidance.

Speaker 1

Thank you, Alessandro. I'm 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 1st 2 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 7.

Speaker 1

Net revenue in the quarter was $1,100,000,000 down 17% both on a reported basis and on a constant currency basis compared to the prior 4th quarter. Mergers and acquisitions had minimal impact on our results. Our 4th quarter adjusted EBITDA decreased 61 percent to $139,000,000 or a margin of 13% versus a margin of 27.8% in the prior year quarter. On an organic constant currency basis, Our 4th quarter adjusted EBITDA declined 65% compared to the Q4 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.

Speaker 1

Adjusted net income was $16,000,000 or $0.09 per diluted share compared to adjusted income of $195,000,000 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 $85,000,000 on an after tax basis. These non cash impairments couple of 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, UK.

Speaker 1

Now let's discuss our segment performance. Our commentary around our segment growth will be in constant currency. As shown on Slide 8, 4th quarter net revenue in our Biologics segment was $406,000,000 a decrease of $239,000,000 or 37% compared to the prior 4th quarter. The decline is primarily driven by significantly lower year on year COVID demand. 4th quarter COVID revenue declined approximately $180,000,000 to approximately $65,000,000 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.

Speaker 1

On a non COVID basis, Biologics revenue in the 4th quarter declined 16% versus the Q4 of 2022. In the Q4, 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 1st 3 quarters of fiscal 2023, In the Q4, gene therapy revenue was down over the prior Q4. This was in line with our expectations and the result of production issues outlined on our Q3 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 The large drop in development revenue in the 4th quarter has 2 primary drivers.

Speaker 1

1st, Year on year decline in COVID revenue that has been designated as development revenue and second, a large Gene Therapy product, whose revenue was treated as development revenue a year ago and is now treated as commercial revenue. When looking at the full year for Biologics, COVID related revenue declined over 50% from $1,300,000,000 in fiscal 2022 to approximately $625,000,000 in fiscal 2023. Non COVID Biologics revenue increased by approximately 12% across the full year. Moving to EBITDA. The Biologics segment 4th quarter EBITDA was down $206,000,000 to a loss of $12,000,000 Margin was negative at 2.9% compared to the positive 30% recorded in the prior 4th quarter.

Speaker 1

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 9, the Pharma and Consumer Health segment generated net revenue of $662,000,000 an increase of $19,000,000 or 3% compared to the prior year Q4. With segment EBITDA of $187,000,000 down $11,000,000 or a 6% decline over the same period. The segment's revenue growth was primarily driven by the October 2022 acquisition of Metrix, which contributed 4 points to the segment's top line growth and 5 points to the change in adjusted EBITDA.

Speaker 1

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 Q4. 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.

Speaker 1

Our nearest maturity is not until 2027. Our primary debt covenant is at a 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 3rd 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 calculated on an LTM basis.

Speaker 1

We expect this ratio to move higher, ultimately peaking

Speaker 2

at the end of

Speaker 1

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.

Speaker 1

These incremental opportunities include: First, working capital, which includes accounts receivable, inventory and contract assets at June 30 was over $2,000,000,000 We have a significant opportunity ahead of us to reduce working capital and drive free cash flow for the company. Our initial focus We'll be on reducing the accounts receivable balance of over $900,000,000 reducing our inventory balance of over $700,000,000 and reducing our contract asset balance of over $400,000,000 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. 2nd, 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 Balance with returning to a more normalized EBITDA margins should improve our overall net debt leverage.

Speaker 1

Our target for our overall net debt Leverage remained less than 3 times. Our combined balance of cash, cash equivalents and marketable securities as of June 30, 2023 was $280,000,000 an increase of $78,000,000 from March 31, 2023, before a $50,000,000 partial pay down 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 $436,000,000 a sequential decrease of $69,000,000 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.

Speaker 1

At June 30, we had one strategic customer, a majority of whose business relates To our gene therapy platform that represented 20 percent of our $1,400,000,000 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 4th quarter, but represented nearly 10% of our revenue for fiscal 2023 compared to approximately 5% in fiscal 2022. Finally, CapEx in fiscal 2023 was $601,000,000 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.

Speaker 1

We expect our 2024 net revenue in the range of $4,300,000,000 to $4,500,000,000 representing growth of 3% at the midpoint. This includes COVID revenue of approximately $130,000,000 a roughly $500,000,000 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.

Speaker 1

Current FX rates, which we use in this forecast, are forecasted to have a positive impact 1 to 2 percentage points on our revenue. We project that inorganic revenue, which reflects one remaining quarter of the Metrix acquisition will not have a meaningful effect. We expect adjusted EBITDA in the range of $680,000,000 to $760,000,000 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.

Speaker 1

We expect the margin for our Biologics segment to improve modestly as we move sequentially from our 2023 4th quarter to the Q1 of 2024 and progressively improved through the year with a more pronounced ramp in the second half. In addition, Given the historical its historically seasonal nature of our PCH business, our revenue and EBITDA generation is lightest in the 1st quarter and more weighted to the back half of the year, combined with our expected productivity ramps later in the year, we forecast roughly 2 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 twenty twenty four. We expect adjusted net income in the range from $113,000,000 to $175,000,000 Adjusted net income growth in fiscal 2024 is being impacted by all 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. 2nd, an increase in interest expense due to rising interest rates.

Speaker 1

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 had previously made. I'd now like to share an update regarding the status of our filing of our fiscal 2023 Form 10 ks. 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 ks. This will not allow enough time for all of our closing procedures to be completed today.

Speaker 1

Therefore, the completion of our financial statement closing processes and subsequent filing 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-twenty 5. Our team is working expeditiously to finish the 10 ks within the 15 day grace period permitted by the Form 12b-twenty 5 filing. We do not expect any change to the numbers we released today. We appreciate your patience.

Speaker 1

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'll now open up the call for questions.

Operator

Thank you. With our first question comes from Tijs Saban from Morgan Stanley. Tijs, your line is now open.

Speaker 3

Hey guys, good morning and thanks for the time here. Maybe Alessandro and Maddie, Can you just help us build a bridge from the $715,000,000 or so in 2023 EBITDA to $720,000,000 in 20 You called out COVID assumptions of about $130,000,000 But could you clarify the contribution from Sarepta that you're resuming at the midpoint here? Sounds like you're expecting very substantial growth there given your 30% non COVID biologics growth assumption. So any sort of color versus the 425,000,000 you generated this year would be great. Thank you.

Speaker 2

Hey, Tejas, Alessandro here. Thanks a lot for your question. Look, first of all, we are pleased here today to Be able to share our new guidance for fiscal 2024 in phase of well, as we disclosed a significant drop further drop in our COVID revenues, We're still seeing resilience in our top line. So that's something that is speaking to the underlying strength Our business, as we shared and as you're pointing out, some of that growth is related to our gene therapy business, which is Now running at full cylinders after the some of the challenges that we shared during the spring. So top line is pleasing us.

Speaker 2

It's also well balanced in H1 versus H2. As we shared during the spring in our Biologics business, there is still some work to do to restore previous margin. We are working expeditiously on addressing underutilization and some performance improvements. Some more time, the work is required in the first half of the year, but we are confident that restoring sequentially our margins over the quarter. So I will turn it now to Matti to give you a little bit more granularity on the bridge.

Speaker 1

Yes. So you asked about going from the $7.14 of EBITDA $23 to our I'll go to the midpoint or approximately midpoint, the $7.20 Obviously, as Alessandro pointed out in his comments and my comments, we're seeing COVID demand down year on year of approximately $500,000,000 and that has high margin profile attached to it and it leaves behind cost we have to action. So there I said it down or from an EBITDA perspective related to that down volume. We're replacing that down volume, as We mentioned with one of our largest customers in gene therapy should be up year on year. We talked about some one of our facilities that Alessandro mentioned It's doing better, which is Brussels, and some of the performance underlying Brussels is doing better as well as Bloomington during the quarter.

Speaker 1

So those are primarily the biggest pieces and we've got the biologics other piece, which is growing at a very rapid rate year over year. Got it. That's helpful. Maybe the last point

Speaker 2

I would add, also pointing you out to some of the one off impacts We recorded in the last fiscal year something that you should consider as you model this.

Speaker 3

Got it. Yes, 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 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?

Speaker 3

Or do these Anticipated working capital improvements and the cut in CapEx, etcetera, mean that you feel pretty confident that you wouldn't need to pull that lever?

Speaker 1

I want to go for Sean. Yes. This is John Greisch. I'll 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.

Speaker 1

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 1, improving our operational performance 2, strengthening the financial profile of company along the lines of some of Matti's comments around portfolio assessment and 3, maximizing the long term value for our shareholders. We've got our first meeting of the committee in September. We've obviously been doing a lot of work ahead of that anyway, And some of our Board appointments are part of that, the 2 nominated by Elliot as well as 2 emanated from a search that we had been conducting. So I think over the next few months, it's hard to put a specific timeline on it. I think it's going to come down to Alessandro's Proposals that he and the management team will bring to the committee and to the Board.

Speaker 1

But certainly by our next earnings call, we should have some traction to speak to you about. And We're 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. Yes. And then just to answer The backside of your question, I think right now sitting here today, we've got ample liquidity to manage the affairs of the company between cash and revolver availability. We also have what I would call a significant and unique opportunity to sustainably take down the working capital intensity and the CapEx intensity of the company, which we're looking at for the year.

Speaker 1

And so and then with the return on profitability in the back half of the year, on the operational improvements that we'll make, I don't necessarily believe it's an issue to go after from a capital and or a debt raise.

Speaker 3

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

Operator

Thank you. With our next question comes from David Binney from Jefferies. David, your line is now open.

Speaker 4

Hi, thanks. I'll start with the first question. Just a slight follow-up to Tejas with 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 timeframe Would you put on that?

Speaker 1

Yes. It's hard to put a pinpoint timeline on Coming out with conclusions or recommendations from the committee to the Board. So I hesitate to put a specific timeline on it. I'd just reiterate what we said in our prepared comments. Working with Elliot with a sense of urgency, working between Alessandra and his And the Board really to drive the things that we spoke to assume we're going to be taking some actions Sooner rather than later, but to put a specific timeline on it, I think would be, I think, imprudent at this point in time.

Speaker 4

Okay. Thank you for that. For Alessandro and Maddie, Maddie congrats on the new seat. On guidance, you've commented both in prior calls and today about trying to improve The accuracy or the conservatism in your guidance, wanted to maybe understand practically how you're doing that, But maybe more specifically, to look at the PCH segment outlook and 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.

Speaker 4

And so I guess I would ask Kind of substantiate that the way you're going about guidance this time around is more conservative than the mistakes that were made

Speaker 2

in the past? Thanks. Yes. Look, I'll cover first probably the second part and leaning to the first part. Look, With regard to our PCH segment, you know that it's always hard to really understand trends, why you evaluate the business Primarily on a year or 2 year basis because again, we have a business that has a high level of concentration in So and the way you look at the performance of PCH into fiscal 2023 was sure below expectations, This is below what you expect from a business that should really grow in the mid single digits.

Speaker 2

So when you extend your Time of observation and time evaluation on a longer period, you would see that PCH is really growing in the middle of the range that we expect To grow, will you extend your evaluation on a 2 year horizon, keep in mind that in between that you also have Some inorganic contributions to the growth there. Speaking of some more specifics, as we pointed out in our prepared remarks, Some of the reasons why we were impacted PCH last year were delayed approval on some new programs And as such launches, Consumer Health, which on a year to year basis was really not performing as expected. And one key product, which has a significant impact on revenues and more so on profitability, which was impacted by our supply chain disruption and in reality didn't contribute to the story of last year. So all of these elements are a little bit returning back now. Consumer Health is stable, While the approvals have happened in the second half of last fiscal year, now we expect these launches to contribute.

Speaker 2

And finally, there is this product now is back on track and not only we need to satisfy the end car at the end Market demand, but we also need to restore safety stock levels, which of course will create a short term higher than normal demand for these Very asset. I would also add that underlining in the business, we still have a very good franchises like Zydis, which continues to on a high pass of growth. So overall across the board, there are elements to be optimistic and I would say that There is a lot of realism in how we're guiding at TCH for in the mid to high single digits, And we feel pretty good about that guidance. With regards to second part of your question, I'm going to give you a very brief Perspective for me that maybe it's more historical and I'm going to be the word, Mady, to elaborate more. Look, I believe that we've been surely learning a lot in the last 12 months, Sometimes learning the odd way, but we're learning a lot not only about how we should be thinking about COVID, but also how we should be thinking about the growth profile of some of these new modalities During this time period, both and we also have changed a little bit our internal mechanism Go after the forecast and to build the forecast from ground up.

Speaker 2

So I feel that these improvements have brought the right level of balance in our future forecast and as such, again, I feel confident about the guidance we are putting out today.

Speaker 1

Yes, 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 It'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 get after that get after those pockets of underutilization. So I think that's what's really driving it.

Speaker 4

Great. Thank you. It's helpful.

Speaker 1

Our next question stays from the line of Jacob Johnson of Stephens. Jacob, your line is open.

Speaker 5

Hey, thanks. Good morning. Maybe a question on Bloomington. I think from some recent headlines, it seems like there could be some new therapies ramping there this fiscal year. Could you just how should we think about utilization at Bloomington FY24 given the COVID roll off and then some of these new tech transfers?

Speaker 5

And then maybe kind of longer term with this kind of reset in COVID at Bloomington, how should we think about the long term growth opportunity and kind of self finish broadly?

Speaker 2

Look, Bloomington is a launchpad for many New Therapies, hands down, has always been, 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 PII work going on, there are a lot of launches, a lot Launches that are also requiring those inspections. Sometimes the timing is a challenging one. You need to work through these situations. We continue to be pleased about the pipeline.

Speaker 2

We have assets which are very heavily utilized that we've 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 happy not only of the pipeline, but also some of the franchises where we expect to play a major role, One of the biggest one being GLP-one. It's something that we've 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 We are a very dominant one in years to come.

Speaker 5

Got it. That's helpful. Thanks, Alessandra. And then I guess for the follow-up, maybe on the kind of these newer modalities, cell therapy and plasmids, this is an area of underutilization. The earlier stage assets and clearly a drag on your margin, but initially you're kind of thinking about the strategic review and cost initiatives And using these as a proxy for kind of near term profitability versus the long term strategy, how much are you willing to accept the near term drag on profitability from these assets, while maybe kind of looking to the long term growth opportunity from those end markets.

Speaker 5

I'm just kind of curious if you still view those as key to your strategy.

Speaker 2

Yes. 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 Sarah, please. And I have to say that the last few months have been exciting in these areas, right? So these are areas which we believe We'll 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 Significant player with a significant market share.

Speaker 2

That 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 slower start, partly due to funding, partly due to the industry figuring out manufacturing processes, which are positioning This therapy is 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 Calyrant. 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 are short term margin impacts as we go forward. But overall, I believe that we need to avoid to jeopardize the long term opportunities here.

Speaker 5

Makes sense. Thanks for taking the questions.

Operator

Thank you. Our next question comes from Jack Niam from Nephron Research. Jack, your line is now open.

Speaker 6

First question is on GLP-1s. I was wondering if you could elaborate more for investors frame out the opportunity you see here. And within your guidance, if these ramp as expected, You share what percentage of sales will they represent just from a concentration perspective?

Speaker 2

Well, look, first of all, the reason why I'm speaking about the GLP-1 category and not a necessary specific product is because as you know, as a company policy agreement with customers. We never really speak specifics of customers or products. I would tell you that overall, In fiscal 2024, we're going to start to see the fruits of the growth in this area, but even more so, we're going to see that in I believe and I do believe that the second half of fiscal twenty twenty four and surely to Fiscal 2025 is going to start to be an inflection point for this category as more assets will come to fruition to accelerate manufacturing and increase the volumes and output. So we're 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 Cadent.

Speaker 6

Great. And wanted to also ask about Vaterra. How did that perform within PCH in the quarter? Maybe for John, was wondering if you could comment on just as you do the strategic review, How you feel about kind of the long term contribution from this business or whether it's something you would consider potentially divesting?

Speaker 2

So look, I will take a little bit of the question and we'll let John to close it out. As we said, the consumer health market, as highlighted by 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's been 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 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 segments of the market, which was not present at the time of the acquisition. Of course, nothing happens overnight in our industry, so it will take some time.

Speaker 2

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 John mentioned, we are exploring all the potential strategic Options on 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.

Speaker 1

Just to add to Alessandro's Comments, albeit some of it may be repetitive. I think he and I are going to work with the committee. And just to be clear on the objectives of the committee To drive actions to improve operations, perform a strategic review of the company as well as the individual businesses, Portfolio assessment, as Alessandra just said, do we have all the pieces that we want, as well as Allocating capital among the portfolio individual businesses, all with the objective of driving long term shareholder value. I think it would be premature to comment on any specific business at this point in time. Clearly understand your question, but Give us some time to go through those activities and initiatives.

Speaker 1

And as I said earlier, we'll report back on the findings So Alessandro and I recommend to the committee and ultimately to the Board, but commenting on specific actions today, I think it'd just be premature.

Speaker 6

Understood. Thank you.

Operator

Thank you. With our next question comes from Sean Dodge from RBC Capital Markets. Sean, your line is now open.

Speaker 7

Yes. Thanks. Good morning. So maybe going back to the guidance one more time. The significant growth you're expecting from the gene therapy customer.

Speaker 7

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 for you all if that reads out good versus bad and how are you handicapping that for the purposes of the guidance?

Speaker 1

Any upside, none of that is included. So if it

Speaker 2

does get expanded, if it

Speaker 1

does get expanded, it's not included in the

Speaker 2

Look, that's been said. That's been 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, mentioning To be transparent to one specific customer, it doesn't mean that the relation we did that customer is all related to one program. And in fact, I'm 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 are a little bit earlier in the pipeline, but we are pretty pleased about that pipeline.

Speaker 7

Okay. That's good color there. And then on Bloomington and the challenges you've had there, can you talk about the changes you've made in terms of Personnel or oversight at that facility that give you confidence and maybe give clients confidence that Bloomington has turned a corner And you are on a path to restoring the kind of the consistency and operational excellence there?

Speaker 2

Sure. Look, first of all, I just want to give a shout to the Bloomington team because he'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 United States and the Board 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 on 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.

Speaker 2

And since the beginning of the year, as you We said we have made several changes both in our in the site leadership, we have a new general manager there as well as in several leadership position at the site and above the site, including our quality function. And we are Very pleased with the progress and sustainable progress is 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 customers' expectations And we continue to serve patients. So changes have happened, have been progressed over the last 3, 4 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.

Speaker 7

Okay. That's very helpful. Thanks again.

Operator

Thank you. Our next question comes from John Salveer from UBS. John, your line is now open.

Speaker 7

Good morning. Thanks for taking my question. Just maybe starting off your clarification. I guess just given the strategic review, I didn't hear A confirmation of that $6,500,000,000 of revenue capacity that was talked about in the fiscal 3Q update, are you confirming that number still?

Speaker 2

So look, when you think about where we need to put to the sweet spot of utilization of this company and where we're going to get the most of our Operating leverage and we believe that the range of utilization you want to achieve in this business is between 70% 80% of utilization across the board of your assets. You translate in what debt utilization in our current footprint can translate. It is EUR 6,500,000,000. Of course, this is predicated and 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 1, and I guarantee you, we're 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.

Speaker 7

Thanks. And just a follow-up here on the Frostblitz facility. Appreciate the color and prepared remarks on the improvements there. Just any additional details you can provide on time lines and Improvements and how you expect to get to maybe more of a normal productivity level there? Thank you.

Speaker 2

Well, look, we have seen a very good progress from that facility. So we are pleased with 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 of what we're doing there, and I believe that Brussels is on the right trajectory. And as we Go through the 1st part of the year, which is a little bit slower also because of preplanned vacations and shutdowns at these facilities and we look The second half of the year, we're going to continue to see progress and we're going to continue to see Brussels returning to output level first and then margin as a consequence.

Speaker 2

We need to remind ourselves that this facility, we have all the demand we want because we are still cashing up some of the demands coming from the previous periods. And we expect in the second half of the year this facility to really come back where it needs to be.

Speaker 1

Thanks for taking the questions.

Operator

Thank you. We have our next question comes from Justin Bauer from Deutsche Bank. Justin, your line is now open.

Speaker 8

Hi, good morning, everyone. In the prepared remarks, you mentioned about returning to historical margin levels in the Biologics segment and also about returning to 3x target leverage level. Can you Provide us a framework on order of magnitude and perhaps duration on reaching those milestones.

Speaker 2

Well, sure, Blok. 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 brown market, the brown product mix or the brown products is a function of the things that we have discussed in terms of underutilization of productive improvement. So there is a significant opportunity for us We continue to work on these programs and revenues and returning those revenues in contributing to the bottom line. Our leverage is very sensitive to the bottom line.

Speaker 2

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 What we expect it to be and as such that leverage will take care a little bit of itself. I also believe that Mehdi We'll be absolutely focused on our EUR 2,000,000,000 of working capital with all the initiatives that he has highlighted and Looking at the progresses that he has already accomplished in the last few weeks since he's joined, I'm 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 top line for less need of capital to be infused into the company to operate. So it's not a it's a pretty simple playbook, grow the EBITDA, you use working capital and improved cash flow.

Speaker 8

Okay. So just to clarify then, Should we think of normalized margins in terms of the pre pandemic margins in the Biologics segments? And then My other quick follow-up is just on the C19 revenue outlook, does that include other respiratory program revenue for that large customer as well?

Speaker 2

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, the equipments are the same And it's a pretty healthy space to be in. So we'll 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.

Speaker 2

It's more appropriate because we believe that these are less Pandemic slash pandemic related to EBITDA. And so the simple answer to your question is no.

Speaker 8

Got it. Thank you, Alessandro.

Operator

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

Speaker 9

Hi, good morning and thank you for taking my question. Just one really, just looking at the cost savings. I'm just sort of Interested in, I mean, have you done I assume you've done a systematic review of all your And look for potential other areas where there may need to be investment or remediation. How should we think about that 150, 170 number in respect to in terms of me, have you Is that a net number after you sort of look at all your facilities and what you might have to spend? Just basically just like what's your confidence in achieving that cost number?

Speaker 1

It's Matti. We're highly confident in getting to the cost savings number and the overall cost of that when we get to that from $25,000,000 to $150,000,000 to $70,000,000 of Alessandro outlined, which is the cumulative cost savings against the baseline. It's really got hard actions behind it. So if you think about what's Done at the company, it's headcount related, taking down significant numbers of heads, both in the corporate section as well as in Underutilized facilities. So we've got that.

Speaker 1

We do have more work to do. And as we talked about earlier, The strategic review committee will look at we'll be looking at capacity as well and utilization as well and we'll be looking we're taking it a step further. So there could be more there could be more to come.

Speaker 9

Sorry. And just one follow-up then on when

Speaker 10

you look at the cell

Speaker 9

and gene therapy demand, I mean, obviously, Big impact from early stage biotech. I think at one point, Catalent had said there's maybe like 150 programs you had ongoing and In sort of the cell and gene therapy area, sort of like how are you looking at that triaging that pipeline, looking at that pipeline longer term And basically sort of adjusting it for the health of the clients, basically just like what your basically your outlook in terms of the early stage for the cell and gene therapy business.

Speaker 2

Sure. Look, I don't believe that at this stage, it's one part of the equation. The other part of the equation As we continue to have good successes 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'll become and we are becoming also the partner of choice to take on assets, which maybe have been early stage elsewhere, And we're going to be able to be the partner of choice to transition them into commercialization. So more specifically, engaging also in the later clinical phases, which is in fact possible.

Speaker 2

So we believe that our market share in that specific Page is significant, but will become even more significant as a result of our track record. So Again, we believe that our growth in debt will be both coming from our continued focus on the commercial We need these early stage assets, which is a little bit of the nature of it, but also being very surgical and going after the opportunity in late stage as this pipeline matures and position ourselves as a partner of choice for commercial assets.

Speaker 9

Thank you.

Operator

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

Speaker 10

Great. Thanks for taking our questions. Just a couple of clarifying ones for me here, starting with GLP-1s. Alessandro, I believe I could have heard you wrong, but I believe you mentioned seeing significant assets were all coming to fruition in fiscal 2025 on the GLP-one I just wanted to try to clarify that. Are you expecting to be involved with another major GLP-one besides the one that has been well discussed here over the last year or so?

Speaker 2

So what I said is that look, the reality is that for TLTR-three-one, 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 that we are pleased that almost all our sterile, phen and phen facilities are some way In some way, in different ways, involved with these therapeutic area, which as I said, is one that will be very exciting for years to come. So We're happy about our role.

Speaker 2

Our role will increase as a result of additional capacity coming online and will be very much straight across the network.

Speaker 10

Understood. Thank you. And then on SRP-nine zero one, just confirming, Your guidance does not assume that the upcoming data readout from Sarepta is positive and that the label remains restricted to boys aged 4 to 5. I guess you mentioned that, I just want to confirm there. And then if that readout is positive, what has Sarepta told you about how manufacturing plans might change?

Speaker 10

Well, I guess put it another way, what level of certain growth is currently assumed in guidance? And what should that go to if the upcoming readout is positive? Thank you.

Speaker 2

Yes. 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 length of this process and how this process is really, If you like, whatever happens today is going to have an impact at the late in time.

Speaker 2

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're going to be observing it with a lot of attention.

Speaker 10

Understood. Thank you.

Operator

Thank you. Our next question comes from Rachel Van Den Stahl from JPMorgan. Rachel, your line is now open.

Speaker 11

Great. Good morning. Thank you for taking the questions and fitting me in here. I wanted to follow-up on David's earlier question around PCH to get some additional color on the to reach that mid single to high single digit growth next year. So you highlighted some of the supply chain issues that will be resolved and drive a tailwind paired with some of the new approvals.

Speaker 11

Can you walk us through what you're seeing from some of the macro headwinds that you've highlighted this year? And then what are you assuming for that magnitude and duration of those macro headwinds in 2024 for PCH?

Speaker 2

Sure. First of all, look, as we said all along, PCH As some macro driven dynamics primarily related to the consumer health, where Consumer discretionary spend is really what can drive end market demand that we've been pretty open and forthcoming about these 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 think you need to think about the dynamics in this 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.

Speaker 2

We have been open about how we were getting those approvals. A dozen of them did happen in the last six And as such, they are now launching that we are 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's important product.

Speaker 2

And as always happens in this case is after the 1 year of suspension, not only you serve the end market demand, but you also Double down on inventory rebuild, 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 2 years, it's really where it needs The mid 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.

Speaker 11

Great. That was really helpful. And then my follow-up, I just want to ask about conversations that you've been having with customers. So given some of the recent challenges, can you give us any color on what your win rates have been with new And then can you discuss, has there been any discussions around cancellations or requests for concessions from customers given some of those challenges? Thank you.

Speaker 2

Sure. Look, as you can I've been always pointing out that the data set of 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, on one side, you have a CRL, which makes it to the news and you have an inspection ending up with 483 observations, similar to how it doesn't lead 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, 1, the perspective is a little bit different and the set of information available is a little bit different.

Speaker 2

According to our quality agreements, we do share with our customers All our regulatory outcomes include both the ones that are impacting the products and the ones that are not impacting the products 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're going It's always transparent, providing perspective, but also reassuring customers that Catalent has been here for decades and will be here for decades to come.

Operator

Thank you. With our last question comes from Tim Daley from Wells Fargo. Tim, your line is now open.

Speaker 8

Great. Thank you. So first off, just wanted to follow-up on earlier answer to the last Today's many GLP-one questions. So Alessandro, I think you said that all your sterile facilities are involved in GLP-one projects in some way. So Could you just update us on the global count of sterile fill finish lines currently offering commercial scale?

Speaker 8

And what percent of those Pre filled syringe and or cartridge capacity?

Speaker 2

So look, I would tell you that at the moment, we have a pretty sizable capacity in sterile fill and finish. I believe at the moment, I would say that probably close to 40% of our capacity in pre sales ranges, And we are rapidly increasing that. So I believe that our capacity will become skewed towards prefilled syringes in calendar 2024. And what you should think about is that Most of our sterilefin and finish volumes will come from prefilled syringes as we go forward. I just would like to point you out also to the fact that our service does not finish with the Fielding operations, but we provide also packaging to our customer.

Speaker 2

We provide auto injector assembly to our customers. So there are a lot of corollary Capacities, which seems to be ancillaries, but are pretty relevant in the overall economics of these franchises, specifically also in the one that you did mention. So we have a pretty large footprint. We are pleased with what is coming online, what will becoming online and we believe that with the absolute pain, we're going to be able to play a major role in these therapeutic areas.

Speaker 8

Yes. No, that's really helpful. And then my second one here is on free cash flow generation efforts. Matti, you called out the inventory balance as the 2nd priority in working capital opportunities behind accounts receivables. So appreciate muted capacity utilization is likely inflating the balance here.

Speaker 8

But given supply chain and supplier lead times have normalized, Why haven't we seen inventories come down already and or why is that not higher in the pecking order in terms of working capital initiatives?

Speaker 1

Well, I mean, I think right now, I wouldn't say there maybe it was my phrasing of the ordering, but it is high on the pull. I think From a ease of getting the cash out, I think it's receivables. We've shipped the product. We have an outstanding receivable. We've got to go collect.

Speaker 1

It's a lot easier to go and get it just when it comes back comes in quicker. Inventory, you have to burn it off and you have to utilize it and burn it off and then change your ordering patterns And look at the SI and OP process to really get at what I'll call the DIOs and the underlying metric of DIOs and bring it down. So I do think there's a little bit more work to do from an inventory perspective. I do think the company just really hadn't focused on it to date As much as they should have. And I think when you sit here and look at the inventory balance, I think it's a bit bloated.

Speaker 1

I think that we have an opportunity to take it down, like I said, in burning those inventory balances and bring it down to a more normalized number where it's sustainable. And I think the idea here is to your point, the supply chain has leveled out. As I see it, I think it's more normalized. With some products currently, they're not clearly fixed, not clearly fixed. We also have stuff on boats.

Speaker 1

So we have to look at Full supply chain in totality, but I do believe there's substantial opportunity sitting here looking at the working capital in total. And I don't think there's going to be much. It's a different team that's going to Commercial team is going to be going after receivables and that manufacturing team and supply chain is going to be going after inventory.

Speaker 8

All right. Got it. Thanks for the time. Appreciate it.

Operator

Thank you. We have no further questions on the line. I will now hand back to Alessandro Marceli for closing remarks.

Speaker 2

Thank you. I'd like to thank everyone on the Catalent team for their commitment to our customers and patients as a showcase by the delivery in partnership with our customers, making an historical milestone in the promise of treating these terrible condition. We remain focused on the on leading covenant towards sustainable and profitable growth and increasing the shareholder value. And I believe that actions announced today have 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 Cadbury.

Earnings Conference Call
Reserve Petroleum Q4 2023
00:00 / 00:00