Avid Bioservices, Inc. (NASDAQ:CDMO) Q2 2023 Earnings Call Transcript

Avid Bioservices, Inc. (NASDAQ:CDMO) Q2 2023 Earnings Call Transcript December 6, 2022

Operator: Good day, ladies and gentlemen. And welcome to the Avid Bioservices Second Quarter Fiscal 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call maybe recorded. I would now like to hand the conference over to Tim Brons of Avid’s Investor Relations group. Please go ahead.

Tim Brons: Thank you. Good afternoon and thank you for joining us. On today’s call, we have Nick Green, President and CEO; Dan Hart, Chief Financial Officer; and Matt Kwietniak, Avid’s Chief Commercial Officer. Today, we will be providing an overview of Avid Bioservices contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended October 31, 2022. After our prepared remarks, we will welcome your questions. Before we begin, I’d like to caution that comments made during this conference call today, December 6, 2022, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the current belief of the Company, which involves a number of assumptions, risks and uncertainties.

Actual results could differ from these statements and the Company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the Company’s filings with the Securities and Exchange Commission, concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations on our corporate website at avidbio.com. With that, I will turn the call over to Nick Green, Avid’s President and CEO.

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Nick Green: Thank you, Tim. And thank you to everyone participating today via webcast. Based on the Company’s performance during the first six months, we anticipate that fiscal 2023 will be another strong year for Avid. During the second quarter, the Company recorded record revenues for any Q2 period, reflecting increases in both, process development and manufacturing work. On the new business front, we signed multiple new customer agreements with both existing and new customers, contributing to our strong backlog. With respect to the Company’s facilities, we continue to make progress with our expansions, and at the same time successfully concluding both our Franklin and Myford annual shutdowns. We remain on track to have the Myford expansion complete by the end of quarter one calendar 2023.

We also expect the new cell and gene therapy facility to come on line mid-calendar 2023. And finally, to manage our growing business and capabilities, during the period, we added significant talent across a broad range of functions, along with some notable additions to the senior management team in operations, process development, and human resources. Matt and I will provide additional details on business developments and operations for the period following an overview of our second quarter on first six months of fiscal 2023 financial results. And for that, I’ll turn the call over to Dan.

Dan Hart: Thank you, Nick. Before I begin, in addition to the brief financial overview I’ll provide on the call today, additional details on our financial results are included in our press release issued prior to this call and in our Form 10-Q, which was filed today with the SEC. I’ll now provide an overview of our financial results from operations for the quarter and first six months ended October 31, 2022. Revenues for the second quarter of fiscal €˜23 were $34.8 million, representing a 33% increase compared to $26.1 million recorded in the prior year period. For the first six months of fiscal €˜23, revenues were $71.4 million, a 26% increase compared to $56.9 million in the prior year period. For both the quarter and the year-to-date periods, the increase in revenues can primarily be attributed to increases in process development and manufacturing revenues as compared to the prior year periods.

Notably, our second quarter process development revenues were at an all-time high, representing a year-over-year increase of 74%. Gross margin for the second quarter of fiscal €˜23 was 12% compared to a gross margin of 35% for the second quarter of fiscal €˜22. Gross margin for the first six months of fiscal €˜23 was 19%, compared to a gross margin of 36% for the same period during fiscal €˜22. For both the quarter and six-month periods, the decreases in gross margins were primarily due to increases in costs associated with our growth of our business and our facility expansions. The primary drivers of these costs were increases in labor, overhead and depreciation, which accounted for incremental decreases in margins of approximately 11% and 9% for the quarter and six-month periods, respectively, split roughly 50-50 between our mammalian, and cell and gene therapy operations.

It is also important to note that the prior year’s gross margins included benefits from unutilized capacity fees. Excluding all of these factors, our second quarter and year-to-date gross margins were in line with the same period the prior year. We expect the expansion related costs incurred to date will continue to affect near term margins, and the coming quarters we foresee incrementally incurring additional expansion related costs in line with anticipated growth. Total SG&A expenses for the second quarter of fiscal €˜23 were $6.8 million, an increase of 36% compared to $5 million recorded in the second quarter of fiscal €˜22. SG&A expenses for the first six months of fiscal €˜23 were $13.2 million, an increase of 39% compared to $9.5 million recorded in the prior year period.

The increases in SG&A for both the quarter and year-to-date periods were primarily due to increases in compensation and benefits related costs, legal, accounting, and other professional fees. For the second quarter of fiscal €˜23, the Company recorded a net loss of $1.2 million or $0.02 per basic and diluted share as compared to a net income of $3.5 million or $0.06 per basic and diluted share for the second quarter of fiscal €˜22. For the first six months of fiscal €˜23, the Company recorded net income of $400,000 or $0.01 per basic and diluted share, as compared to net income of $9.8 million or $0.16 and $0.15 per basic and diluted share respectively, during the prior year period. For the second quarter and the first six months of fiscal €˜23, the Company achieved an adjusted EBITDA of $1.9 million and $8.1 million, respectively.

Our cash and cash equivalents on October 31, 2022 were $77.3 million compared to $126.2 million on April 30, 2022. This concludes my financial overview. I’ll now turn the call over to Matt for an update on commercial activities during the quarter.

Matt Kwietniak: Thanks, Dan. The second quarter was both, busy and productive. We continued to see strong demand in the marketplace for Avid’s current offerings as well as interest in the cell and gene therapy capabilities on line and coming on line in the near term. Our expanded team continues to build visibility within the industry, regularly interfacing with potential as well as existing customers. We’ve seen an increase in client interaction through face-to-face meetings, as well as through our increased presence at trade show conferences. As a result, we continue to add to our client base, our new business pipeline continues to be strong, and our proposal values and other leading indicators continue to develop in a very positive manner.

During the second quarter, our team signed $26 million in net new project orders, bringing the total new business for the first six months of this fiscal year to $67 million. Our backlog at the end of the quarter was $147 million, representing a 23% increase compared to the backlog of $120 million at the end of the second quarter of fiscal €˜22. We expect to recognize the majority of our current backlog over the next 12 months. We are already starting to see the impact of the investments made earlier this year in our commercial team as it relates to the leading indicators we measure internally. We anticipate these opportunities converting into backlog as we bring on our new capacity and capabilities. Looking ahead, we believe that the momentum generated during the first half of this year will continue, and the team is ready to embrace the challenge and looking forward to a successful second half of the year.

This concludes my overview of commercial activities. I will now turn the call back over to Nick for an update on operations and other achievements during the period.

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Nick Green: Thanks, Matt. I am pleased to report that our team continues to execute according to plan. Our business development team continues to fill our project pipeline on top of a significant year-over-year revenue growth. Our manufacturing team continues to produce and deliver on time while employing the highest quality standards. Our facilities and capabilities expansions remain on track, and we continue to invest in the talent required to ensure success across the business. This consistent execution has strengthened and expanded our customer base and significantly improved the Company’s financial position as compared to prior years. This is perhaps most evident through our revenue growth. In the first six months of fiscal 2023, our revenues of $71.4 million represented 26% increase compared to the same prior year period.

It is very important to note that this growth is not simply a result of expanding the Company’s core manufacturing business. During the second quarter, we had particularly strong revenues from process development services. Specifically, revenues from PD during the second quarter of 2023 exceeded PD revenues from the first quarter by 37%, and exceeded our prior high PD revenue mark by 23%. This is particularly encouraging as PD is where the majority of new customers and new projects are on-boarded. And it bodes well for the future growth of the business as a whole and validates our decision to invest in further expansions of both, capacity and capabilities in this key element of our business. As we look forward to the new calendar year and the new capacity we have coming on line, we are excited to report that our recruitment staff required to operate these facilities is progressing well.

Our assets require high-quality, well-trained individuals and in many cases, these must be brought in and trained ahead of time. As we forecast, these investments have impacted and will continue to impact our margins in the short-term. This investment in personnel is essential to meet anticipated customer demand. What is particularly gratifying is as we have been making these investments, we have seen continued growth and the growing interest in Avid’s offerings, further validating the decision taken almost two years ago to move ahead with Phase 2 of our expansions. With the expansions progressing to plan and coming on line at the end of Q1 2023, we will be in a great position to start to consume this capacity. And at this stage, we look forward to seeing positive margin development towards our longer term targets.

During the second quarter, we continued to make progress with our cell and gene therapy expansion. As we announced during quarter one, we have already launched the analytical and process development capabilities for this business, which has allowed us to escalate our dialogue with prospective new customers. We are pleased to report that our first customer is already onboarding in this facility. With respect to the GMP suites for our cell and gene therapy business, construction continues on schedule and we expect them to be completed by mid-calendar 2023. Based on discussions with prospective customers, we believe this timing will align well with our customers’ needs to advance early projects into GMP suites. Likewise, our mammalian cell business capacity expansion is progressing according to plan.

During the first quarter, much of the downstream equipment was positioned in the facility and validation of this equipment was initiated. During quarter two, we installed the upstream equipment. And as we stand today, the facility is mechanically and largely complete and validation is well underway as we remain on schedule for release to operations during quarter one calendar 2023. And finally, expansion of our process development capacity is also well underway. As we announced during quarter one, this PD capacity will provide additional space to onboard future customers, ultimately seeking to utilize the new manufacturing capacity. I am pleased to report that we remain on-track to have all the current mammalian expansions complete by the end of quarter one calendar 2023.

During the quarter, we successfully completed both annual shutdowns in Myford and Franklin alike. It is also worthwhile noting that our shutdown this year was extended slightly to accommodate tie-ins of certain services on the new central utilities plants. It is an incredibly busy time at Avid. The Company is transforming, expanding and growing. And in order to manage this transformation, we recognize the need to bring on expertise and experience to manage and lead our growing workforce. As you have seen during the quarter, we have continued to strengthen our management team. In September, Avid promoted Michael Alston Jr. to the position of Vice President of Operations. Mr. Alston was promoted from Avid’s Director of Project Engineering, a role in which he led all of the Company’s ongoing facility expansions.

Mr. Alston has more than 15 years of experience, starting operational and capital management responsibilities, supporting GMP manufacturing, facilities engineering, and environmental health and safety functions. Oksana Lukash also joined Avid as Vice President People. Mr. Lukash has more than 20 years of human resource experience with both established and entrepreneurial organizations across a range of industries. Prior to joining Avid, Ms. Lukash served as Vice President People & Culture at Oncocyte Corporation, a precision diagnostics company. In closing, I wish to again highlight our accomplishments in the first half of fiscal 2023. Our top line revenues remain strong. Our backlog is substantial and has grown 23% year-over-year. And given the demand we continue to see in the market, we expect it to continue to grow.

As we approach full utilization of our current capacity and with additional capacity and services soon to come on line, we expect this momentum to continue. For all of these reasons, I am pleased to report that Avid is increasing its revenue guidance for the full fiscal year 2023 from between $140 million to $145 million to between $145 million and $150 million. This concludes my prepared remarks for today, and we can now open the call for questions. Operator?

Q&A Session

Operator: Thank you. Our first question comes from Sean Dodge with RBC Capital Markets. You may proceed.

Sean Dodge: Yes. Thanks. Good afternoon. Maybe just starting with the macro backdrop, there continues to be a lot of concern around biotech funding, the extent to which that’s affecting demand, just kind of broadly. Nick, it sounds like client interest continues to be strong, but the $26 million, you signed a new business in the quarter, is lower than it had been running at. So I guess, is there anything notable you can share there around — are you seeing a change in behavior, body language around spending, anything around delays and placing new work, reprioritizations, et cetera? Is this just new business wins can be lumpy quarter-to-quarter and this doesn’t necessarily represent a trend or a theme?

Nick Green: Yes. Hi Sean. And I think, the latter point is really the overall overarching comment that I would make is that it is about the lumpiness quarter-to-quarter. We’ve talked about this before in terms of sometimes people will sign just before the quarter end, which is always great and some people will sign just afterwards, which is not so great when it comes to reporting quarterly numbers. But, if you look at the — if we look at the sort of backdrop behind that, we’re very happy with the amount of interest and the demand that’s for — at least for Avid services that we see in the marketplace. General trends in the marketplace, do we see some of the smaller players who are more cash strap than others maybe doing a little bit more navel-gazing and taking a little longer.

I think that’s probably the case. Sometimes it’s always difficult to determine whether that’s a macro impact as we only see a relatively small subset of everybody. But overall in general, we wouldn’t be raising guidance and — if we weren’t seeing continued strong demand. And I would highlight that we saw the same thing in the last quarter — the same quarter last year as we did in this one. It was a little lower, but not — it again was no — there was no general inference of the strength of the market as we see. So, we remain optimistic as far as the interest in Avid.

Sean Dodge: Okay, great. And then, Dan, just on margins and trajectory over the next several quarters, I guess the question is, are we pretty much at the bottom here? You talked about Myford Phase 2 set to open very soon and the weight that the growth related investments are adding to margins. As those facilities open and become revenue producing, I guess, should the trajectory of margins, the direction of margins from here be upward?

Dan Hart: Hey, Sean. Thanks for the questions. Good questions. As far as looking forward, I’m still confident that we will see incremental margins as we start to fill new capacity and start to absorb some of the costs that we brought on. We’ve invested aggressively through the second quarter in getting the folks in place and some other operational cost for the expansions and the standing up of the cell and gene therapy business. Going forward on the cost side, we plan to make some further investment, we’re going to — but we’re going to make that investment in line with the anticipated growth. So essentially, as we start to roll out the new capacity and start to fill that new capacity, we should be able to continue to move towards incremental margins and ultimately get to that margin goal that we’ve discussed in the past.

Sean Dodge: Okay. Great. Thanks. Thank you again for taking the questions.

Nick Green: Thanks, Sean.

Operator: Thank you. One moment for questions. Our next question comes from Matt Hewitt with Craig-Hallum Capital Group. You may proceed.

Matt Hewitt: Good afternoon. Thank you for taking the questions and congratulations on the progress on building out the new capacity. Maybe the first one for me, as you talk to customers — well, I guess let’s back up. You made a comment in response to one of the prior questions about some orders coming in late in the quarter, some coming in right after the quarter’s closed. Can you talk about, has anything closed already this quarter?

Matt Kwietniak: Matt, I can’t really talk about the next quarter, as we just concluded this — the prior quarter. But, again, just going back, we’ve raised guidance. We’ve obviously brought in the labor ahead of the capacity coming on line for a reason. We remain very optimistic regarding the interest in the business that we see. And again, we see lumpy quarters that we’ve had them in the past. We have some lumpy good ones, and we have some lumpy not so good ones. It’s not a trajectory of the overall business, which I think is pretty clear.

Matt Hewitt: Got it. Thank you for that. And then maybe one of your peers had talked a little bit about not just kind of delays or dragging of the feet and signing new contracts, but even on the payment side. Now looking at your DSOs for the quarter, I think I’ve come up with 54 for the DSO here in Q2. But are you seeing any of that from customers or are payments coming in as you would anticipate?

Dan Hart: From our side, Matt, payments continue to come in as we would anticipate. I do see some more conversation than we’ve had in the past. But, as you can see with the DSO dropping, I think it’s approximately 20 days or so from the prior quarter. People are still paying.

Matt Hewitt: Fantastic. And then maybe one last one and then I’ll hop back in the queue. But, as far as your conversations with customers, both existing and new customers, as they look at this new capacity and the timelines for those to come on, are you hearing from those prospects some excitement that, hey, this is going to work out perfectly with our internal timelines? Is anybody pushing you to maybe try and get something done a little bit faster? I guess, just what are you hearing from your customers? Thank you.