Thank you for standing by. I would like to welcome everyone to the Quarter Two 2023 Maravai LifeSciences' Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to Debra Hart. Deb, please go ahead.

Good afternoon, everyone. Thanks for joining us on our second quarter 2023 earnings call. Our press release and the slides that accompany today's call are posted on our website and are available at investors.maravai.com. As you can see on our agenda on Slide 2, joining me today are Trey Martin, our new CEO, Kevin Herde, Chief Financial Officer, and Carl Hull, Executive Chairman of the Board. Drew Burch, Executive Vice President and General Manager of our Nucleic Acid Products, and Becky Buzzeo, our Chief Commercial Officer, will join the call for the question-and-answer session following the prepared remarks. We remind you, management will make forward-looking statements and refer to GAAP and non-GAAP financial measures during today's call. It's possible that actual results could differ from management's expectations. We refer you to Slide 3 for more details on the forward-looking statements and our use of non-GAAP financial measures. Our just issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Maravai's SEC filings for additional information on the risks and uncertainties that may impact our operating results, performance and financial condition. Now I'll turn the call over to Carl.

Well, thank you, Deb, and good afternoon, everyone. We appreciate having you join us for our call today. During this call, we will provide the details of our financial results for the last quarter and our updated guidance. But first, I want to officially introduce and welcome Maravai's new CEO, Trey Martin, who took over his role on July 27. As many of you know, Trey is a seasoned global life sciences executive with highly relevant industry experience from his time at IDT and Danaher. He brings to Maravai an ideal mix of strategic, operational and scientific acumen, combined with an outstanding operational track record. Over the course of his career, he has built and led complex global operations and successfully integrated multiple acquisitions, experiences particularly well aligned to lead the execution of Maravai's long-term strategic growth plan. I have already seen firsthand that Trey is an excellent cultural fit at Maravai. He is a results-oriented leader with the ability to guide and motivate teams within a culture of high integrity and high performance. I know he is the right CEO to take Maravai through its next phase of innovation and growth. Before I turn it over to Trey, I want to share with each of you the observation that leading Maravai has been the single most rewarding experience in my career. I could not be more proud of what we have accomplished together. I extend my sincere thanks to our leadership team and to the dedicated employees across the world who enthusiastically serve our customers and their communities every day. I'm excited about the company's future, where we are going and what we can achieve together. I'm confident that we have the team, the talent and the technology needed to deliver on our long-term objectives. If you'll turn to Slide 5, I'll now ask Trey to introduce himself and share some early observations. Over time, we'll have many other opportunities to get to know him better. Trey?

Thank you, Carl. It's an honor and a privilege for me to become the CEO of Maravai at this important juncture for the company. I believe we have immense potential to deepen our connections with the scientific and biopharma communities and further serve our customers while elevating the company as the life science tools provider of choice. During my 29-year career in genomics, I've had the good fortune to participate in several overlapping waves of technology from qPCR to next-gen sequencing, from synthetic biology to CRISPR gene editing. What I see now with the opportunities in mRNA is a convergence of technologies and experience that also leverages the many recent learnings from the pandemic and is driving the rapid growth of the mRNA therapeutics field. I believe Maravai has a particularly strong position with our technologies, expertise and long history in mRNA, in the broad field of nucleic acid chemistry. I strongly believe that this conversion gives us a unique opportunity to move the needle for human health. This is a unique opportunity, and I'm excited to be leading the company at a time where we're focused on expanding the many growth opportunities in our base business and innovating to support the rapidly evolving needs of our mRNA, genomics, cell and gene therapy customers. It's been fantastic serving as the President of Biologics Safety Testing here at Maravai as it enabled me to focus deeper into that part of the business to work with the team, to help navigate the post-pandemic transition and to understand the future value levers for the business. I look forward to bringing the insights I gained over the past seven months to my new role as I transition to leave a full company and as we work to unlock the potential we have across Maravai.…

Thanks for the handoff, Trey, and good afternoon, everyone. As Trey mentioned, I will dive deeper into our Q2 and year-to-date financial results and discuss our updated outlook for 2023. Starting on Slide 14. As per our press release this afternoon, our Q2 2023 revenues were $69 million, roughly in line with our expectations for the quarter. As for earnings per share, both our GAAP-based basic and diluted EPS read a $0.05 per share loss, while adjusted fully diluted EPS was $0.00 per share for the quarter and was $0.03 per share for the first half of 2023. Our GAAP based net loss before the amount attributable to non-controlling interest was $11.9 million for the second quarter of 2023. Adjusted EBITDA, a non-GAAP measure, was $9.1 million for Q2, resulting in an adjusted EBITDA margin of 13% for the quarter. For the first six months of 2023, our adjusted EBITDA, a non-GAAP measure, was $32.9 million, resulting in adjusted EBITDA margin of 22%. The overall lower revenues over our cost structure led to the lower margin in the second quarter. In the second quarter, we also saw higher overhead and related direct labor expense versus first quarter levels. These incremental expenses reflect the lower manufacturing throughput in the quarter and the assessment of inventory turns in light of the lower projections for 2023. It was these expenses, combined with the higher depreciation and amortization associated with our organic and inorganic investments that offset the lower variable material portion of cost of revenues. We remain focused on balancing our investments in our facilities and our labor to best position us for the future while also actively managing our expense structure to address our current revenue outlook. This balance is critical to ensure we have the right capacity, capabilities and resources to…

Thanks, Kevin. So to wrap up on Slide 20, I couldn't be more pleased to be leading Maravai. While we're facing some near-term headwinds, I'm confident in our resiliency and our longer-term opportunities as we continue to innovate in mRNA and build our product portfolio in other high-value areas. Even at these post-pandemic low levels, we're still a profitable company and generating solid cash flow. We are putting our cash flow to work with organic investments in our facilities, human capital and product innovation. We will also continue to look for opportunities for inorganic investment to bolster our market position and provide our customers with additional solutions. We are committed to building a strong foundation for long-term sustainable growth of our base business, and we'll continue to focus on operational excellence, innovation and people as our three strategic pillars. Carl, Kevin, Becky, Drew and I are now happy to answer your questions. So I'll turn the call back over to the operator, and we will open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Matt Sykes from Goldman Sachs. Matt, your line is open.

Hey, good afternoon. Thanks for taking my questions. Maybe the first one, just on sort of the weakness in demand in the industry. You guys talked a lot about sort of where some of the issues in demand were emerging biotech in China. I'm just curious on the inventory side, obviously, that's another dynamic in the industry. Any commentary you would have in terms of customer inventory levels and any issues on that front? Or is it really just sort of the demand weakness that we've been witnessing throughout the sector?

Well, I think, Matt, that it's more of the latter. It's the general demand weakness across the sector. You can see by the fact that we talked about our large customers -- largest customers not having reorder COVID-19 during 2023 -- I'm sorry, CleanCap during 2023 that they clearly have been burning off that inventory. But I think the bigger factor for us is really just the combined headwinds that we're seeing.

Got it. And then, Kevin, just one for you. I mean, how should we be thinking about sort of normalized margins? Understanding there's a lot of dynamics here with the revenue declines, but also the high fixed costs. But just given the volatility we've seen in margins, how it stepped down, how would you kind of help us from a modeling perspective, think about normalized margins for this business, mostly focused on nucleic acid rather than BST?

Yeah. Thanks, Matt. Yeah, you're right. I mean, certainly, margins have bounced around a bit and are pretty much tied to the changes in revenues. If you look at what we did in the first quarter, a 35% EBITDA margin and then the decline in margin down about [$50 million to $9 million] (ph) or roughly 12%, 13% range and really two things there. You have the high variable contribution tied to our revenues, which are north of 75%. So that's roughly half of that on the lower end $10 million of revenue. And then one of the dynamics we haven't seen or hasn't been as transparent just because of our high revenue levels has been the impact within the nucleic acid production segment on manufacturing throughput and inventory levels, as I referenced. We had a favorable $3.5 million absorption variance in the first quarter as inventory levels went up and we had manufacturing outputs there, there have been unfavorable manufacturing variance in the second quarter of $3.5 million. So the combined impact about $7 million there quarter-over-quarter, and that was the remainder of the drop in EBITDA that you saw. So we'll continue to see those sort of variations. They were a little bit masked by the super high revenue levels we had over the last 12 quarters or so, but you'll see that a little bit more apparent as manufacturing levels go up and down throughout the year. I would say a better proxy for the margin prospectively as what we've seen over the last 12 months, I think that's around 22% EBITDA margin. We should see some leverage on that as we increase revenues and control costs over that base.

Your next question comes from the line of Conor McNamara of RBC Capital Markets. Conor, your line is open.

Great. Thanks for taking the questions, guys. And first off, Carl, congrats on the retirement. Just to iterate -- reiterate Kevin's point, it's been great working with you over the years, and you've done a fantastic job between PANTHER and CleanCap of combating the global pandemic. So thank you and best of luck.

Thanks, Conor.

So once question for Trey, one question for Kevin. Trey, just if you think about the long-term growth of end markets within the nucleic acid market, six months ago, we were talking about 20% growth market. Longer term, do you think there's anything that's going on right now that has impacted the long-term views of where this market could go? And then Kevin, on the financial side, just how much of the revenue guide down was a push out from 2023 to 2024 versus just kind of a more conservative view on what demand is, given all the challenges that's going on in the industry right now? Thanks for questions, guys.

Yeah. thanks, Conor. I think we all believe very firmly that we are in the right segments with the right technologies. This is definitely a turbulent time in the marketplace generally. We have a great deal of faith though in the long term mid to high double-digit growth rates of our target markets. It's not a matter of if they return to growth, but when and we are just trying to navigate the turbulence at this time before taking off again. But so far, we haven't seen anything or heard anything from customers that leads us to believe that this would be a long-term impact to those markets.

Yeah. Then on your second question, Conor, the slightly more than $100 million of decline in the revenue guide, about 35% of that, around $40 million was attributable to our services business. And that's where you really see some of this timing get pushed out. It's a little hard to parse that $40 million decline from what we previously we're forecasting to what we're forecasting now between budget prioritizations, pushouts and potentially other factors within that segment, but that is sort of the magnitude of the services decline that we're seeing. And certainly, some of that is resulted to prioritization and companies taking programs that are little more in line, which certainly leads to slower decision making and natural push-up timing into further periods.

Great. Thanks for that guys. Appreciate it.

Thank you.

Your next question comes from the line of Dan Leonard of Credit Suisse. Dan, your line is open.

Great. Thank you. And congrats as well, Carl, to be able to retire.

Thanks, Daniel. Appreciate it.

So a couple of questions. First off, on the updated CleanCap forecast. I appreciate that the -- COVID CleanCap forecast. I appreciate the new forecast is merely reflecting your firm orders in hand, but it's still a big ramp into the second half of the year compared to the first half. And it sounds like these are all take-or-pay obligations. Do you worry at all that by enforcing these obligations, the inventory overhang for COVID CleanCap is going to continue into 2024? Or are there reasons why that wouldn't be a problem?

Yeah, Dan, specifically, I don't think we're forcing these obligations here this year. This is really -- these are actually not related to Pfizer and BioNTech. These are other customers and other regions. And this is specifically our scheduled program with them to support the finalization of their products and the launch of their programs. So I think these are very tied to what our customers expected usage is this year. And I think that you never know exactly what the uptake is going to be at the end of the quarter or at the end of the year related as this goes a little more seasonal. But as it relates to the $65 million we had this year, really tied to specific programs and our specific customer needs, and I would consider them stocking [per percent] (ph).

Understood. That's helpful clarification. And then my follow-up, are you able to speak to how the opportunity funnel is building for Flanders 2 be more fully integrated drug substance for mRNA?

Yes, I think we are. And as we released here, the Flanders 2 building has gained occupancy this period. We continue to work on fitting that out, but their commitments are being worked in the funnel, and I think I'll pass it to Becky to get a little bit more specific about that.

Yeah. I think we've gotten a lot of good reception on our Flanders 2 activities. As Trey said, we took occupancy of the building at the end of June and continue to meet our milestones on our construction. We'll be GMP-ready midway through 2024, which puts us in line to continue some of the programs that we make Phase I material now for and then be able to continue servicing those programs and clients as they advance their clinical trials. That's really our objective.

Your next question comes from the line of Catherine Schulte of Baird. Catherine, your line is open.

Hey, guys, thanks for the questions. I guess, first, can you just give initial customer feedback on CleanCap M6? What's been the mix of interest between existing and new customers? And have you seen any interest from enzymatic customers?

Yeah, thank you. We are really thrilled with the early response to CleanCap M6, again, having launched it just last quarter. I'll hand that one to Drew for a few more specifics.

Yeah. Catherine, it's been an exciting uptake for us. Customers have been quite interested and that really runs the gamut from large vaccine companies to large pharmaceutical companies that are pursuing non-vaccine applications to smaller mRNA-focused companies. So it's been pretty much across the piece. And we've had a lot of customers come back for reorders after initial purchase. So we're pretty excited about what we've seen so far.

All right. Great. And Kevin, you talked about your cost structure a little bit. You've made a lot of investments expanding capacity for nucleic acid production that might not be filled in the time frame you expected at the time of those investments. So are there any facility rationalizations that need to happen to bring down fixed costs given the lighter top line and any other cost actions that you're taking?

Yes, certainly. I mean, I think our commitment to the facility footprint we have is -- remains steadfast because we think it's the right thing, right solutions and capabilities for our customers long term. And these are obviously multiyear investments that are incredibly important. I would say, as it comes to best matching our expense structure to our revenue structure, that will -- is something we actively manage. I would say that we're going to continue to resource the Flanders building as we see the demand. And I think as Becky spoke to, that will be how we finalize our late-stage development, how we ramp up the labor, how we move people from existing facilities to new facilities based upon the mix of that revenue. And when it relates to the overall cost structure, yeah, certainly, we are already taking actions to minimize discretionary spend, be very selective with our labor and how we backfill and look at supporting our base of business, but at the same time, balancing that with the opportunity we still see and are very excited about. And that continues to mean we need the right commercial footprint. We also need the right innovation group because it’s doing amazing work. And I would say that when you step back and you look at our cost structure, as you know, a lot of it is people and facilities, but even with that, I would say, our labor efficiency metrics, when you define them as revenue per employee, are still amongst the very highest in life science tools and diagnostics at nearly $0.5 million per head of contribution. So it's something we are sensitive to and look to balance, but it's also something that's a favorable attribute of our business model.

Your next question comes from the line of Justin Bowers from Deutsche Bank. Justin, your line is open.

Hey, good afternoon, everyone. So where are you now with your RUO turnaround time? And then can you provide us with just an updated number for total CleanCap for the year?

Yeah. Thank you. So RUO mRNA turnaround time is now in the weeks, usually four to six weeks, and we have active programs to try to continue to cut that down as quickly as possible to really enable the entire discovery funnel in that space. And -- I'm sorry, what was the second part of the question?

Yeah, just if -- what total CleanCap outlook is for the year?

Total CleanCap outlook…

CleanCap revenue.

I’ve talked about this a little bit in the past. On a year-to-date basis, CleanCap revenue is sitting at $56 million, and that COVID piece is a little over $27 million there. So as Drew mentioned, very strong growth in the quarter of roughly 21%. On a year-to-date basis, non-COVID CleanCap has grown 16%. So really strong growth on our CleanCap franchise related to the indications that don’t support COVID.

Got it. And then just a follow-up in terms of -- can you talk a little bit about the competitive landscape and if you're benefiting at all from the improved throughput times and any difference from what you're seeing from competition here domestically and then in APAC?

Did you say in APAC as well?

Yes.

Yeah, domestic -- so there are a couple of parts to that. Domestic RUO mRNA is competitive. I would say there is likely more competition in the GMP space as people have many players, as you know, have built significant facilities. And at the same time, the market is rationalizing programs, as we've discussed many times. So I would say the competition is more in the later-phase GMP space. APAC, specifically, I don't think we've seen anything different. And there is weakening marketing -- market environment, particularly in China, as we've discussed. But competitively, I don't think that has changed from previous updates.

Your next question comes from the line of Tejas Savant from Morgan Stanley. Tejas, your line is open.

Hey, guys, good evening. And Carl, congrats on the retirement here. Maybe to kick things off, I just want to ask you about the assumptions baked into the guide, Kevin, in terms of things like current weakness in China continuing and the budget flush dynamic that you're assuming for the fourth quarter. Given just the magnitude of the repeated cuts we've had through '23, what drives your confidence that the outlook is now truly de-risked? I mean, is it supported by sort of bottom-up work, frequency of check-ins with your customers have gone up? Anything else that you can point to, to sort of address this air pocket here in demand and enhance the near-term visibility that you guys have?

Yeah. Sir, I'm happy to take that. Yeah, I think as we look at the back half of the year, the numbers, frankly, are such that our range incorporates anywhere from the back half of the year on the base business being down roughly 5% to being up roughly 15%. And so at the midpoint, I think, it's a second half of the year that's maybe about $7 million higher than the first half, so about a 6% growth. I think we're seeing -- leveling out certainly our biologics safety testing business, has been around this level for a while. We are seeing some old customers that didn't order for the first half of the year starting to reorder. So that's a positive sign. We are seeing an order book coming into the quarter that's pretty consistent with what we've seen before and much higher than where we were starting in the second quarter. So that's another positive sign. So that gives us some comfort that this is the right range for the second half of the year. Specific as it relates to China, kind of across the business, that's about a [$15] (ph) million impact to the overall take down, most of that we see in our biologics safety testing business, as we've been seeing since the second quarter of last year. And we're not assuming that that's a growth region for us anymore. I mean, that was probably in the magnitude of a $25-ish million a year business from Maravai overall and growing a little bit. It's going to obviously be substantially less than that here in 2023.

Got it. That's helpful. And then one quick follow-up. The first part is really on biotech. Can you just talk about your current sort of exposure to SMID Cap biotech customers on a revenue basis? And then, Kevin, a similar question for you on EBITDA margin, really. I mean, I think you clocked in at around the 13% range here. The guide is assuming a bump up to about 25%. Just walk us through the puts and takes there. I know you mentioned somewhat of that -- the manufacturing variances and a swing associated with that, et cetera. But just help us build that bridge from 13% to 25% in the back half. Thank you.

Yeah, I'll handle this -- certainly the second part of that question. As I spoke to, really, I think, the right proxy sort of our first six months, which is around 22%, I mean, we're guiding to a little bit higher than that for the full year now, which assumes a little bit of margin increase and to see these at the higher revenue levels in the second half of the year, very high variable margin on the incremental COVID revenues that we're going to see in the second half of the year. And as we flushed out a good deal of some of the overhead variances here in the second quarter, I think the risk of that being negative in the second half of the year is to minimize to 12% or so. So you could take that, along with controlling costs and discretionary spend that we're certainly managing to match these revenue levels, I think to the extent we hit these ranges, so it will be a comfortable margin for us for the full year. Circling back on the exposure to the emerging biotech, I think I'll pass that to Trey for now.

Sure. Yeah, we -- obviously – we’re continuing to monitor that. It's approximately 30%, just to answer your question out right of revenue that can be said to come from emerging biotech depending on how you draw those lines. That said, we are not seeing programs of significant size that are being pulled for funding necessarily. It's the -- prioritization is more of the issue there. But to answer the question directly, we're at about 30% the way we classify small and mid cap.

Your next question comes from the line of Matt Larew of William Blair. Matt, your line is open.

Hi, this is actually Madeline on for Matt. I was just wondering, I think that a large portion, I think you said $40 million of the guidance cut was coming from a decline in services revenue. Can you talk at all about the difference in margin profile for the services revenue versus the products revenue?

Yeah, we don't really get into specific margins on a product-by-product basis. It's always a little bit of a hard to do just because we do have this fixed cost structure and our people do move from builds on the services side to supporting product builds and other things, and some of this is a little bit fungible. So we don't specifically guide to that. We kind of look at it on an overall segment basis, more than anything else. But I would say when we look at our overall revenues, the two things that are distinct. One, we've seen -- continue to see strong variable margins and consistent pricing across the product portfolio, which is a positive. On the services portfolio, we do take our current cost structure into account when we bid those products out and run those margin calculators to ensure we have the sort of margins that we're looking to maintain, and we still believe that we're at a competitive price point on our services and solutions and our products versus competition out there today.

Great. Thank you. And then one thing I think we've heard from peers this quarter is that some of the headwinds that originally were confined to that emerging biotech have now in terms of like pipeline rationalization, conservative spend, things like that are now expanding more to large pharma? Is that something that you've experienced as well?

I'll take that one. I think that -- we just got a little bit of a different customer profile with either the large life sciences competitors for the biotech suppliers. And what I think happened is we saw the hinge on the funding and the resulting desire to conserve capital on part of our customers. We saw that a little bit later than it was apparent to some of the other players in the industry. Why? It could be pure speculation on my part, but I think a lot of the mRNA therapeutic players were very well funded. But once it became apparent in the broader market that there was kind of this winter coming from a funding point of view, I think then the trend among our emerging biotech customers accelerated. We saw the names of a few of our customers in the paper in this past quarter that we hadn't seen before. And so I do think that we're not immune from that. And then broader questions on places like China and the headwinds there, relatively speaking, it was a smaller part of our business. We're running $800 million, $900 million in revenues. Now it becomes more obvious.

Your next question comes from the line of John Sourbeer. John, your line is open.

Thanks. Carl, best of luck on retirement and, Trey, congrats on assuming the CEO role. Just when you look at some of the demand headwinds you talked about there, you kind of bucketed across prioritization, delays, capitalization, any way just to kind of further bucket that down and would you be willing to quantify what percentage or a dollar amount around the cancellations you've seen in the quarter or year-to-date?

Well, I don't think that we've seen any specific cancellations in the quarter that we would refer to or that we call out. I'm looking around the table to see if anybody is shaking their head positively. They've got a great answer for you. [indiscernible] So look, I think the biggest impact we have seen in the last two quarters that surprised us against our prior forecast was clearly the emerging biogenics and the change in their spending patterns or willingness to spend. That happened significantly for us. And I think it probably had an outsized impact, if you will, of services business. And so if you were looking for what's the major driver there, that would be one what I would call out. I don't know, Becky, if you see it slightly different.

Yeah, part of life insurance plan, mainly what we've seen is folks that have had multiple candidates in the pipeline, and they have paused advancing their Phase 1, which is where our GMP services is today as an offering and instead take candidates that are later phased forward and put that investment there, both in their people and their resources. And those are things that I -- pipeline, I think, will come back. It's just that they're playing a more spread-out game instead of taking five molecules through Phase 1, maybe pausing their Phase 1 and taking their Phase 2 to 3 and keeping that funding because that has a less of a risk profile to it.

Okay. I think that actually takes us perfectly to time. Thanks, everybody for your questions, and I will pass it back to Jenny.

This concludes today's conference call. You may now disconnect.