Catalent Inc (CTLT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Catalent Incorporated first quarter fiscal year 2015 earnings conference call. My name is Denise and I will be the operator for today. (Operator Instructions) I would now like to turn the conference over to Monique Kosse, Managing Director of Bertner Advisors. Please proceed.

Thank you, Denise. Good afternoon, everyone, and thank you for joining us today to review Catalent's FY15 first quarter financial results. Please see our agenda on Slide 2. On the call today representing Catalent are John Chiminski, President and Chief Executive Officer; and Matt Walsh, Executive Vice President and Chief Financial Officer.

John will start the call with a review of the key financial and operating achievements for the first quarter. Then Matt will discuss the Company's fiscal fourth quarter financial performance and provide the Company's outlook for FY15. Finally, the Company will open the call for your questions. During our call today, management will make forward-looking statements including its beliefs and expectations about the Company's future results. It is possible that actual results could differ from management's expectations. We want to refer you to Slide 3 for more detail. Please be aware that the forward-looking statements are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties.

We refer you to Catalent's Form 10-K filed with the SEC on September 8, 2014 for more detailed information on the risks and uncertainties that have a direct bearing on the Company's operating results, performance, and financial condition. As discussed on Slides 4 and 5, on the call today, we will also disclose certain non-GAAP financial measures which we use as the supplemental measures of performance. We believe these measures provide useful information to investors in evaluating Catalent's operations period over period. For each non-GAAP financial measure that we use on this call, we have included a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure in our earnings press release.

Please note that the non-GAAP financial measures have limitations as analytical tools, and they should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

Now I would like to turn the call over to John Chiminski, President and Chief Executive Officer.

Thanks, Monique, and welcome, everyone, to our FY15 first quarter earnings conference call. We are pleased with our first quarter results, highlighted by double-digit EBITDA growth within two of our three reporting segments. Additionally, during the quarter, we continued to make strategic investments in our technology platforms to position Catalent for growth and leadership in our addressable markets.

I'd like to start by my presentation on Slide 6, which highlights our recent key financial and operating accomplishments. Our first quarter 2015 revenue grew 1%, both as reported and in constant currency to $418.3 million. This performance was primarily the result of increased sales from our Oral Technologies segment. Also, during the first quarter, we achieved strong double-digit EBITDA growth within our Development & Clinical Services and Medication Delivery Solutions segments. This growth was due both to a mix shift to more profitable products and services and to operating efficiencies which continues to be a core competency of our leadership team. Our total adjusted EBITDA increased 2% year-over-year to $83.4 million, or 19.9% of revenue.

On September 9, following our initial public offering, our underwriters fully executed the greenshoe and Catalent sold an additional 6.375 million shares of its stock at the initial public offering price, which resulted in additional net proceeds of approximately $124 million. The net proceeds generated from the greenshoe were used to further pay down our senior unsecured term loan. In total, we raised on a gross basis, over $1 billion through the IPO.

Now let me briefly discuss our key operating accomplishments during the quarter. To capitalize on our 20-year experience in roller compaction, we launched OptiPact through our 450,000-square-foot facility in Kansas City, Missouri. This integrated service and technology offering will further strengthen our ability to integrate formulation, development, analysis, scale-up and manufacturing capabilities to create differentiated final dosage forms.

Additionally, we acquired the remaining stake Redwood Bioscience and its SMARTag Antibody-Drug Conjugate technology platform which strengthens our position in the fast-growing biologics market. This acquisition brings to Catalent a highly differentiated technology in the SMARTag platform, as well as a high caliber and innovative scientific team.

Finally, this afternoon, we also announced our acquisition of Micron Technologies, the leading international provider of particle-size engineering technologies. This strategic acquisition allows us to provide an unprecedented set of integrated development solutions and superior drug delivery technologies to the industry, partnering with our customers' R&D teams earlier in the development cycle, and helping them deliver better treatments to clinic and to market faster and more efficiently.

Additional information on Micron can be found in the supplemental information section of today's presentation. These transactions underline our strategic focus on innovative technologies and further demonstrate our ability to strengthen our position in key growth markets.

Now I would like to turn the call over to our Executive Vice President and Chief Financial Officer, Matt Walsh.

Thanks, John. First, I will briefly review our first quarter operating accomplishments by business segment, starting with Oral Technologies on Slide 7. Our softgel business, which accounts for approximately two-thirds of the Oral Technologies segment's revenue, is experiencing a pipeline transition as we continue to drive to a more predictable business.

Modest organic softgel growth in AsiaPac, particularly in China and Japan, was offset by a decline in prescription softgel volume in North America. We expect the mix shift from prescription softgel to Consumer Health softgel to continue in the near term as we've discussed on previous calls. Consumer Health softgel in Latin America posted double-digit EBITDA growth, which was driven by favorable product mix and by the Relthy Laboratories acquisition in Brazil which closed early in the second quarter of last year.

The modified release business, which accounts for about one-third of the Oral Technologies segment's revenue, generated strong growth led by controlled release where we experienced higher profit share revenue related to product-participation-related activities. Favorable product mix shift within both controlled release and Zydis drove margin expansion across the business.

The Development & Clinical Services segment, shown on Slide 8, performed well and achieved double-digit EBITDA growth with contributions from both Clinical Services and Analytical Services. Revenue growth from Analytical Services during the quarter was offset by declines within Clinical Services. On an EBITDA basis, however, both businesses recorded improved profitability. Favorable product mix and fixed cost management drove EBITDA growth in Clinical Services, while higher project volumes and growth of our integrated oral solids development and supply business drove the profitability within Analytical Services.

As of September 30, 2014, the Development & Clinical Services business backlog increased 4% from last quarter to $389.6 million. Net new business wins on a year-over-year comparison decreased 17% compared to $114.8 million. The decrease was driven by several large wins booked during the first and second quarters of the prior fiscal year, which drove that year's new business wins to above normal levels. The business's last 12-month book-to-bill ratio was 1.19.

As John already mentioned, this afternoon, we announced our acquisition of Micron Technologies, the leading international provider of particle-size engineering technologies. The acquisition will augment our current capabilities in highly potent and cytotoxic drug handling, integrated inhalation solutions, and analytical laboratory services. We can now partner with more pharmaceutical innovators at the earliest stages of the drug development process with an unrivaled set of options and expertise.

Now on Slide 9, we have the business update for our Medication Delivery Solutions segment. Blow-Fill-Seal posted solid performance compared to the prior year showing double-digit revenue and EBITDA growth. Market fundamentals of this business remain attractive with a robust new product pipeline. Continuing the trend from prior quarters, we are seeing our product mix shift to higher margin products.

Sterile Injectables is off to a slow start due to declines in flu volume which resulted in revenue and EBITDA below prior-year levels. We expect this business to return to growth as we continue to capitalize on our business development opportunities signed last fiscal year and on our entry into the Animal Health market.

Finally, during the quarter, we continued to make strategic investments in our biologics business to position it for future growth. As John mentioned earlier, we completed the acquisition of Redwood Biosciences on October 2. Its SMARTag Antibody-Drug Conjugate technology broadens our overall biologic services offering. As an indicator of our long-cycle business, which includes both Oral Technologies and Medication Delivery Solutions, we are disclosing the number of new product introductions and our long-cycle development revenue has directional indicators of future revenue growth.

Due to the inherent quarterly variability of these metrics, we will provide the numbers on a year-to-date basis. For the year-to-date period, as of September 30, 2014, we introduced 48 new products, an increase of more than 20% from the same period of the prior fiscal year and recorded development revenue of $27 million, an increase of 4% from the same period of the prior fiscal year. These metrics are only directional indicators of our business, as we do not control the sales or marketing of these products, nor can we predict the long-term commercial success of them. However, we expect both of these metrics to provide insight into what the long-term potential organic growth of these businesses might be.

Before I get into more details on our financial results, let me remind you that all the segment revenue and EBITDA results I will discuss in the next few slides are on a constant currency basis. Turning to Slide 10, for the first quarter, revenue from the Oral Technologies segment increased 2% to $261.1 million over the first quarter a year ago. This growth was attributable to strong performance within modified release technologies, primarily related to increase profit from product ownership related activities, partially offset by decreased demand for certain products utilizing our softgel technology platform.

Oral Technologies segment EBITDA in the first quarter decreased 1% to $57.7 million. The decrease was primarily driven by the previously discussed decreased demand and unfavorable product mix within the softgel business, partially offset by favorable product mix within modified release technologies and increased profit from product ownership related activity. Revenue from the Development & Clinical Services segment decreased 1% to $103.1 million over the first quarter a year ago, as growth in the Analytical Services business driven by higher project volumes and by our integrated oral solids development and manufacturing capabilities was offset by revenue decline within our Clinical Services offerings.

Development & Clinical Services segment EBITDA in the first quarter grew 32% to $21.4 million. This EBITDA improvement was primarily due to increased demand for Analytical Services and to favorable product mix across the segment. Revenue from the Medication Delivery Solutions segment was up 1% to $56.9 million over the first quarter a year ago. Growth in our Biologics offering driven by the timing of completed project milestones and increased demand for products utilizing our Blow-Fill-Seal technology platform contributed to the revenue growth in this segment, which was partially offset by lower sales within our Sterile Injectables business.

Medication Delivery Solutions segment EBITDA in the first quarter of 2015 increased 22% to $9.9 million. This improvement was driven by increased demand, favorable product mix, and operating efficiencies within Blow-Fill-Seal, as well as due to timing related favorability within Biologics.

Slide 11 shows a reconciliation to the last 12 months EBITDA from continuing operations from the most proximate GAAP measure which is earnings or loss from continuing operations. This is a mechanical computation which doesn't require much supporting commentary. It's really there for your benefit to assist in tying out the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide.

Now moving to adjusted EBITDA on Slide 12. First quarter 2015 adjusted EBITDA increased 2% to $83.4 million compared to $82.2 million in the first quarter a year ago. I won't go through all of the add-backs in detail, but I would like to draw your attention to two items that are materially higher than what we have recorded historically. The first line item is financing related expenses, where we had an add-back of $20.6 million for the first quarter. These charges are associated with the early redemption of our senior notes and the prepayment of the unsecured term loan. These costs run through the P&L and the Other Income expense line item and were a direct result of the IPO.

The other add-back worth noting is the Other line item where we had added back an expense of $23.8 million, which primarily relates to the sponsor advisory agreement termination fee which was agreed to in connection with the IPO. These costs also run through the P&L and the Other Income expense line item. In total, we have recorded $50.4 million of expenses in the first quarter of one-time costs attributable to the IPO, all of which are added back in the computation of adjusted EBITDA.

Now moving to Slide 13, our track record of adjusted EBITDA growth remains very strong. What we're looking at here is the last 12 months adjusted EBITDA for each and every quarter since June 2009. It clearly depicts our observation that Catalent's business has grown steadily over a longer analysis period, while we have experienced flat quarters, or even down quarters from time to time. The diversity and global scale of our business are key features of Catalent that have helped us deliver growth historically, and we're investing in managing our businesses to continue this trend well into the future.

On Slide 14, you can see that first quarter adjusted net income was $13.4 million, or $0.13 per diluted share, compared to the adjusted net loss of $1.5 million, or $0.02 per diluted share, for the first quarter of the prior fiscal year. The slide also includes the GAAP to non-GAAP reconciliation to adjusted net income, for your reference, where you'll find the same add-backs I discussed earlier on the adjusted EBITDA reconciliation slide.

Now turning to Slide 15, as John mentioned earlier, Catalent's underwriters fully executed the greenshoe option and we sold an additional 6,375 million shares of our stock at the initial public offering price of $20.50, which resulted in net proceeds of approximately $124 million, bringing our total gross proceeds raised through the IPO to over $1 billion. The incremental greenshoe proceeds were used to further pay down our senior unsecured term loan. And as a result, our September 30, 2014 leverage ratio was 4.0x compared to 6.1x as of June 30, 2014.

Finally, on Slide 16, there's no change to our previously issued FY15 guidance. We continue to expect our revenue to be in the range of $1.89 billion to $1.92 billion, our adjusted EBITDA to be in the range of $450 million to $460 million, and our adjusted net income to be in the range of $215 million to $225 million. We anticipate capital spending in the range of $115 million to $125 million for FY15.

Let me remind everyone of the seasonality in our business and highlight our expected quarterly progression through the year. Due to the timing of our customers' annual facility maintenance periods, as well as due to the seasonality associated with budgetary spending decisions in the pharmaceutical and biotechnology industries generally speaking, the first quarter of any fiscal year is seasonally our lightest quarter of the year by far. Performance improves sequentially each quarter, with the fourth quarter of any fiscal year been our strongest by far.

Now I'd like to turn call back to John.

Thanks, Matt. In conclusion, I would like to add that our first quarter was a great start to our FY15 and we're proud of our accomplishments to date. We look forward to leveraging our innovative technologies to position Catalent for further growth in FY15 and beyond.

Denise, now we'd like to open the call for questions.

(Operator Instructions) Ricky Goldwasser with Morgan Stanley.

Yes, hi. Good afternoon.

I have some follow-up questions on Redwood and the new acquisition that you announced today. When we think about after completing the Redwood acquisition, can you guide us to any milestones upcoming that we should be watching for as we assess the progress and how we should think about the opportunities on the Biologics side?

So addressing Redwood, Ricky, we talked about this as Redwood is a development stage Company. The milestones that we will be tracking will really be in two areas. First will be continued scientific progression of the technology as evidenced by technical milestones, all of which have been hit in the early stages. Have been reached, I should say.

And what we are looking for on the financial side is continued signing of what will be at first small development-type projects with customers that will eventually grow in size as the technology becomes adopted. So that gives you some indication of what technically we are looking for and what economically we are looking for.

The timeframe here is really three to five years, and so the business will build slowly from a revenue perspective with individual development projects enumerating in seven-figure -- sorry, five to six figures at first, and then growing in size as the technology progresses and customers become more comfortable with it.

Okay. And then, the acquisition that you announced today, if you can give us a little bit more color. One, do you anticipate any financial impact in the near term, midterm, or should we think about that also as more a long-term value driver?

The latter, Ricky. Micron Technologies offers Catalent terrific long-term potential, which I will talk about in a minute. But just in terms of setting expectations, on a standalone basis, Micron is a small company.

We are not disclosing their financials nor the purchase price, it just wasn't material to Catalent's overall financial results. But we can think about -- just to set expectations -- we can think about revenue on the order 1% to Catalent's total consolidated revenue. So the potential of the acquisition is really in the future for Catalent and what Micron can become as part of Catalent's global platform.

So John had mentioned that the molecules that Micron sees are typically pre-clinical or Phase 1 molecules which complements Catalent's existing business right now very nicely. Most of the molecules that we see are later in the development cycle, Phase 3 or even beyond. So we will have access to a significant number of molecules and customers at earlier stages where we can offer them more broadly Catalent services. So this is terrifically strategic for us and we are quite excited to begin the integration process.

Okay. And then, last question, and then I will get back in the queue. On the margin side, so the EBITDA margins came in a little bit ahead of our expectation, how should we think about just the margin trajectory for the remaining of the year? And I know that there's some seasonality involved in it.

There always is. As our volumes grow during the year and our asset utilization grows, so do the margins. I think the implied margins in our guidance, we still feel quite good about. That -- I think the EBITDA revenue and EBITDA margins implied by the guidance are still the indicators that we would be looking for.

Okay, thanks.

Thanks, Ricky.

Tycho Peterson with JPMorgan.

Thanks. Just following up on margins.

Can you maybe just touch on the contributions from price, fixed cost absorption? And then you highlighted product mix quite a bit, so if there is any way to quantify those relative contributions, that would be helpful?

Sure. Our overall adjusted EBITDA margin was pretty steady versus the prior year period, Tycho, and what we saw was solid increases in our margins in Medication Delivery Solutions and Development & Clinical Services. These would be mostly due to product mix, and I would say largely due to product mix in those two reporting segments.

Within the Oral Technologies segment, it is mainly due to asset utilization, so we've got some -- Q1 being the lowest volumes of the year, so that did impact the margins of the business, as well as this mix shift that we've been talking about towards Consumer Health. So our overall volumes produced were largely consistent on the Consumer Health side with improving mix, and it is mainly a volume issue on the prescription side of the Oral Technologies business within softgel specifically.

So hope that's helpful. Within the modified release piece of the Oral Technologies segment, both volume, as well as mix was favorable.

Okay, and then can you talk on where we are for softgel and the pipeline transition going through the prescription softgels to Consumer Health? How far are we through that process for you as we think about additional headwinds?

I would say that we will be earning our way into that transition for really the rest of FY15. I mentioned this in previous calls, and I want to make sure that I continue to reinforce it, and that is, as we see our product slate, and I shouldn't use the word oscillate because that implies a frequency that may be is faster than what we experienced, but our product slate will vary from time to time. And right now what we're seeing is more of a shift towards Consumer Health.

That's partly what our market is doing. It is partly due to an engineered effort by the Company to pursue Consumer Health business as it tends to be more level, and we can achieve good asset utilization over long periods of time with Consumer Health business. So, I would say we will certainly be looking at it for the rest of the FY15, and then we will have to see how the new product launches size up for FY16.

If you don't mind, Matt, I will just also weigh in here, Tycho, because I do want to reinforce the point that we are not, I would say, subject to changing winds as much as we are making a conscious effort to ensure that we continue to go after a very robust market in the Consumer Health space because it has two things that we like a lot.

One is it has less regulatory risk associated with, and it also has less market uptake risk, especially for bigger brands. And as we continue to diversify the portfolio, we see having improved mix of some Consumer Health business as part of our advanced delivery technologies is very healthy for the business. So this really is strategic positioning by the Company.

From time to time, things come in and out of the pipeline from an Rx perspective and when they hit positive you feel it. When they don't come in or they go away, you can also feel them, but the steady-eddy flow of strong Consumer Health business like our Advil franchise is really terrific. So I just would offer that as some additional color that we are just not being -- it's not the changing tides here, a lot of this is strategically being managed by the Company to drive improved growth.

Okay, and then one last one. Just following up on Ricky's earlier question earlier on Redwood. I know this is a longer-term opportunity, kind of in the three- to five-year timeframe, but is there any way you can help us size the potential opportunity for SMARTag? And then, similarly, for OptiPact, as we think about that ramping over the next couple of years, how do we think about the relative market opportunities for those two?

I will jump in just to provide some general feedback. I will start with OptiPact. This is really a roller compaction technology that's been around for a while, but we have a lot of experience and expertise, specifically out of our Kansas City facility. We have some very important customers there.

I think people have seen the announcement with regards to our relationship that we have with Pharmacyclics, and we also have some other key customers there. And when you take a look at those opportunities, again, I would say in terms of growth for the Company, on an annual basis, you can maybe see a pickup of 0.5% to 1% depending on getting business like what we have with Pharmacyclics. From our standpoint, the way we look at the Company, again, is it is massively diversified. So we don't hang our hat on any one product, we don't hang our hat on any one technology, and we don't hang our hat on any one molecule within our pipeline.

The whole value of a highly diversified Company is the ability to have a suite of technologies, a broad pipeline, and a very diversified set of products such that we can grow as those things mature, but we are not subject to the significant risks of any one technology, any one product and so forth. So, when I broadly think about OptiPact, I would say that it just continues to strengthen our overall position in the advanced delivery technology space.

With regards to Redwood, I would stick with what Matt has said, but only add to the fact that over the next three to five years where we are at with this leading technology, that is really a second-generation technology for ADCs, is that it has met its technical feasibility milestones, which has led to our acquisition. We have further feasibility milestones. We have several customers that we have signed up to this technology.

When you sign up customers to these technologies, they usually come with upfront milestones that are in the low seven-figure range. But then, if it proceeds through towards advancing that technology over a five- to 10-year period you could have milestone payments that are 10 and 100 times that, if you will. It is very substantial. But, again, this is a technology platform.

We are early in its development. We were very fortunate to have developed a relationship with them early on through our GPEx technology, and we see this as a long-term value creator, and also getting us much more substantially into the biologic space where we can help bring more molecules to market faster.

Great. Thank you very much.

Gary Nachman with Goldman Sachs.

Hi. Good afternoon.

In the Oral Technologies business, what modified release technology specifically did well? Was it mainly Zydis or the controlled release products really starting to kick in? And then on the softgel market, just elaborate how you're share has been trending as you are making the transition to consumer, and what your competitors are doing in the space? Are they are doing the same thing? Are you gaining share, losing share? Just those dynamics.

Sure. So starting in modified release, both Zydis, as well as controlled release, showed a favorable performance year-on-year. And one didn't significantly out run the other. So they were comparable in their favorability on a year-on-year basis.

In terms of our market share within our softgel business, we haven't noticed any significant changes to the marketplace. We believe that our marketing efforts within the Consumer Health business will be market share accretive to us and will be likely to -- we will be gaining share at our competitors' expense. And we think we have seen some of that happen already and it should be increasing over the coming quarters.

Okay. And then in MDS, just I think you mentioned it quickly, but just the lower sales of the injectables, what really drove that again, and why are you comfortable that that's going to bounce back?

And then, Matt, on the net debt to EBITDA, you said around 4.0x. How high would you be comfortable going for the right transaction? And should we be expecting more of these smaller type longer-term deals, or are there things out there that you think could be accretive to you in the near term?

Okay. In terms of the MDS business, the lower sales performance year-on-year is really a flu story and flu is highly seasonal. This is typically a first quarter event for the Company. We saw lower flu volumes than we saw last year, and this is really related to overflow decisions that our customers are making. They have productive capacity for flu vaccines internally, and we typically see overflow volumes, or some special situation volumes that our customers are managing.

We saw less of it this year than we did last year. Since it is always Q1 phenomena anyway, we would not expect it to have Q2, Q3, or Q4 impact, so we'd go back to just the general increasing success we've had at securing sterile injectable business at the site. Our business development efforts have been productive over the last year-plus, including Animal Health. So we believe that you will see that and we will see that in the latter quarters of the year versus what we saw in Q1.

Moving to your question on net debt, correct, we were at about 4.0x leverage as of September 30. It is actually quite a bit better than what we were thinking at the time of the IPO, where our goal was to delever down to 4.5x. In terms of where we could see that leverage going for transactions that we believe are strategic, as we've said in the past, this business has functioned very capably at leverage levels in excess of 6.0x.

Now that was when we were private. But I would say that this management team would be quite comfortable extending the leverage beyond 5.0x to maybe something in the range of 5.5x if the deal was strategic and offered great value for our shareholders. We could see leverage going up into that range. This is a great lead into the last part of your question, which was the transaction landscape as we see our M&A growth program unfolding. Yes, it is true, we've done a couple of small deals here in the first quarter.

These are highly strategic deals that position us very well for the future. We are certainly -- we will certainly do those from time to time without a lot of fanfare. As larger transactions become available to us, we would certainly be looking at those, as well. Transactions that would be immediately accretive to the shares and would offer a step change in our competitive position, we are certainly open to those.

So I think to a certain extent, any M&A program tends to be somewhat opportunistic because you do -- you are somewhat limited by the targets that become available. We just happen to have some smaller deals that were compelling opportunities for us that we've moved on, but we have a pipeline of opportunities that we are considering that also includes larger transactions. And once again, when these things become more firm, we will certainly be talking about them, but nothing at this time.

I just want to add one other comment with regards to our acquisition strategy. Again, we operate in highly fragmented marketplace where we're the leader in the space. There's an opportunity for us to continue to do consolidation. We've got a very robust funnel, and with regards to the two transactions that we just discussed, both Redwood, as well as Micron, these were both self-source strategic deals that we went after. They are not things that come to us through processes, so we have are pretty disciplined management team that goes after assets that we know are going to create significant value for the Company.

And although we are not disclosing the financials, I would tell you that the Micron deal is highly strategic for the Company. It exposes us to a large number of molecules much earlier in the development cycle. You will read in the press releases that the Micron Technologies is really largely a first step in terms of trying to solve a bioavailability or solubility problem. They try to do that through the micronization of the API.

And now having Micron as part of the Catalent team, there is a large number of molecules that are in their pipeline, over 400. They've got about 200 customers, there's about 100 molecules that they see per year. And, again, these are molecules that have solubility issues that would naturally lead into our other technologies of softgel, also of hot melt extrusion, which is Catalent's OptiMelt.

So I think that as our analysts see you look at these deals, there is a financial component, and then there's long-term strategic, and I think the growth of Catalent comes from attaching ourselves to the right -- to as many molecules as possible in that high degree of diversification. And that's what yields that long-term growth. So I don't want to minimize the fact that we're not disclosing the financials, but also make sure that you understand these are highly strategic and deals that are done through a self-sourcing process.

Very helpful. Thank you.

Dave Windley with Jefferies.

Hi. Good evening. Thanks for taking my questions. I wanted to start on revenue just to clarify. So I see that your guidance is unchanged, I understand that. And if I look at the midpoint of that, that's about a little over 4% growth year-over-year.

Your first quarter was about $7 million higher than the consensus was looking for. You're adding Micron, which you said a percent of your revenue, but it is only 2.5 quarters or so, so maybe half a percent, or a little more. But those two things add to about a percent of growth to your revenue on a 4% guide, so the unchanged revenue guidance is an implicit 1% reduction.

I'm curious if you mean to be doing that, if your being conservative, if you are more comfortable with maybe the high end of the range? I just want to give you an opportunity to comment on that.

Sure. Our revenue growth tends to be back-end loaded along with the seasonality of the Company. So that's one thing that I would put out there. The other item we should probably enter into this conversation, David, is FX translation, which is impacting a lot of multi-national companies these days.

With Catalent having a approximately 65%-ish of its revenues outside the US, we are certainly exposed to the same issue that other multi-nationals are. And I think one of the messages that is an important takeaway is the Company -- a lot of companies are lowering guidance for exactly that reason. Catalent is not doing that, and what we are implicitly saying by holding guidance is that we can offset what is a translation issue with underlying improvements in the overall business.

Can you comment how much FX headwind you are absorbing? Because the other way to look at it would be that you are acquiring things to offset that FX headwind?

Sure. We are trying to forecast FX rates just like everybody is for the rest of this fiscal year. Our best crystal ball says that on a year-over-year basis, FX translation is impacting us on the order of 3% on the revenue line and the EBITDA line. And might be a little bit under 3%. So what we are saying is we can overcome that, and we can still grow just due to the fundamental strength in the underlying manufacturing and sales that we can generate.

Got you. And then, again, sorry, another clarification question, but, so the adjusted EBITDA, and it looks very solid and better than I think I and others were expecting. The EPS relative to everybody's estimates was a lower, and I guess I'm curious just in terms of the add-backs are not exactly able to understand where those migrate on the P&L. Is there perhaps something in the P&L below the line that is not being added back that would account for that difference?

It is related more to interest expense than anything else. And that is mainly a function of mandatory notice periods that we had to wait through before. We could use the IPO proceeds to actually reduce the debt. So we had 30 days to wait on both the senior sub notes, as well as the 7 7/8% notes.

And that's where the principal difference is. When you think about the add-backs, all the IPO expenses came in exactly where we thought that they would, and it was really -- it is just that timing of the debt pay down that drove a Q1 interest expense higher that we won't see for the rest of the year.

That's what I thought. And I appreciate your confirming, thanks for the clarification.

John Kreger with William Blair.

Hi, thanks very much. John, if you think about the business you have won across your different manufacturing businesses over the last, let's say, three to six months, can you just talk about what sort of pricing dynamics you are seeing from the competition, and are you seeing any changes there?

Let me first start off with saying that there's two sets of our businesses. There's the Development & Clinical Services business, and then we have our advanced delivery technologies business. And our Development & Clinical Services business tends to be at higher competitive activity where we see more pricing pressure, if you will. On the other side, for the advanced delivery technologies, I would say that given in many cases our unique position and strength and the suite of technologies that we have that we are not seeing pricing pressure in that we are able to execute on our pricing that is built into our contracts.

We are winning good business, and, again, we don't have a cost-plus model, we have a what is the value of the molecule and the end market model, and continue to see some very, very interesting deals on the advanced delivery technology side. So in net, I would say that we continue to see stability from a pricing standpoint, I think, is the most favorable way to say it. We tend to have priced up on our advanced delivery technologies.

We have more competitive pressure in our Development & Clinical Services business, it is the nature of a business that has less IP and technology associated with it. But no fundamental changes in the structure of how the Business works, which I think is really a strength of the Business.

Thanks very much. Just one other question. Matt, I know you have talked about in softgel that the shifting mix to Consumer Health. Can you just help us, remind us what the margin differential is roughly from prescription softgels to Consumer Health softgels?

Sure. So this will change from year-to-year, but on average it is about 15 to 20 percentage points on a variable margin basis. So Rx on average is more profitable than Consumer Health business on a variable margin basis by about 15 to 20 percentage points.

That is consistent -- and the data we saw coming out of our first quarter close is consistent with some of the conversations that we've had previously on that. No significant changes.

I just want to add -- to spur additional background for here. When you look at the mix of our Business, we've got about 44% is prescription. We're not talking about massive changing sands or shifts, but certainly as we drive growth, we see Consumer Health as being an interesting area where both our customers and us see it as a very durable, long durable. It is a part of the business that doesn't go generic, if you will.

So we are just continuing to make sure that we are not missing out on that growth would probably be the best way to say it. While we are not try to do that at the expense of Rx, we're still going to drive that business as hard as we always have because it is been a terrific part of the Business. So I think that's the way you should think about it. We are not trying to mute the prescription, we are just trying to make sure we don't miss out on the growth opportunities that avail themselves from the Consumer Health space.

Great. Thank you.

Sean Wieland with Piper Jaffray.

I enjoyed your comments around the Micron acquisition. Can you just educate us a little bit around the science behind this? How exactly does this work? Is there IP protection on the technology?

Yes, I will just jump in and see if Matt wants to add any comments. I would say first of all, like a lot of things in pharma within Catalent, there's technology, there's IP, and then there's know-how. And I would say in this space there's a lot of know-how. The technology is what's called jet milling.

Basically, what you are doing is you are taking an API and you are basically running it through a jet milling process where the particles collide with each other and ultimately are reduced in size. And, as I've stated before, it is generally a first step when you have a solubility, bioavailability type problem is let's just try to make the particle smaller. There is a 25-year history of Micron.

They were originally as part of Colorcon, which is a terrific company also. And Micron, if you talk about someone needing to do this, even though it is like making a Xerox, they say, well, we need to have it micronized, we are going to Micron. So Micron really almost is the brand, if you will, in this micronization technology. They've got a 25-year history. Great track record.

This is why they are just well known in the industry and it is generally, again, a first stop, and the standard, if you will; less about IP protection, a lot more about brand reputation and know-how. We see this as a great footprint for potentially some other niche-type acquisitions like this that will fill that out. But the beauty of this is it just gets us into that pipeline.

We certainly love macro trends that are around Catalent that float the boat higher. But the fact is, we do well when we attach ourselves to molecules that do well. That's really been our secret sauce of having as many molecules as possible in the pipeline. You know we have about 450 active projects now. If I were to take a look at Micron, they've got about 400 or 500 molecules that are currently either in commercial or in development with them.

They see about 100 new ones per year, and when we were looking at this acquisition our ability to plug that into the Catalent system, whether it be anywhere in our advanced delivery technologies where we can now help them from a formulation standpoint, move it into other technologies, such as softgel or hot melt and ultimately do clinical trial supplies for them.

For us, this is like a great feeder system for the Company and so, although, you could probably pick up some of these jet milling machines and start up the business, again, they've got a great quality, a regulatory track record. They are well known within the industry and when somebody thinks about jet milling, Micron is generally first on the list.

Proven out by the fact that we are using them for some of our inhalation projects, so we were actually a customer of theirs. And then when we went out and did customer due diligence, all extremely favorable, and we asked about particle reduction and what companies that they work with, of the customers that we did due diligence, I think all but one of the customers exclusively mentioned Micron. And one customer said Micron, and then another company that's called JETPHARMA, which is out of Europe. Sorry to be over verbose and effusive, but we're very excited about this. And as you look at the long-term potential of the Company and how the management team thinks about driving strategic growth, this is right down the fairway for us.

Am I thinking about it right when I think about this as pulmonary delivery or is there other --

No, no. There's DPI, dry powder inhaler, is one application of this, but it's not exclusively for that. They also just in general reduce the particles in putting it into another dosage form that is oral. So it is not inhalation-only technology. It is a first stop towards improving solubility for molecules for multiple routes of entry.

Got it.

The only thing I would add to what John said is we looked at the company very carefully during diligence for their performance on operational and quality excellence.

Yes.

And there's not many targets that we look at that meet this high standards that we set for ourselves. Micron does. In terms of integrating acquisitions, we believe that this will be on the smoother side. And just one other parallel or contrast I would draw, when you think about Redwood and a Micron, Redwood we are talking about a longer cycle to commercial revenue, three to five years.

With something like Micron, we can start integrating with their molecules and their customer base right now. So we are very excited about the long-term potential for the addition of Micron to improve our ongoing organic growth into the future, and we expect to realize those benefits immediately. It won't be a step change. We will be earning our way into it, but we expect to see positive developments much earlier than a company like a Redwood.

Super, thank you.

Derik de Bruin with Bank of America. Please proceed.

Hi. Good afternoon.

Hi, Derik.

Just following up on Dave's question, so the implied organic revenue growth number for the year is what? Given all the moves, if you think you can offset the currency -- it is basically from my conversation is you are actually more bullish on the organic revenue outlook than previously? Is that how I should interpret that?

I would say that our overall outlook for the year is modestly improved versus when we started the year, yes.

Okay. So just some housekeeping items. So share count, we should think about for the year?

Total share count for the year is 123.6 million shares.

Great. Once again, realizing the seasonality and the net income growth, could you give us a little bit more color on how should we think about the net income the second quarter, and just also progression for the rest of year?

To reiterate the earlier question with David, anybody's sensible projection of interest expense for the second quarter, based on the debt structure that we have as of the end of the first quarter, will yield a number that should be close to what we actually realized in terms of our adjusted net income number. About $23 million to $25 million-ish of interest expense. I want to make sure that that's clear.

Yes, that's where I was going next was the interest expense question, so that's great. And for the full-year then on the net interest expense?

It will be $105 million plus or minus is what we are triangulating to.

Great. Then I will get off of the financial questions and actually ask a couple of other questions. How has the clinical logistics -- the clinical supply logistics business doing? I know you've restructured that Aptuit business, you've gone to it, are you seeing some share wins against Fisher and Alnik?

I would say that we are seeing some share wins again competitors. We are seeing generally less manufacturing and packaging business being offered. We believe that's to us, as well as other competitors in this space.

So just as a refresher, Derik, the Clinical Services business in terms of what we provide end to end and what our customers provide end to end, it will typically start with things like comparator purchases where we will help them secure on a purchasing and a logistics basis comparator drugs for trials, placebo materials, packaging materials, et cetera. We will manufacture and package all the materials the patients would be taking for the trial. And then, from that point forward, it is a storage, distribution, logistics play.

And we see revenues across that spectrum. We provide services across that spectrum. We've seen less manufacturing and packaging versus prior year, but we think our competitors have, as well. So on a share basis, the acquisition of Aptuit made us a more complete end to end service provider. That has enabled us to compete more competitively and secure market share gains. But we have relatively more manufacturing and packaging capacity than we are able to use right now. Our customers are just going out with fewer quotes, we believe.

Great, thanks a lot.

This concludes the question-and-answer session. I will now turn the call over to management for any closing remarks. Please proceed.

If there are no further questions, I would just like to thank all of you for joining us today. We look forward to updating you again on our next conference call, and thanks a lot for your questions and for your time.

This concludes today's conference. You may now disconnect. Have a great day, everyone.