Catalent Inc (CTLT) 2015 Q4 法說會逐字稿

Hello, everyone, and welcome to the fourth-quarter 2015 Catalent Incorporated earnings conference call.

(Operator Instructions)

And I would now like to turn the call over to Vice President of Investor Relations and Treasurer, Tom Castellano.

Thank you, Lauren. Good afternoon, everyone, and thank you for joining us today to review Catalent's fourth-quarter and FY15 financial results. Please see our agenda on slide 2 of our accompanying presentation, which is available on our investor relations website. Joining me today representing Catalent are John Chiminski, President and Chief Executive Officer, Matt Walsh, Executive Vice President and Chief Financial Officer, and Cornell Stamoran, Vice President of Strategy. John will start the call with a review of the key financial and operating achievements for the fourth quarter and fiscal year Then Matt will discuss the Company's fourth quarter and fiscal year financial performance as well as provide our outlook for FY16. Finally, we will open the call to 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 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 earlier today, 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 to 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 in our earnings press release, issued just a few moments ago, a reconciliation of the non-GAAP financial measure to the most directly-comparable GAAP financial measure. 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 US GAAP. Now, I would like to turn the call over to President and Chief Executive Officer, John Chiminski.

Thanks, Tom, and welcome, everyone, to our earnings call. FY15 was our first year as a public Company following our IPO in July of 2014, and we delivered strong results, both financially and strategically. During the year, we achieved revenue and profitability growth on a constant currency basis across all of our reporting segments, while continuing to invest in our innovative technologies in order to meet the growing needs of our customers around the world. We also completed three strategic acquisitions: Micron Technologies, Redwood Bioscience and Pharmapak Technologies.

As you can see on slide 6, our fourth-quarter revenue decreased 2% as reported, but increased 8% in constant currency to $510.1 million. FY15 revenue was $1.83 billion, with no change as reported, and a 7% increase in constant currency. All three of our reporting segments posted revenue growth in constant currency for the fourth quarter and fiscal year. Due to the strong performance of our business and favorable product mix, our gross margin for the fiscal year improved 80 basis points to 33.6%. During the fiscal year, all three of our reporting segments posted improved profitability in constant currency, led by double digit EBITDA growth in the Medication Delivery Solutions and Development and Clinical Services segments. FY15 adjusted EBITDA increased 9% in constant currency to $443.1 million, or 24.2% of revenue. FY15 adjusted net income increased 43% to $203.5 million, or $1.68 per diluted share.

Now, I'll briefly discuss some of our key operating accomplishments during the fourth quarter. First, we continued to help provide more products and better treatments to the marketplace for our advanced delivery technologies. At the end of July, one of our customers, OPKO Health, announced that the US FDA has accepted for review its New Drug Application for the treatment of chronic kidney disease and vitamin D insufficiency, which uses Catalent's proprietary OptiShell softgel technology as its delivery platform. Our OptiShell platform allows for high temperature encapsulation of semisolid fill material within a non-gelatine plant-based shell. The product, Rayaldee, will be manufactured at our North American Softgel Center of Excellence in St. Petersburg, Florida.

Also, we signed an exclusive licensing agreement with Excelimmune to access its antibody combination therapy, or ACT, technology platform. The platform has the potential to enable a consistent and cost-effective method to manufacture multiple recombinant antibodies or other recombinant proteins in a single batch culture. Under the licensing agreement we will continue development work on the platform, both internally and in conjunction with partner-sponsored programs. We'll also be able to leverage our all-in proprietary GPEx technology to help enable that development.

Finally, during the quarter, we expanded our Singapore clinical services facility, to provide secondary packaging and labeling capabilities. The site is now fully approved for GMP across all its activities, including secondary packaging, label printing, storage, distribution, returns and destruction management. These expanded capabilities complement our Shanghai site, and allow us to provide more integrated and flexible solutions for customers conducting trials throughout Asia Pacific.

We also wish to highlight two excellent additions to our Board of Directors, with Greg Lucier, former CEO of Life Technologies, joining during the fourth quarter, and Marty Carroll, former CEO of US operations of Boehringer Ingelheim joining in July. We continue to build on the strong experience and expertise for our Board, as they partner with our management team in creating further shareholder value.

In conclusion, I'd like to underscore the dynamics of our industry and market remain very favorable for our business. First, there remains a growing need for fewer, bigger, better suppliers, with scale and global reach, with an emphasis on both delivery and compliance. Given our market-leading position, capabilities, regulatory track record, and a history of reliable supply, this trend continues to bode well for Catalent's organic growth. The benefit of that trend to Catalent is enhanced by incremental M&A, which augments our offerings and scale.

Second, ongoing consolidation in our dynamic industry is generally positive for Catalent, due to the inherent stickiness of our service offerings for pharmaceutical and biologic products. Our follow the molecule strategy allows us to capitalize on these market opportunities as we continue to pursue our long term growth objectives. Now, I'd like to turn the call over to our Executive Vice President and Chief Financial Officer, Matt Walsh.

Thanks, John. I'll start my presentation with a brief review of our fiscal year operating accomplishments by reporting segment, starting with Oral Technologies on slide 7. Our softgel business, which accounted for approximately two-thirds of Oral Technologies segment revenue, posted modest growth in constant currency, and strong top line performance in North America during the fiscal year was offset by continued product mix shift from prescription products to consumer health products. This mix shift caused EBITDA to come in below the prior year level.

As demonstrated by growth in Asia Pacific and Latin America, where our product mix is more focused on consumer health, the expected mix shift from prescription softgel to consumer health softgel is progressing, and we believe it will continue in the near term. The modified release business, which accounted for roughly one-third of oral technology segment sales, continued to generate strong profit share revenue from product participation related activity. EBITDA margin across the business expanded significantly, due to product participation related activities, favorable product mix, and timing of customer contractual settlements.

The development in clinical services segment, shown on slide 8, posted strong growth during the fiscal year, driven by development in analytical services, as well as by the Micron acquisition. Clinical services revenue was in line with prior year, and EBITDA was modestly below the prior-year level, due to unfavorable product mix and decreased customer project activity, primarily in Europe. Analytical services, however, performed very well, due to our integrated oral solids development and supply business.

As of June 30, 2015, our backlog for the Development and Clinical Services segment was $417.7 million, a 5% increase compared to the third quarter of this year. The segment also recorded net new business wins of $143.3 million during the fourth quarter, representing a 31% increase year-over-year. The segment's trailing 12-month book-to-bill ratio was 1.1.

Now on slide 9, and turning to the Medication Delivery Solutions segment, our blow-fill-seal offering posted double digit revenue and EBITDA growth for the full FY15, driven by increased demand and favorable product mix. Market fundamentals for blow-fill-seal remain attractive, with a robust new product pipeline. As we've seen in prior quarters, our product mix continues to shift to higher-margin products.

The sterile injectables business experienced unfavorable product mix during FY15, which resulted in a modest decline in EBITDA, despite revenue growth of 4%. We expect challenges within this business to continue in the near term; however, we are excited about our entry into the animal health market, which bodes well for future growth potential. Finally, during FY15, we saw the positive results of our investments in the biologics business, which posted revenue and EBITDA growth, despite higher costs related to the Redwood Bioscience acquisition. The addition of the ADC protein engineering technology from Redwood, and our partnership with Excelimmune on their ACT technology broaden the scope of biologic services that we can provide to customers.

To provide additional insight into our long cycle business, which includes both Oral Technologies and Medication Delivery Solutions, we are disclosing the number of new product introductions, or NPIs, and our long cycle development revenue. As a reminder, these metrics are only directional indicators of our business, as we do not control the sales or marketing of these products, nor can we forget the ultimate commercial success of them. We do, however, expect these metrics to offer insight into the long-term organic growth potential of our long cycle business.

For the fiscal year ended June 30, 2015, we introduced 165 new products, versus 175 new products introduced during the prior fiscal year. And we note that the revenue contribution from NPI this fiscal year was similar to that of last year, at approximately 2% of our total revenue. The decline in the number of NPIs launched was primarily driven by quick turn, vitamins, minerals and supplements products, that were cancelled or put on hold by our customers. As a reminder, the number of NPIs in any given year depends on the timing of our customers' product launches, which are often driven by regulatory body approvals, or at the discretion of our customers, and thus this figure will continue to vary quarter to quarter. Additionally during FY15, we recorded development revenue of $142 million, an increase of 4% versus prior year.

I'll now provide more details on our financial results for the fourth quarter, and as a reminder, all the segment revenue and EBITDA year-over-year variances I'll be discussing on the next few slides are all in constant currency. So turning to slide 10, revenue from the Oral Technologies segment was $318.8 million for the fourth quarter of FY15, an increase of 3% compared to the fourth quarter a year ago. This growth was attributable to improved performance in the softgel and modified release offering, as well as the higher revenue from product participation related activity.

Additionally, during the fourth quarter of 2015, we recorded a customer contractual settlement within our Zydis business. Oral Technologies segment EBITDA for the fourth quarter was $99.6 million, a decrease of 2% compared to the prior-year period. This performance was primarily driven by unfavorable product mix within the softgel business, partially offset by the customer contractual settlement.

Revenue from the Development and Clinical Services segment was $124.2 million, an increase of 22% over the fourth quarter a year ago. This increase was related to the Micron acquisition, which occurred in the second quarter of FY15, as well as to the growth in our clinical services and integrated oral solid development and manufacturing offering, partially offset by declines in clinical trial activity within Europe. Development in clinical services segment EBITDA for the fourth quarter was $26.3 million, an increase of 5% year-over-year. This EBITDA improvement was driven by the Micron acquisition, as well as by our integrated oral solids development and manufacturing offering.

Revenue from the Medication Delivery Solutions segment was $70.1 million for the fourth quarter, an increase of 12% over the fourth quarter a year ago. This growth was primarily attributable to increased revenue from our blow-fill-seal technology platform, and from our sterile injectables business. Medication Delivery Solutions segment EBITDA was $15 million, a decrease of 7% year-over-year; however, the fourth quarter of FY14 included a $4 million cost capitalization related to a facility expansion associated with the build out of an animal health suite in our sterile injectables business. Excluding this item, MDS segment EBITDA would have increased 20%, driven by the increased revenue within our blow-fill-seal and sterile injectables businesses, partially offset by the costs associated with the Redwood Bioscience acquisition.

Turning to slide 11, we see in precisely the same format as on slide 10, FY15 performance of our operating segments, both as reported and in constant currency. I won't cover every variance item in detail, but I will say that we were very pleased with the constant currency revenue and EBITDA growth across all of our reporting segments. The 7% constant currency revenue growth, or 6% growth on an organic basis, compared to the same period a year ago was in line with our financial objective of 4% to 6% organic revenue growth, and represents some of the best organic revenue growth performance we've seen over recent years.

Slide 12 shows the 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 support and 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.

So moving to adjusted EBITDA on slide 13, fourth quarter 2015 adjusted EBITDA decreased 10% to $136.3 million, compared to $150.7 million for the fourth quarter a year ago, as higher profitability in the Development and Clinical Services segment was offset by a decrease in the Medication Delivery Solutions segment, as well as the impact of foreign exchange translation. As a result, our year-to-date adjusted EBITDA totaled $443.1 million, an increase of 2% compared to June 30, 2014. As a reminder, FX translation negatively affected our financial results in both the fourth quarter, and for the full year.

Excluding the impact of FX translation, our fourth-quarter adjusted EBITDA would have been in line with the prior year, and our full-year adjusted EBITDA increased 9% compared to FY14. Acquisitions completed in FY15 increased our full year constant currency EBITDA growth by approximately 1 percentage point.

Now moving to slide 14, 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 longer analysis periods, even as 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 consistent growth historically, and we are investing and managing our businesses to continue this trend well into the future.

On slide 15, you can see that fourth quarter adjusted net income was $76.6 million or $0.61 per diluted share, compared to adjusted net income of $77 million or $1.01 per diluted share for the fourth quarter of the prior fiscal year. This slide also includes the reconciliation of earnings or loss from continuing operations to non-GAAP adjusted net income, in a summarized format for your reference. A more detailed version of this reconciliation can be found in our supplemental information section of the slide deck, where you will find essentially the same add backs as seen on the adjusted EBITDA reconciliation slide.

Now turning to slide 16. As we've discussed previously, during FY15, we raised over $1 billion in gross proceeds through the IPO, with the net proceeds used to pay down our highest-cost debt. As of June 30, 2015, our leverage ratio was 3.9, the same ratio as of March 31, 2015, and down from 6.1 at the start of the fiscal year.

I'll now provide our financial outlook for FY16. As you can see on slide 17, we expect full-year revenue in the range of $1.81 billion to $1.9 billion. We expect full-year adjusted EBITDA in the range of $434 million to $457 million, and full year adjusted net income in the range of $203 million to $226 million. We expect in the range of $125 million to $135 million for capital expenditures, and we expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30, 2016 will be in the range of 126 million to 128 million shares. It's important to note that the revenue and adjusted EBITDA ranges to which we are guiding are consistent with our constant currency long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth.

Slide 18 walks through some of the moving pieces that we considered when determining our FY16 revenue and adjusted EBITDA guidance. The first set of bars shows the expected impact of one-timers related to customer contract terminations, net of the full-year impact of the Micron and Pharmapak acquisitions completed during FY15. We project that these items will result in additional revenue in the range of $12 million to $15 million, but will have no impact on adjusted EBITDA during FY16. The second set of bars brackets the changes that we expect to see in our base business performance, which as I mentioned earlier, aligns with our constant currency long-term outlook of 4% to 6% revenue growth, and 6% to 8% adjusted EBITDA growth.

The third set of bars brackets FX translation impact to revenue in the $60 million to $100 million range, and the negative FX translation impact to adjusted EBITDA in the $20 million to $35 million range. We expect the majority of this FX translation impact to adversely affect our first half financial performance in FY16 as opposed to the second half. Additionally, 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 period, as well as due to the seasonality associated with budgetary spending decisions in the pharmaceutical and biotechnology industries, the first quarter of any fiscal year is generally our lightest quarter of the year by far, with the fourth quarter of any fiscal year generally being our strongest by far, with this trend being slightly more pronounced during FY16, as compared to recent history. Operator, we would now like to open the call for questions.

(Operator Instructions)

Our first question comes from the line of Tycho Peterson from JPMorgan.

Thanks. First question on Oral Technologies. Backing out the one-time guidance settlement, growth there, it looked like it was essentially flat. Maybe, can you talk about the puts and takes there, and where you see it from a capacity utilization standpoint at the Winchester facility?

So we'll start with the Winchester piece of that, Tycho. So the Winchester facility was commissioned in the latter half of 2015. We will begin filling that capacity, it will happen gradually. Over time, we'll start with booking increased development revenue for the new space related to business that we can tech transfer in, but in terms of relevant time horizon for filling that capacity, it will be years.

It was a substantial expansion, for one thing, we doubled the footprint at Winchester, and filling that, as I said, we should be viewing that time horizon in terms of order of magnitude years rather than quarters. In terms of the development of the business within Oral Technologies, Q4 over Q4, I think we saw pretty good performance from the modified delivery technologies business, as you said related to product participation-related activities, that was all very encouraging for the fourth quarter. The softgel business year on year saw lower volume, more in the Rx space than the consumer health space, and that also impacted margins year on year.

And then on Medication Delivery, did the softness you saw in Europe last quarter rebound for the pre-filled syringes?

It did, actually. The financial reporting here for the fourth quarter year-on-year has a bit of a one-timer in it in that the prior-year results included this approximately $4 million cost capitalization, which had no revenue impact. If you normalize for that, the business's margins were up year on year, and we do have a relatively bright long term outlook for our MDS business in total and all of the components of it, whether it's blow-fill-seal, our sterile injectables business or the smallest part, but one of the highest growth parts, which is our biologics business in that segment.

Okay, and then just lastly, can you maybe just provide a quick update on some of the acquisitions? Micron, where do you stand in terms of assessing the slate of molecules, and how should we think about the impact in terms of development timelines for DCS? And then for Excelimmune, just any comments on early customer feedback?

So I'll take the Micron piece first. The Micron acquisition, the integration is complete. This was a relatively straightforward integration, as far as acquisitions go. The business was about 1% of our total sales, and had a modest footprint. So the integration is complete.

We've completed the triage of all of the molecules, and we have deployed our sales people in the field to be working with customers to secure development contracts, in our business, development contracts lead to commercial manufacturing, so that is ongoing. And we're seeing about the results we thought we would in terms of the potential for those molecules to be additive to the long-term organic growth of Catalent. So, so far, no surprises out of the Micron acquisition.

In terms of the partnership with Excelimmune, this is obviously very exciting to us. It's very consistent with the high-end services positioning that we're seeking to provide in our biologics business, and I think once again, we're building this business for the long term, it's unlikely you would hear me talk, certainly not in this quarter or even in the next several quarters, about significant year-over-year variances, because of the partnership. But once again, this, along with the Redwood Biosciences acquisition, is the kind of business that we're building for the long term that can support the 4% to 6% long-term growth that we believe the business is overall capable of achieving.

Okay, thank you.

Our next question comes from the line of Derik de Bruin from Bank of America Merrill Lynch.

I want to ask some modeling questions on your 2016 guidance. So when I'm looking at where I was modeling EBITDA, adjusted EBITDA and adjusted net income, I was at the low end of your adjusted EBITDA guidance, but I was well above it on adjusted net income. So I'm trying to reconcile that, so give us a little guidance on like tax, rate, interest expense, and D&A, thinking about that in 2016?

So Derik, this is Tom. I would say D&A we expect to be relatively close to where it was this year, coming in, I would say, a little bit below $100 million, or assuming about $100 million or so, would make sense. I think where you're probably seeing a little bit of a disconnect is around the taxes. The tax rate, we feel more comfortable talking about cash taxes on a dollar basis than we do on a rate basis, and I would say that we saw cash taxes this year come in, in the $34 million range. We would expect that next year to increase to be sort of $40 million at the low end, and maybe as high as $45 million or $46 million on the high end, and I think that's probably the biggest disconnect --

Yes, that's it.

-- that we would have had in the model.

Yes, okay and interest expense?

The interest expense number, I would say is, we're looking at something in the 80-$85 million range. Our rate is essentially flat that we have out there of about 4.25%. Given where LIBOR rates are, we have a 1% floor on that, so if you did the math on that based on our debt balance, we would come out to something in that range.

I was thinking about $84 million, so that's perfect. Great, thanks, I appreciate it.

Our next question comes from the line of Gary Nachman from Goldman Sachs.

Also on the FY16 guidance, how should we think about growth in each of the segments? What might some of the big swing factors be next year by segments specifically? And then just, Matt, what are the expense levels that we should think about? Will they be relatively constant from this year?

In terms of expense, Gary, you are talking about SG&A expense?

Yes, operational expenses.

So let's talk about growth by segment first. We expect to see growth being led by our largest segment, which is Oral Technologies. The softgel business, which experienced a relatively flat year 2014 versus 2015 should see growth above its historical baseline. The expansion of our consumer health business, both in the United States and abroad, is really going pretty well, and the modified delivery technologies business should also see growth commensurate with its historical CAGR.

We should see good growth in our development clinical services business, both organically as well as the full-year impact of the Micron acquisition. Where we might see flatness year on year would be in the Medication Delivery Solutions segment, that one will probably be on the low end of growth, relative to the rest of the businesses. And in terms of our SG&A expense on a constant currency basis, we would be looking at growth in the 3% to 4% range.

Okay, so if MDS is on flatter side, then the others should be growing in the high single digits in order to get to your 4% to 6% target constant currency on the top line, is that fair?

It would need to be towards the upper end of the 4% to 6% range, and in certain cases a little bit beyond that, because don't forget our MDS business is our smallest reporting segment.

Okay, and then on the quarter, just give a little bit more on the development in clinical services to justify such a big jump in the quarter, and then we're going to be using that as a baseline to grow into next year. So I know Micron was a contributor, but maybe you could quantify where most of that came from?

So it really was the Micron acquisition was, by far, the biggest contributor to that growth. We acquired that business in the front end of our second quarter, so we have really almost three-quarters of growth coming from Micron. We saw continued good performance throughout the year from our integrated oral solids manufacturing business, within the segment. That growth should continue, but as you're thinking about modeling, we'll only have about one quarter of full year impact of the Micron acquisition; and then what we would consider to be sort of normal annual growth in this segment, which would be on the high side of the 4% to 6% long term outlook for the Company.

Okay. Last question, just what's your exposure in China? Have you seen any impact yet, given some of the macro challenges there? Thanks.

John here. What I'd tell you, Gary, is that the businesses that we set up in China were both in our clinical supply services business, and also in softgel. And in clinical supply services, the business there is primarily set up to deal with our multi-national customers, so the growth that we have and have planned there is really driven by the multi-nationals. We're still running trials, and we've really had some terrific responses from customers, in terms of completing their audits and placing some initial business. And we've got a long term outlook, but there's nothing from a macroeconomic standpoint in China that would impact that from a CSF standpoint.

And then for our softgel business similarly, we've set up the business to handle a significant amount of -- significant amount of volume that we're actually experiencing in Asia, primarily from our Australia business. So it's really set up for export out of China. So currently as we are configured, we are not impacted from a macroeconomic standpoint or some of the things happening from a domestic demand standpoint that would slow anything down, or changing any of the strategy that we have in China.

And today, I'd also tell you the small percentage of our overall sales, in the 1% range. So again for us, that was a long term growth investment, not predicated specifically on the economics of China, but more on what our pharmaceutical customers and VMS customers were looking for us to do with the footprint there.

Okay, great. Thanks.

Our next question comes from the line of Ricky Goldwasser with Morgan Stanley.

This is Zack for Ricky. Wanted to first ask on oral technology for FY16. I was wondering on the softgel mix shift, is there a timing for next year we should expect that to be annualized going forward, where it's less of a head wind taking in your normal seasonality? And then on the $6 million Zydis settlement in the quarter, does that signal that there was a project or product that was cancelled in FY16 that may be a modest headwind?

Okay Zack, so I've got that. So on the softgel piece, the mix shift to consumer health will be ongoing throughout the year, and I would say it's the kind of thing that by the time we get to the end of the FY16 we would be, we might be about done with that, from what we can see currently. With respect to the Zydis settlement, this really results from products being transferred from one of our customers to another, and so we don't foresee any net decline in volume. And as we have observed over the years, when established products get moved from one of our customers to another, we can often see higher volumes, because the new owner has some sort of synergy or increased commitment to that product, versus the prior owner, that generally results in increased volumes, which benefits Catalent. And we expect that in this case as well.

Okay, I got it, thank you. And one quick one, on MDS, you mentioned the Redwood costs as a bit of an EBITDA headwind. Should we think of Redwood like in the quarter as being an overall EBITDA headwind for the Company? And then it was slightly dilutive? And going into 2016, is it something that we should be thinking as accretive or dilutive relative to when you have longer-term expectations for more business to be coming in from it?

Sure. So we've been pretty clear in the outset that Redwood Bioscience is a really a pre-revenue, technology-related acquisition that has attached to it a cash burn. It's a relatively small number, Zach, now that they have some revenue that they're booking on development projects as customers are trialing the technology. But on a net basis, we're looking at a cash burn in the low single digit millions, so it's not significant to Catalent, but it will, at certain times show up in various explanations for the segment that it's in, which is a relatively small reporting segment for Catalent.

But the financial performance of the business is doing exactly what we thought it would, and in 2016, it will still be a small drain on the Company's performance, but less so than what it was in 2015. But the most important deliverables from that acquisition for the Company are all on the technical milestones of the establishment of that technology, and getting our customers to increasingly trial it, and then, hopefully adopt it one day, one or more products as they intend to market.

Okay, great, thank you.

Our next question comes from the line of Dave Windley from Jefferies.

Hi, good afternoon. Thanks for taking the questions. I guess, first of all, could you, Matt, clarify what time frame or date of pricing you're using for FX in your guidance, and which currency or currencies are the ones that are having the biggest impact on your year-over-year growth?

Okay, so in terms of FX translation, we deal in seven major currencies, Dave, and all of them were down against the dollar. The biggest impact was the euro, but we also have approximately 15% of our revenues denominated in British pounds, and so the euro and the pound together comprise almost 45% of our sales, and that's where we saw the biggest impact year on year. And in terms of the foreign exchange elements of our FY16 guidance, it's right on the chart, and you can -- the low end of our guidance is predicated on the euro at parity with the dollar. And at the midpoint, I think it's about $1.11, euro at $1.11 which is actually not too different from where we are at spot right now.

Yes, Dave. There's some detail on slide 18.

Okay, so don't have my quotes in front of me. But -- so are you assuming something different than where the spot rates are now?

No. And I would say we've really tried to predicate the FX rates we used on where spot is right now, and if you look at that and spot rates stay where they are, Catalent would lap this FX translation issue after the halfway point of the year. That's why we said in the prepared comments that we expect most of the FX translation issue that's embedded in our guidance to be experienced in the first half.

Okay, so then I guess another question on this is, you're saying your underlying constant currency expectations for the businesses are consistent with your view, your longer-term view. So $4 million to $6 million on revenue, I think you said $6 million to $8 million on EBITDA. To the extent, so if that is true, then the FX translation is having a disproportionate impact on margin, causing reported -- expected reported adjusted EBITDA to grow slower. So it's compressing your margin. I guess, what thoughts do you have about protecting yourself against that?

Well, when we constructed the guidance, we were targeting -- and we think that this is really the case in the base business, that we will have overall EBITDA margins that would be consistent with the prior year. And let's just go back for a second. When we took the Company public, we had statements out there which reflected our belief at the time, which is still true, but there's about 300 basis points of margin improvement available to us, relative to where we were in 2014 when we had the IPO.

I think we got out of the gate fast on that, so the margin enhancement we saw in 2015 was -- surpassed our expectations, and this is not the kind of thing we ever expected to be linear, which is why we talked about it on a long-term basis. So, we got out of the gate fast. We think that 2016 margins will probably be similar to 2015; and that's how we constructed the guidance.

Okay, maybe moving off of that point, so the settlement -- was that -- should I interpret that as essentially dropping through to the bottom line? Was there any costs recorded against that settlement in the quarter?

No. No, it's 100% drop through.

Okay, and so that being the case, is that responsible, then, for the constant dollar EBITDA? If I remember correctly, that is responsible for about half of the constant dollar growth, so if I take that away, growth in that segment would have been maybe 1.5, or something like that or maybe less? And then it would have been a pretty big contributor to constant dollar EBITDA, as well; correct?

I think, yes Dave, I think that's fair. Absent that issue, what we saw in the business was generally good performance out of the non-softgel businesses, offset by softgel, but net-net, still growth on an organic basis excluding one-time items.

Well I'm sorry, I can't follow that, so segment EBITDA, excluding FX, was down 2%, and that is with the benefit of $6 million of pure profit to EBITDA? Am I right?

Oh, so we are crossing time periods. I'm talking about full-year performance in the business, sorry.

Okay, so world technologies EBITDA was down pretty hard in the quarter, x that one-time item; right? To be fair, here?

Yes, yes.

Okay. All right, thank you. I've used up enough time, thanks.

Our next question comes from the line of John Kreger from William Baird.

Can you guys talk a little bit more about your long-cycle pipeline, and a couple of things we were wondering. You gave us the NPI for 2015. Based upon what's in your pipeline, do you have any visibility on what that's likely to be next year in FY16, up or down? And are you seeing enough to know if sort of the Redwood Biologics pipeline is ramping, or is it really too soon in that process?

John, John Chiminski here. So first of all, I would say as we look forward to FY16, we see NPI, our current forecast of NPIs to be up, and we have a steady increase of, I would say, NPI projects coming into the Company over the last four to five years, as we really ramped up I would say both front end, as well as the R&D portion of the business. However, I'll modify that, saying that those are forecast by the Company, and that there actually is a lot of churn that happens in our NPIs, because the NPI launch date is generally predicated on regulatory approvals. Sometimes customers put a project on hold, and sometimes they actually outright cancel, and so there ends up being some churn in that. But in terms of overall expected volume our forecast certainly have more NPIs this year than we had last year, which is a consistent trend over the last, I would say three to five years. What was the second part of your question, John?

Yes, how the biologic portfolio is ramping in that long cycle pipeline?

Sure, so first of all, we continued to place a disproportionate emphasis from a Company strategic standpoint on biologics, because we really know that there's a lot of value that Catalent can create as a lot more biologics are coming to the market. First of all, from a pure biologics standpoint, driven out of our Madison facility where we are doing cell line development, and have recently done our expansion, where we now have 1,000 liter single use bioreactors, we saw a substantial double digit increase in the commercial volumes that were put through that facility. We were very pleased with that performance, given that facility had come online not more than 18 months ago.

The strong performance there, Redwood Biosciences, Matt talked a little bit about our performance there. It certainly is in early pre-revenue acquisition, if you will, but our game plan on a go-forward basis does have revenues and milestones being additive to that business such that, maybe not within the year, but certainly within the next several years, we'll end up adding to the business and not be a detractor from this early stage that we have right now. And then I would just say in general, we continued to refine our strategy, which today is based upon our protein improvement strategy in helping customers bring more products that are treatments to our tag lines, and we're looking at other technologies like Excelimmune around that focus, that continue to add to the Company. So we feel good about the focus that we're placing on it, and we'll continue to report on progress.

Thanks, John. One last follow-up again on the pipeline. You have mentioned a couple areas where you have had a negative mix shift. if you look at your pipeline. Are there any particular delivery mechanisms that stand out as likely increasing as a percent of your business, over the next couple of years?

We certainly have a lot of technologies that we've put in the pipeline over the last three to five years. We've talked about Optiform and OptiDose. Those continue to follow the path that we would expect. But I'd say from an overall mix standpoint, as I'd take a look at the last couple of years, its been pretty consistent. Softgel actually has had an increasing rate of molecules coming into the pipeline. It's just whether or not they actually come to fruition, and we also have, I would say, a very strong consumer health pipeline that's across multiple technologies. So, I would say we're just seeing overall increases that are probably somewhat consistent with the similar mix that we've had in the past.

Great, thank you.

Our next question comes from the line of Michael Baker from Raymond James.

Yes, thanks a lot. First off, Matt, I was wondering if you could give us a little bit more color on the more pronounced seasonality that you expect for this upcoming year? And maybe set it in context of what we have seen historically, or what you have seen in the business historically, particularly as it relates to the first quarter?

Okay, yes, thanks Michael. So just to review something, I think Michael already knows, but for the broader audience, the first quarter of our fiscal year, generally our customers plants are undertaking maintenance work, they're shut down. Our plants are shut down, and that results in the lowest level of commercial activity compared to other quarters in the fiscal year. So we just think that, based on the level of customer orders, customer forecasts for the quarter that we're getting, that relative to our expectation for the full year, that this just seems to be winding up to be a quarter that may be where that seasonality is just a little bit more pronounced.

I don't really have any other commentary than that, Michael. It's just how we see the customer order book sizing up, in terms of firm orders, as well as the non-binding projections that we get from our customers on a rolling basis. It's just looking that way for the quarter, but these same projections also go out into quarters two, three, and four, and so we do have good visibility into the year, as we've always had. So, the phasing will be a little bit more pronounced this year than other years, but it doesn't change our outlook for the full year. Which as you know, tends to be well informed with more than 50%, well more than 50%, of our business under long term contracts where we receive these kinds of forward-looking estimates from our customers.

So it just sounds like there might be a bit of a modest differential from what we've seen historically, so that's fine. Then maybe John, comment as you continue to execute your strategy on the biologics side, including M&A. What inning do you think you're in, in terms of where you'd like to be, if we use the baseball analogy?

Well, I would say we're still very early on. I feel very comfortable with the foundation we've laid around the protein enhancement. But we're doing a lot of work internally, both in terms of engaging a lot of, let's just say, outside help and also working with investment bankers to really understand much better the landscape of opportunities out there; and I almost say that reluctantly, because with the M&A effort that we've had here internally, we've been able to self-source most of the deals or actually all of the deals that we've done have pretty much been self-sourced within the Company. But as we pursue the M&A landscape for biologics, we really are going outside to both tap into understand what's available.

But the other thing that we've done is, we've really put in place two very strong biologics advisory boards. Those are now only six to eight months up and running. We've gotten some terrific folks that are put on the Board. I've spent time with each of them, and they are going to add a tremendous amount of value. So, I would say we're very early on, but confident that long term, the strategy that we're currently executing on and will expand upon is going to be a long-term fuel for the growth. But for everybody on the call, you understand that this is a long cycle business, and we think in 5 to 10 year increments, so a lot of the stuff that we're doing today are going to be adding to the long-term consistent financial performance of the Company 5 years out. Just like as we sit here today, a lot of our performance was predicated on decisions we made three and five years ago, and that's just how Catalent rolls.

Thanks for the update.

Our final question comes from the line of George Hill from Deutsche Bank.

It's Steven Higgin on for George today. I was just wondering for FY16, should we continue to expect the benefit from the product participation-related activity?

I would. So those will still be contributing to growth in 2016, probably not at the level as we saw 2015 versus 2014, so it will continue to make various explanations, but probably not with the same level of frequency or the same magnitude.

For the base business, is there anything else you'd call out as major drivers for the margin rate next year? The margin expansion that it looks like you're forecasting?

So just to be clear, when we constructed the guidance for 2016, our assumption was substantially flat EBITDA margin year on year. So just revisiting this topic, we got out of the gate on margin expansion in our first year as a public Company. We got out of the gate faster than we had thought that we would, and margin expansion for us, as we've experienced it over the years, is not a linear kind of thing. So we think that we'll see margin progression.

We should see margin progression in the business 2016 versus 2015, not as hot as it was in 2015 versus 2014, and this will be driven by continued leverage over our fixed costs. That's something we strive for and typically get every year, and then that may be overshadowed on the upside or on the downside by what happens with product mix across all of our segments. We saw good product mix this year in our modified release technology business, as well as blow-fill-seal within the long cycle. On the downside, we saw a not great product mix in our clinical services business, and our softgel business. It's always hard to predict that over the short term, but over the long term, and by long term I mean over the full year 2016, we see puts and takes that would suggest that the prudent thing to do is to forecast margins that are consistent with what we saw in FY15.

Okay, thank you.

I would now like to turn the call over to President and CEO, John Chiminski for closing remarks.

Okay, great. In conclusion, we're very pleased with Catalent's performance during our first fiscal year as a public Company. Also, we're well-positioned to capitalize on favorable market trends in our space. I'd like to thank all of you for joining us today, and we look forward to updating you again on our next conference call. Thanks for your time.

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.