Catalent Inc (CTLT) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 Catalent, Incorporated earnings conference call. My name is Tony, and I will be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to Mr. Tom Castellano, Vice President of Finance, Investor Relations and Treasurer. Please proceed.

Thank you, Tony. Good afternoon, everyone and thank you for joining us today to review Catalent's first-quarter FY16 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 Stameron, Vice President of Strategy.

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 the actual results could differ from Management's expectations. We refer you to slide 3 for more details.

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 2, 2015 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 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've included in our earnings press release issued just a short while 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 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. We are pleased to start the fiscal year with solid results.

As you can see on slide 6, our first-quarter revenue increased 11% in constant currency to $423 million, which represents organic growth of 9%, compared to the first quarter of the prior year. All three of our reporting segments posted revenue growth in constant currency during the quarter, led by double-digit improvement in the Development and Clinical Services segment. During the first quarter, our Development and Clinical Services segment posted significant EBITDA growth on a constant currency basis.

As a result, our EBITDA from continuing operations nearly doubled to $72.2 million, compared to a year ago. On a constant currency basis, our adjusted EBITDA of $83.8 million was in line with the prior year. Our adjusted net income increased 54% year over year to $20.7 million, or $0.16 per diluted share.

Now I will briefly discuss some of our key operating accomplishments during the first quarter. In the middle of October at the CPhI Worldwide Conference and Exhibition held in Spain, we launched our new OptiForm Solution Suite platform designed to pair the optimal, most innovative drug delivery technologies to each developmental molecule with the goal of providing candidate formulations for animal PK studies within 12 weeks of project initiation. OptiForm Solution Suite combines four innovative approaches, including advanced parallel screening, to drug product development and aims to enhance drug bioavailability and to accelerate more molecules to the clinic and beyond.

We also wish to highlight another excellent addition to our Board of Directors with Don Morel, former CEO of West Pharmaceuticals, joining effective the next time the Board of Directors convenes. We continue to build on the strong experience and expertise of our board, as they partner with our management team in creating greater shareholder value.

During the quarter, we announced the formation of an advisory board to provide strategic insight as we continue to build our Biologics business growth strategy. This new board brings diverse expertise in Biologics development and commercialization, new technologies, contract services and a deep understanding of the key challenges facing Biologics. These expert advisors will play a key role in keeping our strategy properly focused as we continue to build our biopharma solutions offerings.

Finally, just a few days ago, our Board of Directors authorized a share repurchase program to use up to $100 million to repurchase shares for our outstanding common stock. Under the program, we are authorized to repurchase shares through open market purchases, privately negotiated transactions or otherwise in accordance with applicable federal securities laws. The buy-back program will not hinder our ability to continue to seek M&A to augment our size and scale.

In conclusion, we're off to a solid start for FY16, and are enthusiastic about several trends in the quarter, particularly the performance of our Development and Clinical Services business. Dynamics of our industry and market remain very favorable, and we continue to leverage our market-leading position, broad capabilities, global reach and regulatory track record to further penetrate our existing markets.

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

Thank you, John. I will start my presentation with a brief review of our first-quarter operating accomplishments by reporting segment starting with oral technologies on slide 7.

Our softgel business, which accounted for approximately 70% of oral technology segment revenue, was significantly affected by non-cash FX translation during the first quarter. However, in constant currency, the business had a strong start to the fiscal year, posting double-digit revenue and EBITDA growth. The consumer health initiative is gaining traction and is an important factor behind the growth we experienced within Latin America, Asia-Pacific and Europe during the first quarter.

Additionally, we continue to see strength within the North America region, which neutralized the margin impact of the consumer health mix change. We believe the strong softgel performance we saw in the first quarter should continue throughout the fiscal year based on the strength of our existing products slate coupled with the continued growth in consumer health that we expect to see during the fiscal year.

The modified release business which accounted for roughly 30% of oral technology sales had a challenging quarter. Due to lower customer demand for certain higher-margin products, revenue within controlled release declined year over year, and EBITDA was affected by unfavorable product mix. Given the higher-margin nature of these products and overall magnitude of the decline, the oral technologies EBITDA margin decreased 150 basis points compared to the first quarter of the prior fiscal year despite the strong performance of softgel. Overall, the modified release business fundamentals remain strong, but we do expect challenges throughout the remainder of the fiscal year driven by continued lower end market demand for certain higher-margin customer products similar to that which we experienced in the first quarter.

The Development and Clinical Services segment shown on slide 8 posted strong organic growth during the first quarter. The improved performance of the Clinical Services business was attributable to increased customer project activity in the US, and more recently Europe, which we expect to continue in the near term.

Revenue and EBITDA growth as well as margin expansion in the analytical services business was driven by the integrated oral solids development and manufacturing business based in Kansas City. The Micron acquisition, in which we acquired the market leader in particle size engineering for clinical stage drug formulation and development, also made positive contributions to segment performance during the first quarter, and Micron continues to gain us access for to new molecules earlier in the development cycle.

As of September 30, 2015, our backlog for the Development and Clinical Services segment was $430 million, a 3% sequential increase. The segment also recorded net new business wins of $129.5 million during the first quarter, representing an 8% increase year over year. The segment's trailing 12-month book-to-bill ratio was 1.1.

During the quarter, we appointed a new President of Clinical Services, which we believe better positions the business to achieve its long-term growth targets. The new President, Mr. Wetteny Joseph, is a tenured employee in the segment who has worked his way up in the business.

Now on slide 9, turning to the medication delivery solutions segment, our Blow-Fill-Seal offering continues to be one of our strongest performing businesses, and it posted double-digit revenue and EBITDA growth during the first quarter. Market fundamentals for Blow-Fill-Seal remain attractive with a robust new product pipeline and continued product mix shift to higher-margin products. However, we expect to see the growth within this offering moderate during the remainder of the fiscal year.

The sterile injectables business experienced modest decline in both revenue and EBITDA during the first quarter. While we expect this business to perform in FY16 in line with prior year, we believe that our entry into the animal health market positions the business well for future growth in FY17 and beyond.

Finally, in the Biologics business, we saw revenue growth from our Madison facility which was driven by the completion of project milestones. Our recently acquired Redwood Biosciences SMARTag technology continues to meet proof of concept milestones, and customer interest remains strong. We continue to believe our Biologics business is well positioned for future growth.

To provide additional insight into our long cycle business, which includes both oral technologies and medication delivery solutions, we are disclosing our long cycle development revenue and the number of new product introductions or NPIs. 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 predict 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 first quarter ended September 30, 2015, we recorded development revenue of $33 million, an increase of 22% versus the prior year. Additionally, we introduced 46 new products versus 48 new products introduced during the first quarter of the prior year. As a reminder, the number of NPIs in any given period depends on the timing of our customers' product launches which are often driven by regulatory body approvals or are at the discretion of our customers, and thus this figure will continue to vary quarter to quarter.

I will now provide more details on our financial results for the first quarter. As a reminder, all of the segment revenue and EBITDA year-over-year variances I will discuss in the next few slides are in constant currency.

Turning to slide 10, revenue from the oral technology segment was $247.7 million for the first quarter of FY16, an increase of 7% compared to the first quarter a year ago. This growth was attributable to increased demand for our softgel offerings partially offset by decreased end market customer demand for higher-margin products within our modified release technology platform.

Oral technology segment EBITDA for the first quarter of FY16 was $51.1 million, unchanged versus the first quarter a year ago. Segment EBITDA within our softgel offering increased primarily due to higher sales and more effective absorption of fixed costs through higher capacity utilization, which was offset by decreased demand for higher-margin offerings within our modified release technologies platform.

Revenue from the Development and Clinical Services segment was $122.9 million for the first quarter, an increase of 23% over the first quarter a year ago. This increase was primarily attributable to organic growth in our analytical services and Clinical Services offerings as well as the $5 million revenue contribution from the Micron acquisition which occurred in the second quarter of 2015.

Development and Clinical Services segment EBITDA for the first quarter was $27.2 million, an increase of 32% year over year. This strong EBITDA improvement was primarily driven by increased sales across the segment and a favorable shift in revenue mix within analytical services related to our oral solids development and manufacturing business. The Micron acquisition also contributed approximately $1.5 million to the improved performance during the quarter.

Revenue from the medication delivery solutions segment was $55.7 million for the first quarter of FY16, an increase of 5% over the first quarter a year ago. This growth was primarily due to higher revenue from our Blow-Fill-Seal technology platform and revenue from the completion of project milestones within Biologics, partially offset by decreased demand for injectable products at our European prefilled syringe operations.

Medication delivery solutions EBITDA was $7.8 million, a decrease of 18% year on year. This decrease was primarily attributable to lower demand and unfavorable revenue mix for injectable products at our European prefilled syringe sites and incremental costs investments in the Redwood Biosciences business. These decreases were partially offset by increased profits generated by our Blow-Fill-Seal technology platform as well as our Biologics offerings.

Slide 11 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 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 2016 adjusted EBITDA decreased 7% to $77.6 million, compared to $83.4 million for the first quarter a year ago, solely due to FX translation. Excluding the impact of FX translation, our first-quarter adjusted EBITDA was in line with the prior year as higher profitability in the Development and Clinical Services segment was offset by a decline in the medication delivery solutions segment.

On slide 13, you can see the first-quarter adjusted net income was $20.7 million, or $0.16 per diluted share compared to adjusted net income of $13.4 million, or $0.13 per diluted share in the first quarter a year ago. This slide also includes the reconciliation of earnings or loss from continuing operations to non-GAAP adjusted net income in the summarized format for your reference. A more detailed version of this reconciliation can be found in our supplemental information section on the slide deck where you will find essentially the same add backs as seen on the adjusted EBITDA reconciliation slide.

Now turning to slide 14, as of September 30, 2015, our leverage ratio was 4.0, compared to 3.9 as of June 30, 2015. And our debt capital structure was essentially unchanged during the first quarter.

On slide 15 as you can see, there's no change to our previously issued financial guidance for FY16. We expect full-year revenue in the range of $1.81 billion to $1.9 billion. We continue to 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 our capital expenditures in the range of $125 million to $135 million, 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.

We also wanted to take this opportunity to provide clarity related to two components of adjusted net income, specifically interest expense and cash taxes. We expect our interest expense for the second through fourth quarters of FY16 to be closely aligned with what we reported in the first quarter. Related to cash taxes, we expect the full-year figure to be in the range of $40 million to $46 million, incurred approximately linearly across the quarter.

Slide 16 is simply there for your reference and bridges our FY15 results to our FY16 guidance, which as a reminder, is the same as our previously issued financial guidance, and this page is reproduced from our last earnings call and is identical in all respects. As we discussed during last quarter's earnings call, FX translation will have a significant impact on our FY16 first-half financial results, but our base business remains strong and is growing in line with our long-term outlook on a constant currency basis.

Lastly, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression throughout 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, where we expect to generate approximately 40% of our earnings in the first half of the year and 60% in the second half of the year.

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

(Operator Instructions)

Ricky Goldwasser, Morgan Stanley.

This is Mark Rosenblum in for Ricky. Just a question on the oral technologies operating margin, or EBITDA margin, is that a result of seasonality, the decrease year over year? Or should we expect that that margin will be lower because of the decreased demand for higher-margin products throughout the year?

The margin decline that we saw in the OT segment was really driven by what we saw on the modified release technology side, where demand was lower for certain of our higher-margin products in the segment. Our softgel margins were actually up year on year. And because we're talking about year-over-year variances, seasonality really doesn't come into it. It is reflected already.

Okay. Thank you.

John Kreger, William Blair.

It's Robbie Fada in for John today. Seems like there were a few moving pieces with regard to mix shifts in the quarter. Can you speak to the persistence of some of those, or which ones might be transitory as we think about the rest of the year?

And then secondly, the DevClin new business in the quarter was very good. Based on these wins, maybe the wins over the last couple of quarters, what does that tell you about what the potential mix shifts will be in the commercial business a couple years out? Thanks very much.

Okay. So on the subject of your first question, mix shift, because of the breadth and diversity of our Business, mix shift in revenue is something we will be talking about quite frequently, whether it's within a segment, or sometimes among our segments. So -- but we will take them one by one here.

Within our oral technology segment, the initiative that is underway to pursue more consumer health business will naturally cause the business to mix down. What we saw in the first quarter was actually better than our expectations because the softgel business performed broadly well across the globe and throughout all the subsets of the business.

So Rx softgel performed well. Development revenue was really strong in the business. And so you didn't see what would be a natural mixing down from just having more consumer health versus Rx business.

So -- but the mix shift related to the modified release technologies business that we saw in the first quarter, we're likely to see that over the next couple of quarters until demand for these products improves, which we believe it will. So that's the oral technologies segment.

Within the MDS segment, we saw some mixing down due to the prefilled syringe performance during the quarter. This is something that will, we believe, will improve towards the latter part of the fiscal year and into next fiscal year. We mentioned the animal health initiative.

The DevClin business is mixing up as we are pursuing more oral solid development and commercial manufacturing. And that's what positively impacted margins in that business during the first quarter. And that is a growing business for us, and we do expect to see margin continue to mix up across our DevClin business.

Thanks. That's very helpful. And then the second part on the new wins, is there anything interesting in those wins that shows you what the mix shift will be longer-term? Or are they pretty much basically what you are seeing now?

Sure. So I'd like to draw a distinction and just make sure -- this was something that we've talked about before, but it's a point that merits repeating. Our DevClin business will perform a wide array of scientific services in support of drug development for molecules that may never become part of the commercial long cycle part of the business.

So what we're seeing on the DevClin side is indicative of just stronger R&D spend generally speaking. It's good for the segment. It's overall good for our business broadly speaking. But because we are taking on all comers, if you will, in that part of our Business, we don't necessarily focus on just molecules that we intend to commercialize.

I would direct your attention to the development revenue metric which we disclosed, and that is scientific services, and formulation and development services that we provide specifically for molecules that we intend to work with our customers to secure approval and then commercially manufacture for the long-term. That metric was up 22% year on year, and that is a very positive indicator for us that in terms of a growth target for our long cycle business and that we will be able to achieve what we have said in terms of 4% to 6% long-term growth at Catalent.

Thanks for all the detail.

Tycho Peterson, JPMorgan.

This is Steve Reiman on for Tycho. Thanks for taking the question. First question is just, you mentioned that you appointed a new President of the clinical supply services business. So could you give a little more color on the opportunity you see in this business, and then what's the steady-state growth rate you're targeting for that segment?

So our clinical supply services business is about three quarters of the Development and Clinical Services reporting segment. The change in President reflects that 75% of the reporting segment, so it's our clinical supply services business that Wetteny has ascended to the new role there.

This is a business that has always had somewhat higher long-term growth outlook top line than the base long cycle business. And we would put that at a couple of points. So if Catalent overall is 4% to 6% top line growth, the Clinical Services business should be a point or two higher than that. And we continue to believe in that as a long-term potential growth rate for the business, and our new President should be able to help us achieve that.

Got it.

Second question is on leverage. You've been at 4 times for a couple quarters now. You've extended out maturities [best beck] pretty far out. So is it safe to say at this point that 4 times is the steady-state ratio you're comfortable operating at going forward, particularly given the buy-back you've put in place?

We're very comfortable at the leverage ratio that we've been at for the last few quarters, but really I would say that our target leverage ratio on a steady-state basis for the long term would be around 3.5. That said, to pursue acquisitions which we believe are strategic to the Company, we can and would consider taking that leverage up to 5, 5.5 as the Company has operated at leverage levels of north of 6 for almost our entire time under private equity and we did not miss a beat to invest the capital that we wanted to invest or pursue other growth initiatives, including three acquisitions last year.

And the steady-state leverage ratio of 3.5, that's not an official position of the Company. That's my own view as CFO of the Company when I look at the cash flow generating profile, our long-term visibility into the revenues and the overall stickiness of the business. This is a business that can naturally shoulder higher levels of leverage than your average business.

Got it. Appreciate the color. Thanks.

Derik de Bruin, Bank of America Merrill Lynch.

This is [Juan] filling in for Derik. He may join us briefly. But had a question -- I was wondering if you could remind us what the margin differential was within softgels for Rx versus OTC?

Sure. So what I will quote you here is variable margins, and then I will provide a footnote to that.

Generally speaking, VMS, which is vitamins mineral supplements, and consumer health business is generally 15 to 25 percentage points lower variable contribution as compared to the Rx and generics side of our business. You generally don't see that flowing through all the way to the bottom line, as VMS products and consumer health products can be runs, generally speaking, more efficiently through the plant.

There are more stringent regulatory requirements on the prescription and generics side of the business, so that narrows when you get to the bottom line. But the spread can be anywhere from 15 to 25 percentage points at the variable profitability line.

And another reason why we didn't see that in the first quarter and why we don't expect to see that through this fiscal year is because we are building this new consumer health capacity or this new consumer health business into capacity that already exists. So you get a nice absorption benefit from the increased capacity utilization, which is another buffer to the overall margin mix down.

Okay. Got it. Thanks for your color. And then also I was wondering if you could pinpoint or tell us, what specific product lines within MRT you were seeing some softness in?

So we don't discuss specific products. I can tell you that they are prescription and generic products. As you might guess, those are higher-margin products for us versus OTC or VMS. But would just tell you that it's generally related to prescription or generic products that are higher margin.

Good. And last, any general comments you have on the recently announced addition of Don Morel to your board, and anything you may be looking forward to?

I would just --this is John Chiminski. I would just say that Don is an excellent executive that comes from the pharmaceutical services space. And as we look to fill out our board, post Blackstone -- we still have two Blackstone board members -- we really wanted to add expertise from our space.

And the way we look at West is that they are completely analogous to Catalent. They do on the pharmaceutical component side what we do on the pharmaceutical finished dosage form side.

So Don going to be a terrific board member. He understands the business, had a similar slate of customers, and I think is really going to help us in terms of guiding growth. We've obviously have had some interactions with the team before, and again, Don's going to be a terrific add.

Thank you.

This is Derik. I'm sorry, I'm in London and I've got some communication problems. I didn't hear most of the call, but I'm wondering, did you give any specific color in terms of the second-quarter EPS guide?

So there's a big differential in terms of your Q1 coming in -- you beat us, but we were at the low end of the Street. I'm just wondering if you could give us a little more color in terms of how to model EPS a little bit more effectively.

Sure. We did give a little bit of guidance on that, Derik. I think the Company relative to consensus beat on revenues. We beat on EBITDA. And then we had a significant miss on EPS, and it's really all related to the timing of cash taxes.

We expect our overall cash tax savings to be about linear for the fiscal year. And the consensus came out more towards proportional to the EBITDA generation. But really, the way that our cash taxes are spent, it's a combination of paying estimated taxes versus actual taxes due.

It actually leans more toward linear than it does proportional to our overall profit generation, and I think that was the discrepancy between where our actual performance was and where consensus came out. So in our prepared comments, we alluded to the notion that as we see the future quarters rolling out, cash taxes are more likely to be linear than they are to be proportional.

Great. Thanks for the color.

Gary Nachman, Goldman Sachs.

This is [Davari Kesha] on behalf of Gary Nachman. Just a couple of questions.

Can you speak to your capital allocation priorities at this point with the debt and the share buy-back? And you said that does not hinder your ability to do M&A, so how would you prioritize the three? And on M&A specifically, do you think given the scrutiny now, what do you think -- is there a window for you to do an inversion deal in this environment?

And lastly, on modified release, you've said there's lower demand for higher-margin products, but you think going into next year, this should improve. Can you talk in some detail about the dynamics and why you expect those fundamentals to rebound next year? Thank you.

Okay. Thank you for your question. I will take the first one first, which is related to capital allocation.

So I want to be clear with everyone that our overall capital allocation strategy has not changed. So we will preferentially direct capital to organic growth in the business, as well as prudently executed M&A. That's where the dollars will go first.

And then beyond that, we would look at share buy-backs before we would look at debt reduction. We're quite comfortable with the leverage where it is, as it has been the lowest that Catalent has fundamentally ever operated under. And that may drift down to about 3.5 times, which as we had discussed earlier is about steady-state.

The institution of the share buy-back program, I would characterize this more under the category of good housekeeping. As we would generally want to contain any share growth related to management equity programs, and having in place a small board-approved share buy-back program is an excellent way to do that. And so that's exactly what we did during the quarter.

The timing of the institution of it should carry no signal to anybody. This is just simply a prudent way to keep our overall share count from rising due to management equity programs.

Your second question related to M&A and the potential for the Company to execute some tax inversion. And what I would say is it's awfully hard for the Company to comment on M&A generally speaking.

And when you're talking about something as specifically targeted as an inversion deal, it just becomes very, very difficult to talk in any specifics about that. So that's just a tough one to address in this format.

And finally, on MRT, in terms of additional color, it's just not unusual for us to experience in any of our technology verticals, periods of ebbs and flows of demand. And I think that's what we have seen in the MRT business in the first quarter, the products that were -- that did not meet our expectations as I mentioned were generally prescription or generic products. These are viable products, they're not going away.

Sometimes our customers will be adjusting inventory levels. Sometimes they're running promotions, and these things will cause ebbs and flows. I think that will we will see this for the next few quarters, but we're not at all worried about either A, these specific products, or B, the long-term growth prospects for our MRT business.

Thank you.

Dave Windley, Jefferies.

Thanks for taking the questions. My question is something of a follow-up to the last.

Trying to back of the envelope triangulate on this, so if oral technologies EBITDA margin was down about 150 basis points, but softgel was actually up a little bit, you said, so modified release maybe down 350 to 400 basis points?

Again to your answer to the last question on technologies can ebb and flow. I'm interested in a little bit better understanding of how many different products are in MRT. When you talk about these products ebbing a little bit for this quarter and then maybe the next couple, should I think about that as products defined as a customer product, or products defined as, say, extended release technology as a class?

It would seem either that there are chunkier products in this revenue stream than I realized, or you had a number of them that have softened at the same time. So I just want to understand more perspective around that.

Okay. Thank you.

I would tell you, David, that it is true that the product slate within our ADT business -- within our MRT business is narrower than softgel. When you look at the oral technology segment, that would be the case.

There's no real relationship amongst the products that we saw lower demand for during the quarter, either by customer or by therapeutic class. And I would characterize it as a handful of products. So five.

Okay.

And that's about all I can divulge at this point. And as I've said in prior calls, when we see these fluctuations, they tend to go for several quarters. And then we will naturally see an uptick.

But the products that are down, as I alluded to at the last caller, we don't have fundamental concerns about the market viability of these products. And sometimes in certain quarters, we will see less or more orders as supply chains are moving. Right?

In the long-term, medications that we manufacture go to patients. And that's why we tend to focus on long-term guidance versus short-term. But in the short term we're supplying our customers' supply chains, which can inherently be more volatile.

But I think just to cap it, I think you are correct, that there is a narrower product slate within the MRT business versus the softgel business. And so, of the 7000 products plus or minus that Catalent makes, softgel might have something like 5000 and the MRT business might have something like 1200 just to give you a little bit of some context.

That does help. Thank you. Follow-up to that would be, I hear you on the expectation that these products are solid and that this is a transient impact.

Are there cost actions that you can or are taking in the business to mitigate the impact for the one or two or three quarters that this happens? Or do you just weather the storm until they come back?

It depends on how pervasive the issue is. I think in this case, we would be inclined to modestly adjust our cost base, and that happens in very sensible ways in terms of how you manage a labor force. But there's nothing that would indicate that we need to be making more wholesale changes to our overall staffing level at the impacted sites.

Thanks. My last question is over on the softgel side, appreciate the description on building the consumer business into existing capacity. Is that capacity running at what you might call reasonable rates?

I suspect you might even say that it's still not fully utilized. I'm trying to get a sense for how perfectly do the stars have to align on the capacity for softgel for the utilization and overhead absorption of the plants to offset the 20%-ish variable margin differential?

Well, that one's difficult to quantify. I would say that it is marginally mix dilutive -- in other words, the absorption doesn't quite cover the lower variable profits.

And the reason why we didn't see it in the first quarter is just because the soft gel business performed so well actually across the board. The Rx business did well globally, including North America. Development revenue was up nicely.

And so that countered what would naturally be a margin down due to the consumer health business that we are onboarding. But we're certainly happy to be realizing the overall absolute increase in profitability dollars, and this is something that I think we will see for the rest of this fiscal year. And then by that point, we would be consider the objective of the overall consumer health initiative pretty much achieved.

Okay. That's very helpful. Thank you.

There are no further questions in the queue at the moment. We will now hear from Mr. John Chiminski, President and CEO, for closing remarks.

In conclusion, I'd like to add that we're pleased with Catalent's performance during the quarter. Looking ahead to the remainder of the year, we're confident that we will continue to benefit from our industry-leading partnerships, service offerings and technologies.

We remain focused on expanding our market share and delivering value to our shareholders. 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. Thank you for your time.

Ladies and gentlemen, that concludes today's presentation. Again, thank you for your patience. You may now disconnect and everyone, have a great day.