Catalent Inc (CTLT) 2017 Q1 法說會逐字稿

Welcome to the Catalent Incorporated first-quarter FY17 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Tom Castellano. Mr. Castellano, you may begin.

Thank you, Andrea. Good afternoon, everyone. Thank you for joining us today to review Catalent's first-quarter FY17 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, Chief Executive Officer; Matt Walsh, Chief Financial Officer; and Cornell Stamoran, Vice President of Strategy.

During our call today, management will make forward-looking statements and refer to non-GAAP financial measures. Is it possible that actual results could differ from management's expectations. We refer you to slide 3 for more detail.

Slides 3, 4 and 5 discuss the non-GAAP measures and our just issued earnings release provides reconciliations to the nearest GAAP measures. Catalent's Form 10-Q to be filed with the SEC later today has additional information on the risks and uncertainties that may bear on our operating results, performance and financial condition. Now, I'd like to turn the call over to Chief Executive Officer, John Chiminski.

Thanks, Tom. Welcome everyone to our earnings call.

Catalent's first quarter delivered a solid start to our fiscal year with year-over-year revenue and adjusted EBITDA growth in constant currency in line with our financial performance expectations. As you can see on slide 6, our revenue for the first quarter increased 5% as reported and increased 7% in constant currency to $442 million, all organic and with all reporting segments contributing to the growth.

Our adjusted EBITDA of $75 million was above the first quarter of FY16 on a constant currency basis by 3%, primarily driven by our drug delivery solutions segment, which recorded double-digit revenue and EBITDA growth. Our adjusted net income was $19.6 million or $0.16 per diluted share for the first quarter.

Now, moving to our key operating accomplishments during the quarter. First, we acquired and began integrating PharmaTek Laboratories, a West Coast US-based specialist in drug development and clinical manufacturing. This acquisition adds extensive early phase drug development capabilities from discovery to clinic, brings spray drying into our extensive portfolio of advanced delivery technologies and expands our capability for handling high potent compounds.

The addition of spray drying also provides our customers with the broadest suite of bioavailability enhancement solutions, while complimenting and expanding our Optiform solutions suite platform. Next, there are three highlights on our fast-growing biologics capability that showcase our commitment to building a world-class biologics business in support of our customers and patients.

First, Triphase Accelerator has obtained worldwide rights to an oncology treatment developed using our proprietary SMARTag antibody drug conjugate technology. Triphase will also use Catalent for development, manufacturing and analytical services to support a fast path to clinic. Leveraging their expertise along with our proprietary SMARTag technology and supporting infrastructure will help bring this potentially transformational treatment to patients.

Second, in the quarter, we reach an agreement with Moderna Therapeutics to support near-term GMP efforts for Phase 1 and 2 clinical studies for its personalized cancer vaccines. Moderna will leverage Catalent's manufacturing expertise and capabilities at our state-of-the-art facility in Madison until 2018, while Moderna builds out its own footprint.

Third, two weeks ago, we broke ground on our new 22,000 square foot expansion at our Madison biologic facility. On our last earnings call, we announced plans to expand Madison's state-of-the-art facility. This new expansion will add a third train of two 2,000-liter single-use bio reactors and is planned to be online in the second half of our FY18. The expansion will help meet the needs of our biologics customers and give us additional capacity so that we may continue to aggressively grow our biologics business.

I would also like to highlight another excellent addition to our Board of Directors with Uwe Rohrhoff, CEO of Gerresheimer AG, joining our Board, following the resignation of Chinh Chu and Bruce McEvoy, the designees of our former equity sponsor Blackstone after the sale of the remaining interest in the Company. Uwe brings additional strong pharma services and international experience and expertise to our Board. We look forward to him joining at our next regularly scheduled Board meeting. We would like to thank Chinh and Bruce, who were so important to Catalent's path over these last several years.

Finally, I want to reiterate that the dynamics of our industry and market continue to remain very favorable. Our customer's needs for fewer, bigger, better development and manufacturing partners will continue to be drivers of long-term growth.

Now I'd like to turn the call over to our Chief Financial Officer, Matt Walsh, who will take you through our first-quarter financial results and provide details on our outlook for FY17.

Thanks, John. Please turn to slide 7 for a more detailed discussion on segment performance beginning with our Softgel business. As a reminder, my commentary around segment results will be in constant currency.

Softgel revenue of $186.4 million grew 2% during the quarter, but EBITDA was down 7% as the Beinheim facility was operating at pre-suspension levels of production during the first quarter of FY16, which led to a challenging prior-year comparison. Excluding the impact related to Beinheim, our Softgel business experienced revenue and EBITDA growth consistent with Catalent's consolidated long-term outlook.

Our Softgel consumer health initiative is essentially complete in terms of its above base line impact on year-over-year sales growth. However, we did see marginally higher consumer health volume growth on a same-store basis than we were expecting this quarter in our key geographies outside the US, mainly in Latin America and Asia-Pacific.

Our North American Softgel business, which is primarily comprised of prescription volume and development revenue had a quiet quarter, posting revenue and EBITDA performance that was in line with the prior-year period. As a reminder, our Beinheim Softgel facility was fully operational and the ramp-up of activity at this site continues to progress in line with our FY17 guidance.

The update for drug delivery solutions segment is shown on slide 8. The DDS segment had a very strong quarter, recording revenue of $191.3 million, which was up 13% versus prior year and recorded EBITDA growth of 18%. The development and analytical services business, which we abbreviate as DAS, recorded increased revenue and EBITDA driven by higher levels of customer project activity and was one of our strongest performing businesses in the first quarter.

Recent investments in our biologics business continued to translate into growth during the first quarter. It remains the fastest growing business within Catalent. We recorded strong revenue and EBITDA growth at our Madison facility, driven by the completion of project milestones and larger clinical programs.

The SMARTag technology continues to meet proof of concept milestones and customer interest remains strong as evidenced by our announcement of the research collaboration of Roche earlier this year. We continue to believe that our biologics business is well positioned to drive future growth as indicated by the Triphase and Moderna business development project signed during the first quarter. As a reminder, at the time of the IPO, our dedicated biologics business was approximately 1% of Catalent's total consolidated sales, which has since grown to nearly 4%.

We also continued to see revenue and EBITDA growth with our blow-fill-seal offering during the first quarter. Market fundamentals continue to remain attractive for this key sterile fill-finish technology.

The oral delivery portion of the business declined versus the prior year, driven by our integrated oral solids development and manufacturing facility in Kansas City. These declines in Kansas City were partially offset by a return to growth within our controlled release business, which saw lower volumes in the prior-year period due to customer supply chain issues that have now normalized.

Within the sterile injectables business, revenue was ahead of the prior year and EBITDA grew modestly. Sterile injectables continues to be well positioned for near-term growth with the entry to animal health prefill syringes for which we anticipate commercial sales beginning in the third quarter of this fiscal year.

In order to provide additional insight into our long-cycle business, which includes both Softgel technologies and drug delivery solutions, we're disclosing our long-cycle development revenue and the number of new product introductions, or NPIs as well as the revenue from those in NPIs. As a reminder, these metrics are only directional indicators of our business since we do not control the sales or marketing of these products nor can we predict the ultimate commercial success of them.

For the quarter ended September 30, 2016, we recorded development revenue of $34 million, an increase of 2% versus the same period of the prior fiscal year. Also in the first quarter, we introduced 31 new products, which contributed $13 million of revenue, an increase of 18% compared to the revenue contribution in the same period of the prior fiscal year.

As a reminder, the number of NPIs in the corresponding revenue contribution in any given period, depending on the timing of our customer's regulatory launches, which are often driven by regulatory approvals or are at the discretion of our customers, [note], these figures will continue to vary quarter-to-quarter.

Now on slide 9, our clinical supply services segment posted revenue of $75 million, which was up 3% compared to the first quarter of the prior-year, driven by increased customer project activity related to our core storage and distribution business. However, EBITDA was hurt by the timing related mix shift, the lower margin storage and distribution revenue from manufacturing and packaging revenue and thus down 17% from the prior year. We also experienced increase costs at one of our facilities, which completed an ERP upgrade during the quarter.

Looking ahead, we're extremely pleased with another strong quarter of backlog in book-to-bill metrics. As of September 30, 2016, our backlog for the CSS segment was $309 million, a 6% sequential increase. The segment also recorded net new business wins of $92 million during the first quarter, representing a 6% increase year-over-year. The segment's trailing 12-month book-to-bill ratio was 1.2. These positive indicators support our expectations that this business will grow revenues towards the high end of our consolidated long-term outlook.

The next two slides contain reference information We've already discussed the segment results shown on the consolidating income statement by reporting segment on slide 10. Slide 11 provides a reconciliation to the last 12-month's EBITDA from continuing operations from the most approximate GAAP measure, which is earnings from continuing operations.

Moving to adjusted EBITDA on slide 12. First-quarter adjusted EBITDA decreased 3% to $75 million compared to $77.6 million for the first quarter a year ago. On a constant currency basis, our first-quarter adjusted EBITDA increased 3% to $80 million driven by strong EBITDA performance across our drug delivery solutions segment, partially offset by declines within Softgel, due to the adverse prior-year comparison for our Beinheim facility.

Just to be clear, all financial impacts of the temporary suspension of Beinheim are reflected within adjusted EBITDA and adjusted net income. Nothing related to the Beinheim suspension or remediation has been adjusted out or excluded.

On slide 13, you can see that first-quarter adjusted net income was $19.6 million or $0.16 per diluted share, compared to adjusted net income of $23 million or $0.18 per diluted share in the first quarter a year ago. This slide also includes the reconciliation of earnings from continuing operations to non-GAAP adjusted net income in a summarized format. A more detailed version of this reconciliation can be found in the supplemental information section at the end of the slide deck, which shows essentially the same add-backs as seen on the adjusted EBITDA reconciliation slide.

Slide 14 shows that our net leverage ratio sequentially increased to 4.5 in the current quarter, due to the debt we took on for the Pharmatek acquisition. However, our net leverage ratio pro forma for the Pharmatek acquisition was 4.4, which is in line with the FY16 year-end figure.

I'll now provide our financial outlook for FY17, in which we are reaffirming our previously issued guidance. Our business continues to perform in line with our expectations, with minor headwinds from FX translation due to the strengthening of the US dollar versus the British pound being essentially offset by the nine-month contribution related to the Pharmatek acquisition.

As seen on slide 15, we expect full-year revenue in the range of $1.92 billion to $1.995 billion. We expect full-year adjusted EBITDA in the range of $430 million to $455 million and full-year adjusted net income in the range of $165 million to $190 million. We expect in the range of $125 million to $135 million for capital expenditures. We expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30, 2017 will be in the range of 126 million to 128 million shares.

It's important to note that 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 increased for the recovery of Beinheim.

Lastly, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression through the year. As discussed for several quarters now, 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.

This will continue to be the case in FY17, where we expect to generate approximately 38% of our annual EBITDA in the first half of the fiscal year, with approximately 62% of our EBITDA to be earned in the second half. It's also worth noting that in FY16, our second fiscal quarter included a one-time volume commitment resolution within our DAS business, which increased both revenue and EBITDA by $10 million. Operator, we would now like to open the call for questions.

(Operator Instructions)

Tycho Peterson, JPMorgan.

This is Tejas on for Tycho.

First of all, on clinical supply services, you've spoken about the segment growing in the high end of your top-line growth range. Are you seeing any impact from the recent spate of clinical trial failures as well as the incremental focus on drug pricing? I know it's election season, but even beyond that it looks like there might be a much more modest growth in pricing for your clients. Has that entered into your conversations for the segment at all? How does that translate into your top-line growth forecasts?

We have not seen anything to this point, Tejas, that reflects some of the things that you have been maybe seeing announced by CROs, which seems to be the nature of your question. Our business generally doesn't correlate with their results that tightly. So if CROs had news in a certain quarter or of a certain 180-day period, it does not necessarily flow through to Catalent's business directly. At least, we haven't experienced that over the years here.

Got it. Then just switching to biologics.

I know you mentioned on the call adding a couple of 2,000-liter bioreactors. Obviously, there's been a lot of news around in-house capacity expansions, as well among your customer base and a few peers have spoken about specific niches of the market, with a lot of the growth coming on the smaller end in terms of bioreactor size versus the larger end. It would just be interesting to get your thoughts on where capacity is today, capacity utilization? How you see that trending over the next couple of years, especially given the influx of in-house capacity adds from your customers?

This is John here.

Our data shows that demands will be outstripping capacity probably for about the next five years. The other thing that I would like to point out is, we know that 40% of the pipeline is currently biologics. 70% of the pipeline in biologics are going to require less than 5,000-liter capacity at full commercial scale. So when you take a look at Catalent's strategy, it's really to build a leadership position in flexible small- to medium-scale manufacturing.

As you know, we did a substantial investment in our Madison facility about three years ago. We have pretty much filled up that capacity. We still have a little bit of room to go, but we are proactively putting in the third train, if you will. It's going to have the capability for the two 2,000-liter single-use bioreactors and also the capability for 4,000 liters. So we really think that Catalent's hitting the sweet spot. The most recent investment, where we just broke ground in Madison, is going to more than double the revenue capability that we currently have at that facility. So I would say that the direction and strategy that we have is really hitting the sweet spot for where the market is.

Got it. Thanks so much, guys.

Derik de Bruin, Bank of America.

This is Juan Avendano on behalf of Derek.

My first question is, I wanted to know if there was any revenue contributions from the recent deal, Pharmatek? I'm just try to figure out how much was the M&A versus the organic in the 7% constant currency?

Juan, all of the revenue growth recorded in the first quarter was organic. The acquisition of Pharmatek happened very late in the quarter and so there was no P&L contribution from that acquisition.

Okay. Thank you.

As a follow-up, when it comes to NPIs, the new product introductions, you had, I believe, 31 in the first quarter. Last year, you had done about 46, if I recall correctly. So I was wondering why the decrease year-over-year in NPIs?

Okay. You are correct, the number of NPIs is down. Not all NPIs are created equal, is the key to the answer here. I'll just answer in round numbers, of the 200 NPIs that we will do in a year, they are generally a mix of branded -- branded prescription, generics, over-the-counter and [VMS]. So because of the dramatically different revenue and profitability profiles from those NPIs, we decided to focus more on the revenue that these NPIs give us versus the count. The count provides relatively less information. So we will continue to disclose the count, but we will also now start to disclose revenue as potentially a more meaningful indicator in our business.

So the specific answer to your question, though, is, the count was down because we had relatively fewer VMS NPIs in the year-over-year period. VMS product launches are generally lower revenue, lower volume opportunities for the Company anyways. As you can see by where the revenue moved, it wasn't significant to the overall progression of the NPI efforts of the Company.

Got it. If I may, one last one: you mentioned the one-off $10 million to account for in the second quarter? Any other one-time items that are needed to adjust the FY17 guidance?

No. That was the only item from the prior-year period that enters into any year-over-year comparisons people may be doing as far as Q2 goes.

Thank you.

Ricky Goldwasser, Morgan Stanley.

This is Mark Rosenblum on for Ricky.

You mentioned a $6 million top-line and $5 million EBITDA impact from Beinheim. Can you just give us some more general information on where you guys are at in bringing that to full capacity? What's left to do and a timeline that we should think about?

From a Beinheim perspective, I would just say that our ramp-up plans are on track. We probably have, I would say, 30 of the 40 products that were being manufactured at the time that we had the facility shut down, now are back up online. We are producing to customer demand. All of the financial impact of Beinheim is taken into account into our full-year forecast as it sits right now.

Okay, great.

Then, on drug delivery, your growth was really strong this quarter. You said it was driven by fee for service development and analytical testing. Is this something that we should expect going forward? Or is it more one-time in nature in the quarter?

I would say that this kind of variance is more reflective of the 90-day period than it is our full-year expectation, as this will happen from time to time in our various technology platforms.

Okay. So then should we expect some slower quarters going forward, then? Since you guys maintained your guidance for the year?

So the part of the business that you are talking about, the DAS business, is a very small part of Catalent consolidated. So it gets caught up in the performance of all of the other segments. So what DAS does doesn't necessarily translate to what we might say for the consolidated results of the Company, given that DAS in total is approximately 4% or 5% of the Company's consolidated revenues.

Okay. All right. Thank you, guys.

Tim Evans, Wells Fargo Securities.

Matt, could you quantify how much Pharmatek will add to your revenue and EBITDA guidance for 2017?

So Pharmatek on a run rate basis, Tim, is about 1% to 2% of our consolidated revenues. It's about the same at the EBITDA line. When you think about that we acquired it three months into the year, we're talking about that kind of contribution for the remainder of the fiscal year.

Right. So, 1% to 2% would be like on a full-year basis, consolidated revenue?

That's right.

Okay. Then you're saying that, that was essentially the impact of the weaker pound as well, so those two things basically offset each other?

Basically, yes. Yes. So there wasn't enough of a net difference to warrant changing guidance at this point in the year.

Okay. What about the strong Q1 performance? Why does that not necessarily flow-through to a guidance increase, given that those other two factors offset?

I would say that our Q1 performance, Tim, more or less met our expectations in terms of the phasing of our full-year performance. So it was a good quarter. But it was basically in line with what we were expecting when we constructed the guidance.

Okay. Understood. Thank you.

Dave Windley, Jefferies.

I wanted to follow-up on Tim's question, Matt. In terms of the first quarter being in line, is that answer applicable to revenue and EBITDA both? Or is it more an EBITDA answer?

I would say it's both, David.

Okay. I saw it, in your prepared remarks, you talked about some of the, I think, the drug delivery outperformance being a little better than you guys had expected. Or was that offset by something else in the portfolio that was not as good as expected?

I think the only comment in the prepared remarks where I said, we probably did little bit better than we were expecting, was in the consumer health volumes on the Softgel side of the business being marginally better than we were expecting. But the outperformance there wouldn't have been enough to move the entire Company.

I got you. You're right. Sorry, okay.

So in the clinical supply business, I think, just looking for clarification here, that the press release talked about higher costs across the segment. I think your prepared remarks you talked about an ERP upgrade at a particular facility. Are those two things essentially referring to the same thing? Or are those different?

They're overlapping. So, a higher cost across the segment, that does capture the comment related to the ERP upgrade at one of our sites. It also captures the change in corporate allocations, which we do year on year. So the clinical services business segment absorbs a little bit more in corporate allocations now that it's growing in size and is absorbing some more of the centralized services that we have. So those two cost items come in addition to just the cost that's incurred on the higher mix to storage and distribution.

Good. If I could ask one that's a little more strategic.

John, as I understand it, Pharmatek does maybe not complete, but it certainly adds an important element to your various delivery capabilities with spray drying coming in, not something that you had before, if I remember correctly; and fits into that OptiForm offering solution. So I'm wondering, how many clients have engaged with you around OptiForm? Or how should we think about that rolling out? How can we set expectations or track how OptiForm might help to lure more business into your platform?

Yes, sure. So let me first start off with Pharmatek, because part of that will [influence] my answer in OptiForm Solutions Suite. As you know, David, our business strategy is one called, follow the molecule, which is, what we're trying to do is basically get as many molecules as we can into the Catalent ecosystem, because we don't know which one of those molecules ultimately will be successful. But we know once we bring them into the Catalent system that we earn development revenue on them. Then as they get through clinic and potential get approved, we then have the opportunity to do commercial revenue. So in our strategy for acquiring some of these small tuck-in acquisitions, those that have differentiated capabilities, what we're looking to do is really bring in their customer base and their suite of molecules, if you will.

So in the case of Pharmatek, it brought in about 100 new unique customers, if you will. They're seeing about 120 new molecules per year. So there's a big part of the strategy behind Pharmatek was then, not to just have it continue to perform well as a standalone business, but have the capability for those molecules, which were pretty much stalled out in, I would say, clinical Phase 1, max Phase 2 commercial manufacturing capability at Pharmatek, but then the ability to take those all the way through to Phase 3 in full-time commercial manufacturing. So we are in the early days of that, but I can already tell you that in literally the 6 to 8 weeks since we closed -- 6 weeks since we closed the business, that there's already a handful of customers where we've already accelerated the dialogue towards commercial manufacturing. So it's very early days.

With regards to OptiForm Solutions Suite, we have I would say more than several hundred opportunities. We've closed more than a dozen, if you will, of these programs where we are working on them. We're just going to continue to accelerate it. I think the way to think about this from a Catalent perspective is, there is generally never one molecule or one commercial deal that ends up changing the revenue profile of the Company. It's just that constant layering on of those molecules that ends up building up to our 4% to 6% revenue, which is why we have that long-term visibility.

So the best way to think about OptiForm Solutions Suite is, it's building that future pipeline. To remind you, the Optiform Solutions Suite was a preclinical solution that we previously didn't have. So we're trying to capture customers more early in the pipeline. So I would just say, from a strategy standpoint, all of this really flows together. I'll also remind you of Micron, which is pretty much right down the same ZIP Code, although, I would say Pharmatek has an even higher level of capability, especially with them bringing in spray drying.

Got it. I appreciate that. Thank you.

George Hill, Deutsche Bank.

I guess, Matt, I will start off. My question for you is, now that Beinheim is ramping, how long should we think about it before margins return to historic levels? When we back out the divestiture a little over a year ago, I don't want to ask any of guidance beyond the fiscal year, but how do we think about where margins in that business settle out? (multiple speakers) Softgels, if I didn't say it, Softgel. I meant Softgels.

Okay. The answer to the first part of your question, George, we have factored into our guidance that Beinheim would be operating below its historic level of margin capability for the remainder of this fiscal year. So it will be sometime in FY18 or potentially beyond before we envision Beinheim returning to its previous level of profitability on a margin basis.

Your larger question was on the EBITDA margins of the Softgel business, I think in particular. When we created the guidance for FY17 around Softgel, we assumed that we would be seeing about 100 basis points or 1 percentage point of margin improvement year on year, even given the fact that Beinheim would be operating at a reduced levels of EBITDA margin.

Okay, that's helpful. If I could have just a couple -- a two-part follow-up, but even I don't think they're related.

John, you talked about how capacity is being outstripped in the biologics business. Your demand is growing much faster than supply. Can you talk about what the implications for pricing there? Then, if relationships like the Triphase relationship are successful and these drugs seek commercial success, is the upside for Catalent, given the proprietary nature of SMARTag -- can you talk about -- what's the long-term opportunity there versus some of the other business segments?

Sure. I would just say, with regards to my comment about demand outstripping capacity, it certainly is providing for a very robust pricing dynamic for our team. We are also able to strike much more strategic deals with, I would say, larger production capacity. In fact, we are able to actually charge for reserving capacity in some cases. So I would just say that the normal economic dynamics of supply and demand are being taken into a place and being taken into account in terms of how we allocate the scarce remaining capacity that we have to generate the best business for Catalent. What we're trying to do, obviously, is get ahead of the curve here. This next capacity expansion, we're really moving forward very quickly and should have it on line by the end of FY18, which is going to double our revenue generating capacity from that site, which, by the way has tripled its revenue in the course of two or three years. So it's a pretty exciting time. I think we do have the right strategy in terms of the flexible small-scale manufacturing, which is really where the business is heading.

With regards to Triphase, I think this is exactly what we saw when we bought the Redwood biosciences business. It really was a very unique technology second-generation EDC technology. In this specific case, you have to read through our press release very carefully. But you'll see that, that actually is a molecule that was developed by Catalent using the EDC technology that we have then out-licensed exclusively to Triphase. So in that kind of a scenario there are milestones and manufacturing that goes with it. And then if we moved so its milestones and royalties, if it moves forward and gets commercialized, there's significant royalties on the ultimate commercial products.

So it's very interesting, I think Triphase was the first of hopefully many more deals like this in Roche that we've announced that really was the impetus for us acquiring that technology from Redwood Biosciences. Again, it fits in with our overall strategy of I, would just say, flexible development and flexible manufacturing for biologics. So we are pursuing it very aggressively. We will continue to invest.

Okay, I appreciate the color. Thanks, guys.

Jon Kaufman, William Blair.

Congrats on the quarter.

First, your CapEx guidance for the year suggests a step-up over the next few quarters compared to Q1. So how should we think about what this means for free cash flow for the full year?

When we issued the FY17 guidance, I think we got that question; and our instruction at the time was, we generally think on an annualized basis for this year, that we should see free cash flow generation at 60% to 70% of adjusted net income. Nothing that happened in the first quarter would cause us to move off of that thought.

Okay. Great. Then you mentioned mix being one of the reasons for lower margins in the CSS business this quarter. So what are your margin expectations in CSS for the remainder of the year? Then, how are you thinking about margins long-term?

We certainly expect higher margins out of the CSS business than it posted in the first quarter. When we think about the business, we're thinking about a high teens to 20%-ish EBITDA margin. This is heavily dependent on how much comparator sales that we'll have in any given time period. But 18% to 20% range EBITDA on a full-year basis is generally what we would look to for our CSS business as it's structured today.

Okay. Great. Thank you.

Nina Deka, Piper Jaffray.

I was wondering if you could describe a little bit more about what you're seeing with the consumer health. You mentioned that this quarter it was higher than you were expecting. Is that a trend that you continue to expect moving forward?

Thanks, Nina.

I think what we're seeing in the first quarter is mainly timing related in the Softgel business; and on the consumer health side, it's not unusual to see that moving quarter to quarter. So it doesn't cause us to change anything about our full-year expectation.

Okay. Then also can you describe a little bit about the animal landscape and the demand that you're seeing there for the animal injectables? If plan to continue to expand in the animal health space?

The animal health business that we referred to is business that we won some time ago. The necessary infrastructure improvements in capital has been purchased and installed and this week is being validated. We believe commercial volumes will be commencing in the third quarter of this fiscal year. That was a nice opportunistic win for us. We have had a couple of those in our various technology platforms that are animal-health related, but at the present time we don't -- the way to say it is, animal health will probably continue to offer us opportunistic wins. It's not certain at this point in time that there's a business unit, an animal health business unit there for Catalent. But it is a terrific way for us to absorb excess capacity around the network.

Great. That's helpful. Thank you.

(Operator Instructions)

Matthew Mishan, KeyBanc.

We are about one quarter in now. In the first quarter, at least on an organic growth basis, it appeared to be the toughest comparison of the year. Why maintain such a large range on the revenue guidance? Are you leaning in one direction or another here? What would definitely give you caution towards the lower end?

Well, Catalent, as we've said, is always better at predicting years than we are quarters. Let's not forget that, as you look at the phasing of our year, the fourth quarter is by far our largest commercial quarter. Quite often June is the biggest month in that quarter. The range at the start of any year is generally driven by the fact that we don't have precise knowledge at this point of how the fourth quarter is going to shake out, specifically that month of June. So that becomes more clear to us as we draw closer to it. There would of have had to have been a significant change in our business for us to adjust full-year guidance after only 90 days in.

We just didn't see that in our first 90 days. We had some nice positives. We've had the addition of a small acquisition. But when you think about that small acquisition being 1% to not even 2% of our consolidated sales and EBITDA, that's certainly within the margin of error of how we think about the year this early in. So if your question is, gee, things seem to be pretty well for Catalent. Why aren't you upping the guidance? That's really why we aren't doing it at this point.

Okay. I think that's very fair.

Then, on Beinheim, I'm just trying to understand what happened to the lost volume. I get that you're recovering back to full production and really making up the easy comparison. What happened to the volume that your customers expected? I would expect you not only to ramp back up to your full production, but don't you also have to make up for some of the volume that was lost in 2016?

What I would just say is that, there's two things going on here. One is the volume from customers and the other is the way that plant needs to operate under the changes that were required under our response to the ANSM. First of all, you do not have a fully loaded plant; you really only have 30 of 40 products that are currently on line. Those other 10 products may not ever come online because, quite frankly, our customers actually had significant requirements that they had to fulfill to actually bring those products back online. In some cases they have chosen not to bring them back to the Company because they were marginally successful in the marketplace; it wasn't worth the effort. Then you have lower volume with higher constraints being put on a pharmaceutical facility. Really, from an overall performance standpoint, really, we were able to model it out for the entire year. It's not going to get back to its previous performance. We have that fully baked into our FY17 financials and guidance.

All right. Thank you very much.

Michael Baker, Raymond James.

I was wondering if you could just comment, generally speaking, on the regulatory environment. Are there any countries that are tightening up in terms of manufacturing reviews or doing a more frequently --? Just some general comments would be helpful. Thank you.

I would just say that the overall regulatory environment continues to, I would say, strengthen. Meaning that, not only has the FDA taken up their game but certainly a lot of the other regulators around the world have taken up their game. We don't see any differentiated, I would say, audits at the Catalent level. It's just kind of ongoing and sustained with, I would say, generally better regulatory audits. I'm just basing that upon my 30 years in the industry in terms of how many auditors they bring and how long they stay and what ultimately are things they observe and have findings on.

I think from a Catalent perspective, the way we look at this is that the regulatory costs and burdens will only continue to increase within Pharma and biopharma space, which is one of the reasons that there's really going to continue to be fewer bigger better suppliers like Catalent because the smaller players, it becomes more challenging for them to continue to compete, invest in, what is both a highly capital-intensive as well as high regulatory cost. So it does provide, I would say some competitive barriers to entry or ultimately to success. So from a Catalent perspective, I would say we're continuing to invest in both our operations and quality. I think that's just going to continue along the path that's been going on, quite frankly, for the last 5 to 7 years.

So it's not really a new phenomenon. But again, it just gets much harder for the smaller players or people that haven't made the investments in their quality and operation systems.

Thanks for the update, John.

Yes, thank you.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to John Chiminski for any closing comments.

Okay. Thanks, Operator. Thanks everyone for your questions and for taking the time to join our call.

I'd like to close by highlighting a few of the Company's key priorities for FY17. First, we are confident and fully committed to delivering FY17 results consistent with our financial guidance, which is aligned with our long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth. We're also focused on the integration of the Pharmatek acquisition, which is on track from a plant and budget perspective and has already begun to add value to the Company and our customers. Next, we are committed to building a world-class biologics business for our customers and for patients, and look forward to another year of double-digit revenue and EBITDA growth from our core biologics offering.

Finally, operations, quality and regulatory excellence is at the heart of how are we run our business and remains a constant focus and priority. We support every customer project with deep scientific expertise and a commitment to putting the patient first in all we do. Lastly, we are well-positioned to capitalize on our industry-leading partnerships and the potential for consolidation. We continue to target tuck-in acquisitions that we can integrate swiftly and efficiently in order to maximize value to our shareholders. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Have a great day.