Catalent Inc (CTLT) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Catalent Inc. second-quarter and FY17 earnings conference call.

(Operator Instructions)

As a reminder to our audience, this conference may be recorded. It is now my pleasure to hand the floor over to Mr. Tom Castellano, Vice President, Investor Relations and Treasurer. Sir, the floor is yours.

Thank you, Brian. Good afternoon, everyone, and thank you joining us today to review Catalent's second-quarter FY17 financial results. Please see our agenda on slide 2 of our accompanying presentation, which is available on the Investor Relations website. Joining me today representing Catalent are John Chiminski, Chief Executive Officer, and Matt Walsh, Chief Financial Officer.

During our call today, management will make forward-looking statements, and refer to non-GAAP financial measures. It is 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 a 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 would like to turn the call over to our Chief Executive Officer, John Chiminski.

Thanks, Tom, and welcome everyone to our earnings call. We continue to perform in line with our financial performance expectations, and are pleased to report second-quarter results, which include year-over-year revenue and adjusted EBITDA growth in constant currency. As you can see on slide 6, our revenue for the second quarter increased 6% as reported, and increased 10% in constant currency to $483.7 million with 8[%] of the 10% being organic, and with all reporting segments contributing to the growth.

Our adjusted EBITDA of $98.1 million was above the second quarter of FY16 on a constant currency basis by 2%, primarily driven by our softgel technology segment which recorded double-digit revenue and EBITDA growth. Our adjusted net income was $34.7 million or $0.27 per diluted share for the second quarter. Additionally, through the first six months of the FY17, we've recorded revenue growth of 5% as reported, and 9% in constant currency with 8[%] of the 9% being organic, which is above our long-term outlook of 4% to 6% top-line growth.

Now moving on to our key operating accomplishments during the quarter. First, we announced the acquisition of Accucaps, a Canadian developer and manufacturer of over-the-counter high-potency and conventional pharmaceutical softgel products. The acquisition highlights our commitment to build upon our market-leading position in the softgel space, and adds two facilities in North America to complement our softgel Center of Excellence in St. Petersburg, Florida. The acquisition is currently under anti-trust review in Canada, and we expect it to close during the third quarter.

Next we made two enhancements to our capital structure during the quarter. We issued EUR380 million of 4.75% euro-denominated notes, and used the proceeds to pay down debt and to fund our acquisitions of Pharmatek and Accucaps. While in the market, we also repriced both our US dollar and euro-denominated term loans, resulting in an interest rate reduction of 50 basis points on the US dollar tranche, and 75 basis points on the euro tranche.

Finally, I want to provide an update regarding the integration of the Pharmatek acquisition that we closed late in the first quarter. As a reminder, Pharmatek Laboratories is a West Coast US-based specialist in drug development and clinical manufacturing, and has extensive early phase drug development capabilities from discovery to clinic, and brings spray drying into our already broad portfolio of advanced delivery technologies. Integration of the business is progressing well, and is already benefiting our customers, and creating value for the Company.

Now I would like to turn the call over to our Chief Financial Officer, Matt Walsh, who'll take you through our second-quarter and year-to-date 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 reminder, my commentary around segment growth will be in constant currency.

Softgel revenue of $201.9 million grew 14% during the quarter, with EBITDA growing at 32% as we saw significant strength across both the Rx and consumer health portfolios. We experienced strong demand for Rx products across the Europe, and expect this momentum to carry into the second half of the fiscal year.

Our softgel consumer health initiative is essentially complete, in terms of its above baseline impact on year-over-year sales growth; however, we did see marginally higher consumer health volume growth in our key geographies outside the US, namely Latin America and Europe, which was partially offset by consumer health volume declines within the Asia-Pacific region. Our Beinheim softgel facility continues to be fully operational, and contributed $13.3 million of this segment's year-over-year revenue growth, and $5.5 million of EBITDA growth during the second quarter. Additionally, the ramp up of the 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. DDS segment recorded revenue of $214 million, which was up 8% versus prior year, but EBITDA was down 16% due to a favorable $12.5 million one-time resolution of a volume commitment recorded in the prior year. Excluding this event, revenue grew 15%, and segment EBITDA grew 6%.

Recent investments in our biologics business continued to translate into growth during the second quarter, and 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.

We continue to believe that our biologics business is positioned well to drive future growth, as indicated by recent business development signings with Roche, [Moderna] Therapeutics and Triphase Accelerator. 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%.

The oral delivery portion of the business had a strong quarter, with favorable end market demand for high-margin offerings within our US-controlled release business, which saw lower volumes throughout most of FY16 due to customer supply chain issues that have since normalized this fiscal year as we had anticipated. 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 continued to build upon its momentum from the first quarter.

Our [Blow/Fill/Seal] offering recorded results during the second quarter that were in line with the prior-year period, and market fundamentals continue to remain attractive for this key sterile fill technology. 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 revenue from 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 six-month ended December 31, 2016, we recorded development revenue of $73 million, which was in line with the same period of the prior fiscal year. Also, during the first six months, we introduced 73 new products which contributed $43 million of revenue, more than double the revenue contribution of new products in the same period of the prior fiscal year. As reminder, the number of NPIs and the corresponding revenue contribution in any given period, depends on the type and timing of our customers' product launches, which are often driven by regulatory approvals, or at the discretion of our customers, and thus these figures will continue to vary quarter to quarter.

Now on slide 9, our clinical supply services segment posted revenue of $77 million, which was up 8% compared to the second quarter of the prior year, driven by increased customer project activity related to our storage and distribution business. However, EBITDA was negatively impacted by the mix shift to lower margin storage and distribution revenue from manufacturing packaging revenue, and thus down 2% from the prior year. We also experienced increased administrative costs within the segment.

Looking ahead, we're extremely pleased with another strong quarter of backlog and book-to-bill metrics. As of December 31, 2016, our backlog for the CSS segment was $334 million, an 8% sequential increase. The segment also recorded net new business wins of $105 million during the second quarter, representing a 31% increase year over year. The segment's trailing 12 month book-to-bill ratio was 1.2. These positive indicators support our expectation that this business should to continue to grow revenues towards the high end of our consolidated long-term outlook, which we expect to see in the second half of the fiscal year.

The next slide contains reference information. We've already discussed the segment results shown on the consolidated income statement, our reporting segment, which is on slide 10. Slide 11 shows in the precisely the same format as slide 10, the six-month year-to-date performance of our operating segments, both as reported and in constant currency. I won't cover the variance drivers in detail, since our year-to-date top-line results parallel our second-quarter results, and show constant currency revenue growth and similar EBITDA performance across all three reporting segments.

The year-to-date 9% constant currency revenue growth, or 8% growth on an organic basis, compared to the same period a year ago, was nicely above our long-term objective of 4% to 6% organic revenue growth per year. Slide 12 provides a reconciliation to last 12 month's EBITDA from continuing operations from the most proximate GAAP measure, which is earnings from continuing operations. This bridge will assist in tying [out] the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide.

Moving to adjusted EBITDA on slide 13, second-quarter adjusted EBITDA decreased 3% to $98.1 million, compared to $101.1 million for the second quarter a year ago, due to the favorable one-time resolution of volume commitment of $12.5 million as recorded in the prior-year period. On a constant currency basis, our second-quarter adjusted EBITDA increased 2% to $[103.2] million. Excluding the one-time item in the prior year, adjusted EBITDA would have increased 16% driven by strong [EBITDA] performance across our softgel and drug delivery solutions segments.

On slide 14, you can see that the second-quarter adjusted net income was $34.7 million, or $0.27 per diluted share, compared to adjusted net income of $38.9 million, or $0.31 per diluted share in the second quarter a year ago. The decline in both ANI and EPS in the quarter can be traced back to the favorable one-time resolution of a volume commitment recorded in the second quarter of the prior fiscal year.

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 is included in the supplemental information section at the back of the slide deck, that shows essentially the same add backs as seen on the adjusted EBITDA reconciliation slide.

Slide 15 shows our capitalization table and capital allocation priorities. As John mentioned earlier, in December we were active in the capital markets, and made two enhancements to our capital structure. First, we issued [EUR]380 million of euro-denominated senior notes with an eight year maturity, at what we believe is an attractive coupon of 4.75%.

We used the proceeds to pay down debt and fund the Pharmatek acquisition. The remainder was taken to the balance sheet and will be used to fund the Accucaps acquisition when it closes later this fiscal year, and for general corporate purposes. The transaction was leverage neutral and had several additional benefits, including diversifying and extending the maturity profile of our debt, reducing interest rate risk, and better aligning our debt currency mix to that of our operating cash flows.

Second, while in the market, we repriced our term loan portfolio and reduced the USD tranche interest rate by 50 basis points, and the euro tranche interest rate by 75 basis points. As a result, we were able to reduce our weighted average interest rate across all of our debt from 4.25% at September 30, 2016, to 3.91% as of December 31, 2016. As I mentioned earlier, the enhancements to our capital structure were leverage neutral. Our net leverage ratio continues to be 4.5 as reported, and 4.4 pro forma for the Pharmatek acquisition. Our capital allocation priorities remain unchanged and focused on organic and inorganic growth.

We're updating our financial outlook for FY17, solely due to the passage of time. As a result, we are narrowing our range for expected revenue, adjusted EBITDA, and adjusted net income. Our base business continues to perform in line with our expectations, with headwinds from foreign exchange translation due to the strengthening of the US dollar versus the British pound and the euro, essentially being offset by the contribution of the Pharmatek acquisition, and the anticipated contribution of the Accucaps acquisition.

As seen on slide 16, we expect full-year revenue in the range of $1.94 billion to $1.98 billion. We expect full-year adjusted EBITDA in the range of $435 million to $450 million, and full-year adjusted net income in the range of $168 million to $183 million. We expect in the range of $130 million to $135 million for capital expenditures, and we expect 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 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, adjusted upward for the recovery of Beinheim this year versus the prior year.

Lastly, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression throughout 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. And this will continue to be the case, this fiscal year. Operator, we'd now like to open the call for questions.

Yes, sir.

(Operator Instructions)

Tycho Peterson, JPMorgan.

Hey, thanks. First on the clinical supply, the mix shift dynamic, you've called this out for a couple quarters now. Can you maybe just talk about when you think about that normalizing? And then, are you still confident longer term that segment can grow at the high end of the top line growth range, given some of the cancellations we've seen?

I will start with the second part of the question, Tycho, which is we do see the recent growth that we've experienced in CSS, we do believe that will continue. So yes, we see it continuing to grow towards the high end. In terms of the mix of business, from what we're able to see in our backlog, it would seem to be the case that we'll probably see mix that is slanted towards storage and distribution for the remainder of this fiscal year. But we do see that normalizing beyond the six-month window.

And then on the biologic side, with the capacity addition at Madison, can you give us a sense as to maybe interest in, from customers, in terms of locking down some of that capacity coming online in early 2018? How quickly do you think you can kind of ramp it there?

Yes, sure, Tycho. John Chiminski here. First of all, I just want to say the biologics business continues to be really growing at an incredibly fast rate. Just to remind you, the revenue from our core business is up nearly 250% over the last three years, and [even] is up over 80%. And currently, as the factory's running, we're running near capacity, I would say upwards of 90%. And we have the third train basically slated for its engineering runs, coming up in October. And that's the $34 million investment that we're currently in process of.

We currently have our business development teams with a very active funnel. And you can imagine with us being at 90%-plus percent of our current capacity, that we're making -- I would just say, good headway, with a very strong pipeline in terms of allocating capacity in advance. And in fact, it's going to be coming in line, I would say just in time, given where our capacity is at with the current -- with the current slate of business that we have there.

Okay. Thank you.

Derik de Bruin, Bank of America.

Hello, good evening. This is Juan Avendano on behalf of Derek. I was wondering if I could -- can you please, I guess, let us know what the M&A contribution was in this fiscal quarter from Pharmatek overall, and what is expected from Accucaps, once that is closed?

The contribution from M&A in the current quarter was approximately 2 points of revenue, and about 1 point of EBITDA. And the acquisition of Accucaps is similarly sized, so that's what we expect the impact to be.

About -- the same about 1% to 2% as Pharmatek on a quarterly basis?

Quarterly or annually, yes. Yes, since we're talking about percentages.

Good. And then, as a follow-up, I guess, my next question would be regarding the pending acquisition of Capsugel by Lonza, can you tell us how that might affect the CDMO competitive dynamics and any impact to Catalent?

I would just say that, it's very early days with regards to the Lonza and Capsugel acquisition, if you will. And we certainly haven't seen any specific competitive dynamic changes in the marketplace due to that acquisition.

Thank you.

Tim Evans, Wells Fargo Securities.

Thanks. Matt, I believe last time you guided back in November, the euro was at [1.30], and now I believe you guiding euro at [1.05]. Can you quantify how much FX headwind you're absorbing into your new guidance here?

The new guidance, Tim, relative to the original guidance at the beginning of the year has about $15 million of FX impact at the EBITDA line.

What about on the revenue line?

It would be -- I would say, approximately $25 million plus or minus.

Okay. And are you including anything for Accucaps in the updated guidance here today?

Yes, we are.

Okay. The last thing I wanted to ask you about, can you comment on the corporate tax reform proposals that are currently being discussed in Washington? Particularly curious, are you guys a net importer, net exporter? How do you think some of those the dynamics might play out for you?

Well, Tim, it's obviously very early days for the Company to be guiding on the impact of any potential tax changes, because we just don't know where it's going to land. In response to the second part of your question though, which is a little bit more specific and easier for me to respond to, Catalent would be more considered to be a net exporter versus importer, as far as the US is concerned, given that we are shipping from our US sites across borders, while most of our inputs are sourced domestically within the US.

Thank you very much.

Dave Windley, Jefferies.

John, I was curious on the Accucaps acquisition, is your (technical difficulities) could you elaborate on the opportunity there -- is your thought that this can (inaudible) already have or (inaudible) cost synergy rationale, or was maybe (inaudible) good (inaudible) to your competitors. Curious on what would (inaudible)?

Sure. So Dave, I apologize. You were breaking up a little bit here, but I got the gist of your questions with regard to Accucaps and rationale. I would say the reason that we were excited about bringing the two facilities in Canada, from Accucaps into the Catalent network is because they actually have a slate of business that's very complementary to what we're doing in North America.

They have a slate of, I would say of both high potent generic pharmaceutical products, and then also they have an OTC slate of business. And also -- that would allow us to I would say, tap into some markets that we had previously foregone in North America, because we were at capacity in our St. Pete's facility. And this is going back nearly a decade, where they made some strategic choices about what business they would and wouldn't do. And they primarily focused on the prescription business.

So by bringing this -- these two facilities and their book of business into the Company, it allows us to further expand our footprint in North America specifically, as it relates to some OTC products, and some additionally for some pharmaceutical products. And again, we always -- although we are by far the largest player in the softgel market, we really want to continue to keep our very strong position there.

John Kreger, William Blair.

Hi, thanks very much. John, just following up on that question. Where across your portfolio other than within Madison, are you capacity constrained at this point? And if we think about your sort of CapEx budget over the longer term, should we assume that can kind of grow with revenues, or might it have to expand faster?

So I would tell you that one of the most important things we do within the Company, John, is our five-year strategic plans, where we're constantly looking at the capacity across all of our facilities. And the most significant constraints that we've had over the last several years, we knew it in advance. Specifically in Winchester, where as you know we doubled our footprint there -- our capacity there, with a $52 million investment. And that's -- that was a capacity that was running, I would say at capacity.

And then our biologics business, I would say, it was a transformation of the business. And we did not really appreciate how quickly that would be taken up, which has driven us to that 90% capacity. I would say elsewhere in the network that we are well-balanced, and are ahead of any big CapEx requirements, and I would expect us to continue to spend kind of in that 6% to 7% of revenues for CapEx going forward.

Great. Thanks. Matt, can you update us on the free cash flow outlook for the full year, has that changed at all?

It has not changed John. We continue to believe that we will generate free cash flow in the range of 60% to 70% of adjusted net income, no changes there.

Great, thanks. And then one last quick one. The new business environment and your long cycle business, how is that going? In particular, are you seeing any changes in the competitive pricing landscape?

John, you said a word I didn't understand, you said, bond cycle, what -- can you repeat in again, because I didn't --?

I'm sorry. Yes, just the competitive landscape and the long cycle business?

Oh, I'm sorry, John. Yes. First of all, I would say, is that the marketplace continues to be incredibly robust. The pipelines have improved -- have increased something like 50% over the last several years, and they continue to grow. So I would say, for a long cycle business, we continue to win at or above previous year rates. We expect to have another I would say, record business development year in Catalent the way that we count internally for our sales team, our business development team.

So I'd say, the overall marketplace continues to be very robust. And I'll just reemphasize that it continues tilt more towards the biologics area, which is again the reason that we continue to invest aggressively given the large number of molecules that are in that pipeline and continue to grow.

Great. Thank you.

Ricky Goldwasser, Morgan Stanley.

Yes, hi, good afternoon, and a couple of questions here. So just circling back on the questions around tax reform, and we know it's still early days. But just when we step back, and you think conceptually about the border tax reform or border adjustments, can you help us understand how you're thinking about this?

Is this a potential opportunity, if biopharma manufacturers need to move production to the US? Do you have capacity here that can help you gain share, or is this a potential headwind?

Yes, sure, Ricky. I'll take this one. First of all, again as Matt earlier -- stated earlier, it's very early days. But with regards to any potential border tax, I think it's important that everybody understands that, for most all of our customers, they take ownership of a product, from the time it leaves our dock. So where they ship it to and for our plants, they may be shipping it to a consolidating area, a packaging area, where it then goes to somewhere upwards of 60 or 70 different countries. They have the complete ownership of that, and have control of it.

So in terms of any impact for Catalent, there is no Catalent shipping into the United States, if you will, as an owner of that product enduring some sort of tax. So that is on our customers. The other part of this question is, well, what if that incurs more cost for your customers, and are they going to come back to you for that? And we point to the fact that, one, we have very strong and enduring contracts. And second of all, we're a very small part of the overall cost of goods, that would not even come close to having any meaningful impact on a large border tax.

The third is, we certainly have capacity in several of our key facilities across the US. I'd point most significantly to our expansion in Winchester, where we would readily take on those products. But in the pharmaceutical world, tech transfers can be a multi-year process, and if there has to be a capacity build, it could be even longer.

So I think as anything happens from a potential tax standpoint, they're going to have to think through the implications in a very highly regulated business, that has products registered in tens of countries that again, could take from three to five years, if you're looking at a build, plus registration of -- qualification and registration of those products across the board. So obviously, we're thinking of these things, but given our position specifically with regards to border tax, and the way our customers take control those products, there's really relatively little for us to worry about. And then, on the -- we're certainly willing to take on additional capacity in the US, if that opportunity affords itself.

Okay. And then, my follow-up question is, just I'm trying to better understand organic growth. You mentioned that each of the acquisitions that you've completed should contribute around on 2% to revenue growth, 1% to EBITDA. So when think we think that the business organically in FY17, and obviously the acquisitions don't contribute to the full-year, but it seems that the new guidance implies organic growth somewhere in the 3% to 5%? Is that fair, and are these kind of like more, kind of how we should think about the base business organically in longer term?

So, the guidance that we've issued implies organic growth that's really squarely in the middle of the 4% to 6%, Ricky, so it would be on the upper end of your 3% to 5%. And our long-term outlook for the business has not changed at all with respect to Catalent, thinking that we can grow the business organically 4% to 6% at constant currency for the foreseeable future.

Okay. Thank you.

George Hill, Deutsche Bank.

Hi, it's Stephen Hagan on for George. I was just wondering, how does the current utilization of Beinheim compare to, prior to the shutdown, and where you were expecting for the contribution from winning back additional business there?

Well, our expectations for the recovery of Beinheim were largely proceeding per our original guidance for the year, and that has Beinheim operating at about half of its former level of utilization. And we believe that will be the case for the foreseeable future.

Okay. And then just one quick other question. Can you update your interest expense forecast for the year, kind of given the December credit repricing and the acquisitions you've done?

The interest expense number actually is -- we're not changing it. Our expectation has been about $92 million of interest expense for the year. And so, what we achieved with the refinancing, even though we've got higher growth debt, it comes at a lower weighted average interest rate, those about offset.

Okay. Thank you.

(Operator Instructions )

Sean Wieland, Piper Jaffray.

Hi, thanks. Maybe one more on the Washington rhetoric. Can you maybe be a little bit more specific on what percentage of your business -- of your business are drugs manufactured offshore, that are destined for the US market?

I don't know that we have that number, and I'd go back to saying, we can give you the split of revenues outside the US, versus in the US. But again, we manufacture products in those plants, then those plants -- our customers take control of those products. And then, they ship upwards of 60 or 70 different countries. So that's a question that our customers know, and again would bear the brunt of any border tax effect that's implemented.

Okay. I mean, maybe is there a way you can get us into the ballpark, like is it more than half, or less than half?

It's -- I wouldn't even guess, Matt. We're making -- and again, we're making -- most of the products in our plants are single-sourced through those plants. And so, you'll have a large pharma customer that will take that product, and they will allocate it to the markets around the world that they're shipping into. And we do get detailed forecasts, but they're generally giving us [flow], because we produce product in bulk. We're not the end packager, so we wouldn't have visibility to all the countries of destination. We just know where the product is actually registered in, but we don't know what percent of that allocation, at a macro level is destined for the US. And again, I go back to my point, the customer owns that product FBO from Catalent.

Okay. You mentioned your API is sourced domestically, which surprised me little bit. Does that -- any of the changes here possibly make you more interested in getting into the API business?

So, let's just make sure we're in the same place. The -- one of the questions was, is Catalent a net importer or net exporter? And I said, my answer to that was, for our sites in the United States, since we seem to be concerned with US tax policy. For our sites in the United States, we are exporting more in terms of dollars in revenues, than we are buying in raw materials, or services, or any other factors of production from offshore. That doesn't necessarily say that, that's just API, Sean. So that's just a general high-level comment about our United States footprint.

So and in many cases, that API is the customer's property to which we're adding value, intellectual property and otherwise, as we are in the processing chain. That will be kind of a wrinkle that the policymakers will have to think about. And I'm not exactly sure what the impact on Catalent is there, in cases where we're getting API, but we're not actually buying it. So it doesn't -- so the short answer after that long answer, is that it doesn't necessarily change our view on the attractiveness of an API target for M&A purposes.

Okay. One more quick one, you talked about the Madison facility being close to the capacity here. Does this give you any pricing power in that market?

I would just say in general, pricing is strong. I think we've given the statistic before, that our data shows that there will be more demand than capacity in the industry for the next five years. And most of it will be positioned for the [Weston] 5,000 liter trains, which is where Catalent is really putting all of our investment into. And so, I would say that pricing is strong. Our ability to lock up customers in advance, and reserve -- for them to reserve capacity is going up. And it has some of the highest margins, I would say, right now in the business -- margin percent.

What percent?

The highest margin percent. I didn't give an exact percent.

All right. Thank you.

Matthew Mishan, KeyBanc.

Hey, good afternoon. Thank you for taking the questions. I just wanted to start off -- I just wanted to make sure got it right, that you included a contribution from Accucaps in the updated guidance, even though it hasn't closed it?

That is correct. We included a small contribution.

And then, just, going back to the organic growth -- the conversation. If the contribution from Beinheim is intact, and that's the same as you expected, I'm just -- is the incremental contribution from acquisitions above the incremental headwind from FX, and essentially, the base organic growth is down a little bit?

In fact, it's just the opposite. The base business is performing better than our expectations. And so, FX is being offset by that, and to a lesser extent acquisitions.

Okay. It's a good thing I clarified that then. And then, you changed the cadence of EBITDA, weighted more towards the back half, a little bit more the back half last quarter. I believe it was due to some timing of new products. Can you give us an update on how those are tracking?

Given that our guidance is essentially unchanged, all we've done is narrowed the range, I think it's safe to assume that our expectations about overall timing of new product introductions and dollar magnitude is mostly unchanged.

Okay. And then last one, you have a tax shield, I believe, that helps you on the free cash flow side. How should we be thinking about that going into 2018, as far as the timing of when that fully expires, or is fully utilized?

So the way to think about it is, we will be continuing to utilize net operating losses at the federal level, United States through the end of our FY18. That's our best projection at this point.

Okay. Excellent. Thank you very much.

Tycho Peterson, JPMorgan.

Hey, thanks. Just one quick one. Sterile injectables, you're calling for a pickup in the back half of the year. Is that a function of some of the new animal health syringes, or are there other dynamics there?

You got it right, Tycho, it is the animal health business. And that is a significant enough product, for that relatively small business segment to be the sole driver of the growth.

Okay. Thanks.

Derik de Bruin, Bank of America.

Hello. Thank you. This is just question also, regarding some of the political rhetoric, but not from a tax perspective, but President Trump has -- he, based on a conference that he had, he seemed to be willing to put some pressure on pharma to bring back, manufacturing back to the US. And so, while there has been a lot of -- there haven't been a lot of details, can you discuss how this could impact Catalent, if it's a negative for the overall [CDMO] space?

Again, this is where you have to sort through the rhetoric, and talk about what is real and pragmatic. And any buildup of a pharmaceutical capability would take many years, and a significant amount of investment. And some -- I wouldn't say regulatory hurdles, as much as again, most of these facilities are -- have single-source, and there -- those facilities being, they have to be registered in upwards of 60 or 70 different countries. And even when we win a job, or when we win business from a pharmaceutical company to do a tech transfer into our facility, it's a two to three-year process in a facility that already has capacity.

So I think, from my perspective, and I'm stating opinion here, that if there is future choices about where to allocate manufacturing for new products, those products and builds will probably get a first look at the US, if those capabilities are there, and it's best positioned. But I don't foresee anything that would be shutting plants down externally, and building new plants into the US. So I'm looking at this purely from a practical standpoint, for a very long cycle business, that is highly regulated.

So I think it's more about what happens to where our -- where choices are made from future build, versus anything else. And I'll just make the final comment, which is most of these choices are not based upon labor costs. They're based upon -- in the pharmaceutical industry generally capabilities. And then, as we've seen over the last 5 or 10 years, based upon tax jurisdictions, for cash flow reasons. Which is why we've had so many people wanting to invert. So I think you'll have less people wanting to make those decisions to go to a lower tax jurisdiction, and making future decision about making their products, again where the capability is, and where we have the best opportunity for return.

The only other thing I would add to John's answer is, the rhetoric around manufacturing seems to be focused on companies that have outsourced their manufacturing to other countries, to realize a lower cost of labor, but then ship those same products back to the United States. That's really not a feature of our manufacturing footprint as it exists today. Where we have plants outside the US, those plants are generally servicing local markets. Or like in the case of Swindon for example, our Zydis technology, we do that in just one place in the world. So the rhetoric as it's being -- as it's coming out of Washington is focused on companies that are far different than the way Catalent is organized, in terms of how we manufacture.

Thank you. I appreciate the color.

Thank you. There are no further questions. So now I'd like to hand the conference back over to John Chiminski, Chief Executive Officer for closing comments or remarks. Sir?

Thanks, operator, and thanks again, everyone for your questions, and for taking the time to join our call. I'd like to close by reminding you of a few of our key priorities for FY17. First, we're confident and committed to delivering FY17 results consistent with our financial guidance, which is aligned with our long-term outlook of 4% to 6% revenue growth, 6% to 8% adjusted EBITDA growth. Next, we're 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.

Operations, quality, and regulatory excellence is at the heart of how we run our business. It 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're 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 as evidenced by both Pharmatek and Accucaps. Thank you.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody, have a wonderful day.