Good day, ladies and gentlemen, and welcome to the Catalent, Inc. First Quarter Fiscal Year 2015 Earnings Conference Call. My name is Denise, and I'll be the operator for today. [Operator Instructions] I would now turn the conference over to Monique Kosse, Managing Director of Bertner Advisors. Please proceed. .

Thank you, Denise. Good afternoon, everyone, and thank you for joining us today to review Catalent's fiscal 2015 first quarter financial results. Please see our agenda on Slide 2. On the call today representing Catalent are John Chiminski, President and Chief Executive Officer; and Matt Walsh, Executive Vice President and Chief Financial Officer.

John will start the call with a review of the key financial and operating achievements for the first quarter. Then Matt will discuss the company's fiscal first quarter financial performance and provide the company's outlook for fiscal year 2015. Finally, the company will open the call for your questions..

During our call today, management will make forward-looking statements, including its beliefs and expectations about the company's future results. It is possible that actual results could differ from management's expectations. We want to refer you to Slide 3 for more detail.

Please be aware that the forward-looking statements are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties.

We refer you to Catalent's Form 10-K filed with the SEC on September 8, 2014, for more detailed information on the risks and uncertainties that have a direct bearing on the company's operating results, performance and financial conditions. .

As discussed on Slides 4 and 5, on the call today, we will also disclose certain non-GAAP financial measures, which we use as the supplemental measures of performance. We believe these measures provide useful information to investors in evaluating Catalent's operations period-over-period.

For each non-GAAP financial measure that we use on this call, we have included a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure in our earnings press release.

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

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

Thanks, Monique and welcome, everyone, to our Fiscal 2015 First Quarter Earnings Conference Call. We're pleased with our first quarter results, highlighted by double-digit EBITDA growth within 2 of our 3 reporting segments.

Additionally, during the quarter, we continued to make strategic investments in our technology platforms to position Catalent for growth and leadership in our addressable markets..

I'd like to start my presentation on Slide 6, which highlights our recent key financial and operating accomplishments. Our first quarter 2015 revenue grew 1%, both as reported and in constant currency, to $418.3 million. This performance was, primarily, the result of increased sales from our Oral Technologies segment.

Also during the first quarter, we achieved strong double-digit EBITDA growth within our Development & Clinical Services and Medication Delivery Solutions segments. This growth was due both to a mix shift to more profitable products and services and to operating efficiencies, which continues to be a core competency of our leadership team..

Our total adjusted EBITDA increased 2% year-over-year to $83.4 million or 19.9% of revenue.

On September 9, following our initial public offering, our underwriters fully executed the greenshoe, and Catalent sold an additional 6,375,000 shares of its stock at the initial public offering price, which resulted in additional net proceeds of approximately $124 million.

The net proceeds generated from the greenshoe were used to further pay down our senior unsecured term loan. In total, we raised, on a gross basis, over $1 billion through the IPO..

Now let me briefly discuss our key operating accomplishments during the quarter. To capitalize on our 20-year experience in roller compaction, we launched OptiPact through our 450,000 square foot facility in Kansas City, Missouri.

This integrated service and technology offering will further strengthen our ability to integrate formulation, development, analysis, scale-up and manufacturing capabilities to create differentiated final dosage forms..

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

Finally, this afternoon, we also announced our acquisition of Micron Technologies, the leading international provider of particle size engineering technologies.

This strategic acquisition allows us to provide an unprecedented set of integrated development solutions and superior drug delivery technologies to the industry, partnering with our customers' R&D teams earlier in the development cycle and helping them deliver better treatments to clinic and to market faster and more efficiently.

Additional information on Micron can be found in the supplemental information section of today's presentation..

These transactions underline our strategic focus on innovative technologies and further demonstrate our ability to strengthen our position in key growth markets..

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

Thanks, John. First, I'll briefly review our first quarter operating accomplishments by business segment, starting with Oral Technologies on Slide 7..

Our softgel business, which accounts for approximately 2/3 of the Oral Technologies segment's revenue, is experiencing a pipeline transition as we continue to drive to a more predictable business. Modest organic softgel growth in Asia Pac, particularly in China and Japan, was offset by a decline in prescription softgel volume in North America.

We expect the mix shift from prescription softgel to consumer health softgel to continue the near-term, as we discussed on previous calls.

Consumer health softgel in Latin America posted double-digit EBITDA growth, which was driven by favorable product mix and by the Relthy Laboratories acquisition in Brazil, which closed early in the second quarter of last year..

The modified release business, which accounts for about 1/3 of the Oral Technologies segment's revenue, generated strong growth led by controlled release, where we experienced higher profit share revenue related to product participation related activities.

Favorable product mix shift within both controlled release and Zydis drove margin expansion across the business. .

The Development & Clinical Services segment, shown on Slide 8, performed well and achieved double-digit EBITDA growth with contributions from both Clinical Services and Analytical Services. Revenue growth from Analytical Services during the quarter was offset by declines within Clinical Services.

On an EBITDA basis, however, both businesses recorded improved profitability. Favorable product mix and fixed cost management drove EBITDA growth in Clinical Services, while higher project volumes and growth of our integrated oral solids development and supply business drove the profitability within Analytical Services..

As of September 30, 2014, the Development & Clinical Services business backlog increased 4% from last quarter to $389.6 million. Net new business wins on a year-over-year comparison decreased 17% compared to $114.8 million.

The decrease was driven by several large wins booked during the first and second quarters of the prior fiscal year, which drove that year's new business wins to above normal levels. The business's last 12 months book-to-bill ratio was 1.19..

As John already mentioned, this afternoon, we announced our acquisition of Micron Technologies, the leading international provider of particle size engineering technologies. The acquisition will augment our current capabilities in highly potent and cytotoxic drug handling, integrated inhalation solutions and analytical laboratory services.

We can now partner with more pharmaceutical innovators at the earliest stages of the drug development process with an unrivaled set of options and expertise..

Now on Slide 9, we have the business update for our Medication Delivery Solutions segment. Blow-fill-seal posted solid performance compared to the prior year, showing double-digit revenue and EBITDA growth. Market fundamentals of this business remain attractive, with a robust new product pipeline.

Continuing the trend from prior quarters, we are seeing our product mix shift to higher margin products..

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

And finally, during the quarter, we continued to make strategic investments in our biologics business to position it for future growth. As John mentioned earlier, we completed the acquisition of Redwood Biosciences on October 2. Its SMARTag Antibody-Drug Conjugate technology broadens our overall biologics services offering..

As an indicator of our long cycle business, which includes both Oral Technologies and the Medication Delivery Solutions, we are disclosing the number of new product introductions and our long cycle development revenue as directional indicators of future revenue growth.

Due to the inherent quarterly variability of these metrics, we will provide the numbers on a year-to-date basis..

For the year-to-date period as of September 30, 2014, we introduced 48 new products, an increase of more than 20% from the same period of the prior fiscal year; and recorded development revenue $27 million, an increase of 4% from the same period of the prior fiscal year.

These metrics are only directional indicators of our business, as we do not control the sales or marketing of these products nor can we predict the long term commercial success of them. However, we expect both of these metrics to provide insight into what the long term potential organic growth of these businesses might be..

Before I get into more details on our financial results, let me remind you that all the segment revenue and EBITDA results, I will discuss in the next few slides, are on a constant-currency basis..

So turning to Slide 10. For the first quarter, revenue from the Oral Technologies segment increased 2% to $261.1 million over the first quarter a year ago.

This growth was attributable to strong performance within modified release technologies, primarily related to increased profit from product ownership related activities, partially offset by decreased demand for certain products utilizing our softgel technology platform. .

Oral Technologies segment EBITDA in the first quarter decreased 1% to $57.7 million.

The decrease was primarily driven by the previously discussed decreased demand and unfavorable products mix within the softgel business, partially offset by favorable products mix within modified release technologies and increased profit from product ownership related activities..

Revenue from the Development & Clinical Services segment decreased 1% to $103.1 million over the first quarter a year ago, as growth in the Analytical Services business driven by higher project volumes and by our integrated oral solids development and manufacturing capabilities was offset by revenue decline within our Clinical Services offering..

Development & Clinical Services segment EBITDA in the first quarter grew 32% to $21.4 million. This EBITDA improvement was primarily due to increased demand for Analytical Services and to favorable product mix across the segment..

Revenue from the Medication Delivery Solutions segment was up 1% to $56.9 million over the first quarter a year ago.

Growth in our biologics offering, driven by the timing of completed project milestones and increased demand for products utilizing our blow-fill-seal technology platform, contributed to the revenue growth in this segment, which was partially offset by lower sales within our sterile injectables business..

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

Slide 11 shows a reconciliation to the last 12 months EBITDA from continuing operations from the most approximate GAAP measure, which is earnings or loss from continuing operations. This is a mechanical computation which doesn't require much supporting commentary.

It's really there for your benefit to assist in tying out the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide..

Now moving to adjusted EBITDA on Slide 12. First quarter 2015, adjusted EBITDA increased 2% to $83.4 million compared to $82.2 million in the first quarter a year ago. I won't go through all of the add-backs in detail, but I would like to draw your attention to 2 items that are materially higher than what we have recorded historically.

The first line item is financing-related expenses, where we had an add-back of $20.6 million for the first quarter. These charges are associated with the early redemption of our senior notes and the prepayment of the unsecured term loan. These costs run through the P&L in the other income expense line item and were a direct result of the IPO..

The other add-back worth noting is the other line item where we had added back an expense of $23.8 million, which primarily relates to the sponsor advisory agreement termination fee, which was agreed to in connection with the IPO. These costs also run through the P&L in the other income expense line item.

In total, we have recorded $50.4 million of expenses in the first quarter of onetime costs attributable to the IPO, all of which were added back in the computation of adjusted EBITDA..

Now moving to Slide 13. Our track record of adjusted EBITDA growth remains very strong. What we're looking at here is the last 12 months adjusted EBITDA for each and every quarter since June 2009.

It clearly depicts our observation that Catalent's business has grown steadily over longer analysis periods, while we've experienced flat quarters or even down quarters from time to time.

The diversity and global scale of our business are key features of Catalent that have helped us deliver growth historically, and we are investing in managing our businesses to continue this trend well into the future..

On Slide 14, you can see that first quarter adjusted net income was $13.4 million, or $0.13 per diluted share, compared to the adjusted net loss of $1.5 million, or $0.02 per diluted share, for the first quarter of the prior fiscal year.

This slide also includes the GAAP to non-GAAP reconciliation to adjusted net income for your reference, where you'll find the same add-backs I discussed earlier on the adjusted EBITDA reconciliation slide..

Now turning to Slide 15.

As John mentioned earlier, Catalent's underwriters fully executed the greenshoe option, and we've sold an additional 6,375,000 shares of our stock at the initial public offering price of $20.50, which resulted in net proceeds of approximately $124 million, bringing our total gross proceeds raised through the IPO to over $1 billion.

The incremental greenshoe proceeds were used to further pay down our senior unsecured term loan. And as a result, our September 30, 2014, leverage ratio was 4x compared to 6.1x as of June 30, 2014..

Finally, on Slide 16, there's no change to our previously issued fiscal year 2015 guidance. We continue to expect our revenue to be in the range of $1.89 billion to $1.92 billion, our adjusted EBITDA to be in the range of $450 million to $460 million, and our adjusted net income to be in the range of $215 million to $225 million.

We anticipate capital spending in the range of $115 million to $125 million for fiscal year 2015..

Let me remind everyone of the seasonality in our business and highlight our expected quarterly progression through the year.

Due to the timing of our customers' annual facility maintenance periods as well as due to the seasonality associated with budgetary spending decisions in the pharmaceutical and biotechnology industries, generally speaking, the first quarter of any fiscal year is seasonally our lightest quarter of the year by far.

Performance improves sequentially each quarter, with the fourth quarter of any fiscal year being our strongest by far..

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

Thanks, Matt. In conclusion, I'd like to add that our first quarter was a great start to our fiscal year 2015. We're proud of our accomplishments to date. We look forward to leveraging our innovative technologies to position Catalent for further growth in fiscal 2015 and beyond. Denise, now we'd like to open the call for questions. .

[Operator Instructions] Our first question comes from Ricky Goldwasser with Morgan Stanley. .

I've some follow-up questions on Redwood and the new acquisition that you announced today.

So when we think about after completing the Redwood acquisition, can you guide us to any milestones upcoming that we should be watching for as we assess, kind of, like, the progress? And how we should think about the opportunities on the biologics side?.

So addressing Redwood, Ricky, we talked about this as Redwood is a development stage company. The milestones that we'll be tracking will really be in 2 areas. First will be continued scientific progression of the technology as evidenced by technical milestones, all of which have been hit in the early stages -- have been reached, I should say.

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

The time frame here is really 3 to 5 years. And so the business will build slowly from a revenue perspective with individual development projects enumerating in 7 figures -- I'm sorry, 5 -- 5 to 6 figures at first and then growing in size as the technology progresses and customers become more comfortable with it. .

Okay. And then the acquisition that you announced today, if you could give us a little bit more color.

One, do you anticipate any financial impact in the near to mid-term? Or should we think about that also as more, kind of, a long-term value driver?.

The latter, Ricky. Micron Technologies offers Catalent terrific long-term potential, which I'll talk about in a minute. But just in terms of setting expectations, on a stand-alone basis, Micron is a small company. We're not disclosing their financials nor the purchase price. It just wasn't material to Catalent's overall financial results.

But we can think about, just to set expectations, we can think about revenue on the order of 1% of Catalent's total consolidated revenue. And so this -- the potential of the acquisition is really in the future for Catalent and what Micron can become as part of Catalent's global platform.

So John had mentioned that the molecules that Micron sees are typically preclinical or Phase I molecules, which complements Catalent's existing business right now very nicely. Most of the molecules that we see are later in the development cycle, Phase III or even beyond.

So we will have access to a significant number of molecules and customers at earlier stages, where we can offer them more broadly Catalent's services. So this is terrifically strategic for us, and we're quite excited to begin the integration process. .

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

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

Our next question comes from Tycho Peterson with JPMorgan. .

Just following up on margins. Can you maybe just touch on the contributions from price fixed costs absorption? And then, you highlighted product mix quite a bit. So if there's any way to kind of quantify those relative contributions, that'd be helpful. .

Sure. Our overall adjusted EBITDA margin was pretty steady versus the prior year period, Tycho. And what we saw was solid increases in our margins in Medication Delivery Solutions and Development & Clinical Services. These would be mostly due to the product mix, and I would say largely due to project -- product mix in those 2 reporting segments.

Within the Oral Technologies segment, it's mainly due to asset utilization. So we've got some -- Q1 being the lowest volumes of the year, so that did impact the margins of the business as well as this mix shift that we've been talking about towards consumer health.

So our overall volumes produced were largely consistent on the consumer health side with improving mix. And it's mainly a volume issue on the prescription side of the Oral Technologies business, within softgel specifically. So hope that's helpful.

Within the modified release piece of the Oral Technologies segment, both volume as well as mix was favorable. .

Okay.

And then, can you just talk on where we are on for softgel and kind of the pipeline transition, going through the prescription softgels to consumer health? How far are we through that process for you guys, as we think about maybe additional headwinds?.

I would say that we'll be earning our way into that transition for really the rest of the FY '15 fiscal year. And I'd mentioned this in previous calls, and I want to make sure that I continue to reinforce it.

And that is, as we see our products slate -- and I shouldn't use the word oscillate because that implies a frequency that maybe is faster than what we experience. But our products slate will vary from time to time. And right now, what we're seeing is more of a shift towards consumer health. That's partly what our market is doing.

It's partly due to an engineered effort by the company to pursue consumer health business because it tends to be more level. And we can achieve good asset utilization over long periods of time with consumer health business. So I would say, we will certainly be looking at it for the rest of the 2015 fiscal year.

And then, we'll have to see how the new product launches size up for FY '16. .

One is, it has less regulatory risk associated with it and it also has market uptake -- less market uptake risks, especially for bigger brands. And as we continue to diversify the portfolio, we see having an improved mix of some consumer health business as part of our advanced delivery technologies is very healthy for the business.

So this really is a strategic positioning by the company. From time to time, things come in and out of the pipeline from -- in our perspective and when they hit positive, you feel them. When they don't come in or they go away, you can also feel them.

But the steady Eddie flow of strong consumer health business like our Advil franchise is really terrific. So I just would offer that as some additional color that we're just not kind of being -- it's not the changing tides here. A lot of this is strategically being managed by the -- our company to drive improved growth. .

Okay, then one last one just following up on Ricky's earlier question earlier on Redwood. I know this is a longer-term opportunity, kind of in the 3- to 5-year time frame.

But is there any way you can help us size the potential opportunity for SMARTag? And then similarly for OptiPact as we think about that ramping over the next couple of years, how do we think about the relative market opportunities for those 2?.

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

I think we -- people have seen the announcement with regards to our relationship that we have with Pharmacyclics. And we also have some other key customers there.

And when you take a look at those opportunities, again, I would say that in terms of growth for the company on an annual basis, you can maybe see a pickup of 0.5% to 1% depending on getting business like what we have with Pharmacyclics. So from our standpoint, the way we look at the company, again, is it's massively diversified.

So we don't hang our hat on any one product, we don't hang our hat on any one technology. And we don't hang our hat on any one molecule within our pipeline.

The whole value of a highly diversified company is the ability to have a suite of technologies, a broad pipeline and a very diversified set of products such that we can grow as those things mature, but we're not subject to the significant risks of any one technology, any one product and so forth.

So when I broadly think about OptiPact, I would say that it just continues to strengthen our overall position in the advanced delivery technology space. With regards to Redwood, I would stick with what Matt has said.

But only add to the fact that over the next 3 to 5 years, where we're at with this leading technology that is really a second-generation technology for ADCs is that it has met its technical feasibility milestones, which has led to this -- our acquisition. We have further feasibility milestones.

We have several customers that we have signed up to this technology. When you sign up customers to these technologies, they usually come with upfront milestones that are in the kind of the low 7-figure kind of range.

But then if it proceeds through towards advancing that technology over a 5- to 10-year period, you could have milestone payments that are 10, 10 and 100x that, if you will. I mean, it's very substantial. But again, this is a technology platform. We're early in its development.

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

Our next question comes from Gary Nachman with Goldman Sachs. .

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

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

In terms of our market share within our softgel business, we haven't noticed any significant changes to the marketplace. And we believe that our marketing efforts within the consumer health business will be market share accretive to us and will be likely to -- will be gaining share at our competitors' expense.

And we think we've have seen some of that happen already and it should be increasing over the coming quarters. .

Okay. And then in MDS, just -- I think you mentioned it quickly. But just the lower sales of the injectables, just what really drove that again? And why are you comfortable that, that's going to bounce back? And then, Matt, on the net debt to EBITDA, you guys are at around 4x.

How high would you be comfortable going for the right transaction? And should we be expecting more of these smaller type, longer-term deals? Or are there things out there that you think could be accretive to you in the near term?.

Okay. In terms of the MDS business, the lower sales performance year-on-year is really a flu story, and flu is highly seasonal. This is typically a first quarter event for the company. We saw lower flu volumes than we saw last year. And this is really related to overflow decisions that our customers are making.

They have productive capacity for flu vaccines internally. And we typically see overflow volumes or some special situation volumes that our customers are managing. We saw less of it this year than we did last year. Since it's always a Q1 phenomena anyway, we wouldn't expect it to have Q2, 3 or 4 impact.

So we go back to just the general increasing success we've had at securing sterile injectable business at the site. Our business development efforts have been productive over the last year plus, including Animal Health. So -- And we believe that you'll see that and we'll see that in the latter quarters of the year versus what we saw in Q1.

Moving to your question on net debt. Correct, we were at about 4x leverage as of September 30. It's actually quite a bit better than what we were thinking at the time of the IPO, where our goal was to delever down to 4.5x.

In terms of where we could see that leverage going for transactions that we believe are strategic, we -- well, as we said in the past, this business has functioned very capably at leverage levels in excess of 6x. Now, that was when we were private.

But I would say that this management team would be quite comfortable extending the leverage beyond 5x to maybe something in the range of 5.5x, if the deal was strategic and offered great value for our shareholders, we could see leverage going up into that range.

And this is a great lead-in to the last part of your question, which was the transaction landscape as we see our M&A growth program unfolding. Yes, it's true. We've done a couple of small deals here in the first quarter. These are highly strategic deals that position us very well for the future.

We're certainly -- we'll certainly do those from time to time without a lot of fanfare. As larger transactions become available to us, we would certainly be looking at those as well, transactions that would be immediately accretive to the shares and would offer, sort of, a step change in our competitive position, we're certainly open to those.

So I think to a certain extent, any M&A program tends to be somewhat opportunistic because you do -- you are somewhat limited by the targets that become available.

We just happened to have some smaller deals that were compelling opportunities for us that we moved on, but we have a pipeline of opportunities that we're considering that also includes larger transactions. And once again, when these things become more firm, we'll certainly be talking about them, but nothing at this time. .

I just want to add one another comment with regards to our acquisition strategy. Again, we operate in a highly fragmented marketplace. We're the leader in this space. There's an opportunity for us to continue to do consolidation. We've got a very robust funneling with regards to the 2 transactions that we just discussed, both Redwood as well as Micron.

These were both self-sourced strategic deals that we went after. They're not things that come to us through processes. So we have a pretty disciplined management team that goes after assets that we know are going to create significant value for the company.

And although we're not talking disclosing the financials, I would tell you that the Micron deal is highly strategic for the company. It exposes us to a large number of molecules much earlier in the development cycle.

You'll read in the press releases that the Micron Technologies is really, largely a first step in terms of trying to solve the bioavailability or solubility problem. They try to do that through the micronization of the API. And now, having Micron as part of the Catalent team, there's a large number of molecules that are in their pipeline, over 400.

They've got about 200 customers. There's about 100 molecules that they see per year. And again, these are molecules that have solubility issues that would naturally lead into our other technologies of softgel, also of hot melt extrusion which is Catalent's OptiMelt.

So I think that is -- as our analysts, you look at these deals, there's a financial component and then there's long-term strategic. And I think the growth of Catalent comes from attaching ourselves to the right -- to as many molecules as possible in that high degree of diversification. And that's what yields that long-term growth.

So I don't want to minimize the fact that we're not disclosing the financials, but also make sure that they understand these are highly strategic deals that are done through a self-sourcing process. .

Our next question comes from Dave Windley with Jefferies. .

I wanted to start on revenue, just to clarify. So I see that your guidance is unchanged, I understand that. And if I look at the mid-point of that, that's about a little over 4% growth year-over-year. Your first quarter was about 7 million higher than the consensus was looking for.

You're adding Micron, which you're not -- you said a percent of your revenue, but it's only 2.5 quarters or so, so maybe 0.5% or a little more. But that -- those 2 things add to about 1% of growth to your revenue on a 4% guide. So the unchanged revenue guidance is kind of an implicit 1% reduction.

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

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

And with Catalent having approximately 65-ish percent of its revenues outside the U.S., we're certainly exposed to the same issue that other multi-nationals are. And I think one of the messages that is an important takeaway is, the company -- a lot of companies are lowering guidance for exactly that reason. Catalent is not doing that.

And what we're implicitly saying by holding guidance is that we can offset what is a translation issue with underlying improvements in the overall business. .

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

Sure. So we are trying to forecast FX rates just like everybody is for the rest of this fiscal year. Our best crystal ball says that on a year-over-year basis, FX translation is impacting us on the order of 3% on the revenue line and the EBITDA line and might be a little bit under 3%.

So what we're saying is, we can overcome that and we can still grow just due to the fundamental strength in the underlying manufacturing and sales that we can generate. .

Got you. And then -- again, sorry, another clarification question. But the -- so the adjusted EBITDA looks -- looked very solid and better than I think I and others were expecting. The EPS relative to everybody's estimates was lower.

And I guess, I'm curious just in terms of the add-backs, we're not exactly able to understand where those migrate on the P&L.

Is there perhaps something in the P&L below the line that is not being added back that would account for that difference?.

It's related more to interest expense than anything else. And that is mainly the function of mandatory notice periods that we had to wait through before we could use the IPO proceeds to actually reduce the debt. And so this -- we had 30 days to wait on both the senior sub notes as well as the 7 7/8 % notes. And that's where the principal difference is.

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

Our next question comes from John Kreger with William Blair. .

John, if you think about the business you've won and -- across your different manufacturing businesses over the last, let's say, 3 to 6 months, can you just talk about what sort of pricing dynamics you're seeing from the competition? And are you seeing any changes there?.

Well, let me first start off with saying that there's 2 sets of our businesses. There's a Development & Clinical Services business; and then, we have our advanced delivery technologies business. And our Development & Clinical Services business tends to be at higher competitive activity where we see more pricing pressure, if you will.

On the other side for the advanced delivery technologies, I would say that given in many cases our unique position and strength in the suite of technologies that we have, that we are not seeing pricing pressure and that we are able to execute on our pricing that is built into our contracts.

We are winning good business at -- and again, we don't do a -- have a "cost-plus" model. We have a "what-is-the-value-of-the-molecule-in-the-end-market" model and continue to see some very, very interesting deals on the advanced delivery technologies side. So in that, I would say that we continue to see stability from a pricing standpoint.

I think is the most favorable way to say it. We tend to have price up on our advanced delivery technologies. We have more competitive pressure in our Dev-Clin business. It's the nature of business that has less IP and technology associated with it.

But no fundamental changes in the structure of how the business works, which I think is really a strength of the business. .

Just one other question. Matt, I know you've talked about in softgel, the shifting mix to consumer health.

Can you just help us or remind us what the margin differential is, roughly from prescription softgels to consumer health softgels?.

Sure. So this will change from year-to-year. But on average, it's about 15 to 20 percentage points on a variable margin basis. So Rx on average is more profitable than consumer health business on a variable margin basis by about 15 to 20 percentage points.

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

I just want to add, too, just for additional background here. I mean, when you guys look at the mix of our business, we've got about 44% is prescription. We're not talking about massive -- changing sands or shifts.

But certainly as we drive growth, we'd see consumer health as being an interesting area, where both our customers and us see there's a very durable -- long durable, I mean, it's a part of the business that doesn't go generic, if you will.

So we're just continuing to make sure that we're not missing out on that growth would probably the best way to say it, while we're not trying to do that at the expense of Rx. We're still going to drive that business as hard as we always have because it's been a terrific part of the business. So I think that's the way you guys should think about it.

We're not trying to mute the prescription. We're just trying to make sure we don't miss out on the growth opportunities that are -- avail themselves in the consumer health space. .

Our next question comes from Sean Wieland with Piper Jaffray. .

I enjoyed your comments around the Micron acquisition.

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

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

Basically, what you're doing is you're taking an API and you're basically running it through a jet milling process, where the particles collide with each other and ultimately reduced in size.

And as I've stated before, it's generally the first step when you have a solubility, bioavailability type problem is, let's just try to make the particle smaller. There's a 25-year history at Micron. They were originally a part of Colorcon, which is a terrific company also.

And Micron, if you talk about someone needing to do this, it's kind of like making a Xerox. So I'd say, while we need to have micronized, we're going to Micron. So Micron really almost is the brand, if you will, in this micronization technology. They've got a 25-year history, great track record. This is why they're just well-known in the industry.

And it's generally, again, a first stop and kind of the standard, if you will. So less about IP protection, a lot more about brand reputation and know-how. And we see this as a great footprint for potentially some other niche-type acquisitions like this that'll fill that out. But the beauty of this is, it just gets us into that pipeline.

We certainly love macro trends that are around Catalent that float the boat higher. But the fact is, we do well when we attach ourselves to molecules that do well. And that's really been our secret sauce of having as many molecules as possible in the pipeline. You guys know, we have about 450 active projects now.

If I were to just take a look at Micron, they've got about 400 or 500 molecules that are currently either in commercial or in development with them. And they see about 100 new ones per year.

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

So for us, this is like a great feeder system for the company. And so -- although you could probably pick up some of these jet milling machines and start up the business. Again, they've got a great quality and regulatory track record. They're well-known within the industry.

When somebody thinks about jet milling, Micron is generally first on the list, proven out by the fact that we are using them for some of our inhalation projects. So we were actually a customer of theirs. And then, we went out and did customer due diligence, all extremely favorable.

When we talked about -- asked about particle reduction and what companies that they worked with, of the customers that we did due diligence, I think all, but one of the customers exclusively mentioned Micron. And one customer said Micron. And then, another company, that's called Jetpharma, which is out in Europe.

So sorry to be over verbose and effusive, but we're very excited about this. And as you guys look at the long-term potential of the company and how the management team thinks about driving strategic growth, this is right down the fairway for us. .

And am I thinking about it right when I think about this as pulmonary delivery? Or is there other application as well?.

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

Got it. .

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

Yes. .

And there's not many targets that we look at that meet this high standard that we set for ourselves. Micron does. So in terms of integrating acquisitions, we believe that this will be on the smoother side. And just one other parallel or contrast I would draw when you think about Redwood and a Micron.

Redwood, we're talking about a longer cycle to commercial revenues, 3 to 5 years. With something like Micron, we can start integrating with their molecules and their customer base right now.

And so we're very excited about the long-term potential for the addition of Micron to improve our ongoing organic growth into the future, and we expect to realize those benefits immediately. It won't be a step change, right. We'll be earning our way into it. But we expect to see positive developments much earlier than in something like a Redwood. .

Our next question comes from Derik De Bruin with Bank of America. .

So just, sort of, following up on, sort of, Dave's questions.

So the implied organic revenue growth number for the year is what? Given all the moves, if you think you can offset some -- the currency, there -- it's basically from my conversation is, you're actually more bullish on the organic revenue outlook than previously? Is that how I should interpret that?.

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

Okay. So can you just -- this is some housekeeping items.

So share count, we should think about for the year?.

Total share count for the year is -- we have a number, 123.6 million shares. .

Great. And again, once again this was sort of the -- realizing the seasonality and through the net income growth.

Could you give us a little bit more color on how should we think about the net income in the second quarter and just also progression for the rest of the year?.

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

So I want to make sure that that's clear. .

Yes. And that's where I was going next was the interest expense question. So that's great.

And for the full year then on the net interest expense?.

I -- it will be $105 million plus or minus is what we're triangulating to. .

Great. So I'll get off the financial questions and actually ask a couple of business -- other questions. So how has the clinical logistics -- the clinical [indiscernible] logistics business doing? Are you -- I know you've restructured that Aptuit business, you've gone to it.

Are you seeing some share wins against Fisher and Almac?.

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

So just as a refresher, Derik, the Clinical Services business, in terms of what we provide end-to-end and what our customers provide end-to-end, it will typically start with things like comparator purchases, where we'll help them secure on a purchasing and logistics basis, comparator drugs for trials, placebo materials, packaging materials, et cetera.

We'll manufacture and package all the materials that patients would be taking for the trial. And then, from that point forward, it's a storage, distribution, logistics play. And we see revenues across that spectrum. We provide services across that spectrum.

We've seen less manufacturing and packaging versus prior year, but we think our competitors have as well. And so on a share basis, the acquisition of Aptuit made us a more complete end-to-end service provider that has enabled us to compete more competitively and secure market share gains.

But we have relatively more manufacturing and packaging capacities than we're able to use right now. Our customers are just going out with fewer quotes we believe. .

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

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

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