Tom Castellano - VP, IR and Treasurer John Chiminski - President and Chief Executive Officer Matt Walsh – EVP and Chief Financial Officer Cornell Stamoran - VP of Strategy.

Tycho Peterson - JPMorgan Derik de Bruin - BofA Merrill Lynch Gary Nachman - Goldman Sachs Zack Sopcak - Morgan Stanley Dave Windley - Jefferies & Company John Kreger - William Blair Michael Baker - Raymond James Steven Higgins - Deutsche Bank.

Hello everyone and welcome to the Fourth Quarter 2015 Catalent Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this call.

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

Thank you, Lauren. Good afternoon, everyone, and thank you for joining us today to review Catalent’s fourth quarter and fiscal 2015 financial results. Please see our agenda on Slide 2 of our accompanying presentation, which is available on our Investor Relations website.

Joining me today representing Catalent are John Chiminski, President and Chief Executive Officer; Matt Walsh, Executive Vice President and Chief Financial Officer and Cornell Stamoran, Vice President of Strategy. John will start the call with a review of the key financial and operating achievements for the fourth quarter and fiscal year.

Then Matt will discuss the Company’s fourth quarter and fiscal year financial performance as well as provide our outlook for fiscal year 2016. Finally, we will open the call for your questions. During our call today, management will make forward-looking statements including its beliefs and expectation about the Company’s future results.

It is possible that actual results could differ from management’s expectations. We refer you to Slide 3 for more detail. Please be aware that the forward-looking statements are based on the best available information to management and assumptions that management believes are reasonable.

Such statements are not intended to be a representation of future results and are subject to risks and uncertainties. We refer you to Catalent’s Form 10-K filed with the SEC earlier today for more detailed information on the risks and uncertainties that have a direct bearing on the Company’s operating results, performance and financial condition.

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

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

Please note that the non-GAAP financial measures have limitations as analytical tools and they should not be considered in isolation or as a substitute for our financial results prepared in accordance with US GAAP. Now, I would like to turn the call over to President and Chief Executive Officer John Chiminski..

Thanks, Tom, and welcome everyone to our earnings call. Fiscal 2015 was our first year as a public company following our IPO in July of 2014 and we delivered strong results both financially and strategically.

During the year, we achieved revenue and profitability growth on a constant currency basis across all of our reporting segments, while continuing to invest in our innovative technologies in order to meet the growing needs of our customers around the world.

We also completed three strategic acquisitions, Micron Technologies, Redwood Bioscience, and Pharmapak Technologies. As you can see on Slide 6, our fourth quarter revenue decreased 2% as reported, but increased 8% in constant currency to $510.1 million.

Fiscal year 2015 revenue was $1.83 billion with no change as reported and a 7% increase in constant currency. All three of our reporting segments posted revenue growth in constant currency for the fourth quarter and fiscal year.

Due to the strong performance of our business and favorable product mix, our gross margin for the fiscal year improved 80 basis points to 33.6%.

During the fiscal year, all three of our reporting segments posted improved profitability in constant currency led by double-digit EBITDA growth in the Medication Delivery Solutions and Development and Clinical Services segments. Fiscal year 2015 adjusted EBITDA increased 9% in constant currency to $443.1 million or 24.2% of revenues.

Fiscal year 2015 adjusted net income increased 43% to $203.5 million or $1.68 per diluted share. Now I will briefly discuss some of our key operating accomplishments during the fourth quarter. First, we continue to help provide more products and better treatments to the marketplace through our advanced delivery technologies.

At the end of July, one of our customers OPKO Health announced that the US FDA has accepted for a review its new drug application for the treatment of chronic kidney disease and vitamin D insufficiency, which uses Catalent’s proprietary OptiShell softgel technology as its delivery platform.

Our OptiShell platform allows for high temperature encapsulation of semi-solid fill material within a non-gelatin plant-based shell. The products Rayaldee will be manufactured at our North American Softgel Center of Excellence in St. Petersburg, Florida.

Also, we signed an exclusive licensing agreement with Excelimmune to access its antibody combination therapy or ACT technology platform. The platform has the potential to enable a consistent and cost-effective method to manufacture multiple recombinant antibodies or other recombinant proteins in a single batch culture.

Under the licensing agreement, we will continue the development work on the platform both internally and in conjunction with partner sponsored programs. We will also be able to leverage our own proprietary GPEx technology to help enable that development.

Finally, during the quarter, we expanded our Singapore clinical services facility to provide secondary packaging and labeling capabilities. The site is now fully approved for GMP across all its activities including secondary packaging, label printing, storage, distribution, returns and destruction management.

These expanded capabilities complement our Shanghai site and allow us to provide more integrated and flexible solutions for customers conducting trials throughout Asia-Pacific.

We also wish to highlight two excellent additions to our Board of Directors with Greg Lucier, former CEO of Life Technologies joining during the fourth quarter, and Martin Carroll, former CEO of the US operations of Boehringer Ingelheim joining in July.

We continue to build on the strong experience and expertise for both as they partner with our management team in creating further shareholder value. In conclusion, I’d like to underscore the dynamics of our industry and market remains very favorable for our business.

First, there remains a growing need for fewer, bigger, better suppliers with scale and global reach with an emphasis on both delivery and compliance. Given our market-leading position, capabilities, regulatory track record, and a history of reliable supply, this trend continues to bode well for Catalent’s organic growth.

The benefit of that trend to Catalent is enhanced by incremental M&A which augments our offerings and scale. Second, ongoing consolidation in our dynamic industry is generally positive for Catalent due to the inherent stickiness of our service offerings for pharmaceutical and biologic products.

Our follow the molecule strategy allows us to capitalize on these market opportunities as we continue to pursue our long-term growth objectives. Now, I’d like to turn the call over to our Executive Vice President and Chief Financial Officer, Matt Walsh. .

Thanks, John. I will start my presentation with a brief review of our fiscal year operating accomplishments by reporting segments starting with Oral Technologies on Slide 7.

Our softgel business, which accounted for approximately two-thirds of Oral Technologies segment revenue posted modest growth in constant currency as strong top-line performance in North America during the fiscal year was offset by continued product mix shift from prescription products to consumer health products.

This mix shift caused EBITDA to come in below the prior year level. As demonstrated by growth in Asia-Pacific and Latin America where our product mix is more focused on consumer health, the expected mix shift from prescription softgel to consumer health softgel is progressing, and we believe it will continue in the near term.

The Modified Release business, which accounted for roughly one-third of Oral Technologies segment sales continue to generate strong profit share revenues from product participation-related activities.

EBITDA margin across the business expanded significantly due to product participation-related activities, favorable product mix and timing of customer contractual settlement.

The development in Clinical Services segment shown on Slide 8 posted strong growth during the fiscal year driven by development in analytical services as well as by the Micron acquisition.

Clinical Services revenue was in line with prior year and EBITDA was modestly below the prior year levels, due to unfavorable product mix and decreased customer project activity primarily in Europe. Analytical Services however performed very well due to our integrated oral solids development and supply business.

As of June 30, 2015, our backlog for the development and clinical services segment was $417.7 million a 5% increase compared to the third quarter of this year. This segment also recorded net new business wins of $143.3 million during the fourth quarter, representing a 31% increase year-over-year.

The segment's trailing 12 month book-to-bill ratio was 1.1. Now on Slide 9, and turning to the Medication Delivery Solutions segment, our blow-fill-seal offering posted double-digit revenue and EBITDA growth for the full 2015 fiscal year driven by increased demand and favorable product mix.

Market fundamentals for Blow-fill-seal remain attractive with a robust new product pipeline. As we have seen in prior quarters, our product mix continues to shift to higher margin products.

The Sterile Injectables business experienced unfavorable product mix during fiscal year 2015 which resulted in a modest decline in EBITDA despite revenue growth of 4%.

We expect challenges within this business to continue in the near-term, however, we are excited about our entry into the animal health market which bodes well for future growth potential.

And finally, during fiscal year 2015, we saw the positive results of our investments in the biologics business, which posted revenue and EBITDA growth, despite higher cost related to the Redwood Bioscience acquisition.

The addition of the ADC protein engineering technology from Redwood and our partnership with Excelimmune on their ACT technologies broaden the scope of biologic services that we can provide to customers.

To provide additional insight into our long cycle business which includes both Oral Technologies and Medication Delivery Solutions, we are disclosing the number of new product introductions or NPIs and our long cycle development revenues.

As a reminder, these metrics are only directional indicators of our business as we do not control the sales or marketing of these products nor can we forget the ultimate commercial success of them. We do however expect these metrics to offer insight into the long-term organic growth potential of our long cycle business.

For the fiscal year ended June 30, 2015, we introduced 165 new products versus 175 new products introduced during the prior fiscal year. And we note that the revenue contribution from NPIs this fiscal year was similar to that of last year’s at approximately 2% of our total revenues.

The decline in the number of NPIs launched was primarily driven by quick turns, vitamins, minerals and supplements products that were cancelled or put on hold by our customers.

As a reminder, the number of NPIs in any given year depends on the timing of our customers’ product launches, which are often driven by regulatory body approvals or are at the discretion of our customers and thus this figure will continue to vary quarter-to-quarter.

Additionally, during fiscal year 2015, we recorded development revenue of $142 million, an increase of 4% versus prior year.

I’ll now provide more details on our financial results for the fourth quarter and as a reminder, all the segment revenue and EBITDA, year-over-year variances I’ll be discussing on the next few slides are all in constant currencies.

So turning to Slide 10, revenue from the Oral Technologies segment was $318.8 million for the fourth quarter of fiscal 2015, an increase of 3% compared to the fourth quarter a year ago.

This growth was attributable to improved performance in the softgel and modified release offerings, as well as the higher revenue from product participation-related activities. Additionally, during the fourth quarter of 2015, we recorded a customer contractual settlement within our Zydis business.

Oral technology segment EBITDA for the fourth quarter was $99.6 million, a decrease of 2% compared to the prior year period. This performance was primarily driven by unfavorable product mix within the softgel business, partially offset by the customer contractual settlement.

Revenue from the Development and Clinical Services Segment was $124.2 million, an increase of 22% over the fourth quarter a year ago.

This increase was related to the Micron acquisition which occurred in the second quarter of fiscal 2015 as well as through the growth in our Clinical Services and integrated oral solids development and manufacturing offerings, partially offset by declines in clinical trial activity within Europe.

Development in Clinical Services segment EBITDA for the fourth quarter was $26.3 million, an increase of 5% year-over-year. This EBITDA improvement was driven by the Micron acquisition as well as by our integrated oral solids development and manufacturing offering.

Revenue from the Medication Delivery Solutions segment was $70.1 million for the fourth quarter, an increase of 12% over the fourth quarter a year ago. This growth was primarily attributable to increased revenue from our blow-fill-seal technology platform and from our sterile injectibles business.

Medication Delivery Solutions segment EBITDA was $15 million, a decrease of 7% year-over-year. However, the fourth quarter of fiscal 2014 included a $4 million cost capitalization related to a facility expansion associated with the build out of an animal health suite in our sterile injectibles business.

Excluding this item, MDS segment EBITDA would have increased 20% driven by the increased revenue within our blow-fill-seal and sterile injectibles businesses, partially offset by the cost associated with the Redwood Bioscience acquisition.

Turning to Slide 11, we see precisely the same format as on Slide 10, fiscal year 2015 performance of our operating segment both as reported and in constant currency. I will cover every variance item in detail, but I will say that we were very pleased with the constant currency revenue and EBITDA growth across all of our reporting segments.

The 7% constant currency revenue growth or 6% growth on an organic basis, compared to the same period a year ago was in line with our financial objective of 4% to 6% organic revenue growth and represents some of the best organic revenue growth performance we've seen over recent years.

Slide 12 shows the reconciliation for the last 12 months EBITDA from continuing operations from the most proximate GAAP measure which is earnings or loss from continuing operations.

This is a mechanical computation which doesn’t require much supporting commentary, it’s really there for your benefit to assist in tying out the reported figures to our computation of adjusted EBITDA which is detailed on the next slide.

So moving to adjusted EBITDA on Slide 13, fourth quarter 2015 adjusted EBITDA decreased 10% to $135.3 million compared to $150.7 million for the fourth quarter a year ago, as higher profitability in the development and clinical services segment was offset by a decrease in the Medication Delivery solutions segment, as well as the impact of foreign exchange translation.

As a result, our year-to-date adjusted EBITDA totaled $443.1 million, an increase of 2% compared to June 30 2014. As a reminder, FX translation negatively affected our financial results in both the fourth quarter and for the full year.

Excluding the impact of FX translation, our fourth quarter adjusted EBITDA would have been in line with the prior year and our full year adjusted EBITDA increased 9% compared to fiscal year 2014. Acquisitions completed in fiscal year 2015 increased our full year constant currency EBITDA growth by approximately one percentage point.

Now moving to Slide 14, our track record of adjusted EBITDA growth remains very strong. What we're looking at here is the last 12 months adjusted EBITDA for each and every quarter since June 2009.

It clearly depicts our observation that Catalent’s business has grown steadily over longer analysis period, even as we have experienced flat quarters or even down quarters from time-to-time.

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

On Slide 15, you can see that fourth quarter adjusted net income was $76.6 million or $0.61 per diluted share, compared to adjusted net income of $77 million or $1.01 per diluted share for the fourth quarter of the prior fiscal year.

This slide also includes the reconciliation of earnings or loss from continuing operations to non-GAAP adjusted net income in a summarized format for your reference.

A more detailed version of this reconciliation can be found in our Supplemental Information section of the slide deck when you find the essentially the same add-back, as seen on the adjusted EBITDA reconciliation slide.

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

I’ll now provide our financial outlook for fiscal year 2016. As you can see on Slide 17, we expect full year revenue in the range of $1.81 billion to $1.9 billion. We expect full year adjusted EBITDA in the range of $434 million to $457 million and full year adjusted net income in the range of $203 million to $226 million.

We expect in the range of $125 million to $135 million for capital expenditures and we expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30, 2016 will be in the range of 126 million to 128 million shares.

It’s important to note that the revenue and adjusted EBITDA ranges to which we are guiding are consistent with our constant currency long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth.

Slide 18 walks through some of the moving pieces that we considered when determining our fiscal year 2016 revenue and adjusted EBITDA guidance. The first set of bars shows the expected impact of one-timers related to customer contract terminations, net of a full year impact of the Micron and Pharmapak acquisitions completed during fiscal year 2015.

We project that these items will result in additional revenue in the range of $12 million to $15 million, but will have no impact on adjusted EBITDA during fiscal year 2016.

The second set of bars brackets the changes that we expect to see in our base business performance, which as I mentioned earlier aligns with our constant currency long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth.

The third set of bars brackets the negative FX translation impact to revenue in the $60 million to $100 million range and the negative FX translation impact to adjusted EBITDA in the $20 million to $35 million range.

We expect the majority of this FX translation impact to adversely affect our first half financial performance in fiscal year 2016 as opposed to the second half. Additionally, let me remind everyone of a seasonality in our business and highlight our expected quarterly progression through the year.

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

With this trend being slightly more pronounced during fiscal year 2016 as compared to recent history. Operator, we now like to open the call for questions..

[Operator Instructions] Our first question comes from the line of Tycho Peterson from JPMorgan. .

Thanks.

First question on Oral Technologies, backing out the one-time Zydis settlement, growth there was – it looks like it was essentially flat, maybe, can you talk about the puts and takes there and where you stand from a capacity utilization standpoint at the Winchester facility?.

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

But in terms of a relevant time horizon for filling that capacity, it will be years that it was a substantial expansion for one thing we doubled the footprint at Winchester and filling that as I said, we should be viewing that time horizon in terms of order of magnitude years rather than quarters.

In terms of the development of the business, within Oral Technologies, Q4 over Q4, I think we saw pretty good performance from the modified delivery technologies business, as we said related to product participation related activities that was all very encouraging for the fourth quarter.

The softgel business year-on-year saw lower volume more in the Rx space than the consumer health space and that also impacted margins year-on-year. .

And then on the medication delivery, did the softness that you saw in Europe last quarter rebound for the pre-filled syringes?.

It did actually. The financial reporting here for the fourth quarter year-on-year has a bit of a one-timer in it in that the prior year result included this approximately $4 million cost capitalization which had no revenue impact.

If you normalize for that, the business’s margins were up year-on-year and we do have a relatively bright long-term outlook for our MDS business in total and all the components of it whether it’s blow-fill-seal, our sterile injectibles business or the smallest part of one of the highest growth part which is our biologics business within that segment.

.

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

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

So, the integration is complete – we’ve completed the triage of all the molecules and we have deployed our sales people in the field to be working with customers to secure development contracts. In our business, development contracts lead to commercial manufacturing.

So that is ongoing and we are seeing – about the results we thought we would in terms of the potential for those molecules to be additive to the long-term organic growth of Catalent. And so far no surprises out of the Micron acquisition. And in terms of the partnership with Excelimmune, this is obviously very exciting to us.

It’s very consistent with the high end services positioning that we are seeking to provide in our biologics business and I think, once again we are building this business for the long-term.

It’s unlikely you would hear me talk – certainly not in this quarter, or even in the next several quarters about significant year-over-year variances because of the partnership.

But once again, this along with the Redwood Biosciences acquisition is a kind of business that we are building for the long-term that can support the 4% to 6% long-term growth that we believe the business is overall capable of achieving. .

Okay, thank you..

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

Hi, good afternoon. .

Hey, Derik..

Hey, Derik..

Hey, I want to ask some modeling questions on your 2016 guidance. So, when I start first looking at where I was modeling EBITDA, adjusted EBITDA and adjusted net income, I was at the low-end of your adjusted EBITDA guidance, but, I was well above it on adjusted net income. So I am trying to reconcile that.

So give us a little guidance on like tax, rate, interest expense, and D&A thinking about that in 2016?.

So Derik, this is Tom. I would say, D&A, we expect to be relatively close to where it was coming in, I would say little bit below $100 million or assuming about $100 million or so would make sense. I think where you are probably seeing a little bit of a disconnect is around the taxes..

Yes. .

The tax rate is – we feel more comfortable talking about cash taxes on a dollar basis than we do on a rate basis, and I would say, we saw cash taxes this year come in, in the $34 million range.

We would expect that next year to increase to be sort of $40 million at the low-end and maybe as high as $45 million or $46 million on the high-end and I think that’s probably the biggest disconnect..

Yes. That’s it..

That we would have had in the model..

Yes.

Okay and interest expense?.

The interest expense number – I would say is, we are looking at something in the $80 million to $85 million range. I mean, our rate is essentially flat that we have out there of about 4.25% given where LIBOR rates are we have a 1% floor on that. So, if you did the math on that based on our debt balance, you’d come out with something in that range. .

Great. Yes, okay. I was thinking about $84 million, so that’s perfect. Great, thanks for that. I appreciate it..

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

Hi, Gary..

Hey guys. Good afternoon.

Also on the fiscal 2016 guidance, how should we think about growth in each of the segments? What might some of the big swing factors be next year by segment specifically? And then just, Matt, what are the expense levels that we should think about? Will they be relatively constant from this year?.

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

Yes, yes, operational expenses..

Okay, okay. So let’s talk about growth by segment first. We expect to see growth being led by our largest segment which is Oral Technologies. The softgel business which experienced a relatively flat year 2014 versus 2015 should see growth above its historical baseline.

The expansion of our consumer health business both in the United States and abroad is really going pretty well. And the modified delivery technologies business should also see growth commensurate with its historical CAGR.

We should see good growth in our development clinical services business both organically as well as the – as well as the full year impact of the Micron acquisition. Where we might see flatness year-on-year would be in the medication delivery solution segment that one will probably be on the low end of growth relative to the rest of the businesses.

And in terms of our SG&A expense on a constant currency basis, we’d be looking at growth in the 3% to 4% range. .

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

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

Okay, and then on the quarter, just – give a little bit more on the development in clinical services to justify such a big jump in the quarter and then we are going to be using that sort of as a baseline to grow into next year.

So, I know Micron was a contributor, but maybe you could quantify where most of that came from?.

Well, so, it was – it really was the Micron acquisition was by far the biggest contributor to that growth. We acquired that business in the front-end of our second quarter. So we had really almost three quarters of growth coming from Micron.

We saw continued good performance throughout the year from our integrated oral solid manufacturing business within the segment.

That growth should continue, but as you are thinking about modeling, we’ll only have about one quarter of sort of full year impact of the Micron acquisition and then, what we would consider to be sort of normal annual growth in the segment which will be on the high side of the 4% to 6% long-term outlook for the company. .

Okay, and then last question, just, what’s your exposure in China? Have you guys seen any impact yet, given some of the macro challenges there? Thanks..

Yes, John here. What I’d tell you, Gary is that, the businesses that we set up in China were both in our clinical supply services business and also in softgel. And in clinical supply services, the business there is primarily set up to deal with our multinational customers.

So the growth that we have and have planned there is really driven by the multinationals are still running trials and we really had some terrific response from the customers in terms of completing their audits and placing some initial business and then you would got a kind of long-term outlook, but there is nothing from a macroeconomic standpoint in China that would impact that from a CSS standpoint.

And then for our softgel business similarly we’ve set up the business to handle a significant amount of volume that we are actually experiencing in Asia primarily from our Australia business. So it’s really set up to our export out of China.

So, currently, as we are configured, we are not impacted from a macroeconomic standpoint or some of the things happening from a domestic demand standpoint that would flow anything down or change in any of the strategy that we have in China.

And today, I’d also tell you the small percentage of our overall sales, kind of in the 1% range, so again, it’s – for us, that was a long-term growth investment not predicated specifically on the economics we are trying but more on what our pharmaceutical customers, the BMS customers were looking for us to do with the footprint there. .

Okay, great. Thanks guys. .

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

Hey good afternoon. This is Zack for Ricky. I wanted to first ask on oral technologies for fiscal 2016? I was wondering on the softgel mix shift.

Is there a timing for next year we should expect that to kind of be annualized going forward, where less of the headwind taking in your normal seasonality? And then on the $6 million Zydis settlement in the quarter, does that signal that there was a project or a product that was canceled in fiscal 2016 that maybe a modest headwind?.

Okay, Zack, I got that. So, on the softgel piece, the mix shift to consumer health will be ongoing throughout the year and I would say, it’s a kind of thing that by the time we get to the end of the FY 2016 fiscal year, we would be – we might see about as – about done with that from what we can see currently.

With respect to the Zydis settlement, this really results from products being transferred from one of our customers to another and so, we don’t foresee any net decline in volume and as we have observed over the years, when established products get moved to one of our customers to another, we can often see higher volumes because the new owner has some sort of synergy or increased commitment to that product versus the prior owner that generally result in increased volumes which benefits Catalent.

And we expect that in this case as well..

Okay, guys. Thank you and then, one quick one. On MDS, you mentioned the Redwood cost as a bit of an EBITDA headwind.

Should we think of Redwood like in the quarter as being an overall EBITDA headwind for the company and that was slightly dilutive going into 2016, like is it something that we should be thinking as accretive or dilutive relative to when, I guess, you have longer-term expectations for more business to be coming in from it?.

Sure, sure. So, we’ve been pretty clear in the outset that Redwood Bioscience is a really a pre-revenue technology related acquisition that has attached to it a cash burn. It’s a relatively small number, Zack. Now that they have some revenue that they are booking on development projects as customers are trialing the technology.

But on a net basis, we are looking at a cash burn in the low single-digit million. So it’s not significant to Catalent, but will at certain times show up in variance explanations for the segment that it’s in which is relatively small reporting segment for Catalent.

But, the financial performance of the business is doing exactly what we thought it would and in 2016, it will still be a small drain on the company’s performance less so than what it was in 2015.

But the most important deliverable from that acquisition for the company are all on the technical milestone of the establishment of that technology and getting our customers to increasingly trial it and then hopefully adopt it one day one or more products as they intend to market..

All right. Great, thank you..

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

Hi, good afternoon. Thanks for taking the questions.

I guess, first of all, could you, Matt, clarify what timeframe or date of pricing you are using for FX in your guidance? And which currency or currencies are the ones that are having the biggest impact on your year-over-year growth?.

Okay, so in terms of FX translation, we deal in seven major currencies, Dave and all of them were down against the dollar. The biggest impact was the euro.

But we also have approximately 15% of our revenues denominated in British pounds and so the euro and the pound together comprise almost 45% of our sales and that’s where we saw the biggest impact year-on-year and in terms of the foreign exchange elements of our FY 2016 guidance that’s right on the chart and you can – the low end of our guidance is predicated on the euro at parity with the dollar and at the midpoint I think it’s about 1.11 euro at 1.11 which is actually not so different from where we are at the spot right now.

.

Yes, Dave, there is – there is some detail on Slide 18 as Matt said..

Okay, okay.

So, don’t have my post in front of me, but so are you assuming something different than where the spot rates are now?.

No, no and I would say, we’d really try to predicate the FX rate to use on where spot is right now and if you look at that, and spot rates stay where they are, Catalent would lack this FX translation issues after the half way point of the year.

That’s why we said in the prepared comments that we expect most of the FX translation issue that’s embedded in our guidance to be experienced in the first half. .

Yes, okay, okay.

So, then, I guess, another question on this is, you are saying your underlying constant currency expectations for the businesses are consistent with what your view, your longer-term view, so 4% to 6% on revenue, I think you said 6% to 8% on EBITDA, to the extent – I mean, so if that is true, then the FX translation is having a disproportionate impact on margin causing reported – expected reported adjusted EBITDA to grow slower, so it’s compressing your margin.

I guess, what thoughts do you have about protecting yourself against that?.

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

I think we got out of the gate staff on that. So the margin enhancement we saw in 2015 was – surpassed our expectations and this is not the kind of thing we ever expect it to be linear to why we talked about it on a long-term basis. So, we got out of the gate fast.

We think that 2016 margins will probably be similar to 2015 and that’s how we constructed the guidance. .

Okay.

Maybe moving off of that point, so the settlement, was that – should I interpret that as essentially dropping through the bottom-line – was there any costs reported against that settlement in the quarter?.

No..

Okay..

It’s a 100% drop through..

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

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

Well, I am sorry. I can’t follow that.

So, segment EBITDA, excluding FX was down 2% and that is with the benefit of $6 million of pure profit to EBITDA? Am I right?.

So, Dave, we are crossing time periods. I am talking about full year performance in the business, sorry. .

Okay, so, I mean, Oral Technologies EBITDA was down pretty hard in the quarter ex that one-time item, right, to be fair here?.

Yes, yes..

Okay, okay. All right. Thank you. Used up enough time. Thanks. .

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

Hi, thanks.

Can you guys talk a little bit more about your long cycle pipeline? And a couple of things we are wondering, you gave us the NPIs for 2015, based upon what’s in your pipeline, do you have any visibility on what that’s likely to be next year in fiscal 2016 up or down? Or are you seeing enough to know if sort of the Redwood Biologics pipeline is ramping or is it really too soon in that process?.

Hey, John, John Chiminski here.

So first of all I would say, as we look forward to FY 2016, we see NPIs, our current forecast of NPIs to be up and we’ve had a steady increase of – I would say, NPI projects coming into the company over the last four to five years that we really ramped up, I would say both the front-end as well as the R&D portion of the business.

However, I’ll modify that saying that, those are forecast by the company and that there actually is a lot of churn that happens in our NPIs because the NPI want state is generally predicated on regulatory approval, sometimes customers put on hold and sometimes they actually outright cancel.

And so there is being some churn in that but in terms of overall expected volume our forecast certainly have to do – have more NPIs this year than we had last year with kind of a consistent trend over the last – I would say three to five years.

What was the second part of your question, John?.

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

Yes, sure, so first of all, we continue to place some disproportionate emphasis from a company strategic standpoint on biologics because we really know that there is one value that Catalent can create as a lot more biologics are coming to the market.

First of all, from a pure biologic standpoint, driven out of our Madison facility, where we are doing sell line development and have recently done our expansion where we now have 1000 liter single use bio-reactors.

We saw a substantial double-digit increase in the commercial volumes that were put through that facility and we are very pleased with that performance given that that facility come online not more than 18 months ago with strong performance there.

Redwood Bioscience as Matt talked a little bit about our performance there, it’s certainly is in early improved revenue acquisition if you will, but our game plan on a go forward basis does have revenues and milestones being additive to that business such that maybe not within the year, but certainly within the next several years and will end up adding to the business and that be a factor in its early stage that we have right now.

And then I would just say in general we continue to refine our strategy which today is based upon approaching improvement strategy and helping customers bring more products that are treatment for our tag line and we are looking at other technologies like Excelimmune around that focus that continues to add to the company.

So we feel good about the focus that we are placing on it and that we will continue to report on the progress. .

Thanks, John. Just one last follow-up, again on the pipeline. You mentioned a couple areas where you had a negative mix shift.

If you look at your pipeline, are there any particular delivery mechanisms that sort of stand out is likely increasing as a percent of your business over the next couple of years?.

We certainly have a lot of technologies that we’ve put in the pipeline over the last three to five years. We’ve talked about outperforming up to those continue to file the past that we would expect. But I would say from an overall mix standpoint as I take a look at, the last couple of years, it’s been pretty consistent.

Softgel actually has had an increasing rate of molecules coming into the pipeline, it’s just whether or not the – actually come to fruition and we also have, I would say, a very strong consumer health pipeline that’s across multiple technologies.

So, I would say, we are just seeing overall increases there probably somewhat consistent with the similar mix that we’ve had in the past. .

Great. Thank you..

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

Yes, thanks a lot. First off, Matt, I was wondering if you could give us a little bit more color on the more pronounced seasonality that you expect for this upcoming year.

And maybe, set it in context of what we’ve seen kind of historically or what you’ve seen in the business historically, particularly as it relates to the first quarter?.

Okay, yes, thanks, Michael.

So just to review something, I think, Michael already knows, but for the broader audience, the first quarter of our fiscal year generally, our customers plans are undertaking maintenance work they are shutdown, our plants are shutdown and that results in the lowest level of commercial activity compared to other quarters in the fiscal year.

And so we just think that based on the level of customer order, customer forecasts for the quarter that we’re getting, that relevant to our expectation for the full year that this is just seems to be lining up to be a quarter that maybe where that seasonality is just a little bit more pronounced.

I don’t really have any other commentary than that Michael, but it’s just how we see the customer order book sizing up in terms of firm orders as well as the non-binding projections that we get from our customers on a rolling basis it’s just looking that way for the quarter.

But these same projections also go out into quarters two, three and four and so we do have good visibility into the year as we’ve always had and so, the phasing will be a little bit more pronounced this year than other years, but it doesn’t change our outlook for the full year which as you know tends to well informed with more than 50%, well more than 50% of our business under long-term contract where we receive these kinds of forward-looking estimates from our customers.

.

So it just sounds like there might be a bit of a modest differential from what we’ve seen historically. So that’s fine. And then maybe John a comment as you continue to execute your strategy on the biologics side including M&A.

What inning do you think you are in, in terms of where you’d like to be – if we use the baseball analogy?.

Well, I would say, we are still very early on.

I feel very comfortable with the foundation that we’ve laid around the protein enhancement but we are doing a lot of work internally both in terms of engaging a lot of what so say – outside help and also working with investment bankers to really understand much better the landscape of opportunities that are out there and I won’t say that reluctantly because with the M&A effort we have here internally, we’ve been able to self-source most of the deals or actually all of the deals that we’ve done has pretty been self-sourced within the company but as we pursue the M&A landscape of biologics, we really are going outside to both tap into understand what’s available, but the other thing that we’ve done is we really put in place two very strong biologic side advisory board those are now only six to eight months up and running.

We’ve gotten some terrific folks that are put on the board. I’ve spent time with each of them. They are going to add a tremendous amount of value.

So I would say, we are very early on, but confident that long-term the strategy that we are currently executing on and we ill expand upon is going to be a long-term fuel for the growth, but for everybody on the call, you understand that this is a long cycle business that we think in five to ten year increments.

So lot of the stuff that we are doing today are going to be adding to the long-term consistent financial performance of the company five years out just like as we sit here today, a lot of our performance is predicated on decisions that we made three and five years ago and that’s just how Catalent evolves..

Thanks for the update..

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

Hi it’s Steven Higgins on for George today.

I was just wondering for FY16, should we continue to expect the benefit from the product participation-related activity?.

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

And For the base business, is there anything else that you'd caught as major drivers for the margin rate next year, the margin expansion that it looks like you are forecasting?.

Well, so, just to be clear, when we constructed the guidance for 2016, our assumption was substantially flat EBITDA margins year-on-year. And so, just revisiting this topic, we got out of the gate on margin expansion in our first year as a public company.

We got out of the gate faster than we had thought that we would and margin expansion for us we have experienced over the years is not a linear kind of thing. So, we think that we’ll see margin progression, we should see margin progression in the business 2016 versus 2015 not as hot as it was in 2016 versus 2014.

And this will be driven by continued leverage over our fixed cost. That’s something we strive for and typically get every year. And then that maybe overshadowed on the upside or on the downside by what happened with product mix across all of our segments.

We saw a good product mix this year in our modified release technology business as well as the blow-fill-seal within the long cycle. On the downside, we saw a not great product mix in our clinical services business and our softgel business.

It’s very hard to predict that over the short-term, but over the long-term and by long-term, I mean, over the full year 2016, we see puts and takes that would suggest that prudent thing t o do is to forecast margins that consistent with what we’ve got in FY 2015..

Okay, thank you..

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

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

Thanks for your time..

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