Thomas Castellano - Catalent, Inc. John R. Chiminski - Catalent, Inc. Matthew M. Walsh - Catalent, Inc..

Tejas R. Savant - JPMorgan Securities LLC Juan Esteban Avendano - Bank of America Merrill Lynch Mark Rosenblum - Morgan Stanley & Co. LLC Tim C. Evans - Wells Fargo Securities LLC David Howard Windley - Jefferies LLC George R. Hill - Deutsche Bank Securities, Inc. Jon Kaufman - William Blair & Co. LLC Nina D. Deka - Piper Jaffray & Co.

Matthew Mishan - KeyBanc Capital Markets, Inc. Michael J. Baker - Raymond James & Associates, Inc..

Good day, ladies and gentlemen, and welcome to the Catalent, Incorporated First Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Tom Castellano. Mr. Castellano, you may begin..

Thank you, Andrea. Good afternoon, everyone, and thank you for joining us today to review Catalent's first quarter fiscal year 2017 financial results. Please see our agenda on slide 2 of our accompanying presentation, which is available on our Investor Relations website.

Joining me today representing Catalent are John Chiminski, Chief Executive Officer; Matt Walsh, Chief Financial Officer; and Cornell Stamoran, Vice President of Strategy. During our call today, management will make forward-looking statements that refer to non-GAAP financial measures.

It is possible that actual results could differ from management's expectations. We refer you to slide 3 for more detail. Slides 3, 4 and 5 discuss the non-GAAP measures and our just issued earnings release provides reconciliations to the nearest GAAP measures.

Catalent's Form 10-Q to be filed with the SEC later today has additional information on the risks and uncertainties that may bear on our operating results, performance and financial condition. Now I'd like to turn the call over to Chief Executive Officer, John Chiminski..

Thanks, Tom, and welcome, everyone, to our earnings call. Catalent's first quarter delivered a solid start to our fiscal year with year-over-year revenue and adjusted EBITDA growth in constant currency in line with our financial performance expectations.

As you can see on slide 6, our revenue for the first quarter increased 5% as reported and increased 7% in constant currency to $442 million, all organic and with all reporting segments contributing to the growth.

Our adjusted EBITDA of $75 million was above the first quarter of fiscal year 2016 on a constant currency basis by 3% primarily driven by our Drug Delivery Solutions segment, which recorded double-digit revenue in EBITDA growth. Our adjusted net income was $19.6 million or $0.16 per diluted share for the first quarter.

Now moving to our key operating accomplishments during the quarter. First, we acquired and began integrating Pharmatek Laboratories, a West Coast U.S.-based specialist in drug development and clinical manufacturing.

This acquisition adds extensive early phase drug development capabilities from discovery to clinic, brings spray drying into our extensive portfolio of advanced delivery technologies and expands our capability for handling high-potent compounds.

The addition of spray drying also provides our customers with the broadest suite of bioavailability enhancement solutions, while complementing and expanding our OptiForm Solution Suite platform.

Next, there are three highlights on our fast-growing biologics capability that showcase our commitment to building a world-class biologics business in support of our customers and patients. First, Triphase Accelerator has obtained worldwide rights to an oncology treatment developed using our proprietary SMARTag antibody-drug conjugate technology.

Triphase will also use Catalent for development, manufacturing and analytical services to support a fast path to clinic, while the junior expertise along with our proprietary SMARTag technology and supporting infrastructure will help bring this potentially transformational treatment to patients.

Second, in the quarter, we reached an agreement with Moderna Therapeutics to support near-term GMP efforts for Phase 1 and Phase 2 clinical studies for its personalized cancer vaccines.

Moderna will leverage Catalent's manufacturing expertise and capabilities at our state-of-the-art facility in Madison until 2018 while Moderna builds out its own footprint. And third, two weeks ago, we broke ground on our new 22,000-square-foot expansion at our Madison biologics facility.

On our last earnings call, we announced plans to expand Madison's state-of-the-art facility. This new expansion will add a third train of 2 x 2,000 liter single-use bioreactors and it's planned to be online in the second half of our fiscal year 2018.

The expansion will help to meet the needs of our biologics customers and gives us additional capacity so that we may continue to aggressively grow our biologics business.

I'd also like to highlight another excellent addition to our board of directors with Uwe Röhrhoff, CEO of Gerresheimer AG, joining our board following the resignation of Chinh Chu and Bruce McEvoy, the designees of our former equity sponsor, Blackstone, after the sale of their remaining interest in the company.

Uwe brings additional strong pharma services and international experience and expertise to our board, and we look forward to him joining in our next regularly scheduled board meeting. We would like to thank Chinh and Bruce, who are so important to Catalent's path over these last several years.

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

Now I'd like to turn the call over to our Chief Financial Officer, Matt Walsh, who will take you through our first quarter financial results and provide details on our outlook for fiscal year 2017..

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

Softgel revenue of $186.4 million grew 2% during the quarter, but EBITDA was down 7% as the Beinheim facility was operating at pre-suspension levels of production during the first quarter of FY 2016, which led to a challenging prior-year comparison.

Excluding the impact related to Beinheim, our Softgel business experienced revenue and EBITDA growth consistent with Catalent's consolidated long-term outlook. Our Softgel consumer health initiative is essentially complete in terms of its above baseline impacts on year-over-year sales growth.

However, we did see marginally higher consumer health volume growth on a same-store basis than we were expecting this quarter in our key geographies outside the U.S., mainly in Latin America and Asia Pacific.

Our North American Softgel business, which is primarily comprised of prescription volume and development revenue, had a quiet quarter, posting revenue and EBITDA performance that was in line with the prior-year period.

As a reminder, our Beinheim Softgel facility was fully operational and the ramp-up of activity at the site continues to progress in line with our FY 2017 guidance. The update for Drug Delivery Solutions segment is shown on slide 8.

The DDS segment had a very strong quarter, recording revenue of $191.3 million which was up 13% versus prior year and recorded EBITDA growth of 18%.

The Development and Analytical Services business, which we abbreviate as DAS, recorded increased revenue and EBITDA, driven by higher levels of customer project activity and was one of our strongest-performing businesses in the first quarter.

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

The SMARTag technology continues to meet proof-of-concept milestones and customer interest remained strong, as evidenced by our announcement of the research collaboration with Roche earlier this year.

We continue to believe that our biologics business is well-positioned to drive future growth as indicated by the Triphase and Moderna business development projects signed during the first quarter.

As a reminder, at the time of the IPO, our dedicated biologics business was approximately 1% of Catalent's total consolidated sales, which has since grown to nearly 4%.

We also continued to see revenue and EBITDA growth within our Blow/Fill/Seal offering during the first quarter, and market fundamentals continue to remain attractive for this key sterile fill/finish technology.

The oral delivery portion of the business declined versus the prior year, driven by our integrated oral solids development and manufacturing facility in Kansas City.

These declines in Kansas City were partially offset by a return to growth within our controlled release business, which saw lower volumes in the prior-year period due to customer supply chain issues that had now normalized. Within the sterile injectables business, revenue was ahead of the prior year and EBITDA improved modestly.

Sterile injectables continues to be well-positioned for near-term growth with the entry to animal health pre-filled syringes for which we anticipate commercial sales beginning in the third quarter in this fiscal year.

In order to provide additional insight into our long cycle business, which includes both Softgel Technologies and Drug Delivery Solutions, we're disclosing our long cycle development revenue and the number of new product introductions, or NPIs, as well as revenue from those NPIs.

As a reminder, these metrics are only directional indicators of our business since we do not control the sales or marketing of these products nor can we predict the ultimate commercial success of them.

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

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

Now on slide 9, our Clinical Supply Services segment posted revenue of $75 million, which was up 3% compared to the first quarter of the prior year, driven by increased customer project activity related to our core storage and distribution business.

However, EBITDA was hurt by the timing-related mix shift to lower-margin storage and distribution revenue from manufacturing and packaging revenue, and that's down 17% from the prior year. We also experienced increased costs to one of our facilities which completed an ERP upgrade during the quarter.

Looking ahead, we're extremely pleased with another strong quarter of backlog and book-to-bill metrics. As of September 30, 2016, our backlog for the CSS segment was $309 million, a 6% sequential increase. The segment also recorded net new business wins of $92 million during the first quarter, representing a 6% increase year-over-year.

The segment's trailing 12-month book-to-bill ratio was 1.2. These positive indicators support our expectations that this business will grow revenues towards the high end of our consolidated long-term outlook. The next two slides contain reference information.

We've already discussed the segment results shown on the consolidating income statement by reporting segment on slide 10. And slide 11 provides a reconciliation to the last 12 months' EBITDA from continuing operations from the most proximate GAAP measure, which is earnings from continuing operations. Moving to adjusted EBITDA on slide 12.

First quarter adjusted EBITDA decreased 3% to $75 million compared to $77.6 million for the first quarter a year ago.

On a constant currency basis, our first quarter adjusted EBITDA increased 3% to $80 million, driven by strong EBITDA performance across our Drug Delivery Solutions segment, partially offset by declines within Softgel due to the adverse prior-year comparison for our Beinheim facility.

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

On slide 13, you can see that first quarter adjusted net income was $19.6 million or $0.16 per diluted share compared to adjusted net income of $23 million or $0.18 per diluted share in the first quarter a year ago.

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

A more detailed version of this reconciliation can be found in the Supplemental Information section at the end of the slide deck, which shows essentially the same add-backs as seen on the adjusted EBITDA reconciliation slide.

Slide 14 shows that our net leverage ratio sequentially increased to 4.5 in the current quarter due to the debt we took on for the Pharmatek acquisition. However, our net leverage ratio pro forma for the Pharmatek acquisition was 4.4, which is in line with the FY 2016 year-end figure.

I'll now provide our financial outlook for fiscal year 2017 in which we are reaffirming our previously issued guidance. Our business continues to perform in line with our expectations with minor headwinds from FX translation due to the strengthening of the U.S.

dollar versus the British pound, being essentially offset by the nine-month contribution related to the Pharmatek acquisition. As seen on slide 15, we expect full-year revenue in the range of $1.92 billion to $1.995 billion.

We expect full-year adjusted EBITDA in the range of $430 million to $455 million and full-year adjusted net income in the range of $165 million to $190 million.

We're expecting the range of $125 million to $135 million for capital expenditures, and we expect that our fully diluted share account on a weighted average basis for the fiscal year ending June 30, 2017, will be in the range of 126 million to 128 million shares.

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

Lastly, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression through the year. As discussed for several quarters now, the first quarter of any fiscal year is generally our lightest quarter of the year by far, with the fourth quarter of any fiscal year generally being our strongest by far.

This will continue to be the case in FY 2017, where we expect to generate approximately 38% of our annual EBITDA in the first half of the fiscal year with approximately 62% of our EBITDA to be earned in the second half.

It's also worth noting that in FY 2016, our second fiscal quarter included a onetime volume commitment resolution within our DAS business, which increased both revenue and EBITDA by $10 million. Operator, we'd now like to open the call for questions..

Thank you. Our first question comes from the line of Tycho Peterson with JPMorgan. Your line is open..

Hey, guys, this is Tejas on for Tycho. Thanks for taking the question. First of all on Clinical Supply Services, you've spoken about the segment growing at the high end of your sort of top-line growth range.

How would you say – are you seeing any impact from the recent spate of clinical trial failures as well as the incremental focus on drug pricing? I mean, I know it's election season, but even beyond that, it looks like there might be a much more modest growth in pricing for your clients.

Has that sort of entered into your sort of conversations for the segment at all, and how does that translate into your top-line growth forecast?.

So, we had not seen anything to this point, Tejas, that reflects some of the things that you've been maybe seeing announced by CROs, which seems to be the nature of your question. And our business generally doesn't correlate with their results that tightly.

So, if CROs had news in a certain quarter or of a certain 180-day period, it does not necessarily flow through to Catalent's business directly. At least we haven't experienced that over the years here..

Got it. And then just switching to biologics, I know you mentioned on the call adding a couple of 2,000-liter bioreactors. Obviously, there's been a lot of news around in-house capacity expansions as well among your customer base.

Some of your peers have spoken about specific niches of the market with a lot of the growth coming on the smaller end in terms of bioreactor size versus the larger end.

It would just be interesting to just get your thoughts on where capacity is today, capacity utilization, and how you see that trending over the next couple of years, especially given this influx of in-house capacity adds from your customers..

Yeah. So, this is John here. Our data shows that demand will be outstripping capacity probably for about the next five years. The other thing that I'd like to point out is we know that 40% of the pipeline is currently biologics and 70% of the pipeline in biologics are going to require less than 5,000-liter capacity at full commercial scale.

So, when you take a look at Catalent's strategy, it's really to build a leadership position in flexible small to medium-scale manufacturing. As you know, we did a substantial investment in our Madison facility about three years ago and we have pretty much filled up that capacity.

We still have a little bit room to go, but we're proactively putting in the third train, if you will, and it's going to have the capability for the 2 x 2,000-liter single-use bioreactors and also the capabilities for 4,000 liters.

So, we really think that Catalent's hitting the sweet spot, and the most recent investment where we just broke ground in Madison is going to more than double the revenue capability that we currently have at that facility. So I would say that the direction and strategy that we have is really hitting the sweet spot for where the market is..

Got it. Thanks so much, guys..

Thank you. Our next question comes from the line of Derik de Bruin with Bank of America. Your line is open..

Hi. Hello. Good evening. This is Juan Avendano on behalf of Derik. My first question is I wanted to know what the – if there was any revenue contribution from the recent deal, Pharmatek. I'm just trying to figure out how much was the M&A versus the organic and the 7% constant currency..

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

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

Okay. You are correct. The number of NPIs is down and there's – not all NPIs are created equal is the key to the answer here. And I'm just answering round numbers. Of the 200 NPIs that we will do in a year, they are generally a mix of branded prescription, generics, over the counter and VMS.

And so because of the dramatically different revenue and profitability profiles from those NPIs, we decided to focus more on the revenue that these NPIs give us versus the count. The count provides relatively less information.

And so, we will continue to disclose the count, but we'll also now start to disclose revenue at potentially a more meaningful indicator in our business. And so the specific answer to your question, though, is the count was down because we had relatively fewer VMS NPIs in the year-over-year period.

And VMS product launches are generally lower-revenue, lower-volume opportunities for the company anyways. And as you can see by where the revenue moved, it wasn't significant to the overall progression of the NPI efforts of the company..

Got it. And if I may, one last one, you mentioned the one-off $10 million to account for in the second quarter.

Any other onetime items that are needed to adjust the fiscal year 2017 guidance?.

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

Thank you..

Thank you. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Your line is open..

Hi. This is Mark Rosenblum on for Ricky. So you mentioned the $6 million top line and $5 million EBITDA impact from Beinheim.

Can you just give us some more general information on sort of where you guys are at in bringing that to full capacity and sort of what's left to do and a timeline that we should think about?.

So from a Beinheim perspective, I would just say that our ramp-up plans are on track. We probably have, I would say, 30 of the 40 products that were being manufactured at the time that we had the facility shutdown now are back up online and we are producing to customer demand.

And all of the financial impact of Beinheim is taken into account into our full-year forecast as it sits right now..

Okay, great. And then on Drug Delivery, your growth is really strong this quarter. You said it was driven by fee for service development in a local testing.

Is this something that we should expect going forward or is it more one time in nature in the quarter?.

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

Okay. Okay.

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

So the part of the business that you're talking about, the DAS business is a very small part of Catalent consolidated, and so it gets caught up in the performance of all of the other segments.

So what DAS doesn't necessarily translate to what we might say for the consolidated results of the company, given that DAS in total is approximately 4% or 5% of the company's consolidated revenues..

Okay. All right. Thank you, guys..

Thank you. Our next question comes from the line of Tim Evans with Wells Fargo Securities. Your line is open..

Thank you.

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

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

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

That's right..

Okay. And....

Yeah, go ahead..

And then you're saying that that was essentially the impact of the weaker pound as well for those two things basically offset each other?.

Basically yes, yes. And so, there wasn't enough of a net difference towards changing guidance..

Okay.

And what about the strong Q1 performance, why does that not necessarily fall through to a guidance increase given that those other two factors offset?.

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

Okay. Understood. Thank you..

Thank you. Our next question comes from the line of Dave Windley with Jefferies. Your line is open..

Hi, John, Matt, Tom, et cetera, good evening. Thanks for taking my questions. I wanted to follow up on Tim's question.

Matt, in terms of the first quarter being in line, is that answer applicable to revenue and EBITDA both or is it more an EBITDA answer?.

I would say it's both, David..

Okay.

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

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

I got you. You're right. Yeah. Okay. Sorry. Okay. So, in the Clinical Supply business, I think, just looking for clarification here that the press release talked about higher cost across the segment. I think in your prepared remarks, you talked about an ERP upgrade at a particular facility.

Are those two things essentially referring to the same thing or are those different?.

They are overlapping. So, higher cost across the segment that does capture the comment related to the ERP upgrade at one of our sites.

It also captures the change in corporate allocations, which we do year-on-year, so the Clinical Services business segment absorbs a little bit more in corporate allocations now that it's growing in size and it's absorbing some more of the centralized services that we have.

And so, those two cost items come in addition to just the cost that's incurred on the higher mix to storage and distribution..

Good. If I could ask one that's a little more strategic, John, on as I understand it, Pharmatek does maybe not complete, but it certainly adds an important element to your various delivery capabilities with spray drying coming in, not something that you had before, if I remember correctly and fits into that OptiForm....

Yeah, Solution Suite..

...offering, Solution.

And so I'm wondering, how many clients have engaged with you around the OptiForm or how should we think about that rolling out? How can we set expectations or track how OptiForm might help to moving more business into your platform?.

Yeah, sure. So, let me first start off with Pharmatek because part of that will explain the answer on OptiForm Solution Suite.

So, as you know, David, our business strategy is one called Follow the Molecule which is what we're trying to do is basically get as many molecules as we can into the Catalent ecosystem because we don't know which one of those molecules ultimately would be successful, but we know once we bring them into the Catalent system that we earned development revenue on them, and then as they get through clinic and potentially get approved with any of the opportunity to do commercial revenue.

So, in our strategy for acquiring some of these small tuck-in acquisitions those that have differentiated capabilities, what we're looking to do is really bring in their customer base and their suite of molecules, if you will. So in the case of Pharmatek, it brought in about 100 new unique customers, if you will.

And they're seeing about 120 new molecules per year.

And so there's – a big part of the strategy behind Pharmatek was then not to just have it continue to perform well as a stand-alone business, but have the capability for those molecules, which were pretty much stalled out in, I would say, clinical Phase 1, max Phase 2 commercial manufacturing capability at Pharmatek, but then the ability to take those all the way through to Phase 3 and full-time commercial manufacturing.

And so we're in the early days of that, but I can already tell you that in literally the six to eight weeks since we closed – or six weeks since we closed the business that there's already a handful of customers where we've already accelerated the dialogue towards commercial manufacturing, so it's very early days.

With regards to OptiForm Solution Suite, we have, I would say, more than several hundred opportunities. We've closed more than dozen, if you will, of these programs where we're working on them. And we're just going to continue to accelerate it.

And I think the way to think about this from a Catalent perspective is there's generally never one molecule or one commercial deal that ends up changing the revenue profile of the company. It's just that constant layering on of those molecules that ends up building up to our 4% to 6% revenue, which is why we have that long-term visibility.

So the best way to think about OptiForm Solution Suite is it's building that future pipeline. And to remind you, the OptiForm Solution Suite was a preclinical solution that we previously didn't have, so we're trying to capture customers more early in the pipeline.

So I would just say from a strategy standpoint, all of this really flows together, and I'll also remind you of Micron which is pretty much right down the same ZIP Code although I would say Pharmatek has an even higher level of capability especially with them bringing in spray drying..

Got it. I appreciate that. Thank you..

Thank you. Our next question comes from the line of George Hill with Deutsche Bank. Your line is open..

Yes. Good afternoon, guys, and thanks for taking the question.

I guess, Matt, I'll start off, my question for you is this, now that Beinheim is ramping, I guess how long should think about it before margins return to historic levels? And kind of when we back out the divestiture a little over a year ago, I don't want to ask you to give guidance kind of beyond the fiscal year, but how do we think about where margins in that business settle out?.

(34:00).

I'm sorry, Softgel, Softgel. If I didn't say it, Softgel, (34:01) I meant Softgel..

Okay. And the answer to the first part of your question, George, we have factored into our guidance that Beinheim would be operating below its historic level of margin capability for the remainder of this fiscal year.

So it will be sometime in FY 2018 or potentially beyond before we envision Beinheim returning to its previous level of profitability on a margin basis. And your larger question was on the EBITDA margins of the Softgel business, I think, in particular..

Yeah..

When we created the guidance for FY 2017 around Softgel, we assumed that we would be seeing about 100 basis points or 1 percentage point of margin improvement year-on-year, even given the fact that Beinheim would be operating at reduced levels of EBITDA margins..

Okay, that's helpful. And then, if I can add just I guess a couple – like a two-part follow-up even though I don't think they're related. John, you talked about how capacity is being outstripped in the biologics business where demand is growing much fast than supply..

Right..

Can you talk about what the implications for pricing there? And then if relationships like the Triphase relationship are successful and these drugs seek commercial success, is the upside for Catalent, given the proprietary nature of SMARTag, I guess, can you talk about like what's the long-term opportunity there versus kind of some of the other business segments?.

Yeah, sure.

So I would just say with regards to my comment about demand outstripping capacity, it certainly is providing for a very robust pricing dynamic for our team, and we're also able to strike much more strategic deals with, I would say, the larger production capacity and, in fact, we're able to reserve – actually charge for reserving capacity in some cases.

So, I would just say that the normal economic dynamics of supply and demand are being taken into a place and – being taken into account in terms of how we allocate the scarce remaining capacity that we have to generate the best business for Catalent. And what we're trying to do, obviously, is get ahead of the curve here.

And this next capacity expansion, we're really moving forward very quickly and should have it online by the end of fiscal year 2018, which is going to double our revenue-generating capacity from that site which, by the way, has tripled its revenue in the course of two or three years.

So it's a pretty exciting time, and I think we do have the right strategy in terms of kind of the flexible small-scale manufacturing, which is really where the business was heading. With regards to Triphase, I think this is exactly what we saw when we bought the Redwood Bioscience business.

It really was a very unique technology, second-generation ADC technology. And in this specific case, you have to read through our press release very carefully, but you'll see that that actually is a molecule that was developed by Catalent using the ADC technology that we have then out-licensed exclusively to Triphase.

And so in that kind of a scenario, there are milestones in manufacturing that goes with it, and then if it would – if we move – so it's milestones and royalty. And if it moves forward and gets commercialized, there's significant royalties on the ultimate commercial product.

So, it's very interesting, and I think Triphase is the first of hopefully many more deals like this and Roche that we've announced that really was the impetus for us acquiring that technology from Redwood Bioscience. And again, it fits in with our overall strategy of, I would just say, flexible development and flexible manufacturing for biologics.

So we're pursuing it very, very aggressively and we'll continue to invest..

Okay. I appreciate the color and thanks, guys..

Thank you. Our next question comes from the line of Jon Kaufman with William Blair. Your line is open..

Hi, guys. Thanks for taking the questions and congrats on the quarter. So, first, your CapEx guidance for the year suggests a step up over the next few quarters compared to Q1.

So, I guess, how should we think about what this means for free cash flow for the full year?.

So when we issued the FY 2017 guidance and I think we got that question, and our instruction at the time was we generally think on an annualized basis for this year that we should see free cash flow generation at 60% to 70% of adjusted net income. Nothing that happens in the first quarter would cause us to move off of that thought..

Okay. Great. And then, you mentioned mix being one of the reasons for lower margins in the CSS business this quarter.

So, I guess, what are your margin expectations in CSS for the remainder of the year and then I guess how are you thinking about margins long term?.

So, we certainly expect higher margins out of the CSS business than it posted in the first quarter. When we think about the business, we're thinking about sort of a high-teen to 20-ish percent EBITDA margin. This is heavily dependent on how much comparator sales that we'll have in any given time period.

But 18% to 20% range EBITDA on a full-year basis is generally what we would look to for our CSS business as it's structured today..

Okay. Great. Thank you..

Thank you. Our next question comes from the line of Nina Deka with Piper Jaffray. Your line is open..

Hey, guys. I was wondering if you could describe a little bit more about what you're seeing with the consumer health. You mentioned that this quarter, it was higher than you were expecting.

Is that a trend that you continue to expect moving forward?.

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

Okay.

And then also, can you describe a little about the animal landscape and the demand that you're seeing there for the animal injectables and if you plan to continue to expand in the animal health space?.

The animal health business that we referred to is a business that we won some time ago. The necessary infrastructure improvements in capital is – yeah, has been purchased and installed and this week being validated. And we believe commercial volumes will be commencing in the third quarter this fiscal year. And that was a nice opportunistic win for us.

We have had a couple of those in our various technology platforms that are animal health related. But at the present time, we don't – well, I guess the way to say it is animal health will probably continue to offer us opportunistic wins.

It's not certain at this point in time that there's a business unit, animal health business unit there for Catalent, but it is a terrific way for us to absorb excess capacity around the network..

Great. That's helpful. Thank you..

Our next question comes from the line of Matthew Mishan with KeyBanc. Your line is open..

Hey, good afternoon and thank you for taking the questions..

Hi..

Hey. We're about one quarter in now. In the first quarter, at least on an organic growth basis, it appeared to be the toughest comparison of the year.

Why maintain such a large range on the revenue guidance? Are you leaning in one direction or another here? And what would necessarily give you caution towards the lower end?.

Well, so Catalent, as we've said, is always better at predicting years than we are quarters. And let's not forget that as you look at the phasing of our year, the fourth quarter is by far our largest commercial quarter. And quite often, June is the biggest month in that quarter.

So the range at the start of any year is generally driven by the fact that we don't have precise knowledge at this point of how the fourth quarter is going to shake out and specifically that month of June. So that becomes more clear to us as we draw closer to it.

So there would have had to have been a significant change in our business for us to adjust full-year guidance after only 90 days in. And we just didn't see that in our first 90 days. We've had some nice positives. We've had the addition of a small acquisition.

But when you think about that small acquisition being sort of 1% to not even 2% of our consolidated sales and EBITDA, that's certainly within the margin of error of how we think about the year this early in. So if your question is, gee, things seem to be going pretty well for Catalent.

Why aren't you upping the guidance? And that's really why – it's really why we aren't doing it at this point..

Okay. I think that's very fair. And then on Beinheim, I'm just trying to understand what happened to the lost volume. I get that you're recovering back to full production and you have a – you're making up the easy comparison.

What happened to the volume that your customers expected? I would expect you to not only to ramp back up full production growth, but you also have to make up for some of the volume that was lost in 2016?.

Yeah. So, what I would just say is that there's two things going on here. One is the volume from customers and the other is the way that plant needs to operate under the changes that were required under our response to the ANSM.

And so, first of all, you do not have a fully loaded plant, you really only have 30 of 40 products that are currently online, and those other 10 products may not ever come online because, quite frankly, our customers actually had significant requirements that they had to fulfill to actually bring those products back online.

So, in some cases, they've chosen not to bring them back to the company because they were marginally successful in the marketplace. It wasn't worth the effort. And then so you have lower volume with higher constraints being put on a pharmaceutical facility.

So, really from an overall performance standpoint, it really – really, we were able to model it out for the entire year, and it's not going to get back to its previous performance, and we have that fully baked in to our fiscal year 2017 financials and guidance..

All right. Thank you very much..

Thank you. Our next question comes from the line of Michael Baker with Raymond James. Your line is open..

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

Yeah. I would just say that the overall regulatory environment continues to, I would say, strengthen. Meaning that not only has the FDA taken up their game, but certainly a lot of the other regulators around the world have taken up their game. We don't see any differentiated, I would say, audits at the Catalent level.

It's just kind of ongoing and sustained with, I would say, generally better regulatory audits, and I'm just basing that upon my 30 years in the industry in terms how many auditors they bring and how long they stay and what ultimately are things that they observe and have findings on.

I think from a Catalent perspective, the way we look at this is that the regulatory costs and burdens will only continue to increase within the pharma and biopharma space, which is one of the reasons that there's really going to continue to be fewer, bigger, better suppliers like Catalent because the smaller players, it becomes more challenging for them to continue to compete, invest in what is both a highly capital intensive as well as a high regulatory cost, so it does provide, I would say, some competitive barriers to entry or ultimately to success.

So from a Catalent perspective, I would say we're continuing to invest in both our operations and quality. And I think that's just going to continue along the path that's been going on, quite frankly, for the last five to seven years.

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

Thanks for the update, John..

Yeah. Thank you..

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

Okay. Thanks, operator and thanks, everyone, for your questions and for taking the time to join our call. I'd like to close by highlighting a few of the company's key priorities for fiscal year 2017.

First, we are confident and fully committed to delivering fiscal year 2017 results consistent with our financial guidance, which is aligned with our long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth.

We're also focused on the integration of the Pharmatek acquisition, which is on track from a plan and budget perspective and has already begun to add value to the company and our customers.

Next, we're committed to building a world-class biologics business for our customers and for patients and look forward to another year of double-digit revenue and EBITDA growth from our core biologics offering.

And finally, operations, quality and regulatory excellence is at the heart of how we run our business and remains a constant focus and priority. We support every customer project with deep scientific expertise and a commitment to putting the patient first in all we do.

Lastly, we're well-positioned to capitalize on our industry leading partnerships and the potential for consolidation. We continue to target tuck-in acquisition that we can integrate swiftly and efficiently in order to maximize value to our shareholders. Thank you..

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