Thomas Castellano - Investor Relations John Chiminski - Chair & Chief Executive Officer Wetteny Joseph - Senior VP & Chief Financial Officer.

Stephen Tusa - JPMorgan Securities Dana Flanders - Goldman Sachs & Co. John Kreger - William Blair & Co. Donald Hooker - KeyBanc Capital Markets Ricky Goldwasser - Morgan Stanley & Co. Sean Wieland - Piper Jaffray & Co..

Good day, ladies and gentlemen, and welcome to the Fourth Quarter Fiscal Year 2018 Catalent Incorporated 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 be given at that time.

[Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Mr. Tom Castellano, Vice President, Investor Relations and Treasurer. Please go ahead. .

Thank you, Crystal. Good morning, everyone, and thank you for joining us today to review Catalent's fourth quarter and fiscal year 2018 financial results. Please see our agenda on slide two of our accompanying presentation, which is available on our Investor Relations website. Speaking today for Catalent are myself, John Chiminski; and Wetteny Joseph.

During our call today, management will make forward-looking statements and refer to non-GAAP financial measures. It is possible that actual results could differ from management's expectations. We refer you to slide three 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-K 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 John Chiminski..

Thanks, Tom, and welcome everyone to our earnings call. We are pleased with our fourth quarter and fiscal year 2018, which were in line with our expectations and position us well as we enter our next fiscal year.

We continue to deliver strong revenue and adjusted EBITDA growth across the company led by our newly formed segment Biologics and Specialty Drug Delivery, as well as from our Clinical Supply Services segment.

As a reminder, we are now reporting on four segments having split our former Drug Delivery Solutions segment into a Biologics and Specialty Drug Delivery segment and an Oral Drug Delivery segment. Our other segments remain the same.

As you can see on Slide 6, our revenue for the fourth quarter increased to 11% as reported and increased 9% in constant currency to $685.3 million driven by the acquisition of our Bloomington Biologics business, the former Cook Pharmica.

Our adjusted EBITDA of $181.5 million was above the fourth quarter fiscal year 2017 on a constant currency basis by 11%.

Our adjusted net income for the fourth quarter was $90 million or $0.67 per diluted share for the fourth quarter, an increase of $0.02 per diluted share versus the prior year reflecting in part a greater number of outstanding shares due to equity issued as part of the Bloomington acquisition.

Additionally, for fiscal year 2018, we’ve recorded revenue growth of 19% as reported and 16% in constant currency or recording adjusted EBITDA growth of 22% as reported and 19% in constant currency. Now, moving to our key accomplishments.

First, on July 3, we announced the acquisition of Juniper Pharmaceuticals, a European early development Center of Excellence with dose-form development and early manufacturing capabilities.

The acquisition builds on our acquisition of Pharmatek completed in fiscal year 2017 and expands and strengthens our offerings in formulations, developments, bioavailability solutions and clinical scale, oral dose manufacturing.

Juniper’s proven solutions and capabilities will further support our strategic goal to be the most comprehensive partner for pharmaceutical innovators and help our customers unlock the full potential of their molecules with the intent to provide better treatments to patients faster.

Juniper’s nearly 150 employees at their Nottingham facility have deep scientific expertise in formulation development and supply and their breadth of technological capabilities will augment our current portfolio including in the development of Spray Dry Dispersions.

Next, just last month, we issued 11.4 million shares of common stock at a price to the public of $40.24 yielding net proceeds of $445 million. The proceeds were used along with cash at hand to pay down $450 million of our US dollar-denominated term loan floating rate debt.

These strategic steps have significantly strengthened our balance sheet and give us additional capacity to continue to accelerate our strategic plans through acquisitions. Later in the call, Wetteny will take us through the impacts this transaction has on our leverage ratio and fiscal year 2019 financials.

We continue to make great strides with regards to our Biologic strategy. First, the integration of the Bloomington business acquired in the second quarter is progressing ahead of our expectation and is very far advanced. The business is off to a terrific start and for the third straight quarter the financial results have exceeded our expectations.

I am pleased to report that Bloomington site recently received approval for its seventeenth commercial product, which is up from the twelve that was producing at the time of the acquisition. Additionally, the third manufacturing train at our Madison facility is complete and began contributing revenue during the fourth quarter.

As mentioned on previous earnings calls, we’ve already signed a number of customer contracts for the third train while also growing a robust funnel of late-stage clinical opportunities, which together will help increase the utilization of the new capacity in fiscal year 2019 to more than 50%.

We are also in the early stages of considering the construction of two additional manufacturing trains at the Madison site due to the anticipated continued growth in this business. A combination of the organic and inorganic investments we’ve made in Biologics continue to create significant value for the company, our customers, and our shareholders.

I also wanted to provide a few remarks regarding our Softgel Technologies business, which has historically on average grown revenues somewhere between 2% and 4% each year with EBITDA margins that have been very steady in the 21% to 22% range.

However, due to recent headwinds related to product participation revenue, a shortage of Ibuprofen API, and a shift by our prescription pharmaceutical customers to lower volume new product launches targeting smaller patient populations, we expect our Softgel Technologies business to grow closer to the lower-end of its historical revenue growth rates over the next few years.

However, we continue to make improvements to optimize capacity across the network and organize around centers of excellence to support business needs and product focus and we expect that these actions will drive margin expansion across the segment over the next several years and contribute to the 160 basis points of margin expansion we’ve included in our fiscal year 2019 guidance.

As a reminder, Softgel Technologies is responsible for generating a significant portion of the company’s free cash flow which we expect to continue and provide us the flexibility to invest in our faster growing, higher margin businesses such as Biologics.

Lastly, I’ll reiterate that we are positioned increasingly well in an attractive robust growing market. We have important leadership, scale and diversification, which we further enhance with our growing participation in Biologics.

With our proven Follow the Molecule strategy, our Patient First focus, our operational excellence and our ongoing growth investments, we are positioned to deliver future organic revenue and earnings growth.

Now I will turn the call over to Wetteny Joseph, our Chief Financial Officer, who will take you through our fourth quarter fiscal year 2018 financial results, as well as provide our outlook for fiscal year 2019.

Wetteny?.

Thanks, John. I will start by providing an update on changes we have made related to our reporting segment structure. Slide 7 shows both the view of our former reporting structure, as well as what the revised structure looks like.

In light of the Bloomington Biologics deal, we reorganized our business to better align our internal business unit structure with our Biologics strategy.

Under the revised structure, which parallels and reflects how we manage our business internally, we have split our Drug Delivery Solutions operating segment into two segments, Biologics and Specialty Drug Delivery, and Oral Drug Delivery.

Our Biologics and Specialty Drug Delivery segment encompasses manufacturing, developments of Biologic cell-lines blow-fill-seal unit-doses, prefilled syringes, vials, cartridges and other injectable and inhaled formats; analytical development and testing services for large molecules; and development and manufacturing for inhaled products for delivery via metered dose inhalers, dry powder inhalers, and intra-nasal sprays.

Our Oral Drug Delivery segment, includes comprehensive formulation manufacturing and analytical development capabilities using advanced processing technologies such as bioavailability enhancement, controlled release, particle size engineering; and taste-masking for solid oral dose forms.

There is no change to our Softgel Technologies or Clinical Supply Services segments. Therefore, for financial reporting purposes, we present four segments, Softgel Technologies, Biologics and Specialty Drug Delivery, Oral Drug Delivery, and Clinical Supply Services.

Next, please turn to Slide 8 for a more detailed discussion on segment performance beginning with our Softgel business. As in past earnings calls, my commentary around segment growth will be in constant currency.

Softgel revenue of $241 million declined 7% during the quarter with segment EBITDA declining 8% due to lower high margin product participation revenue and lower consumer health and prescription volumes in North America and Europe, partly due to the shortage of Ibuprofen and active pharmaceutical ingredient as discussed on our last few earnings calls.

Our Canadian Softgel business acquired as part of the Accucaps deal during the third quarter of the prior fiscal year continued to perform well and realized strong EBITDA growth in the quarter driven by favorable product mix and operational efficiencies at the sites.

Additionally, we experienced higher demand for consumer health products in Latin America and favorable product mix in Asia-Pacific post the divestiture of lower margin businesses in Australia and China. While these growth drivers were not large enough to overcome the headwinds related to product participation and the Ibuprofen shortage.

Going into fiscal year 2019, we expect the Ibuprofen shortage to continue for the first half of the fiscal year and the product participation headwinds to continue through the first quarter of the fiscal year.

As a result, we expect Softgel revenues to grow at the lower end of the segment’s historical annual revenue growth rate during fiscal year 2019 as John mentioned earlier.

Slide 9 shows that our newly created Biologics and Specialty Delivery segments reported revenue of $195.5 million in the quarter, which is up 98% versus the comparable prior year period with segment EBITDA growing 151% during the quarter.

A sizable portion of the segment’s revenue and EBITDA growth was driven by Bloomington Biologics acquisition, which closed in October of 2017 contributed 71 percentage points to the revenue growth and 115 percentage points to the EBITDA growth.

The Bloomington site continues its fast forward and we feel good about the immediate and long-term growth prospects of this business. .

The acquisition filled a major gap we had in our Biologic offering by adding fill/finish formulation, developments and manufacturing capabilities including lyophilization, vial filling, cartridges and U.S.-based sterile formulation and pre-filled syringes to our already strong drug substance and sterile capabilities.

As we are seeing in the numbers, the acquisition of the Bloomington site significantly accelerates the already strong growth of our existing Biologics business. Biologics comprised approximately 14% of Catalent's consolidated revenue in fiscal year 2017 and represented 26% in fiscal year 2018.

On an organic basis, the Biologics and Specialty Drug Delivery segment revenue was up 27% with segment EBITDA increasing 35% during the quarter. Recent organic investments in our legacy Biologics business continued to translate into growth during the fourth quarter and it remains the fastest growing business within Catalent.

We recorded strong growth in drug substance driven by the completion of project milestones and larger clinical programs and higher volumes related to our European Drug Product business. We continue to believe that our Biologics business is positioned well to drive future growth.

As John mentioned, the third suite at Madison is complete and online and it contributed revenue during the fourth quarter. Additionally, our Blow-Fill-Seal offering recorded results during the fourth quarter that was nicely above the prior year period due to increased volume and strong levels of capacity utilization.

The steps we are taking to enhance our quality in manufacturing protocols and processes at the site where our Blow-Fill-Seal business is based are largely complete. Market fundamentals continue to remain attractive for this key sterile fill technology.

Slide 10 shows that our other newly created segment Oral Drug Delivery recorded revenue of $153.7 million in the quarter, which was down 14% versus the comparable prior year period with segment EBITDA declining 27% during the quarter partly related to a contractual settlement that was recorded in the prior year period.

Consistent with the first three quarters of the fiscal year, the segment experienced declines in high margin product participation revenue during the fourth quarter which was in line with our expectations.

On the positive side, we finally lapped these headwinds during the quarter and we don’t expect any material movement related to product participation revenue in fiscal year 2019.

We also experienced volume declines within our Analytical Development Services business, but the performance did improve from the third quarter which we anticipated due to the changes we’ve implemented. The Oral Solid commercial business in the U.S.

and Europe show volumes that were in line with the fourth quarter of the prior year, with unfavorable product mix had a negative impact on profitability. That being said, the end-market demand for oral solids across both the U.S. and Europe remained robust.

In order to provide additional insight into our long-cycle businesses, which now includes Softgel Technologies, Biologics and Specialty Drug Delivery and Oral Drug Delivery, we are disclosing our long-cycle development revenue and the number of new product introductions for NPIs, as well as revenue from NPIs.

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

For the fiscal year ended June 30, 2018, we recorded development revenue across both small and large molecule of $268 million which is 8% above the development revenue recorded in the prior fiscal year.

In addition, we introduced 207 new products which contributed $61 million of revenue in the fiscal year which is 45% more than the revenue contribution of NPIs launched in the prior fiscal year.

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

Now, as shown on slide 11, our Clinical Supply Services segment posted revenue of $107.6 million which was up 5% compared to the fourth quarter of the prior year driven by increased customer project activity across our core storage and distribution services, partially offset by a decline in lower-margin comparator sourcing activity during the quarter.

Segment EBITDA increased 20% compared to the fourth quarter of the prior year, primarily driven by the revenue growth in our Core Storage and Distribution Services business and improved capacity utilization across the network.

Given the low-margin of the comparator sourcing activity, it had a minimal impact on the segment EBITDA in the fourth quarter, all of the revenue and segment EBITDA growth recorded within the CSS was organic. As of June 30, 2018, our backlog for the CSS segment was $273 million, a 2% sequential increase.

The segment recorded net new business wins of $93 million during the fourth quarter, which is an increase of 60%, compared to the net new business wins recorded in the fourth quarter of the prior year. The segment's trailing 12-month book-to-bill ratio was 0.9.

It is important to note that the backlog in net new business wins figures that I just disclosed have been adjusted for the ASC 606 change in revenue accounting and now only include comparator revenue on a net basis. The next slide contains reference information.

We have already disclosed the segment’s results on the consolidating income statement by reporting segment on slide 12. Slide 13 shows in precisely the same presentation format as on slide 12, the fiscal year performance of our reporting segments, both as reported and in constant currency.

I won't cover the various drivers across the business, but I will highlight that our full year 16% constant currency revenue growth or 5% growth on an organic basis was right in line with our long-term objective of 4% to 6% organic revenue growth per year.

Slide 14 provide the reconciliations of the last 12 months of EBITDA from continuing operations from the most proximate GAAP measure, which is earning from continuing operations. This bridge will assist in tying out the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide.

Moving to adjusted EBITDA on slide 15, fourth quarter adjusted EBITDA increased 14% to $181.5 million. On a constant currency basis, our fourth quarter adjusted EBITDA increased to 11%, all of which was inorganic and driven by the Bloomington Biologics acquisition.

On slide 16, you can see that fourth quarter adjusted net income was $90 million or $0.67 per diluted share, compared to adjusted net income of $82.6 million or $0.65 per diluted share in the fourth 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 is included in the supplemental information section at the end of the slide deck and shows essentially the same add-backs as seen on the adjusted EBITDA reconciliation slide.

Additionally, during fiscal year 2018, we recorded a one-time net charge of $42.5 million within our income tax provision as an estimate of the net accounting impact of the U.S. Tax Reform passed in December. We expect only approximately $3 million of this charge to be paid in cash after considering the use of certain NOLs.

Given the significant complexity of the provisional estimate we’ve recorded in the fiscal year, it is important to reiterate that it may require a further adjustment over the next two quarters. Slide 17 shows our capitalization table and capital allocation priorities.

Our total net leverage ratio on a reported basis as of June 30 was 4.2 times, which is down from the 4.5 times we reported in the third fiscal quarter. However, as John mentioned earlier, we proactively paid down $450 million of our U.S. dollar-denominated term loan in July with the proceeds from the equity offering.

Therefore, if you calculate our leverage ratio on a pro forma basis, taking into account the Bloomington Biologics acquisition, the pay down of debt and the Juniper acquisition be closed on August 14, our total net leverage ratio will be 3.4 times, which is the lowest level in Catalent’s history.

Additionally, the pay down of $450 million of our most expensive floating rate debt will yield annualized interest rate savings of more than $20 million. I also want to highlight the strong free cash flow generation we realized in fiscal year 2018.

We generated approximately $200 million of free cash flow during the fiscal year which is approximately 86% of adjusted net income. This is nicely above our expectations going into the year and marks the second consecutive year in which we have pulled more than 85% of our adjusted net income through to free cash flow.

Finally, our capital allocation priorities remain unchanged and focus first and foremost on organic growth followed by strategic M&A. Turning to our financial outlook for fiscal year 2019, slide 18 shows that we expect full year revenue in the range of $2.5 billion to $2.59 billion.

We expect full year adjusted EBITDA in the range of $597 million to $622 million and full year adjusted net income in the range of $260 million to $285 million.

We expect in the range of $175 million to $185 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, will be in the range of 146 million to 147 million shares.

Slide 19 walks through some of the moving pieces that we considered when determining our fiscal year 2019 revenue and adjusted EBITDA guidance.

The first set of bars brackets the changes that we expect to see in our base business performance which aligns with our constant currency long-term outlook of 4% to 6% revenue growth, but it’s slightly stronger at the EBITDA line and assumes 7% to 9% adjusted EBITDA growth.

These assumptions yields anticipated EBITDA margin expansion of 160 basis points in fiscal year 2019. As a reminder, our long-term EBITDA growth outlook remains at 6% to 8% growth. The second set of bars adjust FY 2019 for the full year impact of two acquisitions. First, the Bloomington acquisition was completed in Q2 of fiscal year 2018.

So there is one quarter of incremental contribution in fiscal year 2019 before we lapped the transaction. Second, the Juniper acquisition was completed on August 14 and its expected revenue and EBITDA contribution for the 10 months of fiscal year 2019 in which we will own the asset is also included in this adjustment.

The third set of bars highlights the impacts of the revenue recognition change related to ASC 606. As a reminder, effective in the first quarter of fiscal year 2019, the revenue we generate from securing comparator drugs from third-parties on behalf of our customers within our Clinical Supply Services segment will now be treated as net versus gross.

This means we have a headwind at the revenue line of approximately $110 million compared to the prior fiscal year with no impact to the EBITDA line. For more disclosure on this change, please see our Form 10-K which will be filed with the SEC later today.

The last set of bars brackets the negative FX translation impacts to revenue and adjusted EBITDA on year-on-year principally driven by the recent strengthening of the U.S. dollar in relation to the euro and pound sterling and to a smaller extent the Argentinean Peso and Brazilian Real.

In fiscal year 2018, the average euro rate was 1.19 and the average pound sterling was 1.35. In light of recent activity in the foreign exchange markets, we assumed a euro rate of 1.16 and a pound sterling rate of 1.30 in our fiscal year 2019 financial guidance.

In addition to the guidance we just provided on revenue, adjusted EBITDA, and adjusted net income, we also wanted to reiterate our expectations related to our consolidated effective tax rate given the tax legislation signed at the end of calendar year 2017. As a result of the U.S.

federal statutory corporate tax rate decreasing to 21%, we expect our fiscal year 2019 consolidated global effective tax rate to be between 25% and 27%. We also expect interest expense in fiscal year 2019 to be reduced as a result of our July debt pay down of $450 million and be between $106 million and $110 million during the fiscal year.

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

This will continue to be the case in fiscal year 2019 where we expect to realize approximately 42% of our adjusted EBITDA in the first half of the year and 58% of our adjusted EBITDA in the second half of the year. Operator, we would now like to open the call for questions..

[Operator Instructions] And our first question comes from Tycho Peterson from JPMorgan. Your line is open. .

Hey guys. Good morning and Steve Tusa on for Tycho. So, just to kick things off, maybe I will, the one on Softgel headwinds. Just wanted to get a better understanding for what is relatively weaker than your prior expectations of things getting sort of better by the end of this year.

I know there is a bunch of moving parts here with Accucaps being sort of moderated a little bit. There is weakness now in North America and Europe versus sort of APAC and some of the nearer term sort of headwinds including Ibuprofen and the low end supply contributions.

So, John, maybe you could just walk us through the moving pieces and highlight what sort of increments via little bit worse than sort of your prior forecast for the segment?.

So, I think, the biggest part of this is that, we have seen a historical growth rate for this segment in the 2% to 4% range and we can build back over a seven to ten year period and there was only a short period there where we really went after BMS business in the Asia market to soak up some unutilized capacity and as we – I would say, retooled our strategic plans to really focus on higher growth and higher margin businesses, we essentially took a step back I would say from some of that BMS business.

As you know, we’ve divested two assets in Asia that were Softgel. We also had headwinds both in our fiscal year 2018 which we didn’t detail out in great – to great extent but we’ve had headwinds that were from the Ibuprofen shortage and those headwinds are going to continue into our FY 2019, certainly through the first half.

You already mentioned the fact that we are now lapping Accucaps and quite frankly, the funnel that we have for new product introductions for Softgel is really for much smaller disease states, smaller disease populations.

So as we kind of netted all these things out, we really have moved strategically into a mode where Softgel has been a great cash flow generator at very high ROIC for the company.

And what we’ve really done is moved into a mode where we are going to continue to lean on a cash flow generation of the Softgel business on a go-forward basis to really continue to fund our growth in the higher growth, higher margin businesses of Biologics. We are going to be driving margin expansion much more aggressively within this segment.

So you can see from our overall estimates that we had EBITDA coming in actually quite nicely although the revenue is more or less flat.

So, what I would say is that, from a strategic standpoint, we’ve really moved this business into its historical growth rate and are really focusing on its cash contribution and its margin expansion as the primary points of the asset for the business. .

Got it. That’s helpful. And then, one quick follow-up from here on Oral Drug Delivery. The segment declined, part of that was driven by a tough comp, but looks like, perhaps Wetteny, could you isolate that for us and sort of adjust it for that contractual settlement last year.

What was that 14% decline have looked like in the quarter? And then, once product participation revenues pick up again, or rather you lap the decline, what should segment growth looks like there?.

Yes, it has. So first of all, with respect to Oral Drug Delivery last – prior fiscal year Q4, we didn’t detail out – detailed the specific impact of the contract settlement. What I would say was most of the driver in this year in respect to looking at the comps for fourth quarter versus the prior year, particularly from an EBITDA line perspective.

The other element I would remind you on as well is, we have – we included in our guidance for FY 2018 the product participation impacts, particularly given the higher margin impact of those, for the segment and those came in right in line with our expectations and have now lapped those with the fourth quarter and don’t expect those at least for the Oral Delivery segment to continue into FY 2019.

.

Got it. Thanks guys. .

Thank you. And our next question comes from Dana Flanders from Goldman Sachs. Your line is open. .

Hi. Thank you very much for the questions. My first one here and I appreciate the bridge that you gave on FY 2019 guidance. Can you just breakout exactly how much of the contribution is coming from Juniper this year and what your expected growth rates are around that? And maybe my second question on Softgel, I appreciate the additional color.

I mean, what just gives you confidence that this is a growing top-line business as you work through some of these near-term headwinds? Thank you. .

On the guidance question, what I would say is, we have two acquisitions that we’ve put into the bridge for clarity and transparency here. We have not broken out separately down for the site level, these are two individual sites acquisitions. But you can clearly see what the contribution is in terms of the inorganic element into our fiscal year.

I’ll start with respect to Softgel and then I’ll let John chime in on that in terms of the business.

I think John mentioned, this is a business when we look at it historically have grown in that 2% to 4% range for a long period of time and now we are seeing it’s going at the low-end of that and our confidence in terms of the asset have growth as we are looking at the pipeline of products that we have, we talked about development revenues from NPIs and number of NPIs that we launched in 2018, we are continuing to see a pretty robust pipeline of products to advance for a good subset of those NPIs.

They are targeting patient population for the smaller, in some cases orphan indications and so on. So the business continues to really perform well on attracting its share of new products which is those products that are going after a larger population. So, we still the business well positioned competitively for growth..

Yes, the only thing I would add is, we do have very strong development revenues that are coming out of the business.

We see that increasing – we’ve seen increasing number of NPIs and quite frankly, while although we have the prescription part of the business going towards smaller more focused disease case, the consumer health part of the business continues to be very robust.

We have a very strong pipeline of both owned products as well as just products that our customers are coming to us with and certainly Accucaps significantly strengthened that.

So, I think, even as in the near term we would see the business growing at the low-end of that overall historical growth rates, the long-term prospects for the business continue to be strong. .

Thank you. .

Thank you. And our next question comes from John Kreger from William Blair. Your line is open. .

Thanks very much. John, thanks for the comments you made earlier on the call about sort of how the industry is shifting to smaller more niche rare diseases.

Given that, what is your longer-term outlook for the new Oral Drug Delivery segment? Do you expect some kind of volume headwinds to impact that as well?.

No, I would just tell you that, first of all, the overall space continues to be very robust. So we continue to have a significant number of new molecules that are coming into this space. I think the overall trend is towards more focused disease states, orphan drugs and so forth.

That being said, there continue to still be significant unmet needs in some of the larger spaces, whether they be in C&Fs and so forth. I would really say that, we just see an industry pipeline that continues to grow. So it doesn’t mean that there are blockbusters or molecules that are going to be attacking the significant unmet needs.

But the net of it at this point is we are seeing a much more focus towards some of the smaller more focused disease states. But we got a great pipeline in the Oral Drug Delivery segment. They continue to win a substantial number of new programs and it will be a growth segment for us.

So the other ones was really only Softgel being one that we are pointing out that we believe is going to continue to grow at that historical growth rates of 2% to 4% with the near-term being at 2%. .

Great, thanks. And then, maybe a quick follow-up, I think on the last call, you talked about some of the early batches and the third train in Madison having kind of lower yields.

Are you through that issue? And are you getting on the yields that you are hoping for?.

Yes. No, we are completely through that issue and we had to work through some early start-up issues. It was a small design and a manifold something I need to detail out here.

But we are well beyond that and then as we go into our fiscal year 2019, we expect to based on the very strong demand, we should probably get 50% or more capacity utilization out of that third train. And as I also mentioned in my notes, we are already contemplating the fourth and fifth train for Madison.

So, it continues to be an extremely robust area for the company. .

Excellent. Thank you. .

Thank you. And our next question comes from Derik de Bruin from Bank of America. Your line is open. .

Hi, this is [Indiscernible] on behalf of Derik. Thank you for the question. You gave us an update on the organic revenue growth profile for the Softgel segment.

What would be the long-term organic revenue growth ranges for the two new segments both the Biologics and the Oral Drug Delivery? And also could you give us an update on the long-term organic revenue growth profile for the Clinical Supply Services segment after the adoption of 606?.

Yes, so, one, first of all, we provide guidance at the total Catalent level. We don’t break it down to the individual reporting segments within that. Obviously, we take all of those inputs into consideration in coming up with our long-term guidance which is organic growth rate of 4% to 6%. Obviously, inorganic acquisitions will be additive to those.

So, we continue to drive it that way in terms of overall Catalent and not down to the individual business units. .

Okay. Thank you. And a follow-up, could I – could you give us an update on the capacity utilization at Cook Pharmica? It was about a 40 – it was about 45 as of last quarter.

And so, what was that the end of fiscal year 2018 and what are your expectations by the end of fiscal year 2019?.

We see the business operating just over 50% capacity utilization now coming out of fiscal year 2018. I think John mentioned in his comments, prepared comments as well, that we continue to see more products being approved commercially for the site. At the time of the acquisition, we had 12 products approved. Now the number is 17.

So we continue to be – to look forward to continued growth in utilization of capacity at the site where we estimated previously around 40%. Now we are seeing just over 50%. .

Thank you. .

Thank you. Our next question comes from Donald Hooker from KeyBanc. Your line is open. .

Great. Good morning. Just wanted to get a sense with the new trains coming on.

It looks like your guidance for CapEx is somewhat unsurprising versus historical trends, but kind of going forward, with maybe a little bit weaker growth in Softgel and a greater focus on the high growth Biologics space is, how should we think about CapEx over time and free cash flow over time?.

So, first of all, I would say that, we are going to continue to spend CapEx in about the 7% of company revenues for this year and going forward. However, there is going to be a disproportionate amount of that CapEx is going to be applied towards our faster growing higher margin businesses.

Certainly, Biologics, and I’ve already talked about the fact that we are contemplating fourth and fifth trains for Madison. So, that’s all baked into the current estimated guidance. .

What I would just add from a free cash flow perspective, you’ve seen in the last two years, we’ve generated over 85% of adjusted net income and free cash flow that’s after CapEx.

Obviously, we continue to guide to somewhere between 65% and 75% of our A&I through free cash flow and as we look at our CapEx, it does lean towards the higher growth portions of our business.

Certainly, in the Biologic assets, our Bloomington and our pre-existing businesses will see a lion share of that where we also have maintenance CapEx obviously in a highly regulated industry that we are in to continue to drive that.

So we keep pegging the number around 7% or so of our top-line with the 50% of that being growth-oriented and of that growth-oriented more of it’s leaning towards the biologics assets obviously. .

Okay, gotcha. And then as a follow-up, maybe somewhat related, I think your debt ratio on a pro forma basis is below your previously stated targets I believe.

So obviously, it begs the question, how do we think about that or can you give us a little bit more discussion and thoughts around M&A? What you are looking at? What you are thinking of with regard to that equity raise? Should we expect to see more M&A activity in the near-term?.

Yes, so John here. I would say, first of all, we had obviously, the successful equity raise and now basically about our debt, our ratio is down to a point where we consider ourselves having significant dry powder if you will for continued bolt-on acquisitions and potentially something more meaningful in some adjacent white spaces.

In addition, in the near-term, we certainly, in a rising interest rate environment have also – have eliminated about $20 million of interest payments through the term loan pay down.

So, I would say for us, this was really much more of a strategic move for us and it was, I would say clearly financial, strategic from a standpoint that we wanted to have the balance sheet flexibility to be able to continue to pursue our strategic plans. And certainly we are an organic growth company.

But we use acquisitions to really accelerate our strategic plans and with our balance sheet where it is now and it just gives us that much more flexibility and ability to act..

Okay, thank you for the color. .

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

Yes, thank you for taking the question. Good morning. So, just a few thoughts here.

When we think about kind of high yield guidance in the 160 points of margin expansion, what’s the contribution of the cost-cutting that’s related to the Softgel business versus the mix shift towards the higher margin Biologics?.

So, when you look at the 160 basis points we’ve included in our guidance of fiscal year 2019, Ricky, I would say half relates to the following.

A mix shift towards more Biologics with the addition of the Bloomington, as well as our organic Biologics assets rolling and outpacing the input utilization of our capacity, as well as the operational execution areas that we mentioned, particularly within the Softgel business.

So, those are roughly half of the 160 basis points with the other half contribution coming in from the moving the low-margin comparator revenue and reporting that on a net basis starting in fiscal year 2019, given the change to ASC 606. So that’s half and half. .

Okay. .

Ricky, I would also – sorry, I would also just add that we are still looking at another 200 to 300 basis points of margin expansion opportunity over in the next several years that we are managing in addition to the 160 that’s been baked into our FY 2019 guidance. .

Okay.

So, when we think about that and the incremental margin expansion opportunity, how do you see – what is kind of your margin goal for the Softgel business under kind of a this new cost structure?.

Ricky, we really haven’t disclosed margin goals down to the individual segment level, simply to say that our goal and our target which we’ve been saying was to deliver anywhere from 300 to 400 basis points extension in the next three to four years now with FY 2019 guidance we are essentially one year into that and delivering 160 basis points.

So, as John just mentioned, we’ll have another 200 to 300 basis points to deliver in the next few years.

So that’s the context we like to look at margin expansion and the only other thing I would say is, if you look historically, you’ll see that the Softgel business has historically been very consistent in terms of its delivery of EBITDA margins and now we are looking at these improvements to continue to outpace the business and maybe even better than it has going forward.

.

So, is the message basically, if we think about it right, you said 300 to 400, now you are at 360 to 460 that you’ve identified additional opportunities to expand margin and you are raising that by about 60 basis points, is that how we should think about it?.

The way I would think about it is, as we look ahead, we will continue to see growth in our Biologics and that representing a bigger share of the overall Catalent pie. We ended FY 2017 with Biologics representing about 14%, now it’s 26%.

We still have another quarter of the Bloomington acquisition and our organic business, plus Bloomington will continue to grow. We’ve talked about the third train in Madison considering now a fourth and fifth train in Madison. Again, that’s all going towards a mix shift for overall Catalent.

It’s going to continue to drive margin expansion for the overall business in addition to our operational execution, where on a business like Softgel that is growing at the lower end of its historical rates, we see an opportunity to balance that with a focus on our operational perspective, Centers of Excellence around the world that will drive more throughputs for the business.

So, those are the elements that I would say are going to drive this expansion. If you start at where we ended sort of FY 2018 and you put another 300 to 400 basis points to bracket that over a period of three to four years, FY 2019 clearly is a nice step towards that is how the framework I would give you. .

Okay. And then, lastly, just so we can have some sort of metric that we can follow. You provided us some detail on Bloomington and I think you are now at the 17th commercial product up from 12 when you made the acquisition.

What’s the pipeline? What’s the funnel that you are seeing for fiscal year 2019? So, how many products are pending approval?.

I don’t know that we’ve disclosed specific number of products. What I would say is, the pipeline continues to be robust.

We – one of the attraction in making the acquisition is running around a 100 molecules sort of in development really the track record or if you look at the overall industry, you would say, the track records coming out of this acquisition in terms of number of pipes that have gone commercial.

They were at 12 at the time of the acquisition, just in October and now just a few short quarters later, we are talking about 17. So, clearly the site has a real track record and a pipeline that has advanced and continues to advance.

So we remain very optimistic in terms of the future in terms of what we will see over the next couple of years coming out of the pipeline. .

Okay. Thank you. .

Thank you. And our next question comes from Sean Wieland from Piper Jaffray. Your line is open. .

Thank you. Good morning.

In Madison, at what utilization rate would cause you to add those additional trains? And is the impact on revenue and EBITDA, I understand CapEx is in your guidance, but is the impact to revenue and EBITDA in your guidance already for those?.

So, there is nothing about working with train. It’s in our current guidance and I would just say that, given the fact that we are already going to be using our third train upwards of 50% this year that clearly that’s already getting us to a point where we know need to move forward to add additional capacity. So there is still work to be done.

We just have this in engineering design phase right now, but highly confident that a fourth and fifth train will be needed given the fact that the third train just completed for its first year will already be at 50%.

So, I think the very strong growth momentum that we have both in Bloomington and Madison is going to continue given where the industry is going with Biologics. .

So, could you maybe quantify on an annualized basis, maybe what the impact of an additional train is?.

I think, Tom you are talking about $70 million per additional train at the top-line?.

Yes, we’ve mentioned, Sean that this site is running at about $75 million and we have the ability to nearly double it with the third train that’s coming on. We’ve not given any financial disclosure on what fourth and fifth train could mean for the future revenue on this facility. .

Okay. Thank you for that.

And then, on the contractual settlement from Q4 2017, can you quantify what the impact was in the year ago period?.

So, Sean, this is Wetteny here. We really haven’t specifically quantified that in terms of the fourth quarter of FY 2017. But what I would say, when we look at the fourth quarter of FY2018, the majority of the comparison to the prior year is driven by that contractual settlement at the EBITDA line for sure.

And then, the other contribution which we’ve been talking about now all year and it was well in line within our expectations was the impact of foreign participation which is also high margin opportunities that are towards the end of their lifecycles and we have now completed last of those for the Drug Delivery segment.

It won’t be part of the top shack as we look forward for that segment. So those are two elements drove the vast majority of the comparable year-over-year. .

Okay. So, just to dial into that a little bit more. So, I think that in your K, you called out that the contractual settlement was 2% of the Drug Delivery Solutions segment of $126 million.

So maybe $2.5 million and was that all – was that $2.5 million bucks on the EBITDA line too?.

If you are looking at 2% maybe an annual number on that, I would say that, we haven’t put a specific number to it, 2% sounds low if you are looking just the quarter. And, again, we didn’t quantify that in terms of what the impact was in terms of dollars. .

Okay. And then, I have one quick one.

What’s the target leverage ratio you are pushing towards now?.

Well, 3.5 continues to be our long-term target, as John mentioned, we first and foremost look for organic growth opportunities in investing in our fast-growing parts of the business and then we look for strategic acquisitions given where we are right now, our balance sheet and our leverage ratio, we continue to have a good solid pipeline of potential targets.

But again, those only become actionable from time-to-time and we are now trying to be able to execute should one of those become actionable for us. The 3.5 times remains our long-term target. .

Okay. Thank you very much. .

Thanks. .

Thank you. And I am showing no further questions from our phone lines. I now like to turn the conference back over to John Chiminski for any closing remarks. .

Thanks, operator and thanks everyone for your questions and taking the time to join our call. I’d like to close by reminding you of a few important points.

First, we are confident in and committed to delivering fiscal year 2019 results consistent with our financial guidance and are focused on continuing to drive organic growth across our overall business.

Second, we are committed to building a world-class Biologics business for our customers and for patients and look forward to continued strong revenue and EBITDA growth from our Biologics offerings.

Third, the continued successful and efficient integration of Bloomington Biologics as well as the integration of the Juniper Pharmaceuticals business into the Catalent family, our top priority as we look to swiftly capitalize on our recent inorganic investments.

Next, expanding the EBITDA margin of our business is a key focus area for the management team as we drive towards 200 to 300 basis points of further expansion over the next three to four years. Last but not least, operations, quality, and regulatory excellence are at the heart of how we run our business and remain 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. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day..