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Edited Transcript of CTLT earnings conference call or presentation 6-Nov-18 1:15pm GMT

Q1 2019 Catalent Inc Earnings Call

Somerset Nov 19, 2018 (Thomson StreetEvents) -- Edited Transcript of Catalent Inc earnings conference call or presentation Tuesday, November 6, 2018 at 1:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Chiminski

Catalent, Inc. - Chairman, President & CEO

* Thomas Castellano

Catalent, Inc. - VP of Finance & IR and Treasurer

* Wetteny N. Joseph

Catalent, Inc. - Senior VP & CFO

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Conference Call Participants

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* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Juan Esteban Avendano

BofA Merrill Lynch, Research Division - Associate

* Leighton Thomas Lueder

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Catalent First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to VP Finance, Investor Relations and Treasurer, Tom Castellano, the floor is yours.

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Thomas Castellano, Catalent, Inc. - VP of Finance & IR and Treasurer [2]

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Thank you, George. Good morning, everyone, and thank you for joining us today to review Catalent's first quarter fiscal year 2019 financial results. Please see our agenda on Slide 2 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 will refer to non-GAAP financial measures. It is possible that actual results could differ from management's expectations. We refer you to Slide 3 for more detail. Slides 3, 4 and 5 discuss the non-GAAP measures, and our just-issued earnings release provides a reconciliations to the nearest GAAP measures. Catalent's Form 10-Q, to be filed with the SEC later today, has additional information on the risks and uncertainties that may bear on our operating results, performance and financial condition.

Now I'd like to turn the call over to John Chiminski.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [3]

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Thanks, Tom. And welcome, everyone, to our earnings call. Our Q1 financial results were modestly below our internal expectations. However, we view this as timing related, with no impact to our full year. We continue to have strong visibility to our long-term outlook of 4% to 6% organic revenue growth and 6% to 8% organic adjusted EBITDA growth, along with confidence in delivering our fiscal year 2019 full year financial guidance, which we are reaffirming.

As you can see on Slide 6, our revenue for the first quarter increased 1% as reported and increased 3% in constant currency to $551.8 million, driven by the acquisition of our Bloomington Biologics business as well as the acquisition of Juniper Pharmaceuticals. However, the revenue results were negatively impacted by the ASC 606 revenue recognition change related to the treatment of comparative sourcing activity within our Clinical Supply Services segment, which is now recorded on a net basis as compared to a gross basis under ASC 605. Excluding the impact of this revenue recognition change, revenue would have increased 11% in constant currency compared to the prior year, driven by the previously mentioned acquisitions.

Organic revenue was down 1% year-over-year. Our adjusted EBITDA of $115 million was above the first quarter of fiscal year 2018 on a constant-currency basis by 28%.

Our adjusted net income for the first quarter was $40.5 million or $0.28 per diluted share for the first quarter, an increase of $0.07 per diluted share versus the prior year.

Now moving to our operational update. First, on August 14, we closed the acquisition of Juniper Pharmaceuticals, a European early development Center of Excellence with dose form development and early manufacturing capabilities. The acquisition builds on the addition of Pharmatek, completed in fiscal year 2017, and expands and strengthens our offerings in formulation, development, 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 the development of spray dry dispersions. The integration of the site into the Catalent network is well underway and tracking according to our expectations.

Next, as discussed in our last earnings call, 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 on hand, to pay down $450 million of our U.S. 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. The impact of this transaction is visible in our first quarter fiscal year 2019 financial results, which Wetteny will highlight later on.

Additionally, we continue to make great strides with regards to our Biologics strategy. First, the integration of the Bloomington business acquired in October of last year is progressing ahead of our expectations and is nearly complete. The business continues to deliver and we are excited to have recently celebrated 1 year of Catalent ownership with the Bloomington team.

I'm also pleased to report the Bloomington site recently received approval for its 20th commercial product, which is up from the 12 it 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 of fiscal year 2018.

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 also received approval from our Board of Directors for significant CapEx investments within both Bloomington and Madison to support the strong demand and growth in these businesses. A combination of the organic and inorganic investments we've already made in Biologics continue to create significant value for the company, our customers and our shareholders.

I also wanted to provide a further update on our Softgel Technologies business, which continues to be negatively impacted by a worldwide ibuprofen API shortage. The supply shortage is not improving at the rate we anticipated, and the situation remains a challenge. Although our delivery of products relying on ibuprofen in the first quarter of fiscal year 2019 was in line with the level of ibuprofen-related products we delivered in the first quarter of the prior year, our ability to grow our ibuprofen franchise per plan was limited, and we could have generated approximately $4 million to $5 million of incremental EBITDA in the first quarter had the API been available. We expect similar impact to the next 1 to 2 quarters and are hopeful that the API supply stabilizes by then.

Additionally, I mentioned on the last call that we will be making improvements to optimize capacity across the network and organize around Centers of Excellence to support business needs and product focus. We anticipate 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.

I'm happy to report that we have seen this start to take shape in the first quarter, and we will look to build off the progress we've made thus far.

Lastly, I would like to discuss several factors that give us confidence in delivering our fiscal year 2019 financial guidance. First, we have a very strong pipeline of new products that are expected to launch in the fiscal year, and we already have visibility to $50 million of expected revenue from the 38 products that launched in the first quarter.

Next, our Biologics business continues to experience robust demand and we are confident in our ability to execute on that demand, including the 20 commercial products in Bloomington.

Next, we've built a backlog of orders in many of our sites across the network and, once again, we are confident in our ability to execute on that demand throughout the fiscal year.

Finally, we remain positioned increasingly well in an attractive, robust, growing market and have the strongest development pipeline since Catalent's inception, with more than 1,000 active projects.

Now I'll turn the call over to Wetteny Joseph, our Chief Financial Officer, who'll take you through our first quarter financial results.

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [4]

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Thanks, John. As John briefly mentioned earlier, the company adopted ASC 606, the new accounting standards concerning revenue from contracted customers, as of July 1, 2018, using the modified retrospective method. The reported results for the 3-months ended September 30, 2018, reflect the application of the new standard, while the reported results for the 3-months ended September 30, 2017, were prepared under the guidance of the prior standard, ASC 605. This is especially important as I discuss the results related to our Clinical Supply Services segment, where we had a change related to the treatment of our comparator sourcing activities, which are now treated on a net basis compared to a gross basis in the prior year.

Now please turn to Slide 7 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 $199.2 million declined 6% during the quarter, with segment EBITDA declining 1% due to lower high-margin product participation revenue and lower consumer health and prescription volumes in North America. On the positive side, we experienced higher demand for consumer health products in Latin America and Europe and a favorable product mix in Asia Pacific post the divestiture of lower-margin businesses in Australia and China. The Asia Pacific divestitures negatively impacted the segment's revenue by 2 percentage points but did not materially impact the segment's bottom line. As John already highlighted, we estimate that we could have been able to generate approximately $4 million to $5 million of additional EBITDA in the first quarter if more ibuprofen APIs would have been available to us. Given the latest information we have available to us, we expect the ibuprofen shortage to continue for the next 1 to 2 quarters until the worldwide supply stabilizes.

Slide 8 shows that our Biologics and Specialty Drug Delivery segment recorded revenue of $154.6 million in the quarter, which is up 69% versus the comparable prior year period, with segment EBITDA growing 205% during the quarter. A sizable portion of the segment's revenue growth and all of the segment's EBITDA growth was driven by the Bloomington Biologics acquisition, which closed in October 2017 and contributed 66 percentage points to the revenue growth and 240 percentage points to the EBITDA growth. The Bloomington site continues to perform above our expectations from the time of the acquisition announcement, and we feel good about the immediate and long-term growth prospects of this critical business. As a reminder, the addition of our Bloomington site strengthens our position as a leader in Biologics development, analytical services and finished product supply.

Catalent Biologics, including both Bloomington and our pre-existing businesses can provide integrated solutions from protein expression to commercial supply of biologics in a variety of finished dose forms. The acquisition filled a major gap we had in our Biologics offering by adding fill-finish formulation, development and manufacturing capability, including lyophilization, vial filling, cartridges and U.S. based sterile formulation and prefilled 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 3% but with segment EBITDA decreasing 35% or approximately $3 million during the quarter. Recent organic investments in our legacy Biologics business continued to translate into growth during the first 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 quarter.

However, the strong performance in Biologics was offset by our respiratory and ophthalmic business, which saw lower volumes in the first quarter and was negatively impacted by a combination of unfavorable product mix and lower-than-expected capacity utilization levels. It's important to note that market fundamentals continue to remain attractive for these key sterile-fill technology platforms.

Slide 9 shows that our Oral Drug Delivery segment recorded revenue of $130.1 million in the quarter, which was down 3% versus the comparable prior year period, with segment EBITDA declining 29% during the quarter. But these results were positively impacted by the Juniper Pharmaceuticals acquisition that contributed 6 percentage points to the segment's revenue growth and 9 percentage points to the segment's EBITDA growth during the quarter.

The organic revenue decline of 9% and EBITDA decline of 38% was primarily driven by volume declines for a few high-margin products within our U.S. oral solids business, in which one customer has moved volumes in-house to leverage unused internal capacity. That being said, we continue to have a strong pipeline of development products within the segment and feel good about the future growth prospects, although we could continue to see this headwind persist into the second quarter.

We also experienced volume declines within our analytical development services business. But this performance did improve from the prior quarter, which we anticipated due to the changes we've implemented. It is important to note that the decline in the performance of both our U.S. oral solids business and our analytical services businesses were expected and incorporated into our fiscal year '19 financial guidance.

In order to provide additional insight into our long-cycle businesses, which include 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, NPI, 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 first quarter ended September 30, 2018, we recorded development revenue across both small and large molecule of $144 million, which is 37% above the development revenue recorded in the prior fiscal year. Additional disclosure on our development revenue, which is now calculated in accordance with ASC 606, revenue from contracts with customers, is included in our 10-Q as recently filed with the SEC.

In addition, we introduced 37 new products, which are expected to contribute $51 million of revenue in the fiscal year, which is nearly 4x more than the revenue contribution of NPI's launched in the first quarter of the prior fiscal year. This is especially important as it gives us additional confidence in our ability to deliver our fiscal year 2019 financial guidance after a slower start to the year than anticipated.

Now, as shown on Slide 10, our Clinical Supply Services segment posted revenue of $77.7 million, which was down 29% compared to the first quarter of the prior year, driven by the ASC 606 revenue treatment of comparator sourcing activity on a net basis compared to a gross basis in the prior fiscal year. Excluding the impact of ASC 606, segment revenue increased 1% due to increased volume related to core storage and distribution services. Segment EBITDA increased 22% compared to the first quarter of the prior year, primarily driven by revenue growth in our core storage and distribution services business, favorable product mix and improved capacity utilization across the network. All of the revenue and segment EBITDA growth recorded within CSS was organic.

As of September 30, 2018, our backlog for the CSS segment was $302 million, an 11% sequential increase. The segment recorded net new business wins of $73 million during the first quarter, which is an increase of 9% compared to the net new business wins recorded in the first quarter of the prior year.

The segment's trailing 12-month book-to-bill ratio is 1.0x. It is important to note that the backlog and net new business wins figures that I just disclosed have been adjusted for the ASC 606 change in revenue accounting and now include comparator revenue on a net basis.

The next slide contains reference information. We have already discussed the segment results shown on the consolidated income statement by reporting segment on Slide 11.

Slide 12 provides a reconciliation to the last 12 months of EBITDA from operations from the most proximate GAAP measure, which is net earnings or loss. This bridge will assist in tying out the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide.

Moving to adjusted EBITDA on Slide 13. First quarter adjusted EBITDA increased 27% to $115 million. On a constant-currency basis, our first quarter adjusted EBITDA increased 28%, most of which was inorganic and driven by the Bloomington Biologics and Juniper Pharmaceuticals acquisitions.

One item worth noting is an add-back related to the cumulative effect of the change in accounting for ASC 606 that impacted our first quarter results. This add-back of $15.1 million is primarily related to the cancellation of a key contract related to our prefilled syringe business within our Biologics and Specialty Drug Delivery segment. Given the timing of the notification from the customer and our adoption of ASC 606, this item was recorded through retained earnings on our first quarter 2019 balance sheet for U.S. GAAP purposes with no impact to the Catalent consolidated or BSDD segment P&L. Therefore, we are adding it back to our calculation of adjusted EBITDA to reflect the accurate cash earnings of the company. As you'll recall from prior earnings releases, cancellations of contracts are ordinarily source revenue streams and would normally be included as part of our reported results. But the timing of notification in this instance required different treatment. To further clarify, the transactions did not qualify for revenue recognition under the old rules, ASC 605, as of June 30, 2018, because, although we were notified by the customer, a settlement was not reached. Therefore, we could not and did not report it in the prior year. The new rules, ASC 606, which we adopted effective July 1, 2018, now indicate this was a prior period item and therefore cannot be recognized in the current fiscal year P&L. This creates a unique situation in which this transaction and the revenue associated with it, lost revenue, will never be recorded in the P&L. This resulted in us adding the earnings from the lost revenue back through adjusted EBITDA to create an accurate depiction of the cash earnings of the company and align with how results were recorded in the prior periods. However, going forward, it is our expectation that any future contract cancellations or settlements will be included in our reported results.

On Slide 14, you can see the first quarter adjusted net income was $40.5 million or $0.28 per diluted share compared to adjusted net income of $27.1 million or $0.21 per diluted share in the first quarter a year ago. This slide also includes the reconciliation of net earnings or loss 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.

Slide 15 shows our capitalization table and capital allocation priorities. Our total net leverage ratio on a reported basis, as of September 30, was 3.5x, which was down from the 4.2x we recorded during the prior quarter and the lowest level in Catalent's history.

As a reminder, we proactively paid down $450 million of our U.S. dollar denominated term loan in July with the proceeds from the equity offering and also closed the Juniper acquisition on August 14. The impact from both transactions is reflected in this quarter's leverage ratio.

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 and -- on Slide 16. We are reaffirming our previously issued guidance. We continue to 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 of 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.

In addition to the guidance we just provided on the 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 '19 consolidated global effective tax rate to be between 25% and 27%. We also expect interest expense in fiscal year '19 to be approximately $112 million to $114 million, which is reflective of both the recent debt paydown as well as an updated LIBOR curve for our floating rate debt.

Additionally, 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 40% of our adjusted EBITDA in the first half of the year and 60% of our adjusted EBITDA in the second half of the year, which is only a modest change compared to the 42% first half and 58% second half that we communicated on the last earnings call.

Operator, we would now like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Tycho Peterson with JPMorgan.

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Unidentified Analyst, [2]

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This is actually Julia on for Tycho today. So maybe just start us off with Softgel. I know you pointed out a number of factors that affected the performance this quarter. So could you maybe just talk about your updated Softgel outlook for the full year? And what needs to happen to get to the low end of 2% to 4% that you previously talked about?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [3]

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Julia, John here. So first of all, I would say, outside of the kind of worldwide shortage that we're seeing with ibuprofen, I would say that Softgel is really operating in line with our expectations for the year. Obviously, there was a couple of headwinds, specifically on the revenue front, with regards to a couple of facilities that we had dispositioned, one in DY, another one in Haining. There is a little bit of softness that we've been seeing in our Rx portfolio in our St. Petersburg facility, but it's being offset, I would say, by strength in our OTC portfolio for the year. So net-net, I think, the biggest challenge that we have really is the continuing shortage of ibuprofen. We had highlighted this earlier in the calendar year, and we're hopeful that we would be through the significant issues near the end of this year. And unfortunately, those issues haven't abated and, to some extent, I would say, that it just ended up being worse than we expected. And as we've highlighted on our statements here that, had it not been for ibuprofen, we would have been able to deliver an additional $4 million to $5 million of EBITDA within the quarter. And again, we expect to see, I think, in the next quarter and essentially the quarter after, continuing impacts from this shortage. Again, I stated that, outside of that, Softgel really is operating within our expectations. We've always said that this was going to be really a 0% to 2% year for our Softgel business and then moving back more towards its historical growth rate of 2% to 4% in our fiscal year '20.

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [4]

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Just one quick item I'll add is, first of all, we don't provide guidance by segment. But if you recall, we did indicate that we expected 1 more quarter of participation headwind within our Softgel business, which, again, is part of what we factored into our guidance for the year and what we're seeing here in addition to the APAC divestitures and ibuprofen, which John already mentioned.

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Unidentified Analyst, [5]

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Okay. And then separately on Oral Drug Delivery. I know you talked about decreased end market demand because of high-margin product. So could you just maybe give a little bit more color on that? Was that all due to that one customer in-sourcing? And if that's the case, I guess, can you talk to the degree in which you are confident that this is a pretty isolated event rather than a broader trend? And how should we think about the impact throughout the rest of the year?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [6]

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Well, so first of all, I'll start off with the fact that a significant strength of the company is in our diversification in the more than 7,000 products that we have. But we do have, I would say, a handful of products that are fairly significant. And specifically within ODD, we entered the year knowing that we would have a challenge, specifically with regards to 1 product that a customer was going to be in-sourcing due to internal capacity that they'd had. We didn't know exactly what the timing of that would be and whether or not some of our other product launches would be able to backfill that in time. But I would say net-net, where we're at right now, I -- this is not a systemic issue, this is really that 1 large single product. We've got a great pipeline in the ODD business. And right now, in terms of our overall full year guidance that we're providing, we have that taken into account.

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [7]

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I'll just add a couple of quick things. Our oral drug segment has a broad scope in terms of the products that are available or -- if you look at the number of approvals in terms of oral drugs, more than 90% of them would fall within the format that we offer with our Oral Drug Delivery segment. It's a segment that the market is growing around 6%. So the pipeline of products that we have in this segment is very robust, and we expect it to return to the normalized long-term growth rates, which we believe to be in line with the overall Catalent level.

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Operator [8]

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And our next question comes from the line of Derik De Bruin with Bank of America.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [9]

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This is Juan for Derik. And so a follow-up on the ODD segment, is perhaps high single to a low double-digit decline the way that we should think about this business in the nearer term?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [10]

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So we haven't provided guidance within the year by segment, as I mentioned earlier, Juan. But I would say, I would expect that level as we are into the second quarter. As we mentioned, we expect this headwind to continue through the second quarter. Beyond that, we're not providing any particular segment-by-segment guidance. What I would say is that the product that we discussed earlier, we're actually in talks with the customer now about getting some of that volume back which would have impact into the second half of the year for us.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [11]

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Got it. And my follow-up question is on the Biologics segment, BSDD. Can you give us an update on the capacity utilization at Catalent Indiana? And the number of products that have been launched out of there?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [12]

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Sure. Within Bloomington, we -- actually, this has really been a terrific story for the company, because when we acquired Bloomington, they had 12 products that were commercialized, with visibility to a dozen or so more that we thought would be commercialized over the next, I would say, 24 months. And as we sit here today, we already have 20 products that are commercialized. With regards to the capacity, I would say that on a pure capacity calculation standpoint, we're probably sitting at around 50%, maybe we're even approaching 60% of capacity utilization in Bloomington. But the challenge for us now is effectively allocating that capacity to the actual demand that is there. So we're currently working through, making sure that we're doing more than allocating capacity we have in trying to fulfill the very strong robust demand that we have. I'll also just highlight the fact that I mentioned in my remarks that we recently had our board approve significant CapEx both for Madison and Bloomington. These are projects, specifically for Bloomington, that is going to double the capacity of that facility kind of in a 2021 frame. And then within Madison, it's going to add a fourth and fifth train. Both of these are significant CapEx. They're both -- the one in Madison is just under $100 million; the one in the Bloomington is just over $100 million that will be spent over the next 3 years in those buildouts. It keeps us within our 7% to 8% CapEx spend as a percent of revenue, but it also talks to the confidence that our board has in the demand that we're seeing both on the drug substance side for Madison as well as the drug product for Bloomington.

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Operator [13]

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And our next question comes from the line of John Kreger with William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [14]

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So you -- I guess, the question relates a little bit to the revenue outlook over the next 3 quarters, you talked about starting the year a little bit slow but reaffirmed the top line. So can you just maybe talk about what -- which parts of the business, which segments are you comfortable will show some sequential improvement over the next few quarters?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [15]

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Sure. I think, first of all, I would say, throughout the organization. If you look at the NPIs that we highlighted in our prepared comments, they're really across all of our segments. But in particular, if you look at our Biologics business, which, as John just highlighted, just the demand profile across the business and our opportunity to execute against and deliver in the remainder of the year, I would expect the Biologics, the BSDD segment, to continue to show and have sequential growth as we execute through the balance of the year. And then the last point John mentioned in his prepared comments was that really throughout the network, we have built backlog. We specifically highlighted backlog with respect to our clinical business, which you can see the net new business wins lifting and are building up a backlog. You saw the sequential increase in backlog that we reported for CSS. But also elsewhere in our long-cycle businesses, we've built backlog that we'll be able to execute, again, across both certainly Softgel as well as our BSDD segment.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [16]

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Great. And John, you mentioned a minute ago, both Madison and Bloomington are now getting ready for some significant CapEx. Are those 2 groups operating kind of independently at this point? Or are you seeing collaboration such as cross-selling and load-balancing and the like?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [17]

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Thanks, John. First of all, I would say, the collaboration is good and continues to improve. Clearly, we now have end-to-end Biologics capability from drug substance in Madison all the way through drug product in Bloomington. Bloomington did have some drug substance capability, but it was primarily around 2 by 2,500 stainless steel. They have a much smaller slate of drug substance customers at that site. I would say, in fact, just rough numbers, the Madison slate of customers they pull from for drug substance is about 10x that, that we have in Bloomington. So now the ability for our drug substance customers in Madison to also have full capability, end to end, for drug product has significantly increased. Plus I would say the cross-selling between the slate of customers that we have for drug product in Bloomington compared to the slate of customers that we have in drug substance in Madison is also plussing up, if you will, the overall pool of folks that we get to talk to. I can specifically -- I specifically know of a great example for a very large customer in the Indiana region that we had a great relationship but had not been using the drug product capabilities of Bloomington. And once we had brought the 2 companies together, our relationship with that customer has led to significant opportunities that we wouldn't have otherwise had within Bloomington, and that's happening across a slate of customers. So I couldn't really be more pleased with how our teams are working together, how the overall end-to-end capabilities are really reinforcing each other and really providing for a much more robust business in what is a very robust environment for Biologics. Again, accentuating the point around the significant CapEx that our board just reviewed and approved, which again talks to the confidence that we have in both those businesses, the demand and the pipeline that we have.

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Operator [18]

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And our next question comes from the line of Lee Lueder with RBC.

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Leighton Thomas Lueder, RBC Capital Markets, LLC, Research Division - Associate [19]

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It looks like EBITDA margins in the Biologics segment came down significantly on a sequential basis and was a little below consensus expectations as well. Can you explain what caused that? And when do you expect those margins to rebound?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [20]

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Yes, so in our prepared comments, we discussed actually having growth in our core Biologics businesses. But within our blow-fill-seal and sort of ophthalmic business, we saw declines year-over-year, which really drove that. Just another point is that -- and this is true across Catalent. The first quarter is our sort of lowest quarter across the year, and you tend to see EBITDA margins being the lowest as well as we have shutdowns and other items throughout the network. And I think, if you look at the quarterly spread across historically, the first quarter would be the lowest quarter. But those are the 2 points within Biologics and Specialty.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [21]

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Yes. The only thing that I'd also say is that there is a potential for a launch within that segment, where we're spending a lot of base costs, I would say, in advance of a potential approval that is weighing on margins slightly. And again, that's outside of the core Biologics area. And again, back to our first quarter in terms of, I would say, our lower level of activity compared to the back half of the year. In fact we're splitting it now 40%, 60%, so you are bearing a little bit of the burden of the base costs in those folks in advance of the more significant volume that we get in the second half of the year.

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Leighton Thomas Lueder, RBC Capital Markets, LLC, Research Division - Associate [22]

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Okay, got it. And you talked a little bit about the investments at Bloomington and Madison. Are there any changes to long-term expectations around margin expansion in the segment?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [23]

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I would say our expectations remain the same. In terms of the margin expansion that we have -- that we have baked into our long-term plans of 200 to 300 basis points improvement over the next 3 to 5 years. And obviously, we still have our long-term guidance of 4% to 6% on the revenue line and 6% to 8% on the EBITDA line.

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Operator [24]

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And our next question comes from the line of Donald Hooker with KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [25]

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So in the Softgel segment, you mentioned, though, there are some headwinds from divestitures last year in the Asia Pacific area. I think you guys are also talking about -- or you had talked about more divestitures going forward. I guess, these are these lower-margin VMS facilities. Can you update us on any future divestitures as you look ahead in the near term?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [26]

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Sure. I'll just sort of remind what we have already announced or executed. So we did divest 2 facilities. One in China, the other one in Australia. Those 2 had about a 2 percentage point downward impact on the top line for the Softgel segment. We also announced a third divestiture, which is a facility we have, also, in Australia. That one is actually about 12 months out in terms of closure as we are transferring certain products out of that facility elsewhere in the network, which will certainly aid in terms of the throughput in other factories and operational margin lift as well from that activity. So that one has not closed yet, but it was announced. Other than that, we have not announced any other divestitures. But clearly, we have a broad network across Catalent and across the various segments, which we continue to execute demand from and we'll -- as always, we'll evaluate those. But we have not announced any other divestitures other than those 3.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [27]

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Yes. And I'm sorry, I was scribbling down notes. But did you say what -- there's sort of another maybe emerging headwind as you divest that other facility? Maybe no impact to profitability, but maybe another little bit of a headwind, maybe next year, you're saying, to profitability. How much would that be?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [28]

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Those -- that facility, as I mentioned, we'll be moving products from that facility elsewhere in the network. We have not disclosed any particular headwind related to that. What I would say is a significant number of products are actually going to be remaining with us elsewhere in the network.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [29]

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Okay, great. And I'll just ask 1 more. The -- just going back, looking at the sort of Pharmatek acquisition and thinking about Juniper kind of bringing more products into the funnel, have you seen any revenue synergies or any kind of commercial conversion, anything from Pharmatek as of yet? And any updates? I know it's early for Juniper but...

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [30]

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Yes. No, so we're actually extremely pleased. We actually internally refer to this as the superhighway from Pharmatek to our -- either our Kansas City or our Winchester facilities that we have. Then this will also be the same, although it might have to be a super tunnel, I guess, across the Atlantic from Nottingham. But if my memory serves correctly, I believe there's already 8 products from Pharmatek that we have transferred over for higher scale into our Kansas City facility. So the strategy is absolutely working. Both of these facilities, both Pharmatek as well as the Juniper facility in Nottingham, these were early development houses. They've got great expertise in working with customers early on with regards to formulation development, early molecule development, if you will. However, they did not have the ability to go into further clinical Phase I and on manufacture. So our ability to take them further in the Catalent network is significant, and there's some other -- they brought a spray dry dispersion technology in both of those facilities. And now, within the Catalent network, we're looking to scale up internally with some additional potential CapEx for that spray drying. So overall, I would say, strategically, Pharmatek has absolutely met, if not exceeded our expectations. And we expect the same for Juniper. So it's really -- both of them have been really terrific strategic acquisitions for the company.

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Operator [31]

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And I show no further questions at this time. I would like to turn the call back over to John Chiminski for closing remarks.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [32]

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

First, we're confident in and committed to delivering our fiscal year '19 results consistent with our financial guidance and are focused on continuing to drive organic growth across our overall business.

Second, we're 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 are top priorities as we look to swiftly capitalize on our recent inorganic investments.

Next, expanding the EBITDA margin of our businesses is a key focus area for this management team as we drive towards 200 to 300 basis points of further expansion over the next 3 to 4 years.

Last but not least, operations, quality and regulatory excellence are at the heart of how we run our business and remain our 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.

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Operator [33]

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