4Q/FY 2016 Financial Results Call
December 2016
©2016 PATHEON®
FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES Forward-Looking Statements This presentation contains forward-looking statements which reflect the current beliefs and expectations of Patheon’s management regarding the company’s future growth, results of operations, performance (both operational and financial) and business prospects and opportunities. The statements in this presentation are not historical facts and may be forward-looking statements. Readers can identify these forward-looking statements by the use of words such as ‘‘outlook,’’ ‘‘believes,’’ ‘‘expects,’’ ‘‘potential,’’ ‘‘continues,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘seeks,’’ ‘‘approximately,’’ ‘‘predicts,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘estimates,’’ ‘‘anticipates’’ or the negative version of these words or other comparable words. Such forward looking statements are subject to various risks and uncertainties, which could cause actual results to differ from those indicated in these forward looking statements. For more information concerning factors that could cause actual results to differ materially from those conveyed in the forward-looking statements, please refer to the "Risk Factors" section of the prospectus included in the company’s registration statement, in the form last filed with the SEC. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law. Accordingly, readers should not place undue reliance on forward-looking statements as a prediction of actual results. Use of Non-GAAP Financial Measures See the Appendix for additional information regarding the use of Non-GAAP financial measures.
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©2016 PATHEON®
STRONG 2016 PERFORMANCE – POSITIVE MOMENTUM INTO 2017
Growth across all segments, helping clients simplify the supply chain
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Strong financial performance in the quarter and for the year
Positive momentum going into 2017, 85% of next year’s revenue locked in
Execute on the M&A strategy acquisition of North
American API site
©2016 PATHEON®
Invest in new capabilities to support key growth areas – sterile and Biologics
Outlook for 2017 in line with consensus of analyst’s estimates
STRONG Q4 FINANCIAL RESULTS REVENUE ($M)
ADJUSTED NET INCOME ($M)
10% Growth
22% Growth $67
Adj. EPS $0.46
$510
$462
$55
4Q15
4Q16
4Q15
4Q16
KEY CONSIDERATIONS
ADJUSTED EBITDA ($M)
17% Growth $124
• •
Shares Outstanding Q4’16: 145M Diluted Weighted Avg. Shares Q4’16: 146M
•
Interest Expense Q4’16: $31M, including ~$3M amortization of deferred financing costs
•
Q4’16 adjusted EPS positively impacted by favorable tax expense
$106
4Q15
4Q16
STRONG GROWTH DELIVERS 24% ADJUSTED EBITDA MARGIN 4
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©2016 PATHEON®
Q4’16: BROAD-BASED GROWTH ACROSS ALL SEGMENTS
DRUG SUBSTANCE SERVICES (DSS)
PHARMACEUTICAL DEVELOPMENT SERVICES (PDS)
DRUG PRODUCT SERVICES (DPS)
Revenue up 10% y/y to $152 million
Revenue up 18% y/y to $60 million
Revenue up 10% y/y to $298 million
Adj. EBITDA up 9% y/y to $49 million
Adj. EBITDA up 36% y/y to $23 million
Adj. EBITDA up 14% y/y to $80 million
Adj. EBITDA margin 32%
Adj. EBITDA margin 37%
Adj. EBITDA margin 27%
• Continued strong demand for biologic services
• Strong demand for sterile and lowsolubility services
• Continued volume growth and demand across sterile and oral solid dose
• Biologics represents approximately 50% of the segments revenues
• Improved productivity across the network
• Key client wins • 2017: ~95% of revenue under contract
• 2017: ~85% of revenue under contract
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• 2017: ~ 45% of revenue under contract
©2016 PATHEON®
CASH POSITION OF $165 MILLION
Delevering
Cash Position •
Cash Position: Q3: $100 million****
Deleverage rapidly through debt reduction and Adjusted EBITDA expansion
Q4: $165 million* Q4FY15 LTM
Q4: $347M total liquidity
5.6x*
$2.1B Gross Debt
Q4FY16 LTM
$2.0B Net Debt
4.7x* •
* Incl. $20M borrowing from revolver facility
• •
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•
NTM Leverage Ratio = 4.1x** Leverage ratio is calculated based on net debt and pro forma adjusted EBITDA
*Leverage ratios derived using total debt on the balance sheet less cash on the balance sheet divided by LTM pro-forma Adjusted EBITDA ** NTM Leverage based on forecasted Adjusted EBITDA Refer to reconciliation tables for LTM pro-forma adjusted EBITDA *** Net of cash used for debt repayment in Q4
©2016 PATHEON®
CONTINUED GROWTH WITH STRONG MOMENTUM
SOLID BUSINESS MOMENTUM • More than 100 Tech Transfers in 2016 • More than 50 Launches o 17 New Drug Approvals in FY 2016 • 470 New Contracts Including: o Boehringer Ingelheim, Amgen, Grünenthal • Positive strategic dialogues with clients
Growth across all 3 segments
Successful IPO; reducing leverage
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Strong demand for services
©2016 PATHEON®
SIGNIFICANT ACHIEVEMENTS • Successful IPO • Key management additions: new President, leaders in API and Biologics segments • Added high-quality API capacity with facility acquisition
ACQUISITION OF STATE OF THE ART API FACILITY EXPECTED TO CLOSE FEBRUARY 2017
Florence, South Carolina
STRONG BENEFITS
State of the art facility
Expanded API capacity in North America
Multi-year manufacturing agreement with Roche
SIGNIFICANT OPPORTUNITY
Margin Enhancement Opportunities
Immediate Capacity Utilization
200 professionals, 1,100 acre site to support continued growth 8
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©2016 PATHEON®
Long-Term Growth
FY 2017 OUTLOOK
CONFIDENTIAL ©2016 PATHEON®
SOLID TRACK RECORD OF PERFORMANCE
Revenue Adjusted EBITDA*
8%
1,867
1,774
CAGR***
Organic Growth
1,484 $ in millions
991 748
648**
29** Adj. EBITDA Margin
$700M
87
4%
12%
2011
2012
143
14% 2013
248
375
17%
21%
2014
2015
Revenue from 5 Acquisitions in 5 Years (excluding divestitures)
395
21%
2016
OUTPACING MARKET GROWTH ON BOTH THE TOP LINE AND BOTTOM LINE *Non-GAAP, see Appendix for reconciliation. **Adjusted for contract termination fee. *** CAGR for 2013-2015 and includes FX adjustments
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©2016 PATHEON®
FY17 GUIDANCE | OVERVIEW Mid-term Financial Objectives at IPO
FY 2017 Outlook
ORGANIC REVENUE GROWTH OF 8-9%
ORGANIC REVENUE GROWTH OF 10% $2,050M, on a currency neutral basis
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SOLID MARGIN PROFILE
ADJ EBITDA MARGIN EXPANSION OF 200bps
~150 bps expansion per annum
Adj. EBITDA of $475M
©2016 PATHEON®
KEY ASSUMPTIONS FOR FY 2017 OUTLOOK REVENUE GROWTH OF 10% ASSUMES: CURRENCY NEUTRAL
EVERY $0.01 RATE CHANGE
ADDITIONAL ITEMS INTEREST EXPENSE: $108M
PATHEON-FUNDED CAPEX: $155M
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The avg rate of 2016 Euro / US of $1.11
Impacts top line by $5M and Adj EBITDA by $1M
Excluding amortization of deferred financing costs
CURRENCY COMPOSITION:
AT EURO/US $1.15 RATE AT IPO
FLORENCE SITE ACQUISITION NOT INCLUDED
65% Dollar/ 30% Euro/ 5% Other
2017 US revenue outlook would be $2,070M
©2016 PATHEON®
2/3 growth CapEx
HIGH VISIBILITY TO FY17 BUSINESS DEMANDS: 85% of FY17 revenue locked in
2017 ADJ. EBITDA, ADJ. NET INCOME AND ADJ. EPS $475
$105
$108
Adjusted Net Income: $202 - $222 $40 - $60
~147M Shares
$202 - $222
Adjusted Depreciation Interest EBITDA Expense
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Tax Impacts
| Based on 2017 FactSet Consensus Estimate of Analysts
Adjusted Net Income
©2016 PATHEON®
Adjusted EPS $1.37 - $1.51
LEADING INDICATOR OF LONG-TERM TOTAL CONTRACT VALUE (TCV)
• Metric built on historical analysis of Patheon sales to revenue conversion rates • Signed business only • Indicator of long-term growth • TCV naturally ramps throughout fiscal year • Combined with base business, supports 8-9% revenue growth
• Long and Short Conversion Cycles o 12 to 24 months for commercial o 6 to 18 months for development • High forward visibility, sticky revenue streams • Avg. Length of Contract o Commercial - 5 to 10 years o Development - 18 to 24 months
TCV = revenue expected to be booked over the life of the contracts closed in the current year 14
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©2016 PATHEON®
TOTAL CONTRACT VALUE OF $2B+ IN 2017 EXAMPLE OF SALES TO REVENUE CONVERSION
$2.0 – 2.2B Total Contract Value Development Commercial
ILLUSTRATIVE
2017
2018
FY17 New Business Wins
2019
Revenue Conversion
TCV = Revenue expected to be booked over the life of the contracts closed in the current year
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©2016 PATHEON®
2020
2021-2025
DRIVING ABOVE-MARKET PERFORMANCE
STRONG CLIENT DEMAND
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ABOVE-MARKET REVENUE GROWTH
©2016 PATHEON®
SOLID MARGIN PROFILE
Questions?
CONFIDENTIAL ©2016 PATHEON®
RECONCILIATION OF GAAP TO NON-GAAP MEASURES Unaudited Three months ended
Three months ended
Twelve months ended
Twelve months ended
10/31/2016
10/31/2015
10/31/2016
10/31/2015
$
$
$
$
(in millions of U.S. dollars, except share data) Net income from continuing operations Depreciation and amortization
$
44.1 31.5
$
40.8 28.5
$
34.8 113.0
$
34.9 107.8
Repositioning expenses
6.3
3.8
9.2
25.1
Acquisition and integration costs
4.0
4.0
16.6
22.3
30.9
42.8
160.4
141.8
Interest expense, net Impairment charge
-
(Benefit from) provision for income taxes
0.9
(24.3)
Refinancing expenses
-
(19.5)
4.1
(24.0)
0.3
21.6
-
21.6
3.7
Operational initiatives related consulting costs
0.3
4.1
4.2
13.0
IPO costs
0.9
2.1
2.0
4.5
Acquisition-related litigation expenses
1.0
4.9
4.0
12.7
Stock-based compensation expense
5.3
2.6
21.6
13.9
Remediation costs
5.3
2.6
32.8
2.6
Gain on sale of third party investment
-
Other Total Adjusted EBITDA
(16.2)
(3.0) $
123.9
-
4.7 $
106.1
(16.2)
(1.6) $
394.6
4.1 $
374.6
Depreciation
(25.2)
(23.7)
(88.4)
(85.1)
Interest expense
(28.2)
(39.6)
(147.8)
(130.6)
24.3
19.5
24.0
(0.3)
(20.2)
(5.1)
(29.0)
(6.0)
(7.2)
(1.9)
(26.5)
(18.2)
Tax expense Discrete tax items Estimated tax effect on adjustments Adjusted net income
$
Weighted average shares - diluted (in millions) Adjusted net income per diluted share
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67.4
$
145.8 $
0.46
55.3
$
115.6 $
0.48
©2016 PATHEON®
126.9
$
124.3 $
1.02
134.4 115.6
$
1.16
CONSOLIDATED SEGMENT OPERATIONS Unaudited (in millions of U.S. Dollars) Three months ended October 31, 2016 Revenues
Adjusted EBITDA
$
$
DPS
297.9
80.4
PDS
60.4
22.6
DSS
152.2
49.1
Other
-
(28.2)
(0.3)
-
Intersegment Eliminations Total
510.2
123.9
Three months ended October 31, 2015 Revenues
Adjusted EBITDA $
DPS
272.4
70.6
PDS
51.2
16.6
DSS
138.5
45.2
Other
-
(26.3)
Intersegment Eliminations Total
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$
(0.1) 462.0
106.1
©2016 PATHEON®
RECONCILIATION FOR CONSOLIDATED EBITDA per CREDIT AGREEMENT Unaudited (in millions of U.S. dollars) Consolidated EBITDA per Credit Agreement Less Pro forma cost savings Other Adjusted EBITDA (Deduct) add Depreciation and amortization Repositioning expenses Acquisition and integration costs Interest expense, net Benefit from income taxes Refinancing expenses Operational initiatives related consulting costs IPO Costs Acquisition-related litigation expenses Stock-based compensation expense Remediation costs Other Income from continuing Operations Add (deduct): Depreciation and amortization Stock-based compensation expense Net change in non-cash working capital Net change in deferred revenues Non-cash interest Other, primarily changes in long-term assets and liabilities of deferred taxes Cash flows from operating activities of continuing operations Cash flows from operating activities of discontinued operations Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities
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Twelve Months Ended October 31, 2016 $ 420.2 (24.8) (0.8) 394.6 (113.0) (9.2) (16.6) (160.4) 24.0 (21.6) (4.2) (2.0) (4.0) (21.6) (32.8) 1.6 34.8
113.0 21.6 (175.9) 92.7 25.3 (50.7) 60.8 (2.9) 57.9 (206.7) (16.0)
©2016 PATHEON®
ADJUSTED EBITDA RECONCILIATION Unaudited
(in millions of U.S. dollars) Net (loss) income from continuing operations Depreciation and amortization Repositioning expenses Acquisition and integration costs Interest expense, net Impairment charge Provision for (benefit from) income taxes Refinancing expenses Operational initiatives related consulting costs IPO costs Acquisition-related litigation expenses Stock-based compensation expense Remediation costs Purchase accounting adjustments Gain on sale of third party investment Other Total Adjusted EBITDA
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FY 2011 $ (16.1) 53.2 7.0 25.6 1.1 9.0 3.5 (4.7) 78.6
FY 2012 $ (106.7) 40.8 6.1 3.2 26.5 57.9 43.4 13.3 3.1 (0.5) 87.1
©2016 PATHEON®
FY 2013 $ (32.6) 46.9 15.8 17.0 47.9 13.1 (3.7) 27.3 2.3 6.4 3.2 2.8 (3.6) 142.8
FY 2014 $ (117.1) 79.5 51.7 60.3 90.5 9.7 4.3 28.2 10.1 10.2 10.0 11.4 (0.5) 248.3
FY 2015 $ 34.9 107.8 25.1 22.3 141.8 4.1 0.3 3.7 13.0 4.5 12.7 13.9 2.6 (16.2) 4.1 374.6
FY 2016 $ 34.8 113.0 9.2 16.6 160.4 (24.0) 21.6 4.2 2.0 4.0 21.6 32.8 (1.6) 394.6
2011 REVENUE AND ADJUSTED EBITDA RECONCILIATION ($ in millions)
Revenue
2011 Reported Contract cancellation fee Pro forma results
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©2016 PATHEON®
Adjusted EBITDA 698.0
78.6
50.0
50.0
648.0
28.6
USE OF NON-GAAP FINANCIAL MEASURES Use of Non-GAAP Financial Measures We define Adjusted EBITDA as income (loss) from continuing operations before repositioning expenses (including certain product returns and inventory write-offs recorded in gross profit), interest expense, foreign exchange losses reclassified from other comprehensive income (loss), refinancing expenses, acquisition and integration costs (including certain product returns and inventory write-offs recorded in gross profit), gains and losses on sale of capital assets, Biologics earnout income and expense, income taxes, impairment charges, remediation costs, depreciation and amortization, stock-based compensation expense, consulting costs related to our operational initiatives, purchase accounting adjustments, acquisition-related litigation expenses and other income and expenses. We define Adjusted net income as Adjusted EBITDA minus depreciation expense (excluding amortization from intangibles acquired in acquisitions), interest expense (excluding amortization of the deferred financing costs), and tax expense. In addition, we exclude discrete tax items and apply an estimated tax effect on adjustments within the calculation. The estimated tax effect is calculated using statutory tax rates on each expense item, except in the case where a jurisdiction is under a full valuation allowance at the time of the expense, in which we apply a tax rate of 0%. We define Adjusted EPS as Adjusted net income divided by the average number of shares outstanding on a diluted basis for the related period. Our management uses Adjusted EBITDA as one of several metrics to measure the Company’s operating performance. Adjusted EBITDA is also a component of the performance objectives used to determine the short and long-term incentive portions of executive compensation. We present Adjusted net income and Adjusted EPS because we believe they are useful supplemental measures in evaluating the performance of our operations and provide greater transparency into our results. We believe that providing these non-GAAP financial measures to investors as a supplement to the comparable U.S. GAAP measures in evaluating the performance of our operations provides greater transparency to the information used by the Company’s management in its financial and operational decision-making. These non-GAAP financial measures do not have standard meanings, so they may not be comparable to similarly-titled measures presented by other companies and should not be considered in isolation or as a substitute for U.S. GAAP financial measures of performance. Reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP financial measure is included with the financial statements in this press release. The Company does not provide a reconciliation of forward-looking non-GAAP financial measures to their comparable GAAP financial measures because it could not do so without unreasonable effort due to the unavailability of the information needed to calculate reconciling items and the variability, complexity and limited visibility of the adjusting items that would be excluded from the non-GAAP financial measures in future periods. When planning, forecasting and analyzing future periods, the Company does so primarily on a non-GAAP basis without preparing a GAAP analysis as that would require estimates for various cash and non-cash reconciling items that would be difficult to predict with reasonable accuracy. For example, equity compensation expense would be difficult to estimate because it depends on the Company’s future hiring and retention needs, as well as the future fair market value of the Company’s common stock, all of which are difficult to predict and subject to constant change. It is equally difficult to anticipate the need for or magnitude of a presently unforeseen one-time restructuring expense or the values of end-of-period foreign currency exchange rates. As a result, the Company does not believe that a GAAP reconciliation to forward-looking on-GAAP financial measures would provide meaningful supplemental information about the Company’s outlook. 23
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©2016 PATHEON®