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. 2 2016 PATHEON
STRONG 2016 PERFORMANCE POSITIVE MOMENTUM INTO 2017 Growth across all segments, helping clients simplify the supply chain 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 Invest in new capabilities to support key growth areas sterile and Biologics Outlook for 2017 in line with consensus of analyst s estimates 3 2016 PATHEON
STRONG Q4 FINANCIAL RESULTS REVENUE ($M) ADJUSTED NET INCOME ($M) $462 10% Growth $510 $55 22% Growth $67 Adj. EPS $0.46 4Q15 4Q16 4Q15 4Q16 ADJUSTED EBITDA ($M) KEY CONSIDERATIONS 17% Growth Shares Outstanding Q4 16: 145M Diluted Weighted Avg. Shares Q4 16: 146M $106 $124 Interest Expense Q4 16: $31M, including ~$3M amortization of deferred financing costs Q4 16 adjusted EPS positively impacted by favorable tax expense 4Q15 4Q16 STRONG GROWTH DELIVERS 24% ADJUSTED EBITDA MARGIN 4 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 Adj. EBITDA up 9% y/y to $49 million Adj. EBITDA margin 32% Revenue up 18% y/y to $60 million Adj. EBITDA up 36% y/y to $23 million Adj. EBITDA margin 37% Revenue up 10% y/y to $298 million Adj. EBITDA up 14% y/y to $80 million Adj. EBITDA margin 27% Continued strong demand for biologic services Biologics represents approximately 50% of the segments revenues 2017: ~85% of revenue under contract Strong demand for sterile and lowsolubility services Improved productivity across the network 2017: ~ 45% of revenue under contract Continued volume growth and demand across sterile and oral solid dose Key client wins 2017: ~95% of revenue under contract 5 2016 PATHEON
CASH POSITION OF $165 MILLION Cash Position Cash Position: Q3: $100 million**** Delevering Deleverage rapidly through debt reduction and Adjusted EBITDA expansion Q4: $165 million* Q4: $347M total liquidity Q4FY15 LTM 5.6x* $2.1B Gross Debt $2.0B Net Debt Q4FY16 LTM 4.7x* NTM Leverage Ratio = 4.1x** * Incl. $20M borrowing from revolver facility 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 6 *** Net of cash used for debt repayment in Q4 2016 PATHEON
CONTINUED GROWTH WITH STRONG MOMENTUM Growth across all 3 segments 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 Successful IPO; reducing leverage Strong demand for services SIGNIFICANT ACHIEVEMENTS Successful IPO Key management additions: new President, leaders in API and Biologics segments Added high-quality API capacity with facility acquisition 7 2016 PATHEON
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 SIGNIFICANT OPPORTUNITY Multi-year manufacturing agreement with Roche Margin Enhancement Opportunities Immediate Capacity Utilization Long-Term Growth 200 professionals, 1,100 acre site to support continued growth 8 2016 PATHEON
FY 2017 OUTLOOK CONFIDENTIAL 2016 PATHEON
SOLID TRACK RECORD OF PERFORMANCE Revenue Adjusted EBITDA* 1,774 1,867 8% CAGR*** Organic Growth $ in millions 1,484 648** 29** 748 87 991 143 248 375 395 $700M Revenue from 5 Acquisitions in 5 Years (excluding divestitures) Adj. EBITDA Margin 4% 12% 14% 17% 21% 21% 2011 2012 2013 2014 2015 2016 OUTPACING MARKET GROWTH ON BOTH THE TOP LINE AND BOTTOM LINE 10 *Non-GAAP, see Appendix for reconciliation. **Adjusted for contract termination fee. *** CAGR for 2013-2015 and includes FX adjustments 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 SOLID MARGIN PROFILE ~150 bps expansion per annum ADJ EBITDA MARGIN EXPANSION OF 200bps Adj. EBITDA of $475M 11 2016 PATHEON
KEY ASSUMPTIONS FOR FY 2017 OUTLOOK REVENUE GROWTH OF 10% ASSUMES: ADDITIONAL ITEMS CURRENCY NEUTRAL EVERY $0.01 RATE CHANGE INTEREST EXPENSE: $108M PATHEON-FUNDED CAPEX: $155M 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 2/3 growth CapEx CURRENCY COMPOSITION: AT EURO/US $1.15 RATE AT IPO FLORENCE SITE ACQUISITION NOT INCLUDED HIGH VISIBILITY TO FY17 BUSINESS DEMANDS: 65% Dollar/ 30% Euro/ 5% Other 2017 US revenue outlook would be $2,070M 85% of FY17 revenue locked in 12 2016 PATHEON
2017 ADJ. EBITDA, ADJ. NET INCOME AND ADJ. EPS $475 $105 $108 $40 - $60 Adjusted Net Income: $202 - $222 ~147M Shares Adjusted EPS $1.37 - $1.51 $202 - $222 Adjusted EBITDA Depreciation Interest Expense Tax Impacts Adjusted Net Income 13 Based on 2017 FactSet Consensus Estimate of Analysts 2016 PATHEON
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 2016 PATHEON
TOTAL CONTRACT VALUE OF $2B+ IN 2017 EXAMPLE OF SALES TO REVENUE CONVERSION $2.0 2.2B ILLUSTRATIVE Total Contract Value Development Commercial FY17 New Business Wins 2017 2018 2019 2020 Revenue Conversion 2021-2025 TCV = Revenue expected to be booked over the life of the contracts closed in the current year 15 2016 PATHEON
DRIVING ABOVE-MARKET PERFORMANCE STRONG CLIENT DEMAND ABOVE-MARKET REVENUE GROWTH SOLID MARGIN PROFILE 16 2016 PATHEON
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 $ 44.1 $ 40.8 $ 34.8 $ 34.9 Depreciation and amortization 31.5 28.5 113.0 107.8 Repositioning expenses 6.3 3.8 9.2 25.1 Acquisition and integration costs 4.0 4.0 16.6 22.3 Interest expense, net 30.9 42.8 160.4 141.8 Impairment charge - 0.9-4.1 (Benefit from) provision for income taxes (24.3) (19.5) (24.0) 0.3 Refinancing expenses 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 - (16.2) - (16.2) Other (3.0) 4.7 (1.6) 4.1 Total Adjusted EBITDA $ 123.9 $ 106.1 $ 394.6 $ 374.6 Depreciation (25.2) (23.7) (88.4) (85.1) Interest expense (28.2) (39.6) (147.8) (130.6) Tax expense 24.3 19.5 24.0 (0.3) Discrete tax items (20.2) (5.1) (29.0) (6.0) Estimated tax effect on adjustments (7.2) (1.9) (26.5) (18.2) Adjusted net income $ 67.4 $ 55.3 $ 126.9 $ 134.4 Weighted average shares - diluted (in millions) 145.8 115.6 124.3 115.6 Adjusted net income per diluted share $ 0.46 $ 0.48 $ 1.02 $ 1.16 18 2016 PATHEON
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) Intersegment Eliminations (0.3) - 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 (0.1) - Total 462.0 106.1 19 2016 PATHEON
RECONCILIATION FOR CONSOLIDATED EBITDA per CREDIT AGREEMENT Unaudited Twelve Months Ended October 31, 2016 (in millions of U.S. dollars) $ Consolidated EBITDA per Credit Agreement 420.2 Less Pro forma cost savings (24.8) Other (0.8) Adjusted EBITDA 394.6 (Deduct) add Depreciation and amortization (113.0) Repositioning expenses (9.2) Acquisition and integration costs (16.6) Interest expense, net (160.4) Benefit from income taxes 24.0 Refinancing expenses (21.6) Operational initiatives related consulting costs (4.2) IPO Costs (2.0) Acquisition-related litigation expenses (4.0) Stock-based compensation expense (21.6) Remediation costs (32.8) Other 1.6 Income from continuing Operations 34.8 Add (deduct): Depreciation and amortization 113.0 Stock-based compensation expense 21.6 Net change in non-cash working capital (175.9) Net change in deferred revenues 92.7 Non-cash interest 25.3 Other, primarily changes in long-term assets and liabilities of deferred taxes (50.7) Cash flows from operating activities of continuing operations 60.8 Cash flows from operating activities of discontinued operations (2.9) Cash flows from operating activities 57.9 Cash flows from investing activities (206.7) Cash flows from financing activities (16.0) 20 2016 PATHEON
ADJUSTED EBITDA RECONCILIATION Unaudited FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 (in millions of U.S. dollars) $ $ $ $ $ $ Net (loss) income from continuing operations (16.1) (106.7) (32.6) (117.1) 34.9 34.8 Depreciation and amortization 53.2 40.8 46.9 79.5 107.8 113.0 Repositioning expenses 7.0 6.1 15.8 51.7 25.1 9.2 Acquisition and integration costs - 3.2 17.0 60.3 22.3 16.6 Interest expense, net 25.6 26.5 47.9 90.5 141.8 160.4 Impairment charge - 57.9 13.1 9.7 4.1 - Provision for (benefit from) income taxes 1.1 43.4 (3.7) 4.3 0.3 (24.0) Refinancing expenses - - 27.3 28.2 3.7 21.6 Operational initiatives related consulting costs 9.0 13.3 2.3 10.1 13.0 4.2 IPO costs - - - - 4.5 2.0 Acquisition-related litigation expenses - - 6.4 10.2 12.7 4.0 Stock-based compensation expense 3.5 3.1 3.2 10.0 13.9 21.6 Remediation costs - - - - 2.6 32.8 Purchase accounting adjustments - - 2.8 11.4 - Gain on sale of third party investment - - - - (16.2) - Other (4.7) (0.5) (3.6) (0.5) 4.1 (1.6) Total Adjusted EBITDA 78.6 87.1 142.8 248.3 374.6 394.6 21 2016 PATHEON
2011 REVENUE AND ADJUSTED EBITDA RECONCILIATION ($ in millions) Revenue Adjusted EBITDA 2011 Reported 698.0 78.6 Contract cancellation fee 50.0 50.0 Pro forma results 648.0 28.6 22 2016 PATHEON
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 2016 PATHEON