Shire plc (NASDAQ:SHPG) Q2 2018 Earnings Conference Call - Final Transcript
Jul 31, 2018 • 09:00 am ET
73.5% to 75.5% due to an inventory adjustment and slightly less favorable mix than previously expected for the balance of the year. This implies only modest gross margin improvement in the remaining quarters this year.
Moving on to the P&L, now on Slide 13. Total revenues grew 5% based on 6% product sales growth and the decline in royalties. Similar to last quarter, royalties and other revenues decreased, primarily due to lower SENSIPAR royalties, the reclassification of ADDERALL XR from royalty revenue to product sales and other changes, as required under the new revenue accounting standard. Non-GAAP gross margin declined versus the prior year and fiscal quarter. Non-GAAP operating expenses grew 2% year-over-year. Non-GAAP R&D expenses increased 6%, mostly driven by increased spend on late-stage programs, including SHP647 and ongoing development and post-marketing commitment with our recently launched products. We held non-GAAP SG&A expenses flat. For Q3, I would expect a minor sequential increase in operating expenses, in line with our full year R&D and SG&A expense guidance.
Non-GAAP EBITDA grew 1%, as the benefit of higher product sales was partially offset by a lower gross margin compared to a year ago. The year-over-year increase in depreciation was driven primarily by placing our key assets into service, some initial depreciation expense for our new Covington plant as well as assets related to our enlarged international footprint. We would expect another small step-up in depreciation in Q3 due to the Covington approval, in line with our full year depreciation guidance. You will notice a lower net interest expense and other line in the second quarter, which was driven by unrealized gains on equity investment and lower interest expense, partially offset by the impact of currency foreign exchange translation. As you are probably aware, starting this year, the accounting standards now require changes in the value of equity investment to go through the income statement.
Our non-GAAP tax rate was 15.8% in the quarter, in line with the year-ago period. Given our tax rate in the first half of 2018, we now expect the full year non-GAAP tax rate towards the low end of our guidance range of 16% to 18%. Non-GAAP net income and EPS growth both grew 4% in the quarter.
Now please turn to Slide 14. We generated approximately $750 million of free cash flow in the second quarter. The $300 million year-over-year decrease was driven primarily by higher cash tax payments due to higher taxable income and the timing of tax payments. CapEx was flat year-over-year at about $200 million.
We continued with our progressive dividend policy, as the board declared a 10% increase to the interim dividend in 2018 versus 2017. Our continued strong cash flows enabled us to pay down another $550 million of net debt in Q2, $1.4 billion in the first half of 2018 and $3.6 billion over the last 12 months. We ended this quarter with $17.7 billion of non-GAAP net debt and the non-GAAP net debt-to-EBITDA ratio of 2.7. We remain on