Avantor Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

There are 14 speakers on the call.

Operator

Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like welcome everyone to Avantor's First Quarter 2023 Earnings Results Conference Call. After the prepared remarks, there will be the opportunity for any to begin the question and answer session. I will now turn the call over to Christina Jones, Vice President of Investor Relations.

Operator

To Ms. Jones, you may begin the conference.

Speaker 1

Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield,

Speaker 2

to turn the call over to Mr. President and Chief Executive Officer and

Speaker 1

Tom Sloczek, Executive Vice President and Chief Financial Officer. To the press release and a presentation accompanying this call are available on our Investor Relations website at ir.avantorsciences.com. To A replay of this webcast will also be made available on our website after the call. Following our prepared remarks, we will open the line for questions. To during this call, we will be making some forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments to note that we believe or anticipate may occur in the future.

Speaker 1

These forward looking statements are subject to a number of risks and uncertainties, to including those set forth in our SEC filings. Actual results might differ materially from any forward looking statement that we make today. To these forward looking statements speak only as of the date that they are made. We do not assume any obligation to update these forward looking statements as a result of new information, to review our financial results. This call will include a discussion of non GAAP measures.

Speaker 1

A reconciliation of these non GAAP measures to turn the call over to Michael.

Speaker 3

To Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on Slide 3. Our Q1 operating results were in line with our expectations, to With reported revenue of $1,780,000,000 and adjusted EPS of $0.29 to Market dynamics played out as anticipated, including ongoing destocking of customer inventories and a downturn in semiconductor demand, to resulting in a core organic revenue decline of 1.8%. We continue to leverage the Avantor business system to drive execution of our plan and enhance operational rigor and efficiency.

Speaker 3

Reflective of strong contributions from commercial excellence and productivity, to Adjusted EBITDA margin was 19.4%, at the high end of our expectations. Also, to Free cash flow increased approximately 50% compared to Q1 last year and free cash flow conversion was approximately 100% in the quarter, to reflect our focus on improving working capital performance. We also continue to make progress on our long term strategy to and are seeing the positive impact of our investments in capacity expansion, new product introductions and digital infrastructure to support our growth. To Some notable highlights for the quarter include expanding our hydration capabilities in Glovice, Poland and Aurora, Ohio to provide ready to use buffer solutions to introduce our next question and answer session. Successfully launching multiple new J.

Speaker 3

T. Baker product lines produced at our Ritter facility in Germany to rolling out our enhanced inventory manager digital solution, which supports our customers' needs for real time information about their critical lab products to introduce our speakers to our customers and to our customers. We are very pleased to announce that we are well positioned to deliver on our business and our business model. To we also continue to push forward on our Science for Goodness sustainability platform and look forward to publishing our annual sustainability report later this quarter. To Looking ahead, there are indications from customers that inventory health is improving.

Speaker 3

However, current run rates suggest to highlight that there is a heightened risk that destocking will extend into the second half of the year. Therefore, we think it is appropriate to reflect the risk of to take a more gradual return to normalized growth and are updating our full year outlook accordingly. Tom will walk you through the details of our updated guidance in a moment. To We do view the factors impacting the current operating environment as transitory and remain focused on executing our plan and taking actions to drive growth to and profitability. Our long term algorithm remains unchanged, and we are confident in the resilience of our end markets and our proven business model.

Speaker 3

With that, let me turn it over to Tom to walk you through our financial results and updated guidance in more detail.

Speaker 4

To Thank you, Michael, and good morning, everyone. Starting from the top of Slide 4, reported revenue was $1,780,000,000 for the quarter to Core organic revenue in our bioproduction platform grew low single digits with sales of processed ingredients and excipients up high single digits. To We also continue to see strong momentum in our medical grade silicone platform with 1st quarter revenue up more than 20%. To Adjusted gross profit for the quarter was 35.1%. Favorable contribution from commercial excellence to conclude with the Q1 of 2019.

Speaker 4

Was offset by headwinds associated with inventory destocking and the roll off of margin rich COVID-nineteen revenues. To Adjusted EBITDA was in line with our expectations at approximately $346,000,000 driven by our gross margin results, to offset by a sequential increase in SG and A related to wage inflation and investments in our workforce to support our growth strategy. To Adjusted earnings per share came in at $0.29 for the quarter, reflecting revenue and EBITDA results as well as an increase in interest expense to about 70 to turn the call over to Mr. Earnings, our press release will be recorded for the quarter as compared to $65,000,000 in Q1 2022. COVID-nineteen revenue declines, to Foreign exchange and interest expense in aggregate represented a $0.06 headwind to adjusted EPS.

Speaker 4

To We generated free cash flow of $191,500,000 representing approximately 50% growth from Q1 last year to Approximately 100 percent conversion of adjusted net income. Our working capital performance improved from Q1 of 2022, to And we're actively working a pipeline of initiatives to improve receivables and inventory balances. Our adjusted net to take a look at the leverage ended the quarter at 3.8 times adjusted EBITDA within our stated target leverage of 2 to 4 times adjusted EBITDA. To We paid down over $200,000,000 of debt this quarter and continue to prioritize free cash flow for further deleveraging, while remaining to be active in driving the commercial synergies of our 2021 acquisitions and building our M and A pipeline. To Slide 5 outlines the components of our Q1 revenue growth.

Speaker 4

As previously indicated, core organic revenue declined 1.8% in the quarter. To Customer destocking in liquid handling, consumables and single use solutions played out as expected, representing an approximate 500 basis point headwind in the quarter. To COVID related revenues represented a 4.8% headwind for the quarter, reflecting the roll off of approximately $90,000,000 of COVID related sales to to More exchange translation represented 2.1% headwind, driven primarily by the strength of the U. S. Dollar versus the euro, resulting in a 1st quarter reported revenue decline of 8

Speaker 2

to turn the

Speaker 4

call over to Slide 6. From a regional perspective, the Americas declined 3.7% on a core organic basis, reflecting to share with you the financial results and soft demand in semiconductors and biotech. Europe achieved 1% core organic revenue growth in the quarter. To Bio production was up double digits on a core organic basis in the region and our Applied Technologies and Advanced Materials end market continues to perform well. To Like the Americas, inventory destocking in Europe played out in line with our expectations.

Speaker 4

EMEA also grew 1% on a core organic basis to conclude our Q1 with strong growth in our bioproduction process ingredients and excipients, partially offset by high single digit decline to review our financial results and financial results. We will now begin the call to review our financial results and our financial results. To Slide 7 shows our core organic revenue growth for the quarter by end market and product group. Biopharma, representing almost 55% of our annual revenue, to declined low single digits in the quarter impacted by destocking of lab consumables and single use solutions as anticipated. To Biopharma production was up low single digits on a core organic basis, including high single digit growth in processed chemicals and ingredients, to reflect the strength of underlying end market demand.

Speaker 4

Healthcare, which represents approximately 10% of our annual revenue, to decline mid single digits on a core organic basis in the Q1. Biomaterials performance was strong with double digit growth across all three regions, to While diagnostic sales were negatively impacted by destocking of lab consumables, education and government representing to

Speaker 5

share with you

Speaker 2

the financial results. Approximately 10% of

Speaker 4

our annual revenue grew mid single digits on a core organic basis in the Q1 with growth across all three regions. To We are encouraged by the return to growth of this platform and the supportive research environment, including healthy Q1 NIH outlays to and expect customers in this end market to remain active. Advanced Technologies and Applied Materials representing approximately 25% of our annual revenue to decline low single digits on a core organic basis in the Q1 with solid performance in Europe offset by declines in the Americas and EMEA, to largely attributable to softer demand from semiconductor customers and a broader macroeconomic pressure on industrial customers. To provide product group proprietary materials and consumables offerings were flat in the quarter with strong biomaterials and bioproduction process ingredient sales to Offset by destocking in single use solutions and reduced demand for formulated solutions for semiconductor customers. To Sales of 3rd party materials and consumables declined mid single digits, impacted by a moderation in lab consumables demand related to destocking.

Speaker 4

To Services and Specialty Procurement grew mid single digits, while equipment and instrumentation declined low single digits. To turn the call over to the operator. Turning to Slide 8, I'd like to take a moment to talk through our updated 2023 guidance. We now expect organic revenue declines of 3% to 1% to and core organic revenue of minus 0.5% to positive 1.5%. To This reflects a more gradual wind down of customer destocking of lab consumables and single use solutions, to more pronounced semiconductor headwinds and a modestly weaker macro environment.

Speaker 4

We continue to expect FX to be neutral for the full year, to Leading to reported revenue declines of 3% to 1%. Based on our updated top line view, as well as our commercial and productivity initiatives, to We expect adjusted EBITDA margin to contract between 75 and 25 basis points. We continue to expect interest to take a look at the expense of $270,000,000 to $295,000,000 and a tax rate of 21.5%, leading to adjusted earnings per share to of $1.28 to $1.36 We are updating our free cash flow range to $675,000,000 to 750,000,000 to for the Q2, we estimate organic revenue declines of 6% to 4% as compared with the Q1 decline of 6 to introduce our financial results. This includes a COVID headwind of 2.6%, resulting in core organic decline to turn the call over to the operator

Speaker 6

to review our financial results. Thank you, Emily. Thank you, Emily. Thank you, Emily.

Speaker 4

Thank you, Emily. Thank you, Emily. Thank you, Emily. Thank you, Emily. Thank you.

Speaker 4

Our next question comes from the line of Chris Anderson from JPMorgan. Please go ahead. Thank you. Good morning, everyone. To This core organic decline reflects an aggregate headwind of approximately 700 basis points, reflecting customer inventory destocking to at similar levels to Q1 and a modest further deceleration in sales to our semiconductor customers.

Speaker 4

To We expect a roughly 0.5 percent negative impact from FX, leading to reported revenue of 1,785,000,000 to turn the call over to $1,825,000,000 We also expect adjusted EBITDA margin of 19% to 19.5% in the quarter, to reflect the ongoing volume and mix dynamics as well as our continued focus on commercial excellence. To We expect interest expense to be approximately $2,000,000 lower than Q1, driven by ongoing pay down of our floating rate debt to and expect free cash flow generation to be more modest in Q2 given the timing of cash tax payments. To With that, I will now hand the call back to Michael.

Speaker 3

Thanks, Tom. As we conclude, I want to emphasize our conviction in both the attractiveness to conclude the Q and A portion of our end markets and the relevance of our offering to serve our customers. Earlier this month, we hosted our Americas Sales Conference, to which brought together hundreds of our suppliers and our entire North America sales organization. This important forum strengthened collaboration across Avantor functions to and with our suppliers to drive growth. This was our first in person forum since early 2020 to conclude with the Q and A session.

Speaker 2

And the energy and feedback we

Speaker 3

received reinforce the opportunities ahead of us. We are looking forward to similar forums in Europe and EMEA next month. To We remain confident in our growth strategy and are investing in new capacity, launching new products and expanding our geographic footprint and digital infrastructure to provide a brief update on our financial results. Continuous improvement is in our DNA, and we are taking actions to strengthen our operational rigor, efficiency to thank you for your interest in Avantor and for your continued support. And thank you to the 14,500 associates around the world to take questions from the operator to begin the question and answer portion of our call.

Operator

To

Speaker 2

to our

Operator

first question today comes from Vijay Kumar with Evercore ISI. Please go ahead, Vijay.

Speaker 5

Hey, guys. Thanks for taking my question. To I just want to make sure I had some of these numbers correct. Michael, you just updated guidance here. To So destocking, I think, for Q2, I heard it as minus 700 basis points.

Speaker 5

Is there a continued destocking impact like I think the prior destocking impact for the year was to Something like 200 basis points, 2 50 basis points. Was that change for the year? What was the change? And I think biopharma, there's been a lot of questions. What is your exposure to emerging biopharma, to Early stage biotech and has the bioproduction growth of double digit change at all?

Speaker 7

To Yes. Thanks, Vijay, for the questions. Let me unpack both of those areas for you. First, starting with destocking. To As we indicated in our prepared remarks, Q1 played out essentially in line with our expectations to with roughly 500 basis points of destocking headwinds.

Speaker 7

What we've modeled for the Q2 is to a continuation at approximately that same level. And then to Similar to what we had in the Q1, it's important to take into account we also had roughly 100 basis points of semiconductor to take a look at the headwinds and we see that accelerating modestly in the second quarter. So those are probably the 2 key factors as we think about to move in from the Q1 to the Q2, but we see the quarter is playing out pretty similarly, particularly around destocking. To You're asking a little bit about how we see the bioprocessing market overall. And I think we continue to be to Quite encouraged by the underlying growth drivers for that space.

Speaker 7

There's been some to pretty exciting approvals here around Alzheimer's and obesity and multiple myeloma. Recently, the pipelines are to quite robust and the underlying demand continues to be quite strong and the read through in our business that validates that to Would be in the strength of our process ingredients and excipients platforms that don't suffer from some of the same destocking headwinds that our single use to and we grew those high single digits in the quarter. But based on to The trends we are seeing on destocking and the expectation that we had that those would we would have seen an inflection point on that to reiterate that risk of destocking continuing into the second half of the year. So to We've moderated in our full year guide. It would reflect more of a mid single digit growth in aggregate for our to bioproduction platform, but we continue to be quite bullish about the long term prospects of not only the end market, but certainly our positioning to Within it.

Speaker 7

Then the last point there to address your question around biotech. As we've said consistently, to Biotech is an important part of our customer base, particularly given the science that they're developing. We have moderate exposure here. It's probably to On the order of 2% to 3% of our overall revenues, it's concentrated in our research platform. And to Certainly, we see the headwinds in that space playing out.

Speaker 7

That space was probably off double digits in the first to

Speaker 5

take a look at

Speaker 2

the quarter seems to have stabilized in and

Speaker 7

around those levels, but overall it's a modest exposure in our portfolio. To

Speaker 5

That's helpful, Michael. And just a follow-up to that. If I just take a step back simplistically at a very high level, We had a big guidance change over the last, call it, 3 to 4 months and other guidance reset here. To When we look at these assumptions, can you talk about your visibility and how investors can take comfort in to The numbers haven't been reset, perhaps the second half guide now being dearest. What visibility does Alonzo have?

Speaker 7

To Yes. Happy to weigh in on that, Vijay. When we look at the assumptions that we had coming into the year here, to The Q1 played out very much in line with our expectations as you see by our Q1 coming in at the high end of our range. To But we had obviously contemplated that the destocking headwinds would subside by the middle of the year. To And Bob, we were encouraged by the ramp that we saw as we moved through the Q1.

Speaker 7

We were also needing to see an additional step up to growth in those categories as we moved into the early days of the second quarter here. And frankly, we don't see that happening. So what we've tried to do today is to reflect The risk that this destocking persists through the balance of the year. So if I step back then and look at how to What's embedded in our guidance? If I look at the underlying core business, we're assuming that that continues to run for the balance of the year at levels to take a look at the numbers that we saw in the Q1.

Speaker 7

We assume that we'll continue to face the to take a look at the headwinds in the semiconductor market for the balance of the year with a bit of a step up in headwinds in the second to take a look at the quarter and you can kind of see the read through on that and some of the earnings announcements from our customers in that space, but to definitely validate the depths of the downturn there. And then on the destocking, what we've assumed there is that, to As I said earlier, the Q2 destocking for both lab and bioprocessing are similar to what we saw in Q1. We've extended those to through the balance of the year. It has the effect in the second half of the year of showing a modest improvement to As you see in our growth rate, but of course, that's somewhat mathematical and that you're running incremental headwinds on top of to The destocking that was embedded in our numbers last year. So the impact on growth is a little bit more muted in the second half, to given the dynamics last year, but we have pretty similar levels of destocking factored in here for the second half of the year.

Speaker 7

To So from our perspective, we think it's a prudent change that reflects the current dynamics and doesn't really require to Much improvement in the business as we move through the balance of the year.

Speaker 5

Understood. Thanks, guys. To

Operator

Our next question comes from Patrick Donnelly with Citi. Please go ahead, Patrick.

Speaker 6

To Hey, guys. Thanks for taking the questions. Michael, maybe a follow-up on that one. I think you've talked about when you're talking about stocking, you're at least seeing to take some early signs of things maybe bottoming out or turning a little bit. I guess, what are you seeing in the channel there?

Speaker 6

To Vijay's question, just on the visibility, to What are you hearing from customers? Obviously, the headwind of 2Q being similar is prudent, but it does sound like to You're maybe at least seeing some signs.

Speaker 5

So I would love you to just give us

Speaker 6

a little more color there on what you're seeing and any levels of confidence that we are at a trough of sorts.

Speaker 7

To Thanks, Patrick. I think it's probably helpful to maybe provide a little bit of context on just the operating model that we have here and the level to take a look at the visibility we have into the different parts of the business. We're facing destocking headwinds as we've indicated previously in both our lab consumables to introduce your question and answer session. Within those categories, those are to highlight some of the products that our customers would generally expect us to have on the shelf and order times and lead times would tend to be rather muted, to certainly measure it in days weeks as opposed to months or quarters. So that's one of the dynamics that make to You're predicting these things somewhat difficult.

Speaker 7

But obviously, we have great access to conclude our questions. I'm going to turn the call over to Steve. Our customers are spending a lot of time in posting them to understand the dynamics and the trends. To And we continue to receive positive feedback from our customers that in fact the health of inventories in these categories to are indeed improving. We do see the inventory coming out, perhaps just not at the rate that we had originally anticipated.

Speaker 7

So we

Speaker 2

saw improvements in our daily

Speaker 7

rate of sales, to So we saw improvements in our daily rate of sales in these categories as we move through the Q1. The exit run rate in March to was essentially in line with what we had anticipated going into the year. But we had also expected to see to an additional step up into the Q2. And while rates are moderately improving, they're just not improving at the rate that we had originally contemplated. So we to I felt it was appropriate to reflect the risk that this thing extends for more time than what we had originally modeled, and to That's what we have baked into our outlook today.

Speaker 6

Okay. That's appreciated. To And then on the margin side, Mike, maybe one for Tom. I mean, when you think about you guys reset the margin guidance here, down to take you guys to the midpoint now year over year. Are you taking any cost actions?

Speaker 6

Or is the view this is transitory, we'll keep the P and L where it is, to And then there's a level of confidence that next year we get back to the algorithm that you guys have provided in terms of margin expansion. Can you just talk about How you're approaching this and how we should think about that construct?

Speaker 4

Yes. First of all, Patrick, the view is that it is transitory. To And we do expect to beat through these headwinds by the end of the year. But notwithstanding that, our plan to And even our updated guidance reflects the ongoing productivity initiatives that to take. So recall that the 3 margin drivers for us that we continue to talk about are to Pricing and commercial excellence as well as that the proprietary mix to growth that gives us the better margin mix.

Speaker 4

And then the third has always been productivity. And we built this year's plan with to significant productivity in it. We're using the ABS, Avantra Business Systems to drive to A number of discrete projects across the entire enterprise. We've got actions in the Americas and Europe and to in EMEA to drive continued fixed cost reduction. To The one thing that is not being impacted is the investments on the front end of the business.

Speaker 4

So to In terms of commercial sales force, marketing teams and so forth, we continue to invest there to take a look at the numbers that we're seeing across the entire landscape to drive the better top line. But even as we head into the back half of the year, to That continues to be true. While we do continue to look at additional opportunities on the cost side. So to It's front and center for us. It was at the beginning of the year and continues to be throughout this year.

Speaker 5

Okay. Appreciate it, guys. To

Operator

Our next question comes from Michael Ryskin with Bank of America. To please go ahead, Michael.

Speaker 8

Great. Thanks. Let me throw in one big one to start and then I'll have a follow-up. To So first, I'm just trying to deconvolute the change to the guide a little bit. You provided a lot of commentary, but given all the moving pieces, to Anything you can say in terms of has demand, has the macro deteriorated at all?

Speaker 9

You're talking about

Speaker 8

to Inventory level has feels like being the biggest change to the guide, but then given your comments on semiconductor and some of those in the comments you had in the prepared remarks, to I'm just trying to parse out the moving pieces here. The $200,000,000 roughly cut to the top line, to How much of that is from the inventory of destock? How much is semiconductor versus just broader macro expectations going forward? To What's built in?

Speaker 7

Michael, let me take a shot at that. If you look at the adjustment in the guide, it's roughly 300 basis points to take your questions at the midpoint. And probably the way I'd have you think about that was, it's roughly 2 thirds associated with to take a look at the incremental destocking headwinds that we've anticipated in the business and the balance of that would be to Probably split somewhat equally between a little bit weaker semiconductor end market, particularly in the second quarter to And moderately weaker macro environment overall. So it's probably those three factors, but clearly more weighted towards to

Speaker 8

Okay, thanks. And then on the stocking point, just anything you can say in terms of to How much inventory is actually left with these customers? I mean, they can't keep destocking forever. There's a finite amount. So any clarity on where inventory levels, to This is both for lab and button process by the way.

Speaker 8

Where were inventory levels pre COVID? Where were they sort of at the peak? Where are they now? And to Any sense of could you be seeing incremental share losses that would account for some of those changes? Thanks.

Speaker 7

To Yes. So certainly the posting and the feedback that we get from our customers, as I indicated before, would certainly support a view that inventory health across the network is to I think we've taken a prudent approach here to You're trying to derisk the second half of the year, if you will, just given that you don't have precise data here to call it exactly. To And so extending kind of similar levels of drawdown through the balance of the year here, I think to Certainly, would cover probably our expectations for what theoretically could be to being held at our customers and hopefully it proves to be just that to be a bit on the conservative side. But to In fact, we don't have visibility that takes us all

Speaker 4

the way through the end

Speaker 7

of the year in order books and such. But certainly this would to indicate that there was perhaps a year's worth of inventory in some of these categories, which that's probably on the outer end of to take any data that we've seen or any input that we've received from our customers. So I think it's a prudent to approach given the data that we do have.

Speaker 4

Yes, Mike, and I would just like to follow-up some of the conversations you've had with us to Along the way here, I mean, it was pretty clear that we our original guide had anticipated an earlier inflection point on to destocking. And as we're here deep into April, just haven't seen it yet. We are the feedback, as Michael said, from customers is very clear that to Inventory levels are moderating, but it isn't at a point yet where we're seeing that in order rates. And to So we felt that it was prudent to incorporate more of that through the balance of the year as we have.

Speaker 7

And Michael, the to The other thing I would add, you mentioned what's the topic of potential share loss. To What I would say to that is, which probably won't surprise you is that we would fundamentally disagree with any assertion that we are to share and we continue to be encouraged by the traction that we're getting with our to take your questions. And if you look beyond just these categories that are destocking, I think there are some pretty healthy trends there that support our views. If I to look at sales of lab chemicals, for example, and the growth that we saw in the Q1, to Which was rather healthy and certainly well above our group average here. Certainly, A, to It gives us some confidence in the health of the end markets, but certainly also revalidates the position we have with our customers.

Speaker 7

We've had some number of really high profile customer wins to of late, we talked a little bit about Catalent last quarter, which is one of the larger wins we've had, but we also have to take a look at some number of other accounts that have flowed our way here in recent weeks months. And so to When we look at our growth with our core customers relative to Things like the change in their R and D spend, we continue to run well ahead of the to take a look at trends of their own spend levels. So I think we continue to be quite encouraged by the traction momentum that we have with our customers. And if I broaden it beyond just like the lab to take a look at the broader market by to several 100 basis points and similar to lab, if you move beyond the destocking categories, we see things like processed ingredients and excipients, to We don't think are facing some of these headwinds, again, really strong momentum that gives us to Encouragement about just the underlying health and activity level that our customers are positioning.

Speaker 2

Okay. Thanks.

Operator

The next question comes from Rachel Van Stahl with JPMorgan. Please go ahead.

Speaker 10

Great. Thanks for taking the questions. To So appreciate the comments of emerging biotech being 2% to 3% of total revenues. Can you walk us through your exposure to emerging biotech to take a question from the line of the cell and gene therapy market just with some of the comments from peers this week. To walk me through what's your exposure to Celngene?

Speaker 10

And then have you seen any shift in demand or ordering patterns from customers within that market?

Speaker 7

To Yes, let me unpack those questions for you, Rachel, maybe take them in reverse. So on the cell and gene therapy space, to One of the things I really like about our platform is we're going to be relevant across all modalities, to both at commercial scale as well as in the pipeline. So while we're encouraged by the momentum overall to In cell and gene therapy and the health of the pipeline, clearly, to The commercial platforms are heavily slanted towards monoclonal antibodies driving the bulk of our revenue there, kind of in line with just to The split of revenue at an end market level there. So yes, to we certainly have exposure to cell and gene therapy within our bioproduction platform, but it would be in the proportion to of overall cell and gene therapy end market revenue as a proportion of total biologics end market to take a look at the revenue, so certainly nothing outsized to think about there. And certainly in the pipeline, a lot of our R and D activity certainly would to support a rather fulsome cell and gene therapy pipeline.

Speaker 7

So it's an end market that I think long term to favor growth in that space and we're not going to be over indexed to any particular to Product or customer. It's a rather diverse platform to As you know, and regarding order rates or things like that, have we seen a change in patterns? I'd say, to Given the diversity of the platform, certainly nothing that I would call out is driving momentum one way to I think we continue to have strong specifications across all these platforms. To We are certainly seeing good growth across all of our modalities and are encouraged by the approvals to What we see coming through. On the biotech side, most of our exposure there is going to be on the research to congratulate you on the call to questions.

Speaker 7

And while we like that customer segment a lot, to Just given the number of molecules that they're developing, it is kind of low single digit exposure for our platform. It was off to double digits in the Q1. It was also off in the Q4 following quite a lengthy period of growth. To It seems to have moderated a bit. When I look at the bioproduction side of our business, which we tend to think about only on commercialized to take your questions.

Speaker 7

Your exposure there would typically be through the CDMO lens to where you have biotechs that are scaling up to produce commercial quantities probably don't have their own capabilities. And so to we would probably service those through the CDMOs to take a look at the numbers around the world that we would be working with there. So overall, I don't think we to You are calling out any particular risk here from a biotech standpoint that's moving the needle one way or another on

Speaker 2

our numbers.

Speaker 10

Great. Thanks. And then one on semis here. Appreciate that your products to really use the next semi processing in bulk on the production side. You're more closely tied to current demand levels than some of your peers.

Speaker 10

But can you just confirm to congratulate your exposure to the semiconductor market is still 2% to 3%. And then it sounds like roughly 75 basis points of the guidance change is tied to the worsening market for semis. To So how much revenue is really left in that model for semiconductors this year? And is there any risk to that declining further? And then finally on semiconductors, when do you think you're going to have visibility on this market and at what point could it really look positive?

Speaker 10

Thank you.

Speaker 7

Yes. So just to remind you all on our to take your questions. Our offering into the semiconductor market, we certainly have a host of lab consumables and PPE and clean room to offerings that support our customers there, but probably the biggest headwind we're facing at the moment would be on the to take a look at the commercialization of a semiconductor wafer, primarily in logic to take a look at the commercial relationships that provide cleaning and etching functionality throughout the manufacturing process. To So it's truly a consumable that's going to mirror our customers' manufacturing output in their production levels. To Similar to what we see in life sciences, there is a very, very significant inventory correction that's underway within the semiconductor space.

Speaker 7

To And if you look at the earnings release from our customers, that space, they're off to 40% plus and their production schedules are probably off even more than that as they look to reset inventories. To We typically get a little bit longer range forecast for most of the semiconductor customers that are updated kind of on a rolling monthly to take a look at the numbers on the numbers. We do see a step down coming through in the second quarter, but we are encouraged by the to take the feedback we're getting from our customers that they see kind of arresting the inventory headwinds somewhere around midyear here to And then to return to kind of recovery as we move through the back half of the year. So We factored in pretty much headwinds all year, probably the steepest in the Q2. And I think the view here is that to The health of that end market improves heading into 2024.

Operator

To Our next question comes from Dan Brennan with TD Cowen. Please go ahead, Dan.

Speaker 9

To Thanks for taking the questions, Michael and Tom. Maybe just one on back to the guide. So For the inventory destock, so it sounds like it's around 4% in the first half, right, roughly, I believe, maybe a little higher in Q2, I guess, but to I'm not sure if the delta between the 1Q and 2Q is all semi, but are you now contemplating or is included in the guidance now that 4% headwind persists to In Q3, Q4, so when we look at your guidance, we should be thinking about that's baked in to the implied organic growth at that much of a headwind drag through the full year now.

Speaker 7

To Yes. So maybe clarify a couple of points there, Dan. On the Q1 headwinds from destocking, it was roughly 500 basis points, to And we have a similar level factored in for the Q2, so no real change there. To If you look at the back half of the year, you can do the math and see that our core organic growth rate overall to improve somewhat relative to the first half of the year in order to come in at the midpoint of our full year to provide guidance and really what you see reflecting there is the fact that the second half of last year also had to meaningful destocking headwinds in there. So while we're indeed carrying forward incremental destocking in the second half to turn the call back to the operator for questions.

Speaker 7

Beyond what we saw last year, it does have the effect of showing an improved growth rate in that it to off of a lower base or a time period that also reflected headwinds. So we're seeing kind of similar levels of destocking is what the guidance to contemplate in the second half as we see in the first half. And then you made a comment about semiconductors. To Semiconductors are in fact worsening by roughly a full point in the second quarter relative to to The first point, the first quarter. If we think about having roughly 600 to basis points of headwinds in Q1 that was roughly 500, associated with destocking and other 100 basis points or so for semis.

Speaker 7

To As you look at Q2, it steps up to roughly 700 basis points of headwinds, as Tom indicated in his prepared remarks, similar levels, to take a look at the numbers of the restocking, roughly 200 basis points of semi headwind in the second quarter that we see moderating back to something closer to the 1% headwind for the balance of the year. Got it. Great. Thank you.

Speaker 9

To Got it. Great. Thank you for that. And then maybe just one other. To I know you highlighted beyond semis, there was some impact from broader industrial.

Speaker 9

Just kind of remind us, I think to Maybe half of your Advanced Second Applied Materials could be considered some more cyclical industries. But just kind of ex semis, what else are you seeing in there? Just to kind of quantify and give us some color about kind of what's baked in and kind of how you arrived at that? Thank you.

Speaker 7

Yes. So if you look at the performance of our Advanced to take an applied materials end market, which would certainly have some end markets there within there to I do exhibit more cyclical GDP type dynamics. We were actually overall, I was to You're relatively pleased with given the macro environment we're operating in and how well that platform

Speaker 2

to turn

Speaker 7

the call back over to Tom. It was coming down low single digits, if you will, which in large part is being driven by to What we're seeing here in semiconductors, but to We actually saw growth, for example, in Europe, in our applied exposure there, which was to turn the call over to Steve. This is somewhat encouraging given what we've been keeping an eye on in Europe. So whether it's petchem, oil and gas, to Some of the other food and beverage, these are the aerospace, defense, these are some of the other end markets that we would serve in there. And I'd say to Generally, overall, that part of our business held up reasonably well.

Speaker 7

The most notable point to make here is to Just the heavy downturn in semiconductors. I mean, I think on this what we supply into the manufacturing process itself, to It was probably down 50% in Q1 and it's probably going to move to down 70% in Q2 before bouncing back a bit. So to It is really driving the numbers there. But a lot of that exposure being in the Americas enables to Probably a better read through in Europe where we don't have as much semi exposure. You can see how the applied markets for us are playing out where we actually grew to Mid single digits in the quarter.

Speaker 9

Great. Thanks, Michael.

Operator

To our next question comes from Jack Meehan with Nephron Research. Please go ahead, Jack.

Speaker 11

To Thank you. Good morning. Good morning. I wanted to ask about the margin cadence in the second half of the year. So just to Playing around with the numbers.

Speaker 11

I think it implies about a 200 bps step up in second half EBITDA margins relative to the first half. To Historically, I look like pre COVID, it's been a little bit more muted than that. Can you just walk us through the framework on margins in the year end? To

Speaker 4

Yes. Thanks, Jack. So Q1, as you know, is a reference point, to came in at 19.4%, which was down significantly from the Q1 of 20 to And the COVID impacts on the revenue side were the most to Pronounced impact there. So we had roughly $90,000,000 of COVID headwinds coming out in the Q1. That's to Predominantly proprietary materials, which are very high margin content.

Speaker 4

And So that contributed to the bulk of that reduction. The headwinds that we've talked about as well in the to Particularly in the biopharma production category also have pretty good margins. So the combination of those 2 is what to That kind of drove us to the lower margins. As you progress through the year, we do see to Improvement in the second half. I do think that when you look at the second quarter and you model that out, it will be very similar to the first half in terms of to Your pure P and L number is probably $20,000,000 more of revenue or so at the midpoint, a to take a couple of points of EPS, but your margin rate, I think, continues given that you have that same complexion of headwinds to continue.

Speaker 4

We do see the second half an improvement. We do see a step up in the margin rates as to those revenues and the inflection points that we're anticipating come into play, to take a look at the biopharma side. So overall, full year, we do end up at the midpoint to What we've talked about would be modest reduction from 2022 overall.

Speaker 11

To Got it. Okay. And then as a follow-up, I wanted to ask just the performance of Masterflex to and Ritter in the quarter. I know don't break out the M and A sales anymore, but just what how is their progression to start the year kind of relative to the exit rate at the end of 2022. Thank you.

Speaker 7

Thanks for the opportunity to talk about those, to Jack, we're actually continuing to spend a lot of time in driving the acceleration of synergies on really across all three of to And when I look at Q1 in isolation, happy to report that all three of those to share some of the key financials that we're seeing in the past. We're seeing some momentum really across all three of those. To I think in the press release, we referenced a couple of new to product launches in our Ritter category that we've been signaling and we've got some more that will come here in the second quarter that will continue to bolster our to we do see inventory positions improving and the engagement with our customers in Ritter to Starting to pick up as well. Masterflex, we continue to drive hard after some of the innovation to And are quite encouraged by what that does for building out and to Really the only end to end aseptic foot management solution in the space and certainly a lot of excitement from our customers. I would say one of the more notable things to in Masterflex in the Q1 is just the improvement in the supply chain.

Speaker 7

We've been talking a lot about headwinds to access to chips and stuff and backlogs on the pump. And while we continue to work through some of those challenges, to I think we've been able to cut the lead times on our peristaltic pump offering by half. We've got a little bit more room to go yet before that to ultimately normalize this, but certainly some good momentum there. And then on Rimbio, obviously, a more modest sized platform for us, to Well, we're super excited by the progress that we're making in translating that technology, to take the 2 d and 3 d bag technology to our customers around the world. And we had talked at the Q4 call about to review some meaningful revenues that we were looking to capture in the Q1 on that platform and certainly those came through as planned.

Speaker 7

To It's an area that we're going to continue to drive hard on. We've got a lot of resources focusing on capturing these commercial synergies, and to We continue to anticipate these platforms growing in 2023 and certainly they to We're keeping pace with those plans in the Q1.

Speaker 2

To

Operator

our next question comes from Dan Arias with Stifel. Please go ahead, Dan.

Speaker 4

To Good morning, guys. Thanks for

Speaker 12

the questions. Michael or Tom, on biopharma overall, low single digit decline in the quarter, what should growth be to growth or decline be for the year there? And then what should BioProcess specifically be for the year? Apologies if I missed that in the moving parts to And then as a follow-up, you guys have talked about service penetration and just what that means for you. Do you think that to Service can be accretive to the biopharma piece or should we more or less expect that to move alongside the product side?

Speaker 12

It feels like it could be a little bit more sticky for you guys.

Speaker 7

To Yes, happy to talk a little bit more about biopharma. So you of course, there's some significant COVID to

Speaker 2

take a look at the headwinds that run into our

Speaker 7

biopharma numbers. You probably also have to think about it on both an organic as well as a core basis. To Within the Q1, biopharma overall was off high single digits. But you have in that particular to And Mark, if you had a bit over 500 basis points of COVID headwinds, and so you get to a core growth rate of low single digits to As you indicated, I think for the year as you see the COVID headwinds to Subsiding as we move through the year that certainly leads to better growth rates sequentially each quarter. To And given the comps in the second half of the year that do include destocking, although we've to continue to model destocking persisting through the second half of the year.

Speaker 7

The impact that that has on growth is a bit more muted. So to You moved from kind of low single digit decline in the Q1 to On a full year basis, you're probably looking at a low to mid single digit growth for biopharma overall. And to That would contemplate bioprocessing, which is the production component of that coming in and around a mid single digit level

Speaker 12

Okay, helpful. If I could just maybe ask another and just sort of stay with the details around the inventory topic. When you look at the to When you look at the destocking activity that's taking place and you try to separate bioprocess from routine lab consumables, to Are you able to discern a difference when it just comes to the pace of the work down? I mean, is everything looking like it's moving at the same velocity, so to speak? To Or do you think that at the end of the day we see one of these buckets resolve itself a little faster than the other?

Speaker 7

That's a really good question, Dan. As we look into the data and as we have to extrapolate the potential risk into the second half of the year. We've got them moving at about the same pace. And the data to Coming back from our customers would certainly indicate that's not a bad way to think about that. And if I look at to changes in daily rate of sales as we move through the Q1 and into the early days here of the Q2.

Speaker 7

I think that's another validation of our view They seem to be winding down or moving at roughly the same pace. So we've to As we've extended the view into the second half, it does cover Both of those categories.

Speaker 4

Okay. Thanks very much, guys.

Operator

To Our next question comes from John Salisbury with UBS. Please go ahead, John.

Speaker 12

To Hi. Thanks for taking

Speaker 13

the question. I guess just continuing on the destocking here. Just any broader regional color on how you see this playing out in the second half to take a look at the U. S. And then just second question and I'll ask it too at the same time.

Speaker 13

On the industrial and applied market piece, I guess, to How much conservatism do you think you have in the guidance for this new market? If we were to enter a deeper recession in the second half of the year, I guess, how much do you think that is baked in to On the guidance there. Thanks.

Speaker 7

Yes. On destocking, that's going to kind of flow in line with to Just the revenue splits that we have between the region, which is just another way of saying we have probably more destocking headwinds in the Americas, to That's probably more a function of our Americas business being roughly 2x what our European business is. We certainly see both in the lab to as well as in bioprocessing headwinds in both regions. On the COVID side to as the COVID headwinds wind down, particularly on things like the vaccine, we had more pronounced headwinds to in the Americas, but I would say the on a percentage basis, you see similar dynamics between to address both regions and a bit more muted exposure in Asia, of course. To And then on your second question regarding just the applied markets and how we see those to playing out pretty encouraged, like I said, by what we saw in the Q1, down low single digits with to Semiconductors being off 50%.

Speaker 7

We've contemplated that being off 70% in Q2. So I think to We've got a fairly realistic view of baked in here

Speaker 2

to

Operator

to thank you everyone for your questions. Unfortunately, those are all the questions we have time for today. So I'll now turn the call back to Michael for closing remarks.

Speaker 7

To Yes. Thank you, Emily. And thank you to all of you for participating in our call today. Certainly appreciate your to support and interest in our business and look forward to updating you when we meet next. Until then, take care and be well everyone.

Speaker 7

To

Speaker 2

Thank you all.

Operator

Thank you, everyone, for joining us today.

Speaker 2

To

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Earnings Conference Call
Avantor Q1 2023
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