Q4 2019 Earnings Call
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Thank you operator, and good morning, everyone. Thank you for joining us on today's call. Our speakers. They are Michael Stubblefield, President and Chief Executive Officer, and Thompson Executive Vice President and Chief Financial Officer, The press release.
Okay and a presentation accompanying this call are available on our investor website at <unk> dot the bunker scientists dot com a replay of this webcast will also be available on our website. Following this call. Following our prepared remarks, we will open up the lines for questions I would like to note that we will be making some forward looking statements within the meaning of the federal securities.
Laws, including statements regarding events or developments that we believe we're anticipating may occur in the future. These forward looking statements are subject to a number of risks and uncertainties, including those set forth in our SCC filings actual results may differ materially from any forward looking statements that we make today. These forward looking statements speak only as of the.
They that they need and we do not assume any obligation to update these forward looking statements whether as a result of new information future events and developments or otherwise. This call will include a discussion of non-GAAP measures reconciliation of these non-GAAP measures can be found in the appendix to the presentation with that I'll now turn the call over to Michael.
Thank you Helen and good morning, everyone. We appreciate you joining our fourth quarter earnings call.
I'm pleased to report that we finished 2019 with great momentum. In addition to having strong revenue growth across our pro forma business continued margin expansion and robust cash generation, we made great progress in executing our growth strategy and expanding our global.
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Since completing the largest U.S. health care IPO in May we have continually improved our leverage position empowering us to drive the innovations and breakthroughs that help our life science customers dramatically improve patient outcomes.
I'd like to begin by covering some business highlights since our last earnings call on slide three.
November we announced they do cooperation with the National Institute of Bioprocessing Research and training in Dublin, Ireland.
I work as a global center of excellence for training and research solutions for the biopharmaceutical manufacturing industry its clients, including number of industry, leading companies such as Pfizer, Eli Lilly Amgen Bristol Myers Squibb.
Being Takeda.
Born towards working with fiber to address downstream bottlenecks in buffer preparation in producing monoclonal antibodies.
In December we opened our ninth innovation and customer support center.
Our newest addition, as in Shanghai, China, and will support accelerated process development for biologic therapies that were advanced the development.
Life changing treatments for patients in the region.
It will specifically focused on enhancing industry capabilities, and the development and manufacturer of safe and effective biologic medicines, such as monoclonal antibodies and cell and gene therapy.
These treatments show great potential in China, and our fast growing segment of the bio processing industry worldwide.
We recently began a capacity expansion initiatives that are gonna be say pull insights that will support the growth of our biopharma production clients across Europe.
We also initiate an expansion to our single use production capabilities in more still North Carolina.
We continue to experience a high win rate on new customer accounts as well as on contract renewals.
I'm pleased to report that we are ahead of plan on our integration synergy targets and I remain confident with our goal of achieving 300 million of synergies by the end of 2020.
We also recently successfully repriced our term loans during the rate on our U.S. dollar and euro denominated term loans by 75 basis points.
And we're looking.
Looking forward to repricing our bonds later this year.
I also want to share some organization enhancements that we've implemented in recent weeks that will enable us to execute our long term growth strategy.
For enhanced our ability to deliver work for based solutions in the lab, we've established a global laboratory products group, which will be led by Frederic vendor Hagen <unk>.
<unk> Europe.
Frederic and his team will work to enrich our product offering and improve our solution selling for critical workflows.
As with our other platform teams laboratory products group will work closely with our regional teams to accelerate the growth of our lab products portfolio.
We recently announced plans to create two commercial sub regions.
Within our EMEA region.
Substantial growth potential this part of the world, especially in China wants more dedicated leadership sort of offer will now have a commercial organization specifically for the India Middle Eastern Africa region I appreciate and another for the Asia Pacific Region Hapag that includes greater China Korea in Southeast Asia.
Therefore, he is serving as executive Vice President for I., M&A, and we've hired spend Henry Ford as our new Executive Vice President for the Asia Pacific Region.
Then brings more than 20 years of leadership in the biotech life science and medical technology industries, including more than 12 years at GE healthcare.
We welcome to Mark Murray two of onwards.
Executive Vice President of the Biomaterials, an advanced technologies platform.
Mark brings extensive global sales marketing operations and strategy leadership in key related industries. There was more than 25 years of experience at Mckinsey Honeywell and Sony.
Lastly, Mark Centrella join Tom's organization in December as Vice President corporate strategy.
In M&A.
Well, our top priority remains de leveraging the balance sheet and it's important that we begin to rebuild our M&A capabilities and processes Mark has a rich background in the life Sciences space and it's been tough with rebuilding our M&A capability.
Also earlier today, we announced a Corey Walker executive Vice President for the Americas region has.
Resigned from his position for sure I roll outside of the life Sciences industry that will allow him to move his family closer to other relative.
We have already begun our search for a successor and until one is hired I will oversee our high performing Americas region.
We are fortunate to have a very experienced leadership team and our Americas region, who are committed to capitalizing on the many opportunities.
In these before us in this important region and I'm confident that we won't Miss a beat.
Putting the additions that I just described we have built the high caliber leadership team over the last few years and have added significant life sciences capability and up.
Aided by the of onshore business system. The hallmark of a team continues to be its ability to execute and we're well positioned for.
For another great.
Moving to slide four you can see the financial highlights for the fourth quarter.
Organic revenue growth was 4.3% for the period and 5.1% for the full year.
Including high single digit growth in our Biopharma business in the fourth quarter, reflecting ongoing strength in our portfolio of customized for.
Probably Terry solutions.
The Biopharma end markets remain healthy around the world and we experienced attractive growth in these regions.
The segment accounts for approximately half of our total cells and we expect biopharma to continue to be the strongest driver of our future growth.
The other growth platforms that we have discussed including services and.
Materials also had high single digit growth in the quarter.
We did experience a continuation of softer trends in the industrial markets as we noted in the third quarter and our growth was somewhat tempered by weaker year end budget flush in both Europe and the Americas.
Our adjusted EBITDA margin for the quarter was up 12.7%.
Excluding adverse currency impacts.
Reflecting an improvement of 131 basis points for the quarter and 95 basis points for the full year.
These results reflect stronger volumes and pricing it continued improving mix of proprietary product sales.
The ongoing impacts of the VW, our synergies and the execution discipline enabled.
Able by the I'm on for business system.
Our adjusted earnings per share increased nearly 90% this quarter to 19 cents per share and are up approximately 62% for the full year to 58 cents per share hitting the high end of our guidance.
Excellent performance reflects strong operational execution as was the benefit of reduced interest expense.
And an improved tax rate.
We expect that these factors will continue to drive significant earnings improvement going forward.
The fourth quarter also reflected significant strength in cash flow generation and de leveraging.
Our unlevered free cash flow in the quarter was 188 million representing 97% for the.
Net income excluding interest expense.
Net leverage declined to 4.6 times EBITDA in the quarter down from 4.8 times EBITDA at the end of the third quarter and from seven times EBITDA at the beginning of the year.
In addition to the impact from the IPO earlier this year our growth in EBITDA and focus on working capital have also.
It it's between 19 de leveraging and as Tom will discuss later, we expect further improvement during 2020.
With that let me turn it over to Tom.
Thank you Michael I'm on slide five where you can see the breakdown of the 4.3% organic growth for the fourth quarter by region.
We experienced improved growth in the Americas.
Reflecting continued strength in the Biopharma and education end markets.
Partially offset by lower government and health care spending.
Europe growth was solid at 3.5%, reflecting high single digit growth in the bio pharma business and double digit growth in the health care end markets, partially offset by.
Clients in education and government.
The AMEA region enjoyed a very strong 22.7% increase in sales this period, reflecting high double digit growth in our biopharma business, most notably in proprietary materials for Bioproduction.
Let me move to slide six would show sales by end market and.
Of group for the quarter as you can see Biopharma, which comprises about half of our sales grew in the high single digits, well health care and advanced technologies and applied materials grew low single digits.
Education, and government had a low single digit decline, which reflects softer government spending across the enterprise.
By product group Q4 was a strong quarter for proprietary materials, and consumables, which had a high single digit increase continuing to outpace the low single digit growth in the third party materials and consumables.
Services in specialty procurement continues to grow very strongly reflecting strength in all of our service offerings.
The equipment in instrumentation group reported a mid single digit decline, reflecting a soft close to the year as Michael noted earlier.
Let me move to Q4 adjusted EBITDA on Slide seven we were pleased with the 12.7% growth and a 131 basis points of margin expansion the sales growth.
I heard it very well, reflecting volume leverage continued management of pricing versus Cogs inflation the growth in our higher margin proprietary offerings and productivity, including the VW. Our synergies. These were slightly offset by the impact of growth investments that we continue to make particularly in the AMEA region.
In the.
Slide seven you can see that fourth quarter free cash flow improved from 65 million to 75 million, an increase of 16% and Unlevered free cash flow was 187.8 million for the quarter I'll cover cash performance more out of later slides.
Lastly, as Michael mentioned the 90.
<unk> growth in our adjusted earnings per share for the quarter, primarily reflects the strong operational performance driven by organic sales growth and margin expansion as well as the ongoing reduction in interest expense from our deleveraging.
Slide eight has our segment results.
The Americas reported 3.1.
Percent organic revenue growth this quarter, which I discussed earlier, despite the sales growth management EBITDA in the Americas declined by roughly 2 million and about 70 basis points.
In the fourth quarter of 2018, we had a favorable adjustment inventory without which the Q4 19 management.
EBITDA would have grown ahead of the sales growth, reflecting strong price management relative to Cogs inflation offset by lower sales of higher margin biomaterials products and some unfavorable manufacturing variances in Europe. The organic sales growth of 3.5% resulted in management EBITDA growth of 10.4.
He said, excluding adverse impacts of the stronger U.S. dollar.
And margin expansion of 110 basis points, we benefited in Europe from higher sales of higher margin biomaterial Bioproduction and other proprietary offer.
It may have had a very strong performance this quarter as I previously mentioned.
And with a 22.7% organic sales growth management EBITDA in EMEA increased nearly 70% and the margin rate improved by over 850 basis points to 32.4% the strong sales of proprietary material into Bioproduction and overall volume growth were the main drivers.
And were slightly offset by the additional growth investments, we're making it a region in the form of sales and marketing resources.
Slide nine provides an update of our free cash flow performance for the quarter and the full year.
For the quarter, we generated 75 million in free cash flow a 16% increase.
For.
The full year, we generated 302 million in free cash flow.
A 140 million dollar increase for 86% from 2018.
Operational performance and lower interest expense drove 129 million and 71 million of this full year improvement respectively. These.
If it's were offset by a 47 million dollar growth in taxes paid reflecting the significant growth in our income notwithstanding the improved effective tax rate.
Capex requirements to support the growth in the business continue to be modest and overall Capex grew from 38 million in 2018 to 52 million in.
In 2019.
Slides 10, and 11 provide summaries of our performance for the full year Slide 10 presents the organic growth, which ended up at just north of 5% pretty much in line with a model we presented at the outset of the IPO as expected.
The growth exceeded double digits and each.
Chip Americas, and Europe reflected mid single digit growth.
On slide 11, you'll see a summary of our full year results in operating profits cash flow and earnings per share. Following the 5.1% organic sales growth adjusted EBITDA grew 11% and EBITDA margin improved from 16.1% to.
Nearly 17.1% despite some headwinds from higher than expected public company cost share based compensation and adverse foreign currency movements.
On cash flow I discuss the drivers of the free cash flow earlier, even excluding the benefit from de leveraging cash flow grew 24%, which.
As nicely to an already attractive 11% adjusted EBITDA growth.
Adjusted EPS was 58 cents at the high end of our guidance and up nearly 62% over 2019 again, a reflection of attractive growth margin expansion and the ongoing impacts from de leveraging and debt.
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Turning to slide 12 were pleased with the pace of de leveraging and the reduction in the cost of our debt. During 2019, we reduce debt outstanding by 1.9 billion comprised of 1.6 billion from our IPO proceeds and 300 million from operations, we started the year at seven.
Times EBITDA leverage and ended at 4.6 times.
As we've noted before we are targeting a leverage of two to four times EBITDA and we expect to be within this range by the end of 2020.
We've also been working down the cost of our debt.
Through the Repricings, we've done on our term loans in 2000.
I was 19, we reduced the weighted average cost of our debt to 6.5% looking ahead, we see further deleveraging and significant repricing opportunities in particular, we have 2 billion in senior unsecured debt with a 9% coupon.
And 1.5 billion in senior secured debt with a 6%.
Both of which offer attractive opportunities for repricing in the second half of 2020.
We will share more details as we get closer to that day.
Our 2020 earnings guidance is on slide 13.
We expect organic revenue growth of 4% to 6% this assumes that the.
Market conditions from 2019 prevail and the events out of our control such as the Corona virus do not have a meaningful impact on growth. We're also assuming that the geographic mix of our growth that is high single digit growth in a bad and low to mid single digit growth in the Americas and.
Europe remains unchanged, we expect adjusted EBITDA of 1.090 billion to 1.135 billion, an increase of 6% to 10%.
This reflects our ongoing expectation of a stronger growth in our proprietary offerings versus growth in third party offerings.
Operating leverage on our fixed cost base continued focus on managing the price versus inflation dynamic and the remaining integration synergies.
Our guidance for adjusted earnings per share is a range of 74 cents to 79 cents per share representing growth of 27% to 36%.
This reflects continued strong operational improvement lower interest expense from de leveraging and already completed repricing actions and an effective tax rate in the 25% to 26% range. We also maintain a flat share count for guidance purposes last free cash flow is.
Got it to be in the range of 450 million to 500 million.
This is 302 million in 2019 also reflecting the strong operational performance lower interest payments from de leveraging and already completed repricing actions as well as our Capex light business model.
I want to thank you sincerely for your interest and investment of on tour and for your ongoing advice and support I will now turn the call over to the operator to begin the question and answer section.
Thank you as a reminder to ask the question you want me to press Star one on your telephone to withdraw your question press the pound or hash key please.
Standby will be some pilot Q and a roster.
And our first question today comes from the line of Tyco Peterson from JP Morgan Your line is open.
Hey, good morning.
Let's start with EBITDA outlook at the high into the guide here, you're still about 40 million below Street. So can you maybe just talk Thomas.
Some offsets on EBITDA expansion things, we have to factor in terms of incremental investments that would lead you to be guiding.
Great and I think what people were assuming for longer for EBITDA, Yes, certainly thanks for the question Tyco.
Yeah first of all the guide implies on the high end about 75 basis points of margin.
Expansion, certainly where we are.
Shooting and targeting for more internally, we do have some incremental headwinds.
From probably would have had in our long term model this little bit more public company cost between you're having to become a sox adopter this year.
And a little bit of other things like directors and officers insurance.
We're doing a little bit more inflation that we had anticipated as well.
But again certainly were shipped were shooting for higher we're early in the year.
Yes, we want to be a little bit more prudent in terms of what we commit to at this point and.
Obviously, we'll update you every quarter in terms of how we're progressing on that.
Okay, and then in terms of trends on the fourth quarter.
Two questions here the government piece was that the weakness there were just spillover from the third quarter or was there anything incremental.
The government side and then for equipment instrumentation. So mid single digit reflected you commented on the.
Most of the year, maybe just talk yet dynamics.
Yeah, I mean, let me first of all the overall growth, we're really pleased with the Biopharma piece of it continues to track away at that high single digits.
Yeah, and when you look at the government piece of it yes smaller piece of the business.
You know certainly down or sorry, sorry, the equipped government and education certainly down in aggregate. The government was that was the bigger driver there tyco, but it was where it was it was almost all of all of the month of October was.
Yes, just coming out of other September it was a slowdown across all three.
Regions, then that after that.
It picked up in kind of flattened out by the by the end of year.
On the equipment piece of it.
Probably.
Similar in terms of the month December was.
Lighter than the other two matson, we really didnt see as.
As intense a.
Equipment purchases.
In the month of December as we sometimes do.
When we're closing out the year.
More so in Europe than than anywhere else.
But I don't view either of them as long term trends I think I think it's timing I.
I mean, the government piece was clearly behind us by the time November started.
Okay. Thank you.
Our next question comes from the line of Dare to Brown from Bank of America. Your line is open.
Hi.
Good morning. This is one of them no further Eric.
I have a question I guess can you give us an idea of what is the penetration level of their higher margin proprietary legacy of and toward products in the VW, our distribution channel I'm curious about what percentage of the legacy of and her products are already been fully offered and distributed globally versus.
What percentage of these products are yet to be offered and VW our catalog.
Juan This is Michael Thanks for the question.
You're hitting on an important aspect of our model and that the growth in margins associated with proprietary part of our business, our aren't really strategic and obviously an area that.
We spent a lot of time.
Investing in.
When you look at our core.
Polio is you're referencing.
A lot of that content flows into our bio production.
Platform, which has been growing for most of the year in the mid teens levels and we saw that again in the fourth quarter and.
Yeah, that's led by our single use portfolio, our excipients portfolio.
Well as love our process ingredients in such prior to the combination of the two companies.
Warranty that portfolio was.
Being offered through the VW, our channel and I quote as we've come together we've.
We deepened that especially in.
Geographies outside the Americas.
Our biomaterials platform is a unique platform.
You know without real strength in that.
Medical technology and implant area.
A lot of overlap in the customer set between.
We.
Our legacy new cell customers and the VW, our channel customers and there's been many examples throughout the year, we've been able to leverage that customer access to drive growth on both sides of the equation.
And.
Teams continue to work out very well so the trends are.
Positive it's obviously.
Business like this where you're earning specifications and customizing solutions theres a bit of a tail here as to how you would expect to see the benefits of the better channel access that we have we would anticipate those playing out over the next you know number of years, but we have fully integrated.
These businesses and are.
Seeing.
Very strong uptick in our.
Pipeline of opportunities around the world by having proprietary content for him to our channel.
Got it. Thank you and then second question is are there any other major.
Supplier agreements.
Coming up for renewal or that are being renegotiated in the near term.
Yeah, one I mean things we've said before we've got a very diverse portfolio here.
And can be seen goal.
Fire and represents more than a few percentage of our total.
Revenue we.
Don't have any significant contracts.
Matt.
You know would change our ability to access product in the near term.
Great relationships overall and.
When you look at the growth that we've been driving with these partners over the last couple of years.
And.
Solutions that they help us enable together with our own content. We're excited by the partnerships that we've forged over many years with these suppliers and look forward to working with them going forward.
Thank you.
Our next question comes from the line of Jack Meehan from Barclays. Your line.
This open.
Yes. Thank you good morning.
I wanted to focus a couple of questions on not 2020 outlook. The first one was was hoping you could weigh in on the pacing of growth. This year you called out.
In Asia Pac I think you I heard high single digit growth.
Growth for the year, but maybe obviously small percentage of revenue, but what are you assuming in terms of how that might impact. The overall growth and then also I think you have an extra day in the first quarter, two I don't know where that necessarily fault, but maybe if you could just talk about the PC and growth in different factors that would be helpful.
Thanks Jack.
Yes in terms of the the 2020 plan.
When you when you look at where we ended up in 2019 most of the.
Most of the trends that are worried intact.
Close the year.
We are we're fairly consistent in terms of how that stacks up for AD for 2000 Teus. So you can think of it is as I was saying on the nodes.
You know mid single digit growth for both Americas and in Europe.
And.
It will be it.
We'll be in the mid teens.
For for me that's the that's the overall expectation.
Yeah, we hear what you're asking.
Yes, thanks for the clarification, but also I guess as you think about how it grows first quarter two fourth quarter do you think it's more linear are there things that you know.
Just timing wise for the first quarter, we should be aware of.
Yeah, I mean, I mean, when you look when you consider the comps over the course of.
Over the course of the year.
Q1 will probably be.
On the lower end of the mid single digits.
Yes.
It's not low single digits, and then and then wrapping up second half of the are you on the on the higher end of mid single digits, though at character.
Okay, and then Tom just as a second question you highlighted the potential for some of the refinancings ahead.
Within the 2020 guidance.
What are you assuming in terms of interest expense and is there way you can help quantify asset for US just what you think.
That can translate to in 2021 for the refinancing.
Yeah, the way I look at a check is well first of all to answer the question, we have not assumed any additional.
Refinancing repricing or anything in the and then the plan that we presented to you. So.
As you noticed this probably most people would follow up onto a no. We we have still opportunities in the.
In the second half of the year.
Specifically around October November timeframe.
Where begins to make more economic sense to.
Consider repricing some of the.
The bonds that we have we have $2 billion of.
Unsecured bonds at 9%, we have another 1 billion in a half of secured senior secured at 6%.
And.
Depending on where the market conditions are will will obviously pursue opportunities you can kind of think of it as overall as you know every.
On a quarterly basis every hundred basis points ASCO worth about 5 billion or so of interest costs.
And so you can pick your favorite number and do the.
You know do the math in terms of the impacts that a repricing could potentially have but going back to what we put into the plan. It is only.
The pricing that we had.
After the the January repricing that we successfully did which.
You might know we will reduce the the rates on the term debt being about 1 billion of terms that we reduced it by 75 basis points. So.
No that gives us a nice pre tax headwind or tailwind of about $8 billion. So continue to.
Keep our eye or that continue to make good traction on.
That portfolio.
Thanks, Tom.
Okay.
Our next question comes from the line a VJ Kumar from Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question I.
So maybe you might.
Mike Big picture question for you.
Past two quarters, we've had some of these one off and I appreciate the color on the macro and the guidance range.
Just in terms, if you know modeling purposes should you be looking at the bottom half of the range.
Just given how the last two quarters of up you know.
Taken out is that that is that more on more prudent approach or I'm. Just curious on now where do you guys feel comfortable level EBITDA guidance range on the on the topline.
Yes, VJ could continue here from you I mean actually we were really pleased with our overall performance in Q4.
And when you look at it.
You know relative to some of our prior Prince I think it was really characterized by almost an absence of kind of one offs.
Very low noise in the quarter and I think.
If you would have asked me kind of two and a half months through the quarter.
Where I felt we were going to come in on probably at that point, what I told you we work.
Trending towards the high end of our of our guide.
The last five to 10 days of the of the month really were slower than what we had seen historically and we hadn't planned for anything unusual to finish the year, but certainly it came and slower than what we expected.
It's both in the Americas as well as and in Europe, How do we had a normal budget flush out I think we'd be talking about a number that was probably one to 200 basis points higher from an organic growth standpoint. So overall when you look at the core business Biopharma production the Biopharma platform broadly speaking.
You know printing and just to take under 10%.
Returned to growth of Obama internals platform at nearly 10% continued strong double digit growth of our services platform.
Our core engines.
Running at full speed here somebody I think about the guide going into.
20.
20.
I think it certainly falls squarely in line with.
The messaging that we've been.
Sharing with you all over the last number quarters in that.
No. We view this platform as a mid single digit plus grower.
I think our 2019 performance falls right in line with that.
As does the guy that we've.
We've given you here so I think were.
Optimistic about the year had I think we see the end market conditions at least as we reflected in our guide you know essentially continuing in 2020 and similar fashion has.
As.
2019.
Thats helpful, Mike and not just out one not follow up on I think you mentioned that corner wireless Im assuming the guy does not baking Colonel Iris given you guys are under next in China.
How if you know what if any impact us Colonel I was happy to business and you mentioned not you know there's some.
You know leadership transition here in America I did that have any impact at all on on sales performance. Thank you.
Yes, let me let me address your second question first around the leadership changes that we've announced today.
First I'm Super excited by some of the capabilities that we've been able to bring to the.
Team over the last couple of years, we've brought a tremendous amount of life science debts and capability to the business and.
You know the recent additions.
Particularly in China.
Our no different.
You know be excited to introduce you alternatives fan as we get an auction.
Interact in the coming months, but.
He's lift in the Asia region for.
Better part of a decade, driving some of the pure platforms and the bio processing space really deep experience there and.
I'm looking forward to.
Having him.
Takes the lead here and driving our growth in the region, especially in China relative to the.
The change in the Americas.
Core is an integral part of the team here over the last three years or so.
He's still here, we'll go through a transition in the month of.
February.
Really nothing to do it for businesses to why he's.
Welcome to move on he's got a personal situation that is going to resolve them.
We are fully supportive of.
Helping him.
Address out through the transition so.
Core he's been in place throughout the.
There will continue to be in place here through.
First of month here in February and.
We have really senior team Bobby.
Understating, how how sinjar he mentioned the Americas all the commercial leads are driving that platform for 25 plus years of experience.
In our business.
And now we're in good hands there.
Relative to your first question around the Corona virus, I think we'd echo probably the comments as you've heard others reflect which is I think we're early innings.
To this we do have a very formal.
Structure set up to manage a number of key work streams.
Including the health and safety of our own associates.
Making sure we're able to address.
He supply chain concerns.
As we sit here today.
We've certainly seen an uptick in demand around the world for some of the clean room supply.
Flies and personal protective equipment.
But it's hard to tell the impact that what happens you're kind of sitting on top of Chinese new year in any event and I think you Frightfully mentioned, China for us as a more modest.
Closure so.
A moment, probably too early to call, but I wouldn't anticipate having.
I mean for impact on us one way or another.
Thanks, guys.
Hey, BJ when when Michael was talking about the the leadership changes he forgot to mention the quality of the interim leader that we're putting in the Americas.
Keep in mind as well.
Quite capable.
Yes.
Comments, Tom I.
I look forward to meeting the leadership team.
Good.
Our next question comes from the line of Doug Schenkel from Cowen Your line is open.
Hi, good morning.
I wanted to talk about three things Biopharma gross margin and tax rate, so on and bio pharma.
It was another.
Quarterly really strong growth, what's embedded for biopharma growth within 2020 guidance and recognizing the comparisons are difficult this year, particularly in the first half.
Kind of going back to an earlier question should we be thinking about that in the context of.
How we model out things from a quarterly cadence perspective.
Yes, let me Doug take question on on Biopharma, obviously, it's been a has been a tremendous year for that platform and we're just re ground. The audience you on the call today, while pharma for us is about half of our.
<unk> revenue and it reflects.
The offering both into the laboratory environment and the workflows, we service there as well as into the production environment.
And we would typically see a little bit stronger growth rates in the in the production environment and a little bit more muted growth in the in the laboratory environment.
And.
On an aggregate basis that platform for us in 2019 grew at 10%, which is a reflection of kind of high single digit growth in the lab environment and.
Double digits think kind of mid teens level growth of our Bioproduction platform as we think about the.
Transition into Twentytwenty, we really see no reason.
To change the outlook for 2020 based on that but finished pretty similar conditions going forward is our.
As our asking.
Okay, so to be clear.
Another year of high single or close to double digit growth.
How you're thinking about that end market.
Exactly.
Okay, Alright gross margin. So it was up 210 basis points year over year, but considering the strong proprietary products gross.
We actually thought it could have been up a little bit more sequentially versus Q3, how did Q4 gross.
Fair versus your internal expectations and again, recognizing some positive trends here. What are you are expecting for 2020.
Yes, I mean.
When you look at.
Q4 out of the full year I mean, we were able to Q4, we were up about 100 basis points year over year on.
Hi.
Gross margin certainly you know as we've talked about.
The volume leverage.
It's a big help but and we're doing it I shall by managing the.
Nice Cogs mix, but the shift the continued growth higher growth proprietary products. This is also big factor.
For us.
Yes, if we get good growth in Biopharma production as an example piled material.
It did works out quite quite well for us.
When you look at.
The full year was it.
With similar Doug I mean, that's not quite as dramatic.
From a from a GM from a perspective, but still 30 40 basis points of gross margin improvement and still seeing those same factors.
No we expect a similar kind of.
Growth rate over the course of.
2020 as as we.
We drive.
The continued.
Proprietary the growth in our proprietary products.
Okay.
Thank you for that in late last one on tax rate.
Tax rate was well below our expectations in the quarter.
Guided 2020 to 25% to 26%.
Any room for upside versus that and then I guess at this point I guess just a question on how you're thinking about the long term opportunity should we expect to see steady cadence of annual declines for say the next three to five years.
Going off of what you guided to for 2020.
Yes, just to address the.
The fourth quarter first of all the rate was abnormally low I think you picked up on it.
And it's just a matter of.
Cleaning up our year end.
Reserves and finalizing some of the positions around the intercompany.
Financing that we've talked about.
We started.
For the IPO with a 30% plus tax rate run rate and we explained that big part of that was some inefficiencies in our rate structure or at our structure for for financing some of our international operations over the course of.
2019 kept you have to data that.
And in the fourth quarter really finalized.
The new structures to enable us to have a much more efficient tax rate that enable us to.
It's just the overall tax rate for the full year and.
So that impact come through in the fourth quarter, I'd say I would consider the run rate.
For the for the full year to be.
If I take out that at one time kind of impact somewhere in the 28% range.
And when I look at 2020, the guide is 25.
26% hopefully we'll be at the at the lower end of that but we've we've got pretty pretty clear line of sight to being within that range I think longer term, Doug we should be.
Low twentys kind of.
A couple of weeks, we see a path in the timeframe you talked about three to five here too.
Only get there.
It's the the activities we have to undertake impact our operations more than what Weve, what we've had to undertake so far to drive improvement.
And so it's a it's a more enterprise wide type of initiative.
Moving their supply chains commercial teams and the like that.
We have to engage in to keep that progress going.
Okay. That's super helpful. Thank you.
Alright. Thanks.
Our next question comes from the line of Dan Brennan from you, but yes. Your line is open.
Great. Thank you thanks for the questions.
I guess so much go back to.
The 2020 EBITDA margin outlook could you just walk through.
What you're assuming the impact is from synergies how much of the expansion is organic.
How does that organic expansion compared to what you achieved in 2019.
Yes, when you when you look at the.
No the synergies for.
Thousand and where we are up where we are the program through the end of.
2000.
19, we've made.
And just to take you back for everybody's benefit the program at the outset started in November 2017, we identified 300.
And our CIO of.
Acquisition synergies.
70 million or so what would have been on the commercial side.
And $230 million, so would would have been on the.
On the cost side.
Making good progress on.
The impacts of.
Each of those but probably neared nearing completion with the.
With a commercial synergies part of it and overall, we're probably at a run rate basis.
Close to 230 million as of the as of the yes, it actually actually closer to 250.
Million asses the.
End of 2019, so actions required to get to 300 or about 50 million more.
In terms of the.
Impact on the EBITDA margins next year you can you can think of it is somewhere in that 40 to 50 million dollar range.
Yeah.
Of the incremental PML benefit a lot our EBITDA in 2020.
Okay, Great and then and then maybe I wanted to go back to a couple of the customer groups here do you address biopharma, but.
Just a few of the areas that or even by product area excuse me that were more.
Kind of deviated from I think some of the growth rates that you had kind of outlined when you guys came public so, particularly advanced materials and then on the equipment in shouldn't side. Just just had how do we think about those going into 2020 like what what kind of baked in and yes. You can provide any color around not you know what the environment looks like for those thank you.
On the.
Equipment and instruments side is as Tom I think articulated earlier.
We certainly saw a lower finished the year in that category than what we've seen historically.
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Pretty pronounced in Europe.
And you know ended up.
Being about a mid single digit decline overall in the quarter.
We wouldn't expect that.
To continue.
Into twentytwenty.
You know that would tend to be more in the low single digit growth levels and that's probably how we would think about it.
In 2020.
Thinking about some of.
Proprietary.
Platforms that we have obviously, we've talked a bit join the call today about our bile production platform.
By our single use offering that we would expect to continue to grow.
Probably close to 20% netting us somewhere in the mid teens overall levels as kind of what we saw in 2019 and I think we see.
Somewhere environment going forward into 2020 are biomaterials platform as a as upon front, we've talked a bit about this year.
Particularly in the third quarter, where we saw a little bit of inventory draw leading to more of a flattish environment and that quarter. We're obviously pleased to see as we expected a return to to high.
Single digit growth.
Not quite 10% in the fourth quarter, that's a platform that when you think about it.
Over a 12 to 18 months cycle, that's a high single digit growth platform and.
We.
Modestly underperformed that level in 2019 really owing to the.
Inventory corrections in the third quarter that we've discussed but would anticipate in 2020.
Normalized demand environment and kind of high single digit growth.
Our advanced technology platform, which is a collection of a large number of end markets.
Applied.
Including aerospace defense, our semiconductor exposure.
As well as.
Kind of a collection on.
A lot of another industrial applications.
Yes, that's been pretty soft throughout the year.
And we saw that again in 2019 and.
While we will be thrilled to see those markets recover in 2020.
As we think about our guidance, we've really anticipated and reflected a continuation of those trends into the new year here.
Great. Thank you.
Our next question comes.
From the line of Glen Santangelo from Guggenheim. Your line is open.
Yes, thanks for taking my questions, Mike Obviously, a lot of focus on this call the topline growth growth rates in in your prepared remarks, you called out some of the softness thing in Europe, and the U.S. and I'm just kind of curious I mean.
Have you really considered.
The competitive landscape here and then any assessment in terms of market share and maybe how that may be has shifted with respect to some of your major business lines or geographies anything on the market share from worth calling out at all.
Well, you think shift market driven.
Well, if you look to specifically in the fourth quarter.
If you take out the last five days of the of the year, which are always very very difficult to call and driven by vacation schedules.
And the like we had a very very strong quarter.
Like I said earlier.
Probably in the quarter probably wanted.
To be one to 200 basis points.
A stronger which would have been at the high end of our expectations in the quarter.
At the level of growth that you see us driving little over 5% on a full year basis.
That said at worst case.
Inline with what we see these end markets growing and.
In many instances whether that be in the bioproduction space or whether that be and.
The education market, we do see ourselves.
Running ahead of the market growth rate and extending our our share around the globe. So we're pleased with the positioning that we have in being able to leverage the unparalleled.
Customer access that we have through through the channel.
Really happens is positioned well to continue to bring.
A more complete offering to our customers around the world.
Tom maybe if I could just follow up with a quick question on the balance sheet I think in your prepared remarks, you suggested that you hope to get the leverage.
Within that target range in two to four times by the end it 20, but based on I think you'd have to pay down another 600 plus million and debt.
Given where your free cash flow estimates are for the year. It could you just help us bridge that gap on how you can get there by the end to 2020 and then when you think about capital.
Deployment opportunities from there.
Any comments to make on the M&A environment based on where you sit now thanks very much.
Yes, thanks Glenn.
Yes, we talked about finishing the year at about 4.6 times.
Average and talked about being able to get under.
Attorney four times by the end of 2020.
Theres Theres basically two factors that are driving that obviously the increase in EBITDA as a is a big lift.
And you can see you can pick your number out of the range that that.
You had the most confidence in but if you think of.
Anywhere between.
75, or so of EBITDA growth.
That is a contributor here and the other one is the free cash flow that we generate.
We're guiding to forfeit between 450 and 500.
When you apply that to.
The to the debt.
You know between between those two factors that gets you hundred the the four times.
In terms of.
Alternative capital deployment.
First and foremost we contagious focus on of the leverage that's that's where we plan for.
Most of our cash flow to go in 2000.
And 20.
That will continue to be the priority, but once we get to that range. Once we get to that two to four times.
We do we do think that we'll be at a physician too.
You don't pursue some of the some of the opportunities that there were out on the market.
Typically in in things that would be.
In the.
Proprietary offerings space that Michael was referring to particularly around Biopharma biopharma production.
And the like.
We as Michael mentioned.
Yes, I have brought on it.
M&A leader, we're excited about that.
But that's that's something that.
Clearly focused on the long term horizon try to find and be prepared for opportunities when our capital structure allows it so that's kind of overall to.
Short term medium term long term or the way we're thinking about.
The leverage and the alternative capital deployment opportunities.
Okay. Thanks for the comments.
Yes.
Our final question today will come from the line of Aaron right from Credit Suisse. Your line is.
Wilson.
Great. Thanks.
Asia region, you did mention some of the stepped up.
That youre, maintaining that maybe that was a little bit of that potential that.
Strong growth that we thought that region in the quarter, I guess with that meaningful at all to that.
What exactly.
Going on there.
Yes, thanks, Eric it's pretty consistent with what you would've seen over the course of 2019.
You know we've stepped up our our investments, particularly on.
No sales and marketing, but also.
We have a new lab that we've opened up in that in Shanghai, There's got to do.
Yes.
Clean room and distribution center in Singapore, So clearly, making some investments to drive the.
The future growth in a region that we know were underrepresented in.
We're also.
Expanding.
In a way to help us grow further Michael talked about the organizational enhancements that we've done in that regard.
So if it has resulted in higher.
Jay cost, but we think we consider those to be investments to.
For the growth.
Okay.
Bigger picture here over the past few quarters.
Customer retention contract win.
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Merger.
Your positioning in the marketplace overall.
Your win rate.
Right.
Our main.
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Yes, thanks for the question.
You know when we put these two businesses together, we were optimistic that the.
The broad customer access that the beauty of your channel would provide together with a really strong.
Yeah.
Mix of technologies.
Coming from the legacy of onto our space would certainly Lisa.
New opportunities over the long term.
And as we've now got a couple of years under our balance here in bringing these models together.
Thank you see that reflected in.
Lift in the.
Revenue profile of a combined businesses you see that in the momentum that we're seeing.
Especially in our Biopharma business with our offering now into the lab running over the last.
Your plus it at high single digits levels, our customers certainly are benefiting from a more.
Complete integrated offerings that we're able to take into this into their important workflows and and we see that playing out perhaps a piece I'm. Most excited about actually is the we just look at the opportunity the number of drugs that were.
Partnering with our customers on.
Customizing Salon.
Asian burning those specifications that we'll really.
Seed our longer term growth opportunities and play out as those molecules that we're we're supporting those new therapies that we're supporting work their way through the clinical processes and ultimately get commercialized and to me that's probably a more important.
You drive.
However, bring these businesses together is just what this does to enhance sustainability.
Growth of the platform over the long term.
Thank you.
Now I'd like to turn the call back over to Michael for closing remarks.
Great. Thank you on behalf of our more.
Non 12000 associates around the World. We appreciate your your support of our business and participating in our in our call today.
As you can tell from our comments today, we are excited about our 2019 performance our first year as a public company and are looking forward to another great year of revenue growth and margin expansion.
Cash generation as Tom is going to discuss your continued de leveraging mark our balance sheet.
No I think we see the power of our business model.
Our 2019 results were confident that we're well positioned.
For another great year.
And are excited about enabling innovations and.
Breakthroughs that help our life science customers dramatically improve.
Patient outcomes again appreciate everyone's support here on the line.
Thanks for joining the call have a great to everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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