Q2 2020 Avantor Inc Earnings Call
This conference call.
At this time, all participant lines when they listen only mode. After the secrets presentation, there will be a questionnaire for session ask a question during the session.
The press Star one on your telephone if your part any further or say since we first started zero Oh no no work behind the conference over to Mr. Tommy Thomas. Thank you go ahead.
Thank you operator, and good afternoon, everyone. Thank you for joining up on todays call.
Our speakers today.
Field, President and Chief Executive Officer, and Tom flow, Nick Executive Vice President and Chief Financial Officer.
The press release and presentation accompanying this call are available on our Investor website.
Got a lot for sciences 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 line for questions.
I'd like to note, though will be making some forward looking statements within the meaning of the old security laws.
Any statements regarding events or developments that we believe anticipate may occur in future.
These forward looking statements are subject to a number of risks and uncertainties, including those set forth in RCC fine.
Actual results might differ materially.
The forward looking statements that we make today.
These forward looking statements speak only as of the date that they are made and we do not assume any obligation to update these forward looking statements, but there is all the new information.
Sure, but and developments or otherwise.
This call will include a discussion non-GAAP measures reconciliation of these non-GAAP measures can be found in the appendix to the presentation.
With that I would now like turn call over to Michael Michael.
[music]. Thank you told me I think so you for joining US today first second quarter earnings call.
I'm starting on slide three.
With a brief review over one towards revenue profile.
You heard me mentioned before but our business model is very resilient due to our diversified revenue base combined with a customized HR solutions.
We are well positioned for continued growth in Europe in the Americas, and we're investing to expand our capabilities in emerging markets throughout Asia, the middle Eastern Africa.
More than 85% of our business is recurring and approximately half of our revenue comes from proprietary branded products and services.
No single customer represents more than 3% of our revenue at approximately two thirds of our revenue is an attractive life science end markets, such as Biopharma and health care.
Our financial results for the second quarter, which I will elaborate on at the moment further substantiates our resiliency.
Second quarter was the first before we affected by the global corporate 19 pandemic.
Our business was adversely impacted by mouth closures across the R&D and academic landscape as well by declines in elective procedures.
We were able to offset most of the headwinds with new corporate banking related opportunities in diagnostic testing vaccine and therapy development and clinical trial support.
Moving to slide four and our second quarter business highlights.
Despite the challenging environment, resulting from a goal pandemic our dedication to our customers has not wavered, our distribution research and manufacturing sites I remain fully operational.
Our board customer access and extensive portfolio of products and workforce solutions to support patient testing research and development clinical trial services and ultimately the production of approved treatments and vaccines make him onboard important partner.
We're actively working with me in the world's leading pharmaceutical and biotech companies as they develop untapped potential cobot 19 therapies and vaccines.
Our comprehensive Bioproduction portfolio is being leveraged and most of the leading cope with 19 vaccine candidates across all major technologies, including recombinant proteins viral vectors Ameren <unk> and DNA.
Our direct involvement and government sponsored initiatives such as operation Warp speed in the United States is another proof point of our relevance in the race to come back over 19.
Of course, the health and safety of our associates, who are working out or distribution research and manufacturing sites remains a top priority.
We continue to comply with local statutes as well as guidelines from Cardinal health agencies around personal protection workplace density symptom monitoring and September identification and reporting.
Ourselves customer service and support personnel continue to work from home throughout the quarter.
We have currently developed plans to return somebody's associates to work site and we'll begin to implement those plans in the third quarter as local conditions permit.
Our second quarter results reflect the powerful operating model and even the most challenging conditions.
Reported organic revenue declined only 2%, including cover 19 tell went through approximately 500 to 600 basis points.
Despite the organic revenue decline the resiliency of our model enabled us to expand our adjusted EBITDA margins by 94 basis points grow adjusted earnings per share approximately 33% and continue our strong cash generation.
Earlier this month, we refinanced $2 billion of our high interest that which will result in cash interest savings of more than 90 million per year.
As part of the refinancing we also extended our liquidity by doubling the size our revolving credit facility.
Our proven balance sheet and favorable outlook resulted in another credit rating upgrade giving us the opportunity over the next few quarters to further reduce interest cost by lowering the rate on the remaining $3 billion of that.
Our mission drives our deep sense of purpose to create a better more sustainable world and our teams have been actively engaged on improving the transparency of our environmental social and governments or S.G. reporting.
We're pleased to have a published our 2020 corporate social responsibility benchmark report and look forward to sharing more information about our few priorities in the coming months.
We've also taken a number of recent actions to reinforce our commitment to providing a positive work environment. We're all associates for respected and have an equal opportunity to contribute and succeed.
There's no place for racism prejudice or hatred of any kind and we are actively focused on making the company a role model for diversity equity and inclusion.
Turning to slide five the presentation I'd like to share a few financial highlights from the quarter.
Organic revenue declined 2% as covert 19 related headwinds in our education health care and applied end markets more than offset continued high single digit growth and our biopharma business, where demand continues to be strong globally, especially in bioproduction, where we realize more than 20% growth in the quarter.
Putting in our results are approximately 500 to 600 basis points of covert 19 related headwinds as we realize incremental revenue associated with higher sales at PPG Q PCR testing kids, Q, PCR reagents and consumables.
Your logic will test kits and proprietary materials being used to support vaccine and therapy development.
Adjusted EBITDA in the quarter was up approximately 3% on a constant currency basis and adjusted earnings per share increased approximately 33% to 19 cents per share.
We continue to generate strong cash flow with first half free cash flow up over 300 million from 2019.
When continued reduction in our net leverage to 4.3 times EBITDA down from 4.6 times at the beginning of the year.
We remain committed to continue de leveraging as we approach our target leverage range of two to four times EBITDA.
And then repair to turn in line over to Tom to discuss the financials in more detail I want to emphasize that I'm on for his mission of setting science emotion to create a better world is more relevant now than ever before.
Our second quarter in first half 2020 results are evidence of the mission critical role we play in supporting our global customers.
We're well positioned with a highly recurring revenue base deep customer access the government exposure to attractive end markets like Biopharma and a strong culture of execution enabled by the of on for business system.
With that let me turn it over to Tom.
Thank you Michael and good afternoon, let's start on slide six organic revenues declined 2% in the quarter, which as Michael mentioned include the 500 600 basis point tailwind from Kobin 19 related to pp any diagnostic testing vaccine and therapy development and clinical trials for.
These tailwinds were more than offset by the pandemic driven headwinds, including higher education government business, reflecting the widespread academic labs closures.
We also experienced impacts from commercial that closures as well as declines in our health care business, reflecting temporary decline.
Acted surgical procedures and our industrial businesses.
Looking at growth from a regional perspective, the Americas, which represents approximately 60% of global sales reported 6.7% organic revenue declined in the quarter. The reagent sales were impacted by academic and commercial lab closures fewer elective procedures performed by customers of our health care business.
And I brought reduction in sales of equipment and instrumentation.
Well power production and clinical services were bright spots for the Americas, each growing double digits, Europe, which represents approximately 35% of global sales reported 3% organic revenue growth driven by the strong performance in the Biopharma and health care end markets offset by covert 19 related declines in the health.
Their education and industrial end markets, the stronger second quarter growth rate in Europe versus the Americas reflects the lower exposure in Europe to academic labs, and elective procedures and higher participation rate in the kogan related testing opportunities.
AMEA, representing approximately 5% of global sales recorded 18.2% organic revenue increased revenue growth was driven by the Biopharma and advanced technology and applied materials and markets.
Slide seven shows our organic revenue growth by end market and product group for the quarter. What is notable on the slide is the two areas, where we achieved high single digit growth in the quarter. The bio pharma end market on the left sided slide and the proprietary product group on the right side.
These are our most significant and higher profit categories and their continued strength. Despite the overall modest sales decline was a big factor in the nearly 100 basis point expansion in adjusted EBITDA margins for the core.
Biopharma, representing approximately 50% of our revenue once again experienced high single digit organic revenue growth strength came from our bio power production platform, including thing that you solutions production chemicals personal protective equipment and clinical services healthcare, which represents approximately 10 for.
Outside of our revenue declined high single digits impacted by a reduction in elective procedures and routine clinical diagnostics education and government, representing approximately 15% of our revenue experienced organic revenue declines of over 20%. This end market was impacted by the full or partial closure back.
That makes and government research labs, and K through 12 schools for the majority of corridor.
Advanced technologies applied materials, representing approximately 25% of our revenue experienced mid single digit organic revenue decline.
Economic weakness impacted our industrial segments with modest offsets in our non industrial segments, including solid growth in the electronic materials business.
By product group proprietary materials and consumables experienced high single digit growth with strength in the Americas animated services in specialty procurement declined mid single digits impacted by lower demand for our specialty procurement services.
Equipment instrumentation was down mid teens, collecting capex investment declines across our customer base.
In July the Biopharma momentum has continued with strong growth in led products in Biopharma production. We are actively engaged with our supplier partners and customers offering to support diagnostic testing vaccine in therapy development and clinical trials for the other end markets. The Kogan 19 impacts we experienced.
In the second quarter have moderated slightly labs in the academic end market have slowly start to reopen we also expect modest sequential improvement in health care as elective procedures slowly resume.
The industrial portion of the advanced technologies applied materials end market also continues to see modest improvement.
Considering these factors, we expect july's revenues to be approximately flat or grow low single digits versus 2019, however, given the ongoing uncertainties around the intensity and duration of the pandemic, we will continue to refrain from issuing guidance.
Turning to slide eight let me start with our second quarter adjusted EBITDA, Excluding foreign exchange, we achieved 3% growth in adjusted EBITDA 94 basis points have reported margin expansion.
Key drivers of the performance, where commercial excellence favorable mix, including strong growth in biopharma production and proprietary offerings productivity and continued discretionary cost containment.
Free cash flow improved nearly 100 billion to 76 million, reflecting stronger adjusted EBITDA better working capital performance and lower interest and tax payments first that free cash flow generation of 316 billion or 136% of adjusted net income was seven times the prior year.
Well, we're on track to achieve or be our original full year free cash flow guidance at $450 million to $500 million recognizing that guidance has since been withdrawn.
Finally, we reported approximately 33% growth in our adjusted earnings per share for the quarter, primarily reflecting strong operating performance the ongoing reduction in interest expense from our de leveraging and the improvement in our income tax rate for the first half 2020, we grew our adjusted earnings per share 46%.
To 36 cents per share slide nine has our segment results America's reported 210 basis points of improvement in adjusted EBITDA Key drivers include commercial excellence favorable mix driven by a higher proportion of growth in proprietary materials and consumables.
Good activity and strong discretionary cost containment. The first half 2020, adjusted EBITDA margin expanded 90 basis points.
Europe reported 120 basis points of improvement in adjusted EBITDA Key drivers include volume growth commercial excellence favorable mix productivity and strong discretionary cost containment first half 2020, adjusted EBITDA margin expanded 80 basis points.
It may have reported 330 basis points of improvement in adjusted EBITDA key drivers include volume growth and favorable mix first half 2020, adjusted EBITDA margins declined 60 basis points.
Let me move to slide 10 in this environment, we occasionally received questions regarding liquidity like we did in the first quarter, we're providing a brief summary of our liquidity you.
Do you see on the left half of the slide our liquidity as of December 30, Onest 2019.
And at June Thirtyth 2020, the June numbers are shown on a pro forma basis to reflect the July refinancing.
As part of the refinancing we more than doubled the size of our revolving credit facility to $515 million recall that in the first quarter of 2020, we expanded our receivable securitization line by $50 million. These facility enhancements and the continued free cash flow generation the business have been able to greater than.
And 70% an increase in our overall liquidity to $1.037 billion roughly 100% of our adjusted EBITDA, which is in line with our pure both these facilities remain undrawn, we have no significant debt maturities and we have the Capex light business model just.
Summarize our liquidity and cash flow continue to get even stronger and we're committed to de leveraging even in these challenging market conditions since the beginning of the year, we have reduced leverage from 4.6 times EBITDA to 4.3 times.
Now on slide 11, which summarizes our July debt refinancing. We recently received approval from our board to execute a comprehensive strategy to lower the cost of our 5 billion dollar debt portfolio, while preserving the existing covenant lite and minimal principal service required features.
This is a continuation of our move toward an investment grade capital structure typical of a large cap public company.
After the first six to eight weeks of the pandemic the high yield debt markets began to turn in our favor. Shortly after the July 4th holiday, We launched a 1 billion dollar us debt offering at a 400 million euro debt offering to replace in part the 2 billion, 9% unsecured notes that were issued as part of that.
CW our acquisition 2017.
Each of the tranches offered would significantly oversubscribed and were able to upsize the U.S. dollar piece, allowing us to replace the entire 2 billion in unsecured notes and achieve a composite coupon rate of less than 4.5%. This refinancing will generate close to 90 million of interest savings per year and reason.
Also lowering of the weighted average cost of our entire debt portfolio by approximately 180 basis points.
We incurred approximately a 180 million in one time cash costs, which will be recovered within two years under the new financing.
And the third quarter, there will be a onetime charge to reflect the cost incurred on the early extinguishment of the 9% unsecured notes.
We continue to monitor the remaining 3 billion of the debt portfolio for refinancing opportunities on page 14 of the appendix you can see that there are some additional costly pieces of debt remaining in that 3 billion than we are easier to address depending on the conditions of the pro rata and leverage loan Mark.
With that I'll hand, it back over to Michael.
Thanks, Tom I'm on slide 12.
We executed well in a challenging environments and our topline performance strong EBITDA growth outstanding cash generation and continued de leveraging reflect the resiliency of our business model.
Our ability to complete a debt refinancing in a challenging times like this highlights the value of our highly recurring revenue base broad mission critical product portfolio and exposure to attractive end markets like Biopharma.
While the uncertainty associated with the current pandemic continues to make forecasting difficult for parts of our business. Our long term growth strategy remains intact and we are steadfast in our commitment to help our customers come back. This current virus by supporting ongoing initiatives and testing vaccine and therapy development and ultimately in the production of approved treatments our mission.
Setting science and motion to create a better world has never mattered more I want to sincerely. Thank you for your interest and investment income encore and for your ongoing support.
I'll now turn it over to the operator to begin the question and answer portion of our call operator.
And as a reminder to ask your question.
I guess telephone keypad Burns ask a question.
And our first question comes from Tyco JP Morgan.
Hey, Thanks, Mike, Yes, 500, 600 basis points cobot tailwind for this quarter can you just talked about where that's coming relative to the 5200 basis points last quarter is incremental products can you just provide a little bit more color on on what's driving the step up.
Hi, good even tyco things for the question.
We're getting.
Some syntel wins across a few areas. So we continue to see strong demand for PPD, which.
Our supply chain on that particular areas is indeed constrained and we're not able to satisfy all the demand that thats coming our way, but you're seeing.
Some contribution from incremental CPE sales.
The bigger Tailwinds are actually coming from the work we're doing to support.
Covert testing.
As well as vaccine and.
Therapy development, we're pretty deeply.
Engaged in providing.
A large number of materials across the entire Q PCR workflow as was the lateral flow so logical tests and our proprietary materials portfolio is being broadly.
In the process development on the various vaccines across.
All four of the major technologies that are.
And front running.
The chase for Curie here, so pretty well positioned across that space and we're getting we've got quite a lot of traction in the second quarter in those areas.
And then a follow up just on EBITDA margin, obviously nice improvement despite the top one this quarter can you just talk a little bit about the levers.
Much of this was VW, our synergy for some other factors and sustainability going forward.
Yes, Hey, Thanks, Tom I'll take that one the.
We looked at 94 basis points. It was it was a combination of factors I think the.
More significant ones continued to be.
The mix dynamic that we talked about of course in the quarter.
We had lower.
Instrumentation equipment sales and other specialty equipment sales that and then.
Replacement, we had better sales of some of our higher margin offerings, Michael mentioned, a few of them pick them up our production side.
So that that was a definite tailwind for US. We also continue to a really good job managing.
Price versus Cogs inflation dynamic and got a bit of.
A tailwind there and I'd say the third thing is just overall productivity, including.
Discretionary cost control I mean, obviously nobody is traveling.
So that helped us but is there a number of other discretionary categories that we use.
Pretty careful with across the cross landscapes I'd say those are that are the biggest drivers.
Okay. Thanks, guys.
Okay.
Our next question comes from Derek with Bank of America.
Hi, good good afternoon.
Hey, guys.
Hey, so.
Just was wondering when we've looked at your compared to first quarter to second quarter results.
America, there's a little bit stronger in the first quarter little bit softer in the second quarter were there any.
I guess with any stocking or pull forwards and do that I'm, just sort of thinking about.
The dynamics between the two because this is a question I asked last quarter, just maybe any further color on it and this obviously leads into the question of how should we think about the.
The Americas in Europe split as we head into the third quarter.
Yes, Thanks Derek.
We look at the performance in the Americas in the first quarter compared to the second quarter. You'll know that says that was only probably the last 10 days or so of the first quarter, where we were really starting to see any impact of the pandemic had the Americans that obviously first started in Asia spreads.
To Europe and was last showing up here. So we had relatively modest impact plus or minus in the quarter.
First quarter in the Americas was the most significant impacting child in the education the hybrid space.
Moving into the second quarter, obviously, we had before weighted the pandemic hitting our numbers for the quarter.
With.
April clearly being the low point with significant headwinds with.
More than half of the.
Lab work in that.
University space offline.
You know the slowdown in elective procedures, and just I would say routine clinical diagnostics.
Falling off and then you also had.
More modest impact to Biopharma R&D capacity in the quarter as well so.
I don't think.
We would we would look as the inventory as a driver of the comparison I think the bigger issues just.
You know the amount of first quarter that was exposed to the pandemic relative to kind of a full full weight of hitting in in April.
It's a follow up just a follow up on that when you look at your July trends and you talked about a modest improvement the base, but what about some of the Tailwinds that you saw that 500 600 basis points of cobot tail in Twoq is that something similar level, we should expect in the third quarter.
Yes, when you looked at the categories.
But outline for tyco around where we're seeing tailwinds, whether it be PE or testing or vaccine therapy development. We're also doing a fair bit of support to our clinical trial services business in supporting the trials associated.
With the vaccine development.
We've certainly seen each of those categories carryover with some strength.
Into July.
But no no comment on whether or not it's too early to know whether or not to me. The same magnitude I'm just thinking about what somebody other companies reported organic revenue growth number has been a lot higher for the koby tail than we would've thought.
Right I mean.
In July I think we've seen probably similar magnitude I mean, you obviously see escalation on the number of tests that are being conducted around the country.
As we go forward each each day.
You see a lot of these vaccines now starting to progress towards late stage clinical trials, which is driving more demand and more more volume so.
It appears that certainly those fundamentals will be with us for the foreseeable future, yes, I mean that safety category is.
We're on allocation with our customers and suppliers side. So the continues to be significant demand. There you might much. That's one of the factors and you're like you said on the on the Bioflo power production side as well on where we saw some good.
Tailwind our backlog or open orders is very very strong.
Its a.
It's up significantly so we're we're continuing to see the demand pulls in the those tailwind areas you mentioned.
Great and then just one housekeeping FX hit to the topline for Threeq you and.
Full year.
Yes, well I mean, it's kind of tough with the way the FX rates it moves in the in the last two weeks.
So we're continuing to look at it just on an organic basis and try to normalize that.
Derek maybe and maybe we can.
Do some follow up on that but but right now it's that situation as a bit volatile. So it's it's tough for us to predict exactly what the.
The fact is going to FX impact is going to be for the full quarter when we're not giving.
Guidance on media full quarter.
Thank you.
Okay.
Our next question comes from BJ with Evercore ISI.
Steven Thanks.
Matt.
On the exclusive here, Mike maybe up a bit due to one for you.
In July guidance of Bob.
Moving on guidance when it gets experts say before.
Does that include the.
I guess.
Looking at that lack to upload most after the big business and I'm curious that you made some comments on vaccine.
Now at a time.
Thank you.
Perhaps longer opportunity.
It's field.
The code vaccine could mean.
Yeah BJ, thanks for joining the call Tonight on your on your first question.
Regarding the quarter annualized specifically.
Probably give you a flavor here recognizing we haven't quite completed the month of July yet just trying to give you some color on how we see things, finishing up here as we sit here with a couple of days to go and we're somewhere in that flat to up low single digits and that would be inclusive of.
The tailwinds that we're seeing in in the business.
On your second question about.
Just where we're at with these vaccines that is it too early to.
Start to frame in potential impact.
It certainly is a little bit premature.
But it's moving quickly when you look at the front runners and even some of the second partners that are moving forward.
You see.
A lot of a promise across recombinant vaccine biovectra vaccines.
DNA vaccines and then.
Regarding M&A vaccine and.
Go Pfizer.
And.
We look at our portfolio within bio production.
We're going to be relevant across all four of these areas VJ and as I mentioned in prepared remarks, we're working on all the major.
Programs that are out there and certainly.
Being pulled into a lot of the activity in planning by various governments around the world that are following these things as well so we're right in the second things with.
During all we can support our customers in this.
When you start to look at the impact that one of these vaccines could have there's obviously a number of factors that play into this including the number of doses.
That is able to patient needs to be give you know given more for to be effective how many patients we looking to treat visibility into the 7 billion.
Which technology.
The addressable market as we look at it is highly dependent on which one of these therapies.
Ultimately prevails and.
On the on the low end you could be looking at adding.
Tens of percent to our.
Addressable market for Bioproduction and on the high end BJ you can be looking at doubling.
You know our addressable markets.
And then some.
You know in bile productions, so pretty wide range of potential outcomes here.
And I think that will start to clarify here over the next few months as.
We start to get some feedback from these phase three clinical trials and then we start to hone in on which one of these vaccines are which ones are these vaccines will make it to market first but.
We're definitely going be relevant here it will have an impact and.
Pretty broad range at the moment, but I think we're optimistic about the role that we're playing.
And then not one.
With that question.
Thats a monster a number.
Are there any one now.
Cash flow.
What's driving it.
And then.
Improve.
Nothing you can actually.
So.
Thank you.
Yes, I mean.
Thanks for question visa, you're breaking up a little bit but.
Relative to.
Yes.
First quarter and second if I mean, you combine first half very strong.
And as you as you pointed out I mean were over 300 million were about 320 million of free cash flow.
Through the first half our original guidance was for 5500. So we're.
At that 60% point of the of the high end as that.
As you mentioned.
And you know the performance has been so far driven by better.
Performance on working capital certainly.
And as weak as we've gone in the second quarter and look forward to the third fourth where we've got some other tailwinds that you'll have emerged I mean, certainly that the refinancing is.
Is helping us when we lowered our interest still significantly out to you on a run rate basis for full year by 90 million. So we should see.
Yes somewhere on order of.
Less than half of that and the second half alone.
We're doing a lot better than we had expected on tax.
Through a combination of both the carriers Act.
Revisions that have helped the stability of our interest costs.
For both 2020 and 2019.
And we've done well on managing risks on some.
Refund applications and those should be coming through as well so tax will be you'll continue to be a really good driver for the second half. So I'm really optimistic we can continue to momentum.
Yes. So if you were kind of looking at the second half and we were able to maintain.
Reasonable level of the.
Flat to low single digit growth that we talked about in July I mean, if you could keep that going you would be looking at doubling the amount of cash for the full year.
On this basis now as you continue to manage working capital like we have but.
Yes, if we do that some of the other pieces are falling into place nicely.
And we should we see continued momentum.
Wow.
Exactly.
Thank you Sir.
And our next question comes from Doe with Cowen.
Hey, good afternoon, guys. Thank you for taking my questions just starting at the follow up to what I think was B-j's first a question on vaccines.
It sounds like it's just too early for you guys at this point to quantify in dollar terms, what the vaccine opportunity might be just given all the moving parts all the unknown.
That said would you be willing to confirm that you believe vaccine production will drive and either even further acceleration of growth within your bioproduction business versus already robust recent trends given that things for just getting going there.
At this point it seems to us that bio production could keep growing more than 20% year over year for the next several.
Maybe next year, three maybe even longer I just want to make sure we're thinking about it right.
Yes, Doug good evening and thanks to the question.
I think generally your Ah you are thinking about it correctly when you look at the Tailwinds that we've seen in the second quarter.
Within the vaccine area you got to keep in mind most of that is.
We're all of that is it within just a process development and early phase clinical trials support, which you're talking relatively modest.
Doses that that we're supporting and just given the breadth of our of our coverage here number programs, we're going to have exposure to most of the nearly 200 programs are out there across the main technologies that.
You are coming through here I think it is reasonable to assume that when one of these heads.
Whichever one ultimately comes through.
It will have a meaningful impact on.
Business.
We look at our open order report for example, and Tom referenced but.
Since the pandemic hit our open orders as we sit here today are up more than 40% and growing.
So we're seeing a tremendous pickup in the business, we drove more than 20% growth in the quarter and I think we see that.
Certainly continuing through through July and we look at the strength of the order book I think we're optimistic about where this has had.
Okay that is super helpful. And then then moving down the piano gross margin increased 120 basis points year over year in the quarters, you know how much of the increase was driven by higher proprietary product mix.
And then looking to the second half assuming bioproduction and your other proprietary products continue outperforming.
And then just layering in the fact that.
Bioproduction as higher margin is 33% a reasonable floor or.
Or is that even to low it's about the rest of the year.
Yeah couple of things that at work here certainly within the quarter.
The strength of our of the growth of our proprietary materials.
High single digits was a significant contributor to the margin expansion, we did see in the quarter. It was also aided by where you look at the headwinds in our business primarily focused on some of the lower margin components of our portfolio, including our equipment and instrumentation offering as well as are our service.
Yes.
Platform and so you're getting the kind of the double benefit there have really strong growth in support of our business that carries the highest margins and let the headwinds were primarily concentrated in.
Lower margin part of our business.
We expect to continue to see strength in the proprietary offering within the portfolio, which will carry the margins with it.
One thing to keep in mind, though is as we see sequential improvements in say the education market in health care market in some of our applied markets, where you see a more normalized.
Product mix, you will start to bring back in some of the lower margin components of our of our portfolio, which will somewhat moderate.
Strength that we're seeing in and proprietary offerings and you also get Doug.
At some point, we get we get beyond this.
Returning to some of those discretionary costs that we we need to reinvest in here.
People come back and be able to you want to see customers and.
Incur a little bit of teenage so that will that will be a factor we need to consider as we move forward as well.
Okay, and Tom if I could just sneak in one last one congrats on the refinancing your highest cost Scott as you know you still have a one and a half billion slug of got at 6% well above where do you recently refinanced.
Why wouldn't you refinance that that as well over the next six months or so and as to be clear along those lines of 2020, and 2021 interest expense guidance assume any incremental refile. Thank you.
Right.
First question second question first no no incremental rifai benefit and then.
And what we have laid out and chart on the interest expense going forward.
Your first question.
Really well.
Okay.
Set out to.
Reconsider our capital structure, we when we got into cold, but we were we were really.
Melancholic about the impact that the rates were having the high yield rates were.
Now instead of improving they were they were.
Approaching seven or 8% on on that on the debt and so we just took a pause but over over time.
Just the high yield piece of the market seem to improve in our favor.
We work with our partners they did a great job, helping us execute.
And yeah that was that was a good outcome as for the rest.
Your accessing other parts of the debt market, which.
Have not yet returned to pre colder levels and are starting to moderate.
But it's going to take some time it clearly is our intention.
So to work with our our Treasury team and the same side of advisors to get us to a point, where we're in a position to do something on those higher higher cost pieces that you are the exact time frame.
Remains to be seen its really going to be market driven.
I will say that when we look and we reviewed the entire debt portfolio with our board.
And talked about the potential benefits that we saw from.
Refinancing I would say more than two thirds of the benefit was in the unsecured.
Which we've done.
And so I'm not I don't want to hold out that we're going to be able to.
Generate another 90 million of.
Annual savings that will be meaningful.
Right, but I think we got the bulk of it with the the first piece here and we'll continue to your point over the next six months maybe sooner to.
To address the other other parts of the month of the of the debt as well.
Great. Thank you again.
Okay.
Being mindful of time, please remember to ask one question one follow up question.
And our next question comes from Jack.
Research.
Hi, guys good afternoon.
Hey, Jack.
I was hoping you could comment a little bit more on what you're expecting in terms the pace of.
Academic and government and then library openings in second half and I think you're probably one of the company is the called out cadence wells exposure. Historically, just maybe help US quantify you know whether you have a little bit of what that represent and how that might be impacted from could have been 19, specifically.
Yeah, Jack happy to take the question on that.
Obviously the academics.
Market for Us has probably been the hardest hit of any of our end markets.
As the pandemic.
You played out.
And as we look at it probably hit a low point in April with.
Thank you can probably see a lot of the same publicly available information that we follow but you know there was probably less than 20% of the.
Scientific capacity at the bench at that at that time and we saw.
Incremental improvements as we move through the through the quarter and we've seen.
Steady progression through the month of July as well not fully back yet.
I would say.
And we track couple of things we track.
Not only just a number of labs that are opened but we try to take a read on how much of the capacity in the lab is being used and.
I think we're encouraged by some of the creativity that our customers are deploying their worth implementing ship schedules in such to be able to get more of their scientists back into labs were obviously supporting our customers restart restarts and.
You know talked about how they're going to.
Continued to progress I.
I think I would.
Make one point here it does it does feel like.
The return of scientist to the bench will be a separate activity from whether or not students come back to a campus in the fall and I think we're encouraged.
Our original assumptions that that would happen do seem to be playing out so.
Our numbers.
In Europe for example, I think a little bit ahead of where we're adding in the US just given the timing of recovery there and I think we're really encouraged by.
The momentum we have in Europe, and I think were.
We're certainly not back at at full.
Full run rates in the Americas, but.
Things are continuing to improve week by week there.
Great and then I.
I guess with the combination of the refinancing which took place and the outlook seems to be a little brighter today.
The change the way you think about the pace of M&A and maybe just give us an update on how progress has been that building out the strategic.
Development team.
Yes, it's a great. Great question, you know, we've been focused and continue to be focused as a priority of.
Taking or leverage into comes as a target range of two to four times and we're getting very close.
Knowing that M&A isn't necessarily a linear event.
We kind of at the end of last year early in the first quarter started to rebuild our team.
Put in place all of our processes and cadence and rhythm with our board and.
We have been active throughout the year in.
Building a pipeline you know engaging in a number of discussions and we continue to.
The active in that regard certainly.
The acceleration of cash flow and the strength of our cash flow generation is encouraging.
When you look at the outlook for cash flow generation, taking into account and improvements that we're making in the business and particularly the financing costs.
We are well positioned to start so.
You know turned this part of our growth strategy on now having said that.
We will be disciplined about it and they were really focused on bringing in more proprietary technologies, where we're very focused on looking at ways and strengthening our bioproduction off and looking at ways of strengthening our life sciences portfolio within our.
Lab workflows.
We'll continue to be opportunistic about extending our capabilities.
Into Asia. So I think the filter is pretty clear that we're applying and as we sit here at the end of July certainly the size of the funnel. So.
Sophistication of.
The funnel.
Certainly far greater than it was say when we spoke 90 days ago and so it's getting a lot of our attention and we're anxious to put put capital to work. Another one thing I'd mentioned on that.
And the reason going back to the refinancing I mean that has moved on.
Cost of capital, which obviously the factor in.
And any consideration I think.
That will make us more competitive and.
Given the way we pursue some of these deals.
Okay. Thank you Beth.
Our next question comes from Patrick CD.
Great. Thanks, guys.
Maybe just one on the industrial market trends.
I'm just curious in terms of what you guys are seeing now in the more macro sensitive areas confidence in the outlook going forward. It seems like sentiment bottom to bid in Twoq, maybe more on the way back up but wondering what you guys you're going from a customer base, there and visibility next couple of quarters.
Yes, it's a good good questions are there we've been focused on I think when you look at our you know applied markets as we've said before it's roughly 25% of our business.
Half of it is pretty sensitive to the macro environment and so as you suggest that we've seen.
The recession heads that part of the portfolio has certainly been impacted the most certainly off double digits.
The other half of that.
End market is in more defensive growth.
Oriented applications, probably headlined by our exposure to the to the semiconductor space, which.
We play in a relatively unique way and we continue to see nice nice growth momentum on that end markets and things like oil and gas and pet Chem that we're really hardest hit by.
The pandemic, we do see.
Some modest recovery starting to come back into the business and I think when you look at the platform as a whole.
Even the depth of the pandemic in the recession.
To have the platform off.
Mid single digits in the quarter Andy.
Do you think it highlights.
Just how diversified that part of our businesses and.
How many levers there are to kind of keep that.
You know keep that you're moving towards a positive direction. So I think we're encouraged by some of the fact is we're seeing still I think that net were.
Probably still experiencing some headwinds in the month of July but.
Our hopeful that we'll see the the trend continue.
Makes sense and then maybe one for Tom just on the margin side, certainly encouraging progress so far along with the internal initiatives. You guys are doing can you just help us think about the mix shift going forward again things like vaccines have obviously been highlighted quite a bit here Tonight.
What's the mix look like as you look out a couple of quarters not going to continue to trend higher on the margin side.
Yeah, I mean, I guess I guess, if I knew the specific to that I would probably giving guidance.
Not to be a smoke Patrick but the.
Yes, the dynamics it we've had in this quarter have helped to drive the good portion of that because of the EBITDA improvement and it is it is a combination of the growth in like a 20% growth in areas like vital power production.
But it's also helped by.
A a.
Moderation on equipment instrumentation like you're seeing in.
In that landscape across the tools sector.
And to the extent that starts to.
Revitalizing the in the second half set a third quarter fourth quarter that will moderate.
The margin expansion that we get from that we continue to benefit from in the.
And these higher growth areas, we've talked about so it's it's a it's a tough balance the call right now.
Together it is it did is a significant impact.
And we'll continue to watch it and continue to keep you keep you up to date.
Okay. Thank you.
Our next question.
Jeffrey.
Thanks, Good afternoon.
Mike back on the the Bioproduction business on are you capacity constraint there at all or are you seeing any areas, where maybe you've got competitors that are seeing out of stocks and you've been able actually capture some share.
Yeah, Brian Thanks for the question within the bio production.
Space, we do have a relatively broad and and unique offering and.
You know as we sit here today supporting the the clinical trial work.
I think we're doing pretty good job keeping up with.
You are really unprecedented demand that we're seeing in the business.
I think where we spend our time on this topic Brandon is trying to project forward and obviously, it's a pretty complex equation. When you look at the number of programs that are in flight that we're working on all different technologies in each leveraging certain portions of our portfolio.
But as an industry, we're facing really unprecedented.
Potential demand.
Think about trying to provide a vaccine for the for the globe, but.
At least as we sit here at the moment with what we know appears that it's not going to be one dose per patient, but it looks like it's trending towards multiple doses and and probably annually. So.
I think capacity is definitely going to be an issue for the industry as things start to move into into commercial production.
Across various elements I think we're all trying to figure out how you prioritize those bottlenecks and how you can get creative and bringing capacity.
To the market to support as much.
Production as possible so.
We wouldn't look at it so much in terms of near term.
Market share.
Gains I think the.
The way, we think about it is probably looking ahead, where the bottleneck.
Inevitably going to be for all of us just given.
The volumes that we're talking about share of it is going to stress.
Are you factoring capabilities and.
We're going to have to be pretty creative and.
How we de bottleneck and how quickly we can we can make the capacity available.
Thanks, a follow up for Tom in terms of the co bid a tailwind to 5% to 6% in second quarter I'm curious if the exit rate in June, but actually higher than that scaled up through the through the quarter and.
You Shouldnt you could share with is the impact of this tailwind by geography between Americas Europe quantify those.
Yes, I mean the.
I'll just say overall, our exit rates were were positive in June relative to the entire quarter.
And that it probably was a combination of both.
Further progress on the Tailwinds as well as slight moderation on on the on the headwinds.
I think as we head into July that that.
The positive momentum on the exit rates continues.
I think as Michael said earlier.
Mix of the.
Tailwinds right now I mean, obviously, we're not close.
The mix of that Tailwinds looks like it should.
Follow a similar pace that we had in the second quarter.
Relative to the the mix of the Tailwinds amongst the regions.
Little bit heavier in Europe.
Yes, you solved the growth rate that we had there, but I wouldn't say it was a.
Material part of the growth that branch I think we are dealing more with.
Yes, the headwinds and the significant to the headwinds in the in the Americas being more pronounced.
With the with the concentration of higher concentration of academic in education and in the Americas, which was obviously if.
A headwind as well as.
Higher concentration of our bio materials business in health care space in the in the Americas.
Great. Thanks.
Yes.
And our next question comes from Dan.
Yes.
Great. Thank you for taking the questions guys I.
I joined a little later, but I kind of got they know it I'm just wondering I know, there's no guidance for Q3 of the back half and it could possibly give us a sentiment give a lot of color on.
Trends and exit rates, but given.
The repeatability durability consume orientation of you kind of the consumable only takes me business Im wondering if it's possible. The then.
Give us some flavor for a range or or maybe a couple more I'm thinking through kind of a an expectation for Q3.
Yes, thanks Sandy.
It was as Michael was was alluding and as we said our prepared remarks.
No the exit rates in June you have continued it had have accelerated into.
Into July.
And I.
I think I think were being reasonable with saying flat to low single digit growth and I really wouldn't want to.
Go beyond that.
Point in terms of forecasting August and September I mean, you've got a number variables at work beyond just covert including yes see.
Seasonal vacations and shutdowns and.
And things like that we're not clear entirely how those will play out in this kind of environment. So.
I think the variables around the duration and they extend.
Particularly when you consider some of the thing that reading about make it difficult for us to.
Talk about.
Man patterns beyond.
You know off of beyond what's right in front of that's where.
We're a low backlog kind of business, putting aside by far production business. So most of it turns around a 24 to 48 hours from the time again order.
And so it's no we're sort of in a position, where we know that we're well positioned with reordering and.
So as things return, but its predicting the precise nature that is difficult, but from a timeframe perspective and from a a precision on that the absolute range perspective.
Got it kind of it makes sense and I know, it's been a bunch of question on the vaccine genomic testing side Tecogen I think brand then ask about capacity and on your kind of biologics part of the business, but on testing I think expectations. After testing that continue to ramp in the back half certainly in the U.S. maybe globally. How are you position if that does.
Correct.
We need to benefit from that.
And then you didn't quantify winning Colby contribution how much testing leg of that did you.
We did not it is significant and I would say again, a couple of things about that one if you look at.
The more prevalent testing that's going on right now the PCR based testing and you consider the entire workflows, starting with sample collection to our night extraction purification.
And ultimately through.
Three action set up an actual testing and so we're going to be relevant at each each phase of that.
Workflow when a very broad.
Portfolio and so as you know testing has accelerated through the quarter and and looking ahead at the expectation that testing is going to.
Seems to be.
Going to be an important part of.
Our lives going forward here I think we are well positioned to continue to build on.
The position that we've got here and participate in incremental customer machine playing out.
Great. Thank you Michael.
Okay.
Question.
Yes. Thank you operator, and thank you all for participating in our call today as we close I want to express my gratitude and admiration for.
All of our associates around the World, who continue to live our values and work tirelessly to support our customers as they navigate the Coca 19 pandemic can and seek solutions to protect and type can treat the virus.
Our associates passion and dedication to our mission on setting science and motion to create a better world really does physicians to help bring life changing therapies that can improve patient outcomes for people across the world.
I'm optimistic about what lies ahead for our business and look forward to updating you at the end of the third quarter until then take care and be well everyone.
And that does conclude today's conference call. Thank you for your participation you may now disconnect.
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