Q3 2020 Avantor Inc Earnings Call
[music].
Fine for third quarter 2020, <unk> earnings conference call.
At this time all participants.
Sorry in listen only mode.
Oh, the speaker's presentation, there will be a question and answer session.
Ask a question during the session you wouldn't need to press star one on your telephone we ask that you. Please limit your questions to one and one follow up question.
Please be advised that todays conference is being recorded if you require further assistance. Please press star zero. Thank you you may begin.
[music]. Thank you operator, and good morning, everyone. Thank you for joining us on today's call.
We made the decision to accelerate the timing of our earnings release and conference call to coincide with our debt offering.
I appreciate the flexibility and joining us this morning.
Speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom Sullivan, Executive Vice President and Chief Financial Officer.
The press release and presentation accompanying this call are available on our Investor website.
Yeah, our Satcom on tour Sciences Dotcom.
A replay of this webcast will be made available on our website after the call.
Following our prepared remarks.
[music] line for question.
I would like to know that we will be making.
Statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future.
Forward looking statements are subject to a number of risks and uncertainties, including those set forth in our filings with.
Actual results might differ materially from any forward looking statements that we make today.
These forward looking statements speak only as of the date. They are made and we do not assume any obligation to update. These forward looking statements, whether a result of new information future events and developments or otherwise.
This call will include a discussion of non-GAAP measures.
A reconciliation of these non-GAAP measures can be found in the appendix to the presentation.
With that I'd like to turn the call over to Michael Michael.
Thanks Tommy.
Starting on slide three with a brief review of on towards revenue profile.
Offshore is uniquely positioned to offer complete solutions for many scientific workflows.
We are among the most recognized and trusted gold providers of products and services.
Life Science, and advanced Technology industries, and our portfolio is used in virtually every stage of the research development and production activities, our global customers conduct.
Our business model is very resilient due to our consumables driven portfolio and highly recurring revenue base.
Approximately half of our revenue comes from proprietary branded products and services and no single customer represents more than 3% of our revenue.
Approximately two thirds of our revenue is an attractive life science end markets, including significant exposure to the Bioproduction space.
We are well positioned for continued growth in Europe, and the Americas, and we're investing to expand our capabilities in emerging markets throughout Asia, the middle East and Africa.
Moving to slide four here.
Here are the third quarter business highlights.
The team continues to execute extremely well in a challenging environment.
We grew our top line more than 5% organically expanded margins more than 100 basis points increased earnings per share by more than 60% and generated 266 million in free cash flow.
I will cover these results in more detail on the next slide.
Serving our customers and supporting them in their mission critical work remains a top priority for us and one of our core values.
Fortunately all of our distribution research and manufacturing sites have remained fully operational.
And we've been able to leverage our global scale and footprint to maintain supply to our customers throughout the pandemic.
Bringing innovation and developing new workforce solutions is another important element of our customer centric business model during the third quarter, we launched multiple products to enhance our biopharma offering.
Each one creating significant value to our customers. For example, we expanded our single use portfolio with the addition of new to the single use bags, demonstrating our commitment to ensuring our customers have a complete range of packaging options available to meet their needs.
We expanded our large scale direct dispensed packaging offerings significantly reducing customer processing time and minimizing contamination risk.
Our army top adjustable volumes sterile sampling solution enables precise sample collection at very low volumes and also minimizes contamination risk a particular benefit for our cell and gene therapy customers.
We also launched JT Baker cgmp, great IP TG, a molecular reagent use by our bioproduction customers to trigger transcription and increased protein expression.
We're in the midst of commissioning our new bio repository site in Germany, and expect to receive our first samples before the end of the month.
With 40000 square feet of temperature and humidity controlled space. This new facility will complement our existing bar repository and archiving capacity in Europe, enabling us to serve the growing clinical trial support needs of our bar pharma pharma and see our old customers.
I'm on for as a critical player in the COVID-19 vaccine and therapy supply chain and we continue to collaborate closely with biopharma customers and relevant governmental authorities around the world, including Representatives from operation Warp speed.
Our 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 of onto an important partner during this unprecedented time right.
We're actively supporting multiple technologies and each of the key vaccine modalities and are making the appropriate investments to increase our clean room and manufacturing capacity to enable us to ramp production to support commercial production of any approved vaccines.
Our mission of setting science in motion to create a better world has never mattered more.
Turning to slide five of the presentation I'd like to review our financial results in more detail.
Organic revenues increased 5.4%, reflecting 300 to 400 basis points of COVID-19, Tailwinds improvements in all of our end markets and low single digit growth of our base business.
Performance was once again headlined by Biopharma, which grew by double digits in the quarter.
As complexity in drug development grows and drugs increasingly become defined by the process not the product our comprehensive portfolio of raw materials production technologies and innovation capabilities position us to excel in this space.
Our strong performance in the third quarter is indicative of the value we offer through our ability to collaborate directly with customers to characterize and scale up their formulations also.
Also we experienced strong double digit growth in health care, driven by strength in hospital and clinical reference labs.
Adjusted EBITDA in the quarter was up approximately 14% or more than two and a half times, our revenue growth and adjusted earnings per share increased approximately 63% to 24 cents.
We also continue to make good traction on tax planning and now forecast the full year effective tax rate of 24%.
We continue to generate strong free cash flow through solid operational performance and working capital discipline.
We generated 266 million in the quarter, an increase of 44% compared to the same quarter last year and are on track to generate more than 700 million in free cash flow for the full year well above our initial full year guidance.
This will enable ongoing reduction in our net leverage to approximately four times EBITDA by year end down from 4.6 times at the beginning of the year.
Our results reflect our attractive end market exposure are highly recurring revenue base trusted and collaborative customer relationships and our strong culture of execution enabled by the of onto our business system, which underpins everything we do.
With that let me turn it over to Tom.
Thank you Michael and good morning, everyone, let's start on slide six organic revenues increased 5.4% in the quarter, which as Michael mentioned includes approximately 300 to 400 basis points of Tailwinds from COVID-19 related items similar to the second quarter diagnostic testing solutions drove approximately half.
After this benefit with a balanced equally represented by sales of personal protective equipment, and biopharma production materials, including those to support vaccine and therapy development.
We called our Q2 earnings release, we indicated an expectation for growth in July of flat to low single digit we achieved low single digits and momentum built over the quarter looking.
Looking at growth from a regional perspective, Americas, which represents approximately 60% of global sales reported 4% organic revenue growth a big improvement from the Q2 decline of nearly 7% we experienced market improvements across all end markets highlighted by high single digit growth in biopharma, including.
Double digit growth in Biopharma production and greater than 20% growth in healthcare driven by hospital and a clinical reference lab customers and despite continued year over year declines in elective procedures. The declines in education moderated significantly although lab in school closures continue to drive.
Overall negative growth the government business was strong with mid teens growth and advanced technology in applied materials improved to roughly flat year over year.
Europe, which represents approximately 35% of global sales reported 7.2% organic revenue growth also a big improvement from the 3% growth in the second quarter similar to the second quarter Biopharma grew close to 20%, which included over 40% growth in Biopharma production.
Health care improved from flattish in the second quarter to high single digit in the third quarter education was flat, but this actually mark a strong sequential improvement of over a 1000 basis points from the second quarter.
Government grew double digits advanced technologies and applied materials also improved from the second quarter double digit declines declining mid single digits in the third quarter impacted by continued industrial weakness AMEA, representing 5% of global sales reported a 9.4% organic revenue increase driven by Bioflo.
Pharma and government sales offset by continued COVID-19 headwinds in our Indian diagnostics platform and advanced technology and applied materials end markets.
Slide seven shows our organic revenue growth by end market and product group for the quarter Biopharma, representing approximately 50% of our revenue experienced low teens organic revenue growth building on the high single digit growth in the second quarter strength came from our bio pharma production platform, including single use solutions.
In chemicals, and personal protective equipment health care, which represents approximately 10% of our revenue also increased double digit organically in the third quarter sales.
Strength was driven by new customer wins and continued cobot testing strength offset by ongoing elective procedure weakness education and government, representing approximately 15% of our revenue experienced mid single digit organic revenue decline as compared to the second quarter declines of over 20% headwinds driven by.
Full or partial site closures at academic labs, and schools have moderated and we remain cautiously optimistic on improvements for the balance of the year.
Advanced technologies and applied materials, representing approximately 25% of our revenue experienced low single digit organic revenue decline as compared to the second quarter mid single digit declines modest sequential improvements were experienced in our Americas defense, Europe, micro electronics, and global food and beverage businesses.
By product group proprietary materials, and consumables experienced double digit growth with strength in the Americas and EMEA.
Services and specialty procurement increased high single digits, driven by ongoing clinical services strength and improved equipment services as customer sites continue to reopen.
Equipment and instrumentation were down mid single digits, reflecting ongoing capex investment declines. However, these declines are moderating and we actually improved over 15% from the second quarter to the third quarter.
Looking ahead to October we expect organic revenues to be up approximately mid to high single digits. However, we are cautious projecting these october trends over the full quarter given the ongoing limited forward visibility and uncertainty in the macro environment. Our biopharma momentum is expected to continue in the educate.
Second and government end market, we forecast modest improvements as lab sites continue to gradually reopened in healthcare cobot related tailwinds should continue and offset the adverse impact from elective procedure weakness.
Finally, our advanced technologies applied materials business is expected to experience modest fourth quarter to clients.
Turning to slide eight let me start with our third quarter adjusted EBITDA.
We achieved approximately 14% growth in adjusted EBITDA, and a 112 basis points of margin expansion key drivers are the performance were commercial excellence volume growth favorable mix, including strong growth in biopharma production and proprietary offerings and continued discretionary cost containment or.
All offset by material inflation.
While the factors driving strong adjusted EBITDA margin expansion year to date are expected to continue we are facing a difficult prior year comparison in the fourth quarter of 2019 of 130 basis points of margin expansion.
Consequently, the fourth quarter 2020 margin expansion may be more moderate compared to the 80 basis points of expansion, we have driven through the first three quarters of the year free.
Free cash flow continues to be strong with $266 million in the third quarter, reflecting stronger adjusted EBITDA better working capital performance and lower tax payments offset by the unfavorable timing of interest payments, which will be an upside to our fourth quarter cash flows normalizing. This timing free cash flow would have been 319.
Billion.
Year to date free cash flow generation stands at $582 million and we're now on track to achieve free cash flow exceeding $700 million in 2020.
Finally, we achieved approximately 63% growth in our adjusted earnings per share for the quarter, primarily reflecting strong operating performance the ongoing reduction in interest expense from our deleveraging and refinancing and the improvement in our income tax rate. We continue to make progress with respect to income tax planning and now expect a full year effective tax.
Its rate of approximately 24% year.
Year to date for 2020, we grew our adjusted earnings per share approximately 53% to 60 cents per share.
Slide nine has our segment results.
Americas reported 21.4% and adjusted EBITDA margin rate, a 152 basis point improvement as compared to the third quarter of 2019 key drivers include commercial excellence volume growth favorable mix driven by a higher proportion of growth in proprietary materials and consumables product.
Tivity and strong discretionary cost containment year to date 2020, adjusted EBITDA margin expanded 173 basis points in the Americas.
Europe reported 17.5% in adjusted EBITDA margin rate 73 basis point improvement as compared to the third quarter of 2019.
Key drivers include commercial excellence volume growth productivity and strong discretionary cost containment offsetting unfavorable mix and inflation.
Year to date 2020, adjusted EBITDA margin has expanded 76 basis points.
May I reported 22.7% and adjusted EBITDA margin rate, a 380 basis point improvement as compared to the third quarter of 2019 key.
Key drivers include volume growth better supply chain performance and strong discretionary cost containment year to date 2020, adjusted EBITDA margin expanded 88 basis points for Matt.
This concludes my prepared remarks, I'll now hand, it back over to Michael.
Thanks, Tom Im on slide 10.
We executed well in a challenging environment and our topline performance strong EBITDA and adjusted earnings per share and outstanding cash generation reflect the resiliency of our business model the value of our highly recurring revenue base broad mission critical product portfolio and exposure to act attractive end markets like Biopharma.
While the uncertainty associated with the current pandemic continues our business remains strong and we are committed to our role in combating COVID-19 by supporting our customers' ongoing initiatives and testing vaccine and therapy development and ultimately the production of approved treatments.
Reflecting our relevance in this critical endeavour, our Bioproduction order book has more than doubled and we are actively investing to capture this opportunity.
Potential to achieve life Sciences breakthroughs has never been greater.
We remain steadfast in our focus on executing our long term growth strategy and are optimistic about our future.
I want to thank you for your interest and investment in an onshore and for your ongoing support.
I will now turn it over to the operator to begin the question and answer portion of our call.
If you would like to ask an audio question. Please press star one on your telephone keypad.
So I wanted to ask an audio question, we ask that you. Please limit your questions one and one follow up.
Our first question comes from the line of Tyco Peterson with JP Morgan.
Hey, good morning.
Michael I'm, just wondering if you could comment on why that coded tailwinds moderated this quarter relative to last quarter is that just the timing of some of the vaccine campaigns and should we assume that three quarters of it was tested and people like it was last quarter or was there any mix shift there.
Yeah. Good morning, Tyco, thanks for joining the call today.
As we mentioned in Tom's remarks.
Roughly half of the.
The tailwinds are linked to testing and I think as we've said earlier.
Earlier in the quarter, we saw somewhat of a moderation in testing in the early part of the summer, particularly in July and August and we saw an acceleration.
Back in September.
But on a full quarter basis testing tailwinds for us were somewhat moderated relative to what we saw in the second quarter similar dynamic for PPD.
Whereas a tailwind wasn't quite as strong.
A piece of that is the continued supply constraints that.
Certain elements of that portfolio continue to endure.
And.
For us the acceleration on the vaccine piece really won't come in a meaningful way.
Until there is a an approved treatment we've been supporting.
The the process developments in the clinical trials.
But now you are talking tens of thousands of doses.
Scale and as we move forward.
Just want eventual approval, you're obviously, then moving into the millions and presumably billions of dose so.
The Tailwinds will slow shift as we move into a phase of profit improved.
[music].
And then on the end markets.
On Biopharm, obviously, great great strength, there you talked a lot about process can you talk on the R&D side.
EPS that still 30, your revenues and any thoughts on for Q budget flush we put some of your peers kind of top that down is no overall equipment was down mid single digits. So is there any hope equipment could recover in the fourth quarter.
We don't have a lot of visibility we were encouraged.
As we saw equipment kind of accelerate maybe 15% in the third quarter relative to the second quarter to quarter, but still off the meter.
Meaningfully.
We don't have a long.
Window into the order book for that for that equipment.
You're correct to point out at the end of the year you would typically see some.
Potential budget flush remind you last year, we didnt really experienced much in the way of a budget flush the last couple of weeks of the year ends.
The Visibilities further hampered this go around just given the the.
The pandemic, but what I can say about the R&D environment, we've seen that steadily improved throughout the third quarter and even as we moved into.
October here.
As Tom indicated the business is our overall IC.
Hi single digits in the month of October and certainly part of that acceleration that we do see is coming from the R&D space in Biopharma. It does appear to be.
Moving sequentially.
Okay, and then last one for help on healthcare you had a huge sequential swing there how much of that was recapture of any delays out of it.
Second quarter and any additional thoughts into this quarter.
Yes, a lot of momentum in the healthcare space as you as you pointed out we were well into the double digits from a loan growth standpoint strong recovery in both the.
In other reference labs that we that we service and our return of obviously not just the cobot testing, but many of those labs that we support don't have a lot of exposure to to covert and you're seeing a return of kind of a more normalized.
You know procedure environment, and then associated diagnostics to come with us.
We were also successful in the quarter leveraging our supply chain.
To pickup business that we hadnt and enjoyed before.
Customers.
Really benefiting from the security that our supply chain provides to keep them supplied in.
Pretty critical time, so certainly a piece of that is a reflection of of new business wins that we had profit quarter.
That all that take it all that delivered was still.
Fairly tepid environment on an elective procedures.
So looking forward to.
Pension.
Improvement as well.
Great. Thanks for the color.
The second.
Your next question comes from the line of BJ Kumar with Evercore ISI.
Hey, guys. Thanks for taking the question and congrats on a good print here.
So maybe on another comment on Bioproduction order book has double what was that.
What was the base is that a year on year in a doubling up for sequential doubling up and.
And what does it mean for I guess.
From a topline perspective, or perhaps contribution I could toppling when you think about 2021.
Yes, good morning, VJ good to hear from you.
Good morning folks has doubled since.
Since the beginning of the year and we've really seen an acceleration of that book.
As we've moved.
Through the second quarter and into the into the third quarter and so you can continue to build here as we've gone through the early days of the of the fourth quarter and the.
It reflects a couple of things firstly the base business that we support the absent.
The vaccine effect is extremely robust.
We've been investing heavily over the last several years and.
New product capabilities and innovation capabilities and.
We've had tremendous success in moving.
Our technologies through the through the pipeline and you see that reflected in the base business. The encouragingly. The majority of this order book build is actually in.
In our base business as I mentioned.
Last quarter, we are starting to see cobot, driven vaccine orders coming into the book.
And that will certainly satisfy some of that in the fourth quarter.
As any.
Any of these vaccines move from from clinical trial into.
Our approval phase and into commercial production, but I would anticipate more of that coming.
Next year, just given where we're out here in the quarter in fact has risen in approved.
Vaccine.
But ultimately the visibility in terms of what it could mean for us next year.
Is still pretty foggy VJ.
I think a couple things I would point out one we're going to be relevant across all of the major modalities that are being.
Developed whether that be M&A or recombinant proteins viral vectors.
So that's the first point turning point.
Yes, there is a lot of variables that will ultimately dictate what this means for us specifically we've tried to articulate.
What we think this does from a from an addressable market standpoint by technology.
But that's obviously influenced by.
Things like the number of doses that are ultimately produce the mix. So technologies that are ultimately approved here and then I think an important variable here is what's going to be the adoption rate of any of the the vaccines that are on the market I think the data on that is somewhat mixed at the moment. So makes it difficult for us to give you a real specific range on what level of.
The revenue we would build into.
Our forward plan, there's obviously lots of different scenarios as a as they play out I think the key takeaway for US is we do see considerable opportunity here, we have mobilized to meet that demand through investments in in capacity to ensure that we can fulfill the orders as a as a comment I think were wrong.
I'm very encouraged about the trencher debbie's yet on the open orders a couple other things I would add is that.
The mix between.
Mike You mentioned that you had a cohesive is fairly small but the mix between our single use at our high purity chemicals is is roughly split equal.
The other thing is that most of this is customized. So this is this is a offerings that.
Our non taxable and we have created from the customers and Weve done engineering and formulations work with them.
So it is pretty firm and like what I will say continues to track upward in the fourth quarter.
That's helpful guys in Netcomm, one on the free cash this year I mean, if I recollect the start of the year.
We started I think thats sub 600.
I mean this is im.
Im just curious about 700 million for the year, that's really strong.
Was there any timing impact and how should we think about the free cash flow should see cash flows be growing off of this new base.
And what's the primary use if it's d'etre Fi I did see that Wi Fi announcement. This morning, perhaps any color on what that would mean for our interest expense going forward.
Yes, sure. So just on the free cash flow itself BJ just.
And remind everybody we started the year with expectation for $450 million to $500 million and and.
Free cash flow at work, we are already at 582 million through the.
Third quarter, the only unusual thing that's in there.
Apart from the benefit from the refinancing that we've done and Thats basically a forward benefit not not a ton that's come through yet because we actually had an acceleration interest payments into the third quarter.
Normally would be paid in the fourth quarter after that to about $60 million net debt.
That we were able to overcome still deliver that 582.
The only unusual item really in there is part of the carriers Act, we were able to defer.
Some tax payments and some employer tax liabilities, but thats less than less than $50 million. So I mean, the real benefit is in working capital we've been able to contain working capital to just about flat through through three quarters.
Despite the growth that we've delivered in fact in the third quarter.
We actually reduced working capital by close to $20 million and yet we grew sales you saw 5.5% or so so that's that.
I think mostly reflective of operational I think going forward I think refinancings that.
We've done will be helpful.
As is as you're aware and just to give everybody an update on the refinancing process as I am sure. We had questions on it we have about $5 billion of debt outstanding.
We refinanced two of that five in July as you know, we reduced the rate on those borrowings from 9% to about 4.5%.
And that's going to be close to 90 million of annual pre tax savings as I said that start to kick in in our facility in the fourth quarter on the remaining 3 billion unsecured we're pretty happy with a billion of it thats in our term loans. The we reprice that in February that's added.
Below are below at today's market is about labor plus 225. So there is no prepayment penalty and we prefer to keep that one in place. The remaining 2 billion of that security is bond financing.
It's got an effective rate if you look at the two tranches about five five and three quarters. We believe we can do much better than that given the continued improvement in our capital structure.
Our debt rating, our cash flows and so forth, we expect to refinance it with a combination of term loans and bonds. We launched the terminal process on Friday and at the time. It was pretty clear. We're also going to do a bond process because of the sources and uses we articulate it had more uses and sources and that that came clearance sales.
Morning.
When we announced the two.
Bond as well so the term loan process normally takes a week thats when we started last Friday.
Process a bit faster.
And by the way that's why we that's why we accelerated earnings release, we want to have all the information.
Q3 out there for as long as possible. So all in I expect to see the pricing on that 2 billion.
By the end of the week I will say the market has turned a little bit choppy since we launched as you know, but we're dealing from a position of strength, we've got no requiring whatsoever to accept anything it will be suboptimal.
The investor interest so far strong we've got we've got.
Both building in the term loan we expect to have a decision point at the end of the week.
You can kind of do the math on the 5.75 on that on the 2 billion but.
You know if you can if you can reduce that to.
Effectively 300, or sorry, three 3% or so.
Meaningful savings so will we.
We'll update everybody once were once we're through the process.
Okay. Thank you.
Your next question comes from the line of Patrick Donnelly with Citi.
Great. Thanks, guys, maybe just a follow up on the VJ there on the bio production book doubling.
Are you able to talk about the magnitude there in terms of hard numbers that we had a couple of your peers give give hard numbers there and talk about what percent is going to burn in 2019 versus sorry, 2020 versus 21.
So wondering again just just the raw size there if you're able to talk about it and then Michael maybe just a little more color in terms of how you see it trending once these vaccine slipped commercial is that does the revenue really take off their feet from the book.
Yes. Thanks for the question good to hear from you.
I mean, theres a lot of momentum here in the order book, obviously with.
Yes, the numbers that we've that we've talked about typically in this in this quarter, but we would see a couple of months ahead and one of the elements of this is we're starting to see at least in this part of the business in order to focus on lengthened well into next year and as we sit here today, we probably have.
Okay.
An order book that was back roughly half of a full years.
Demand or revenue in that part of the business. So it is obviously very very meaningful.
Relative to what it looks like on the back end of a vaccine I'll just take you back to the to the various factors here that will dictate that which.
Which makes some technology is ultimately get approved as you know raw material requirements are greatly.
Different depending on which of the four modalities ultimately prevail here or whats mix of modalities I think as our view of how to be more than one approval coming through here.
And then how quickly our customers can ramp production is.
He is going to be a major driver of how quickly that they start pulling on.
On on our materials and then lastly, again I'll point out is one thing to have the capacity in approval, but is.
You know the society going to adopt these vaccines and how quickly will that optimal.
Pete that but we're in.
Investing as if.
There will be a pretty rapid ramp once.
Once their approvals and as Tom mentioned.
At some level already starting to see and fulfill orders.
That are obviously.
Moving from clinical trial to kind of production at risk here and given the lead time on these materials and the customized nature of these materials. The orders that were getting at this point for the delay.
Deliveries later this year or into the first quarter you would be from at this point given the commitments that we have to make on those so well continue follow it closely and obviously as.
Approvals on any vaccines.
Good good issued warrants will respond accordingly.
Thats helpful. Michael Thanks, maybe Tom just on the margin expansion side, obviously been been pretty compelling here year to date great quarter here.
As you look ahead to some of those Tailwinds, we just talked about the Bioproduction book, how should we think about the margin profile of that revenue again. It feels like is that inflects higher should carry a higher margin profile than than the core business, but just wondering if we're thinking about that right. If you could just talk about the margin profile, yes, absolutely, yes, absolutely from a longer term perspective Patrick.
Weve as you know we have endeavored to.
Grow our EBITDA margin at a rate of one and a half to two times the sales growth rate. So sales is growing.
5%, we expect at least to be growing separate half on the EBITDA side, it's not not tend to be the big variable between the two would be mix and you're right. The biopharma production business does have.
More attractive margin profile and.
Some of the other parts of the portfolio. So our gross margin is roughly 31, 32%.
I'm not saying this is double what it is meaningfully accretive to that 31% to 32% and.
We'll we'll be planning 2021 with that those those open orders in mind.
I do want to remind everybody from a shorter term perspective, we had a we had a really outsized margin growth in the fourth quarter of last year, our 30 basis points as I said so.
As as some of these better.
Better mix products start to come through.
We'll see that longer term impact and hopefully if we start to see it in the in the fourth quarter, maybe we can offset some of these headwinds we're facing but.
Overall, I think we will will.
Well finish very very strong and.
Attractive margin profile should point out for first quarter and beyond.
That sounds good thanks, Tom.
Your next question comes from the line of debt Schenkel Cowen.
Hi, This is Ryan on for Doug Thanks for taking my questions.
Yes.
Good morning, maybe starting on Europe can you talk about customer activity levels across the core business in Europe. Early in Q4 have you seen any pause in the pace of improvement recently due to covert flare ups or you expect continued improvement in activity for the quarter.
Europe has been a bright spot for us all year and you saw that again in our third quarter numbers with more than 7%.
Growth the team has done an amazing job out there meeting you really strong demand, obviously and supplementing the portfolio with with new products and solutions, we launched more than 90000 products. This year.
Many of those to.
To supplement a lot of these colder workflows that were that were addressing and you see that being reflected in what the team in Europe has been able to deliver this year.
As we moved into.
Through the third quarter, probably one of the bigger changes that we saw was a return of the academic sector.
I think in Tom's remarks, he referenced maybe a thousand point improvement in the in the performance of that part of the business and kind of return to somewhat flattish if you will.
Momentum continues into the into the fourth quarter here Europe is off to another very strong start.
Here in the in the first month of the quarter.
But we are aware, obviously as we're in whatever wave of the pandemic.
If we want to refer to this as theirs.
Theres, obviously, a lot of concern across continental Europe regarding.
The spread of the pandemic and we're aware that certain countries have institute is.
More.
Lockdown type measures. It was on the phone team. This morning, just understand where things are at at the moment and I think this is a general trend, we see playing out in the us as well where.
There seems to be limited appetite to go back to the extreme lockdown measures that were put in place back in March and April I think are doing prudent things around masks and limiting crowd size at restaurants and bars.
Gems and such but.
But universities continue to remain open.
And I think from where we see at the moment.
We're not anticipating as we sit here today.
Rollback of.
Of the performance that we've experienced in third quarter.
Got it and then maybe just a follow up on Bioproduction more more explicitly so revenue up 40% in the quarter orders up greater than 100%.
Given you haven't had any meaningful contributions conducting yet and given the significant scale up expected in vaccine production over the next 12 months.
You expect by production revenue growth to at least be sustained at the current 40% level in 2021 or could it accelerate even even faster in 2021.
You know that platform for us has been growing.
Well biopharma as an end market for us has been growing high single digits for the better for the last couple of years and Thats strong strong growth in the R&D portion of that business and then.
The other sort of that platform as our production offering which has been growing double digits.
Over the last several years and we certainly see that.
Momentum continuing absence.
Even any impact from the vaccine the vaccine will obviously only works or two.
To accelerate that growth to the extent that we do see approvals and an adoption and ultimately a ramp up here.
Hard to say.
What the what the ceiling on that is going to be.
Given the variables that I've already described here.
But you know we're.
We're confident absent vaccines and continued double digit growth for that while production platform and certainly will be favorably impacted by.
Any approvals that come from.
Okay, if I could sneak one more in can.
Can you talk a bit about your exposure to rapid ended in testing within within those clinical diagnostic tailwinds.
And how meaningful that could be for events over the next few quarters as manufacturing of those EPS begins to meaningfully scale have have you seen any benefit from rapid antigen test to date or is that largely incremental to your coven diagnostic tailwind to that couple of quarters. Thank you that's.
Thats a great question.
In the third quarter results very limited.
[music].
The impact from the antigen based testing but.
But.
We are starting to see some upside from that in the early days of the fourth quarter here, just maybe take a step back and remind the group here on our exposure to testing broadly I think we've all become experts and thus the three types of tests that are out there you have the two versions of kind of antigen based testing the molecular.
PCR testing, which continues to be the gold standards for us to date has probably been.
The platform it has driven the most tailwinds, we're very well positioned to support the sample prep workflow.
Precedes the actual.
Test itself and that has been strong and we see that continuing.
The other tests that you're referring to is these more rapid antigen based tests.
We will play that.
You know platform really as a as a supply chain solution, we've got access to certain.
Approved tests that we will source from our third party partners and we will distribute those into the marketplace and we have a.
Quite a meaningful order book Thats as developing here for the fourth quarter on that piece of that.
The testing workflow and then the last.
Yeah.
Elements of the testing capabilities in the serological tests, where we have both.
Content that we provide to OEM manufacturers as well as access to test themselves I think the.
The upside was expected to be stronger than it has been today than I think that tracks the relatively muted adoption that we've seen around the world for those for.
For those tests so.
As we look forward I think I'd summarize it by saying.
Continued momentum and Tailwinds associated with PCR testing.
At least in the early days of the fourth quarter here. We are encouraged by the uptake of some of these antigen based tests.
Your next question comes from the line of Michael Ryskin with Bank of America.
Hey, Thanks, This is Mike on for Derik.
I want to go back to some of the underlying three key performance sort of looking at the landscape X coded.
I think we were just expecting a little bit stronger performance in the quarter given the easy comps you had year over year, I think Threeq and 19 was one of the easiest comps you've seen all year. So just wondering if you could go deeper into the sequential improvement in the base business. If you sort of look at it on adjusted basis and how that brings your thinking as you go into 40, because again get a little bit of a.
Tougher comp three.
Threeq to Fourq.
Next coated.
Yeah. Good morning. Thanks for the question if you look at the performance in the second quarter, maybe as a starting point, we saw roughly 700 to 800 basis point decline in our base business and then we were aided by roughly 500 to 600 basis points of of Cowen Tailwinds. So as.
Kind of an anchoring point for you the base business.
From second quarter to third quarter improved sequentially.
You know by nearly a 1000 basis points.
So when I read through all the numbers here, obviously were excited by the overall growth and margin expansion and cash flow, but one of the things that is most encouraging to me is to see the base business.
Growing low single digits in the.
In the quarter on aided by obviously these tailwinds as you described.
And if you look at it from an end market perspective.
Biopharma, 50% of the revenue very very strong performance in the quarter and I would say.
We saw sequential improvement in the.
Capacity utilization in the R&D space, and we've seen that carry into the fourth quarter.
The education and government part of our business. The government piece has been strong second quarter and third quarter driven by a lot of the covert programs that weve been supporting.
But the education piece has probably been one of the pieces of our portfolio has been hit the most.
You know that business was down 50% in the early days of the second quarter and the.
Have recovered substantially in the third quarter.
It was roughly flat in in Europe, we were down mid to high single digits on that platform in.
In the Americas, and so there's still a bit of recovery to come there and that's over hopefully going to take.
A full reopening of all the campuses as well as you know a reopening of the K two came through 12.
Schools across the U.S.
Healthcare, obviously continues to be a big bright spot for us.
We've seen.
Nice recovery in our reference lab business and acceleration in the hospital portion of that business.
But we still have headwinds.
In the elective procedure, driven part of our business, particularly in our bio materials.
Business, which.
You know, we don't really anticipate much recovery in that business here in the in the fourth quarter and hopefully I think.
Thats, probably more of a 2021 event so still I think some some headroom to go there on that piece of the business and then on the applied part of our business roughly half of that is going to be rather defensive.
Oriented in.
Not necessarily subject to some of the macro shocks that we've seen that piece of the business has held up very well the other part of the business, which is roughly 10% and more linked to PMI and we've seen that some sequential recovery as PMI ism moved above 50 in the.
The recent quarter, it's still down modestly for us low single digits, but obviously has held up well so.
A little how we see the the.
The end markets and as we move into the into the fourth quarter. Obviously, we ended the third quarter with with some nice momentum and seems still carried into the month of October.
Great. Thanks, and a quick follow up from me on the on the free cash flow in the debt refinance.
If you look at the the debt you did early this year, what you've got going on now and the strong free cash flow year to date.
The debt burden certainly lot of lighter than you would have thought maybe six months or a year ago.
I recognize you still got the long term targets of two to four times.
Leveraged but more in the near term does this give you a little bit more flexibility to go out and do something or is that still getting a little bit ahead of ourselves do you want to do want to get it down further before you start getting active again.
Yeah, Great question My fault at this time.
Yes, I think you're you're right on point, there I mean, our our what we said all along since the IPO is that we.
We wanted to.
Be comfortably operating within two to four times leverage we started out 2019 north of seven.
So we've worked that down to the 4.2, we have today.
We do expect to be.
At everybody for by the by the end of year, given the strength in the in the business performance.
Thats not a magical 0.4, so from an M&A perspective, I mean, weve, we actually.
Started our program up at the beginning of this year being brought in a leader.
Mark Centrella, he's been working with each of our global business units.
To not only.
Bill pipeline, but I understand the strategy and help them with their strategy to link that with what are the opportunities that are out there. So.
We've actually participated in a couple of a rather small processes, but we're we're anxious to get rolling I.
I would expect that in the near term probably.
Next six months or so you wouldnt see us.
Do anything, but it's sort of tuck ins maybe for the next year in tuck in type acquisitions, which would be maybe one or 2% of revenue looking to round out some of the work flow positions in places like Biopharma production or.
Our in our lab offerings.
And then going forward, who knows I mean will we.
Well look at I mean, we were looking at.
A broad funnel of things that might not be available today.
But we're really trying to focus on.
Our core businesses.
And so you can expect us to be doing deals that are more of a tuck in or a little bit larger variety than let's say a massive transformational deal thats away with that.
That's really helpful. Thanks, so much guys.
Okay.
Your next question comes from the line of Brandon Couillard with Jefferies.
Hey, Thanks, good morning.
Just a two part question.
For you Tom.
Looking through the Q looks like there was about a 70 basis point inventory charge in gross margin line in the third quarter is.
Is that a onetime dynamic mini.
Goalpost, you can kind of share with us as far as kind of your gross margin outlook for the fourth quarter and then nice progress on the tax rate just curious to what extent you might see more room to bring that down even further into the low twentys.
The term.
Yes, great great questions, Brian Let me take the first one.
We have a number of initiatives that are driving gross margin improvement. We've got really good management of price versus cost inflation dynamic we've had favorable mix as we've talked about proprietary growth.
Driving better better margin rates, and then the productivity and cost containment initiatives that weve got including in this current environment I mean, obviously discretionary spend is that.
Pretty important area of focus our year to date gross margins are up 70 basis points, we went from.
31, nine to 30 to six.
As you point out the third quarter gross margin rate was a little bit.
Less than that.
The drivers that that I mentioned, so that the price.
[music].
The mix.
Productivity all were already place, but we did we did have a couple of non recurring non cash adjustments in the quarter one was.
LIFO related we follow LIFO accounting for.
Our inventory the Americas, and we had to make some adjustments to reflect the inflation, we're experiencing in certain inventory areas in the personal protective.
Equipment in particular theres been unprecedented demand.
That is basically overwhelming the supply which is leading to abnormally high inflation in purchase materials things like clubs in apparel and so forth.
And so that was just all of our accounting policy to roughly.
Reflect.
Cost of goods sold at the current prices and leave and inventory the.
The older prices that just.
Dynamic of LIFO and inflationary accounting environment.
The second point, we had some cleanup and.
Some distribution inventories.
That you haven't gotten behind us.
For both of these things I don't expect.
Then too.
Have any impact going forward in the fourth quarter certainly out into two.
2021.
Thanks.
[music].
Your next question comes from the line of Dan Brennan.
Yes.
Hey, Dan Dan before before right.
Before I get to your question I Didnt get to point to on a.
Brandon's question on tax rate apologize for that.
Yes. So I mean, you go back and you go back in time. It is the start of pre IPO we were.
We were at around a 30 north of 30% adjusted tax rate and we had articulated a plan to.
Yes work that to the mid twice through the removal of some inefficiencies in the way weve, but as some of our businesses that are actually we're largely through those efforts.
At issue and as you've seen our tax rate is down too.
For the for the full year, we're now expecting a roughly a 24% tax rate, which is better than the lower end of guidance that we had had provided at the beginning of year. So good progress there yes, there is.
More opportunity.
In particular in the way.
We operate our our businesses in places like Central Europe, and the whole European continent.
And so we've got some longer lead time initiatives that.
That are under way that we think can can continue to drive that.
That rate down I'd like to be approach.
Approaching 20.
With the implementation of these initiatives there, they're probably going to take a year or two to.
Get into place so I would factor into your short term modeling, but the traction has has been pretty good EPS has that.
The work on the tax rate or sorry, the cash tax part so.
So overall thinking.
Thinking like you are that and we've got to continue with this the the one wildcard is the election.
And how that impacts.
Tax like tax rates for all of us.
Thats great. Thanks.
Sure maybe just maybe maybe just one question on the.
Q4, common and mid single high single could you give a sense or the actual become if you.
Did you break that down between what would be implied for cobi versus the base and then.
No data.
And I would expect that is as Michael said I mean, the the mix of the co bid tailwind.
Tailwinds.
Can have some variability to it.
Yes. The second quarter was was really strong for a lot of the diagnostic testing as we said.
And Michael was referencing the different testing types. We had we had some benefit from the psychological testing in the in the second quarter that contributed to.
The five to 600 basis points as you look at the third quarter, I mean that the sort of logic piece of it fell off a bit.
Just because of the mix and what the market is as using but by the same token overall testing volumes have increased as we head into the fourth quarter. We saw some good orders activity in the tail end of the third quarter. So we expect that mix to kind of move back to a little bit more of that on the diagnostic side the.
The Biopharma production piece of it has been has been.
Really strong so it's hard to say what the exact the exact precise.
Tailwinds would be but I would expect somewhere in the Q.
Q2 to Q3 kind of range is somewhere in those.
In those dynamics.
Great. Thank you for that and then I know there's been a series of questions on obviously your competitive positioning in the vaccine and therapeutic opportunity, but I was hoping that more.
More follow up there if you guys could provide a pretty extensive analysis on sizing the opportunity across the different modalities. So.
Sounds like that part of your business. Maybe you know was maybe 50 bips or sales in Q3, just doing some quick math I mean is it great.
Granted there remain good outcomes at Whiteman 21, but certainly with the order book that you see I would I would I would think there is a way to maybe spring what could be kind.
Kind of a range of outlook for 21 based upon the different modality. So anyway, one more one more Scott just given the extensive analysis you've done.
The importance of acute business I was just wondering if there is another way to practicing through maybe what a range of outcomes could look like going forward. Thanks.
Yes. Thanks for the question certainly can.
Hi, guys with your interest in trying to understand what this could mean for the for the business and I believe US we are spending a tremendous amount of time trying to model that and really reflect that in the investments, we're making to us and ensure that we can maximize the opportunity here.
I think the best way that we found so far to kind of.
You described the potential impact to the business is take it back to the impact on addressable market. So I'd remind you we we participate in our Bioproduction business in a market that's.
Roughly $10 million.
Based on the technologies that we have in our portfolio.
And depending on.
Well based on the vaccine candidates are in the pipeline and the projected doses based on publicly available information on what can be produced from each of those candidates.
And then looking at the the raw material requirements for those and single use requirements for those.
Technologies.
We think that this could increase our addressable market anywhere from call. It four to 5 billion on the low end up to eight or 9 billion on on the high end. So you can see.
Pretty big range of outcomes, but at least on a minimum it.
We anticipate having a pretty market impact on the addressable market for our for our business.
Ladies and gentlemen.
Allotted time for questions I would now like.
To turn the conference over to Mike.
Double sales for any additional or closing remarks.
Yes. Thank you operator, and thank you all again for participating in our call today and for being flexible with the least shift in the timing of the call as we close just wanted to express my continued gratitude admiration for all of our global Associates, who are.
Actively living our values everyday and working tirelessly to support all of our global customer during this unprecedented time.
Truly is an inspiration and their passion and dedication to our mission of setting science in motion to create a better world is never mattered more.
I'm truly excited about what lies ahead for long forward looking forward to updating you at the end of the fourth quarter and until then take care and be well everyone. Thank you.
Thank you for participating in today's conference call. You May now disconnect your lines at this time.