Q4 2020 Avantor Inc Earnings Call
Good afternoon, My name is Chris and I will be your conference operator today at this time I would like to welcome everyone. So our mantra for quarter and full year 2000, swine, you're earning results conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
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I'll now turn the call over to Tommy Thomas Vice President of Investor Relations. Mr. Pharma for me begin the conference.
Thank you operator, and good afternoon, everyone. Thank you for joining us on today's call are.
Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom <unk>, Executive Vice President and Chief Financial Officer.
The press release and a presentation accompanying this call are available on our Investor website at IR day of onshore Sciences dotcom.
A replay of this webcast will also be made available on our website. Following this call.
Following our prepared remarks, we will open up the line for questions.
I would like to note that we will be making some forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future.
These forward looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings.
Actual results might differ materially from any 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, whether a result of new information for.
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 will now turn the call over to Michael Michael.
Thanks, Tommy and good afternoon, everyone. I appreciate you joining us today and hope for new year is off to a good start for you.
I also hope that you and your families are staying healthy.
Reflecting on 2020 the value of the significant transformation, we have undergone since acquiring VW are in 2017, it's clear.
Organic growth has doubled margins and our overall business profitability have increased substantially and our leverage has now reached our target range of two to four times EBITDA.
This transformation has position of on tour as a global life Sciences leader and there has never been a more exciting time to serve this space.
As shown here on slide three.
Where is deeply embedded in virtually every stage of the most important research scale up and production activities in the industries we serve.
Our model is grounded in supporting our customers early phase discovery activities and we serve as a one stop shop and providing scientists all that they need to conduct their research.
Our customer centric innovation model enables us to provide solutions for some of the most demanding applications.
And we leverage our access to the early stage work to see content and solutions that ultimately become specified into our customers' approved production platforms.
Our fully integrated business model enabled us to support our customers' journey every step of the way.
Resiliency is an element of watchwords business model that was demonstrated throughout 2020.
Slide four provides an overview of our revenue across several dimensions, our resiliency stems from the consumables driven nature of our portfolio and our highly recurring revenue base.
Approximately half of our revenue comes from proprietary branded products and services.
These proprietary products are supplemented by innovative third party offerings from our critical supplier partners, enabling us to provide comprehensive work flow driven solutions to our customers.
We searched for end markets that feature similar characteristics, including high regulatory oversight and complex development processes.
Approximately 70% of our revenue is an attractive life science end markets.
Including more than $1 billion in the bio production space.
We have leading positions in the Americas, and Europe and have a growing presence in the EMEA region, driven by our ongoing investments in core Biopharma hubs, like Singapore Korea and China.
Moving to slide five I want to share some highlights from the fourth quarter.
As pre announced last month, we ended 2020 with a Q4 organic growth rate of 14, 9%, our strongest growth quarter of the year.
Combined with solid margin expansion and strong cash flow generation, our results underscore the relevance and value of our business model.
And our team's ability to execute in a challenging environment.
In addition to generating strong financial results. We also remained focused on driving innovation and growth across our core business.
We enhanced our bio production offering through several technology launches in the quarter.
Our <unk> top mixture of single use mixing system with integrated formulation programming enables consistency and reproducibility during media and buffer mixing processes.
Our new style and single use high pressure fluid handling system sustained pressure up to 150 <unk> Si.
Making it suitable for applications, where temperatures are elevated and pressures exceed normal biopharma process conditions.
Both technologies are compatible with our full line of single use solutions, complementing and extending the range of our customer offering.
During the quarter, our biomaterials business commercialized a controlled release drug delivery technology for HIV prevention application that has received a positive opinion from the European Medicines agency.
The technology Leverages, our flexible high purity silicone to continuously release and anti HIV drugs.
We are proud of our role in expanding the HIV prevention options available for women.
Particularly those in geographies most affected by the HIV epidemic.
We also completed the transformation of our capital structure by refinancing the remaining high cost portions of our debt.
Over the last couple of years, we have cut our weighted average cost of debt by nearly 50% and reduced our interest expense by over $300 million.
This will give us significant financial flexibility going forward.
Positions us to pursue M&A opportunities that will accelerate growth and enhance our portfolio of proprietary offerings.
A bunch for remains an important partner in the fight against the COVID-19 pandemic.
In addition to the PPE and testing solutions, we offer.
We're relevant in all vaccine modality.
Including the mrna and viral vector all modalities that have already received emergency use authorization in several countries around the world.
We continue to make appropriate investments to increase our critical bio production clean room and manufacturing capacity to meet the growing production in the first clean room expansion in our North Carolina facility came online in the fourth quarter.
And we expect additional capacity to be ready at our Massachusetts site by the summer.
We're also working to increase our raw material manufacturing capacity with plans to bring additional capacity online for key products throughout the year.
Additionally, our innovation team recently commercialized a silicone elastomer to support fluid transfer at extremely low temperatures a critical requirement in the production of some of the COVID-19 vaccines.
This is a good example of our integrated business model and highlights the value of leveraging the breadth of our portfolio to solve customer challenges.
Turning to slide six of the presentation I'd like to summarize our Q4 financial results.
Organic revenues increased 14, 9%, reflecting approximately 800 to 900 basis points of COVID-19 related tailwind improvements in all our end markets and importantly, mid to high single digit growth in our base business.
<unk> continues to be driven by Biopharma for organic revenue growth exceeded 20%.
Biopharma is broad based strength in the quarter is indicative of the value we offer through our ability to collaborate directly with customers to characterize and scale up their formulations.
In healthcare, we once again experienced double digit growth driven by strong hospital and clinical reference lab activity that offset ongoing elective procedure weakness. It was an outstanding quarter and our government end markets growth exceeded 50% as we were favorably impacted by Covid related purchases.
Adjusted EBITDA in the quarter was up approximately 21%.
Leading to adjusted earnings per share growth of approximately 57 per cent to 29.
Our EBITDA margin rate growth continues to reflect the impact of volume leverage favorable mix from our proprietary offerings commercial excellence and productivity.
Tom will provide more details on adjusted EBITDA and EPS growth and just a few minutes.
Our strong free cash flow generation drove a 152% conversion of adjusted net income.
For the full year, we generated $868 million and free cash flow about 75% higher than the high end of our initial 2020 guidance aided by strong EBITDA growth and lower interest and taxes.
This full year performance enabled net leverage to reach our target range of two to four times EBITDA.
Down from four six times at the beginning of the year.
Our results reflect our attractive end market exposure highly recurring revenue base trusted and collaborative customer relationships and a strong culture of execution enabled by the onshore business system, which underpins everything we do.
With that let me turn it over to Tom.
Thank you Michael and good afternoon, everyone slide seven shows our organic revenue growth by end market and product group for the quarter Biopharma, representing approximately 50% of our revenue.
<unk> organic revenue growth of over 20% in the quarter and double digit growth for the full year.
<unk> trends in R&D workflows drove growth in our lab products business. In addition, our bio production platform experienced very strong growth in production materials and single use assemblies to support both our base business and Covid related areas health care, which represents approximately 10% of our revenue also.
So increased revenues over 20% organically in the fourth quarter and attained mid single digit growth for the full year.
Strength was once again driven by continued COVID-19 testing momentum offset by ongoing elective procedure weakness, which adversely impacted our medical implants business education and government, representing approximately 15% of our revenue experienced double digit organic revenue growth in the fourth quarter and declined mid single digits.
In the full year fourth quarter growth was driven by government customer purchases offset by ongoing education declines Saturday in the Americas advanced technologies and applied materials.
Presenting approximately 25 per cent of our revenue experienced low single digit organic revenue growth in the fourth quarter and declined low single digits for the full year.
Core industrials portion of this end market, including oil and gas petrochemicals and mining has driven the sequential improvement.
By product group proprietary materials and consumables experienced approximately 20% revenue growth with strong growth in the Americas.
Third party materials and consumables also experienced very strong high teens organic growth services and specialty procurement increased high single digits, driven by ongoing clinical services strength and continuing equipment services assets continued to reopen.
Shipment and instrumentation experienced a sequential recovery to low single digit growth, reflecting a modest improvement in capex investment.
Let me move to slide eight.
Looking at growth from a regional perspective, Americas, which represents approximately 60 per cent of global sales reported 16, 2% organic revenue growth.
Strong sequential improvement from Q3 growth of 4% for.
Full year growth was four 6%.
Most end markets experienced sequential growth improvement in the quarter.
Highlights for growth of 20% in biopharma, including strong double digit growth in Biopharma production.
And greater than 20% growth in health care, driven by hospital and clinical reference lab customers offsetting ongoing elective procedure weakness, which continues to impact our medical implants business.
The declines in education moderated, although lab and school closures are still creating a headwind.
Our government business was very strong essentially doubling driven by COVID-19 related purchases.
Europe, which represents approximately 35 per cent of global sales reported for 2000, 14.7% organic revenue growth and strong sequential improvement from Q3 full year growth was seven 1%.
All end markets experienced sequential improvement with growth highlighted by ongoing biopharma strength and strong government sales as both grew by double digits.
Similar to the Americas, Q4 strength and research materials, and consumables and continuing Biopharma production sales drove the biopharma growth.
Governments continued their broad based purchases largely centered around the COVID-19 related personal protective equipment and diagnostic testing offerings.
Health care experienced double digit growth in education grew by mid single digits. The first growth quarter in 2020 aided by ongoing lab reopening.
Advanced technologies grew by low single digits.
EMEA, representing approximately 5% of global sales reported five 2% organic revenue growth.
Spite, a challenging comparable in the prior year when growth in our Biopharma production and market drove overall EMEA a growth over 20 per cent.
<unk> nine has our segment results Americas reported 26% and adjusted EBITDA margin rate, approximately 240 basis points higher as compared to the prior period.
Drivers include strong volume growth favorable mix driven by strong growth in proprietary materials and consumables content.
And commercial excellence offset by additional costs to support the growth.
2020 full year adjusted EBITDA margin expanded approximately 190 basis points in the Americas.
Europe reported an 18, 1% adjusted EBITDA margin rate.
Approximately 60 basis points lower as compared to the prior period.
We continue to experience favorable margin impacts from strong volume growth and commercial excellence.
In the quarter. However, some additional investments to support the growth along with some nonrecurring items created the margin rate decline 2020 full year. Adjusted EBITDA margin has expanded approximately 50 basis points in Europe EMEA reported a 21, 4% adjusted EBITDA margin rate of approximately 900.
Basis points, lower as compared to the prior period as you'll recall, we had an exceptionally strong adjusted EBITDA margin rate in Q4, 2019, and EMEA driven by this very strong growth in our biopharma production and market.
2020 full year adjusted EBIT margin declined approximately 170 basis points in EMEA due to the same factor.
Turning to slide 10, let me start with our fourth quarter adjusted EBITDA, we achieved approximately 21% growth in reported adjusted EBITDA and 60 basis points of reported margin expansion.
Key drivers of the performance where volume growth.
Favorable mix, including strong growth in Biopharma production and proprietary offerings.
Commercial excellence and continued discretionary cost containment offset by increased compensation costs driven by our strong performance.
For the full year adjusted EBIT margin expanded approximately 80 basis points.
We achieved approximately 57% growth in our adjusted earnings per share for the quarter and approximately 54% growth in adjusted earnings per share for the full year.
Primary drivers were the strong operating performance the ongoing reduction in interest expense from our deleveraging and refinancing.
And the improvement in our income tax rate.
As Michael mentioned, we had a strong quarter of free cash flow generation with $286 million in the fourth quarter full year free cash flow generation was $868 million almost $400 million higher than the high end of our previously withdrawn guidance.
The growth was driven by higher EBITDA outstanding leverage of working capital and lower tax and interest payments.
Turning to slide 11, you may recall that we withdrew our 2020 earnings guidance due to the extraordinary uncertainties and volatility created by the global pandemic, although a path to resolving the pandemic is starting to take shape significant uncertainty remains with lab utilization diagnostic testing volumes.
And vaccine production distribution and adoption. In addition, the path to full recovery for our education medical implants, and industrial businesses is still unclear. These uncertainties make it extremely challenging to construct an operating plan for 2021.
Nevertheless, we do provide some preliminary perspectives for revenues profits and free cash flow.
We will update you on the full year guidance during each quarter's earning call.
Excluding the impact of the Covid tailwind our core business grew approximately 100 to 200 basis points in 2020.
We consider a mid single digit run rate.
A reasonable baseline for core revenue growth as we start the new year and it should be even higher as we move into the second quarter, where the year over year comparison becomes significantly easier.
As we head into the second half of the year and particularly into the fourth quarter the comparable prior year periods will become more challenging.
Based on this outlook for our core business together with the potential COVID-19 tailwind of 250 million to $350 million plus we are currently planning a 4% to 7% organic growth rate range for 2021, including growth of mid to high single digits for the first half.
For the year reported growth will reflect the weaker U S dollar and approximately 6% to 10 per cent for the year.
Preliminary results for January suggests that we are off to a strong start to 2021.
We expect adjusted EBITDA margin to improve by about 50 basis points. This improvement reflects our ongoing expectation of strong growth in our proprietary offerings.
Operating leverage on our fixed cost base continued focus on managing inflation and productivity there will likely be a return of certain operating costs like travel and entertainment.
And employee health care as the impacts of the pandemic subsides over the latter half of the year.
We anticipate adjusted earnings per share growth of approximately 30%. This reflects continued strong operational improvement lower interest expense from deleveraging and completed repricing and refinancing actions and an effective tax rate of 24 per cent.
Maintaining a flat share count for guidance purposes.
Last free cash flow is expected to be approximately $800 million versus $868 million in 2020.
Also reflecting the strong operational performance lower interest payments from deleveraging and already completed repricing and refinancing actions, we do expect higher capex and working capital investments during the year to support our continued organic growth and for certain nonrecurring.
2020 benefits mainly related to income taxes to subside in 2021.
This concludes my prepared remarks, I will now hand, the call back over to Michael.
Reflecting on 2020, we executed extremely well in a challenging environment and our top line performance strong EBITDA and adjusted earnings per share and outstanding cash generation reflects the resiliency of our business model.
The value of our highly recurring revenue base broad mission critical product portfolio and exposure to attractive end markets like biopharma position.
Position us well for continued growth as we head into 2021.
While the uncertainty associated with the current pandemic continues our business remains strong.
And we have embraced our critical role in providing solutions and services to support COVID-19 testing workflows and to total personal protective equipment and customized materials needed to produce vaccines and therapies.
Reflecting our relevance in this critical endeavor.
Our bio production order book continues to experience strong growth.
And we are actively investing to capture this opportunity.
There has never been a more exciting time to serve the life Sciences space. The COVID-19 pandemic has underscored the importance of science to our society and have on tour has the scale and resources to capitalize on the opportunities in this driving industry.
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 income on tour and for your ongoing support.
I will now turn it over to the operator to begin the question and answer portion of our call.
Thank you I'm, Sorry reminder, to other clusters, you will need to press Star then the number one on your telephone keypad Dodge a question. Please press. The pankey. Please note that there will only have one question one follow up for price zone.
Your first question comes from the line of Tycho Peterson from Jpmorgan. Your line is open.
Hey, Thanks, Michael when you laid out the guidance for the year you didn't know noted a number of variables based lab utilization COVID-19 vaccine trends and non Covid health care demand and I'm wondering if you think about the 400% to 7% organic outlook.
If you could just talk to where you see conservatism in the numbers would it be around additional vaccine approvals or maybe more durability of COVID-19 tailwind I'm. Just curious you know what could get you to the high end or maybe a book.
Yes, Thanks, Tycho Thanks for taking the call I appreciate the question.
As we look at how we have constructed the guidance. There's obviously two key components for you have.
Our perspective on how the base business will perform and then obviously trying to take a view on how.
The COVID-19 related revenues will flow throughout the year. So let me try to unpack each of those for you in some detail here.
For the for the base business.
As Tom mentioned in his remarks, we grew in 2020, roughly 1% to 2%.
And we're estimating somewhere in the mid single digit levels for full year 2021, So we're definitely assuming.
Some sequential improvement year over year, and if we look at where we finished Q4, obviously, we've seen continued momentum in.
All of our key.
Key end markets, but.
But we still do have some headwinds that we're facing our education business.
There is still.
Flattish to modestly down our medical implants business still has some headwinds to it and our industrial business is still somewhat below pre COVID-19 levels and for most of those end markets I think we're going to need to see.
For the effects of the pandemic subside before we would anticipate those things are growing so that's I think one important assumption obviously continue strong.
Strong momentum in our Biopharma.
Platform, particularly in the R&D environment is is going to be key here.
And then from a vaccine perspective, we obviously generated significant tailwind in 2020 and.
For the gauge here anticipating.
Somewhere around the same level, although the mix would be different and.
With more focus or more weight on the vaccine opportunities compared to 2020 now that we have a number of.
Candidates that are that are in full scale production.
We do have an assumption baked in here that testing.
<unk> strong here in the first quarter and likely into the second quarter that we would anticipate that trailing off somewhat in the second half of the year under the.
Assumption that as the vaccine becomes more.
Prevalent in the marketplace.
Transmission rates decline.
Demand for testing will start to fall off somewhat in the second half of the year I think that's a key assumption.
That could push the numbers, one way or another as testing honestly where to hang up at the levels that we're at at the moment.
That can provide.
This momentum for pushes to the high side of the range and then the vaccine is we've talked in.
At your conference and in other forums.
We're obviously very relevant here across all the modalities and our order book is is ramping in.
The revenues for recognizing from suppliers that we're providing there are.
Providing some nice momentum here.
There are some assumptions here obviously around.
How many vaccines can produce how many doses get produced which modalities get.
Get commercialized or get approved.
And then of course, we have our order book and I would say at the moment our outlook is probably more based on our order book.
Some of the other variables that we can try to take a read on and as.
If the order book for to.
Continued to grow over time.
Radically see some upside coming from that but I would say a lot of variables at play there and so on.
We've taken an approach share.
Trying to be prudent with line of sight to.
The business in hand at the moment.
Thanks, and then a follow up for Tom If I think about the margins for 50 basis points. I think you had said 50 to 100 at our conference in January. So can you just clarify why the outlook a little bit more muted than what you talked about the beginning of the year and then secondly, there was a $38 million noncash charge and the cash.
Cash flow statement for inventory was that was that PPE or something else.
Okay.
Just on the on the 50 to 100.
Long term guidance that's what.
Confident in.
And.
Going into 2020.
For 45 to 75 ended up at 80 basis points.
I think you can consider the 52.
Somewhat of a minimum we didnt range at the top end given the variables that Michael talked about because they can have.
So quite an impact on.
The margin rate.
In terms of non.
Noncash items.
We continue to have.
Ongoing.
Strength in cash flow as they picked up in our in our cash flow statement.
But you will as you're integrating <unk>.
Our acquisitions.
VW are in accounts are continuing to.
Complete youll see some.
Non operating non operating items come through but.
Provisioning for bad debt provisioning for inventories as a normal course of business kind of thing overall.
And we do see some improvement opportunities, but overall not not that big of a factor for us.
Okay. Thank you.
Thank you. Your next question comes from the line of Derik de Bruin from Bank of America for your line is open.
Hey, good good afternoon.
Just a couple of questions I think on the first one.
Can you I mean, you sort of alluded to it but can you talk a little bit more.
About the mix between PPE.
Diagnostics in Bioprocess, and I'm also particularly I'm, particularly interested in.
Specifically as the.
Mrna vaccines rollout just what essentially how's it been weighted through think about your revenue contribution specifically from the different vaccine types I know you've laid out some stuff in the past might be up a little bit more granularity on how we should sort of think about the mix on this in the margin profile on this incremental growth.
Yes, Derek Thanks for the question.
Kind of where.
Each of the categories that we participate in related to.
For the Covid pandemic.
The relative proportions of contribution remains somewhat steady throughout the year.
Meaning that roughly half of.
A tailwind came from diagnostics and then.
Kind of equal parts, then PPE and vaccines made up for.
The balance.
One of my NAV, if we did see obviously in the fourth quarter is as anticipated given the order book.
A.
A meaningful step up in the absolute contribution from vaccines.
But you also then saw.
Covid tailwind is accelerate from kind of three or 400 basis points in the third quarter to a 900 basis points in the fourth quarter and.
In addition to the strong contribution for vaccines diagnostic testing, obviously played a meaningful role in the quarter given the number of tests that were being.
Ron So the proportions didn't actually changed that much in the fourth quarter. Despite.
Vaccine stuffing up.
As much as they did.
Going forward.
On a full year basis, we would anticipate.
For $250 million to $350 million of plus.
Cost of revenue coming in 2021.
Roughly half of that we would anticipate coming for vaccines.
And then.
Diagnostics and.
Kind of being the one that.
Declines in PPE, probably being similar in 2021 relative to 2020 is how we would see that.
Playing out.
<unk> kind of put.
The range of $2 $53 50, plus to indicate there are obviously scenarios here.
Could evolve here that would cause us to move the range up.
I mentioned earlier in response Tyco's question that we've made an assumption the diagnostic testing falls off in the second half of the year.
We will see how that develops and then.
Depending on how the vaccine rolls out you could theoretically see some upside there from additional approvals in a more aggressive.
So ramp of production throughout the year as we've said in a lot of different forums dark.
We're relevant in all of these modalities you mentioned mrna and.
We're certainly well positioned there with the.
The candidates that are.
And production at the moment I think it's also important to point out that the viral vector vaccines for J&J vaccine Astrazeneca vaccine for example.
We're also pretty significant pretty.
Pretty significant requirements for.
Our raw materials, an excipient in single use systems.
Actually not that far behind what we would supply to mrna and so we're excited about the potential of getting those vaccines approved and in the market as well.
I don't think our view probably hasn't changed in terms of the amount of content that.
As required for each of these various modalities.
Just reiterate how well represented we are throughout the pipeline here.
Okay.
Once again I think that's the question I'm getting is it like it is in general the bioprocess contribution higher margin in 'twenty.
Basically is that higher margin for diagnostic contribution I think that for the questions getting yes. So if you look at the three areas.
Derek has to stack it up for you in terms of margin contribution nearly everything that we are going to be supplying to those vaccines is going to be proprietary content.
Carry correspondingly then.
A highest margins of any of the solutions the day.
Agnostic piece, we're probably.
Yeah.
Second in line there with a mix of kind of third party content, but we do have quite some proprietary content there as well whether it would be.
Some of the reagents some of the other consumables or even some other equipment.
Thermal cycles for example, and then PPE will probably lag that a bit with quite a lot of that for the majority of that being third party in nature.
Great.
You did spike.
And one follow up on that when you mentioned the lab equipment.
That's sort of net grew in the quarter.
Could you just sort of characterize with net pickup I mean, just given.
Is it is it is it.
Pent up spending that's been sort of like pent up and people sort of like waiting for it is it new labs being build out.
I'm wondering just given your equipment mix, a little bit different than some of your peers you have more extensive like where the laboratory builds our needs are going out just sort of curious in terms of what you're seeing in terms of placements of instrumentation equipment.
Alright, we definitely did see some acceleration in the quarter, but even with the sequential improvement, but we saw moving from third quarter to fourth quarter still somewhat muted I think equipment and instrument growth for us in the quarter was low single digits. So it was nice to see the category returned to.
Growth.
And.
Certainly.
The budget flush topic.
We encountered this time of year kind of played out I would say probably at the historical levels, which is to say that nothing particularly unusual.
But.
Across the Biopharma space for example.
C.
Probably the strongest acceleration.
Of the equipment and instrument purchases.
In the quarter and to support.
A lot of other new projects and things that are that are going on here, but still.
Even with the growth, we did see still somewhat muted relative to historical levels.
Great. Thank you very much.
Thank you. Our next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open.
Hey, guys congratulations on a good print here.
Michael if I may start on.
One on the guidance for top line here I guess.
If you look at that Q4 number $130 million.
Covid Calvin's sequential step up of 70 I'm, assuming most of that was vaccines you annualize that number I mean, we're getting close to 300 ish.
Heard you correctly I think you said 150 to 175 vaccine revenues in fiscal 'twenty, one so I'm curious.
What would cause that.
Vaccine could drop is that a mix change.
And I think on the base.
X X the incremental tailwind.
The guidance as you haven't for years to 6% on the base.
Offer for 1% comp so perhaps.
Talk about the base business as well in the context of easy comps.
Yes happy to address both of those elements Vijay.
BJ for.
Firstly on kind of a Q4 split and contributions.
Yes vaccine contribution definitely stepped up.
But we also saw a meaningful step up in the quarter for our diagnostic platform as well testing in the quarter was obviously at its highest point at any point in the year, we participated in that in a meaningful level.
It's probably important for you to account for a meaningful step up on the.
The other testing side of things as well as you're extrapolating out.
Where where things come out in 2021, I do think with the order book that we have in place at the moment for the visibility we have.
Kind of the guidance that we've given around $253 50, plus with half of that coming for vaccine is still a pretty reasonable estimates.
For perhaps.
<unk> is more vaccines get approved in more orders come in we will see a way to.
Increase that but not a bad jumping off point.
Relative to the base business.
If you kind of book in 2020 with.
The Q1 growth of core growth a little over 4%.
The Q4 growth of.
6% to 7%.
We'll have relatively modest comps to address in the second and third quarter, but.
Pretty pretty good comps in the other two quarters.
And we do have still some some headwinds in.
Important parts of our business, our education business is still down improving but nevertheless, still behind pre COVID-19 levels, our biomaterials platform.
Particularly our medical implants business is still off.
High single digits, and our industrial complex is still lagging pre COVID-19 levels as well so.
And if you remember last last Q1 for example was a pretty normal quarter, mostly free from Covid impact so.
We don't anticipate any of those end markets that I. Just described is having headwinds is.
Clearly cut recovering until.
Later in the year.
So I think thats, maybe some of the differences youre seeing there but.
Recovering from 1% to 2% growth into that mid single digit level, what would reflect I think kind of the momentum that we've got exiting the year, but does take into account.
Some of the comp dynamics.
That's helpful comments, Michael and maybe one for <unk> com.
My favorite question enough free cash flow is impressive fiscal 'twenty.
It looks like there was some timing element guiding to free cash of 800 stepped down for fiscal 'twenty. One I guess, if that's normalized level what should free cash flows.
No.
But can you kind of normalized level and it looks like you're guiding to tax rate stepping up for any comments on why tax rate step up.
Yeah, a couple of things.
VJ.
<unk>.
On the free cash flow first of all.
We did $868 million in 2020.
Which was was up significantly from the $300 million, we did in 2019 so.
More than more than two X almost three eggs.
We're signaling throughout the year that there were some.
No extraordinary items coming through around cares Act.
Just to refresh we had some deferrals are for.
Of employer taxes for employer taxes, we also.
On payroll we also had.
Some interest deductibility.
Improvements or enhancements from from the act and there were a couple of other things in the tax area.
We settled some open.
<unk> got some refunds there so when you look at the <unk>.
Tax area in particular and cash taxes.
2020 number was extraordinarily low.
At roughly $40 million or so in taxes.
To return to a normalized level that will be.
North of 100 $120 million given those the one timers that I talked about.
I think we're signaling.
These items throughout most of the year, if I look at it.
What are.
Entitlement is.
On net income on adjusted net income we should be around 110, 115%.
And because of some of these factors we ended up.
Converting at around 150% in 2020.
One other element that is when you look at 2021.
Are some investments that we're going to need to make.
We have some opportunities we've talked about the need to add capacity.
And some of the Biopharma production areas as an example, we've got some projects underway in particular to create some exciting additional growth.
And then also in working capital to support for ongoing growth there could be.
Some additional working capital investments there so.
Between.
Just.
And then one time.
Out of the ordinary sort of benefits that we had signaled throughout the course of the year as well as.
Some modest investments.
Into 2021.
We're starting with an $800 million.
Estimate for free cash flow for 2020, sorry, 2021 relative to the age of 68.
In 2020.
Hopefully, we'll drive it higher but we think thats.
Proven starting point.
At this early point.
In the year.
Second question Vijay Rami.
The desktop.
And any one timers in that 24% and should that zone.
No.
Yes.
Yeah again on tax rate.
Just kind of recall from where we came from if you started in.
2019, you would've seen us north of a 30.
30%.
For 2020, we guided.
An improvement, but we didn't we didn't guide to improvements down there.
The $22 nine percentage, but we got to there certainly was.
The positive impact from the initiatives that we've talked about in terms of removing some of the inefficiencies.
Terms of how we're funding our international operations, we also had some.
The one time benefits in 2000.
And 'twenty around.
The excess.
Benefit around.
Employee stock option exercises.
And some other minor things so those probably gave US 50 to 100 basis points of improvement on tax rate.
Do expect those to continue on a normal run rate basis, havent factored those into the into the return or I'm sorry into the.
And to the estimate I do expect US is as we've said to continue to drive our tax rate down a long term basis to the to the lower <unk>.
So I wouldn't read into that.
The starting guide for two.
'twenty one if any.
Difficult change in how we're approaching tax or our confidence in being able to drive continued improvement.
So the team has done.
Thank you and your next question comes from the line of Doug Schenkel from Cowen Your line is open.
Hey, good afternoon, everybody. Thank you for taking my question I'm going to just ask.
Two questions I have and then get back into queue, because I know I'm heading into a bad reception area. So my first question is really on M&A per property.
You guys have always been a cash flow generating with me that that was never more evident than it was in 2020.
Given where the balance sheet.
I was just wondering if you could provide a little more detail on the parameters that we should be thinking of as we think about the types of deals that you would pursue and why for what.
If you wanted to give us some parameters mathematically that's out for your capacity that would be appreciated as well. So that's the first thing.
Second on Covid.
I'm just curious as you.
Think about it.
Good.
Doing well there by doing good.
Is that also opening opportunities with new accounts that you would expect to be more durable overtime. So I guess put differently.
The new account openings because of what Youre doing.
For helping with Covid.
Our day opening the door for does it do you expect to be durable even after the pandemic guidance. Thank you.
Okay, Hey, Doug Thanks for the question.
Take the M&A piece.
Mike will address your second question around Covid.
Terms of overall capital deployment.
You are right around the cash generation and it has had a direct impact on improving our balance sheet of our leverage has gone from seven times at the beginning of 19 too.
The four times that you see at the end of <unk>.
2020.
We think that with.
Continued cash generation if you didn't if you didn't do anything around.
EBITDA you'd continue to drive that down between.
<unk> 75, and our full full point turn a year such that by the end of 2021, you could be approaching three times.
Our targeted leverage range is two to four so we're inside that corridor now.
That in itself is one of the governance here, but to get to capacity.
We can stay within that corridor, and then all the cash flow that we generate.
If youre going to argue about if you can say that we could take leverage up a little bit as well, but if you just started with $800 million of free cash flow.
Yes.
Projected for 2000.
For the 21 that would be capacity that that would be available.
Plus whatever incremental.
Leverage you'd be comfortable taking on as well as the cash that we have on the balance sheet. So there's well over one.
$1 billion of.
Capacity right now to do something.
And our approach has been for first of all to <unk>.
Prove that flexibility and that is materializing.
We're active.
But we're certainly not desperate in terms of.
Developing an M&A pipeline.
We've got all of the businesses engaged.
We have been.
Actively pursuing.
Individual deals, but we're going to be disciplined.
That's not to say, we're not willing to pay a fair price, but we want to engage with.
Opportunities that can.
Can bring.
Good growth and enhance our overall growth rate.
But also bring cash and be accretive to our margin rates as well.
And so we're typically looking for deals.
<unk> proprietary content.
That.
Would be in Biopharma production space.
Some of the some of the lab.
The research space is that.
We've talked about in the past that we find to be interest including genomics.
And other things.
In that lab area. So.
It's okay for us.
We've got plenty of things.
Things to do on the balance sheet, if we're not <unk>.
Scoring on M&A every single month every single quarter.
Because we have plenty of capacity continue to deleverage essentially.
Cost.
So that flexibility is going to is serving us well has served us well.
And we will continue to be disciplined on that front.
Hey, Doug maybe picking up the second question, probably check opportunity to expand the question a bit to think about.
Our maybe our longer term perspective on.
What we're what we've learned or what this experience of Covid has.
Maybe changed in our thinking here.
Firstly I think my personal view here, that's evolving is that.
Covid vaccine world is probably going to be.
More durable than not.
And I think given what we're seeing unfold here with.
The variance in the mutations that are emerging.
And the work that's going on by even some of the existing.
Vaccine manufacturers.
Likely going to be necessary to even have some kind of a boost for market perhaps.
Latter part of the year heading into the winter flu season again.
And so I think that the data is starting to indicate that this is.
Perhaps heading towards paying something more endemic in nature, meaning we could be facing kind of an annual COVID-19 vaccine. So.
Obviously not definitive at this stage, but certainly the durability of Covid.
It seems to be.
Creasing.
The second piece, which maybe is more responsive to your question.
We see great opportunity here.
Emerging beyond Covid, leveraging the technologies that have been accelerated here.
Bioengineered vaccines, a category I think is going to take on a whole new level of importance for us COVID-19.
Presumably that becomes index will be a part of that but you already see many of these companies.
Initiating research activities to apply the technology.
Two other.
Areas that that would maybe more common vaccine technologies.
That were used too there could be potentially replaced by this which would bring in biologic player like ourselves into that realm and that can be exciting and then I think just the acceleration of a modality like mrna. There was obviously a nice pipeline building for the technology outside the vaccine space.
That presumably will have been accelerated through this experience we've all learned a lot.
And in scaling the technology and certainly the benefits of the technology are clear so we see.
So nice.
<unk> emerging from this that go even beyond Covid they give us.
A lot of excitement and we were bullish on the biologic space pre COVID-19.
Certainly as we sit here today or even be more bullish on that as an end market and then relative to new account openings.
We said all along our technology is very relevant across all of these modalities.
Many of the names that have emerged as leading candidates for well known names that you know that we've had as customers for a long time.
But there is obviously a really deep pipeline of activities that includes a number of companies that we probably haven't done a lot of work with before.
That could be another element of this.
It produces some value to us over over the long term.
That's great. Thank you guys.
Thank you. Your next question comes from the line of Jack Meehan from NASA Research. Your line is open.
Thanks, Good afternoon.
Wanted to dig in a little bit more around the assumptions behind the guidance for Covid testing. It just seems like an important assumption around the back half.
To frame that I was wondering if you could provide some color on the fourth quarter step up did.
Did you have any notable wins on the PCR side, and how much damage and contribute to the step up.
Yes, all fair questions. So Jack Thanks for thanks for calling in Tonight.
Diagnostics in the fourth quarter.
Was close to half of the.
The tailwind that we saw in the quarter and that was really.
Some nice pickup on the PCR side of things, where we've been well positioned throughout the pandemic with.
Kind of tracking just.
The daily testing right there in terms of the volumes that we've been supplying.
But we also.
Saw a nice contribution in the quarter from the antigen based testing.
Flow that obviously started to take on prominence late in the third quarter and kind of got a full quarter's benefit from that and we did have a number of pretty significant wins, if you dig into the numbers there youll see our government business grew at over 50% in <unk>.
In the quarter.
A lot of that actually is diagnostic driven.
Both PCR, but definitely we.
We had a number of pretty significant wins.
On the antigen side, particularly here in the Americas.
<unk>.
Some of the state governments and other municipalities that we were able to penetrate.
In the in the quarter so that was.
We had anticipated and I think we even signaled that on our last call that we had anticipated seeing some pickup from that from that particular workflow.
And it certainly did materialize in the in the quarter.
Great. That's helpful color and then looking at the 2021, just wondering if you could give some color on the interplay between proprietary and third party products. It sounds like from all the commentary that should remain favorable but can you just wan and maybe confirm that.
Yes, it's an important question, Jeff because as you know.
That's a strong driver for margin expansion and historically our proprietary.
Product category has outgrown our third party category by anywhere from two to three X and in large part driven by just the dynamics of how are our production platform growth relative to maybe the R&D space.
That trend isn't exactly a holdup exactly like that in 2020 and you take a look at the fourth quarter, we had phenomenal proprietary growth.
20% or so in the quarter.
But we also had very very strong third party growth as well.
Only lagged by.
A few percent.
And that really is a reflection of.
Some of the uptick that we saw in the diagnostics space.
Particularly on the antigen side, where a lot of that has.
Comes from our third party partners that we.
We work with.
Obviously, we feel comfortable.
Showing at least 50 basis points of expansion moving into the new year and it is our expectation that the proprietary product category will outgrow the third party category.
She is by how much and I think that gets into some of our reluctance to.
To kind of put out a specific range on the.
The guidance for the year, given how important mixes to us.
And depending on how testing workflows hold up for the year.
It will be one of the stronger determinants of mix for the year, but Theres also a couple of other areas that <unk>.
Probably we're lagging a bit in 2020, namely our third party procurement platform as well as the equipment and instruments.
Category that lagged for most of the year.
How far back those come to normal will also be an influencer on.
On mix and margin for the year Jack.
Alright, thank you.
Thank you. Your next question comes from the line of Dan Brennan from UBS. Your line is open.
Great. Thanks, Thanks for taking the questions.
Michael You mentioned a few times early on in the discussion about the start for the year I think was good and January you also talked about the vaccine order book being solid could you could you just give us some visibility to the color about the order book itself any details about it in kind of how far out the deliveries run through for the order book.
Yes, absolutely.
And maybe to just use the same.
Kind of context as we've quoted in previous quarters, our bar production order book.
Ending the year was up approximately three times the level that it was at heading into last year.
And that compares to being up roughly two times at the end of the third quarter to give you a flavor for how hum.
The book is accelerating.
I don't have a specific number to share with you for January but needless to say it has continued to accelerate into.
The early weeks here of the new year.
And so we're.
A fair bit of momentum there that we're excited about.
That order book in the fourth quarter, obviously stepped up in a meaningful way a lot of that came from the vaccines, but I would highlight the base business continues to be very robust.
Similar to the third quarter, where I think we said roughly.
Roughly three quarters, if not a bit more was from our core business and the balance coming from.
The vaccine space.
The net order book for the core business continues to be strong the mix is shifting no doubt.
Towards vaccines and <unk>.
The proportion of vaccine in that order book.
Probably moved up another.
10%, 15%, 20% something in that range in the fourth quarter and.
<unk> to evolve here in the early weeks of the new year here, So very strong order book and it's a mix of.
Very good momentum in the base and obviously, our growing vaccine order book as we.
Support these production orders I would say we've got.
Stronger visibility than we've had historically the core we probably have some visibility for orders that go out even into the middle of the year in.
The vaccine is probably similar.
For early summer kind of visibility on it.
The platforms that are approved for now.
Got it and then as a follow up.
I wanted to ask just kind of within bio production, obviously, you've got you've given a lot of information over the last three to six months about the areas you plan, but could you highlight within <unk>.
Media and resins and buffers excipient in single use and you've got more listed on some other charts you've laid out.
Where would you characterize your real strength, what other what are the two or three products, maybe that you're really dialed in at a critical across whether it's the other vaccines that are rolling out or just more broadly in bio production just wondering how you would highlight.
The real strength for <unk> offering in that space. Thank you.
Yes relative to the vaccines.
Clearly very very strong growth in pull from our single use portfolio.
And that's going to be across all the relevant.
Irrelevant modalities here very very strong demand for those technologies for.
For the mrna vaccines, while the full breadth of our portfolio is going to be applicable there.
The piece there that's unique.
Is going to be some of the cholesterol and lipids that are used in the delivery technology.
Of that platform.
No.
Some of the buffers and other processing ingredients are key there as well, but that's probably something that's a bit unique to <unk>.
<unk>, Inc.
That you might not see another other platforms.
Great. Thank you.
That is all the questions that.
I will turn the call over to back to Mr. Michael Channel fill for any closing remarks.
Great. Thank you operator, and thank you all for participating in our call today as we close I would be remiss if I didn't express my.
Sincere gratitude for the tireless efforts of our global associates around the world who are living our values every day.
Working to fulfill our mission of setting science in motion to create a better world.
As they are giving everything they've got to support our customers. During this unprecedented time and I'm certainly inspired by by their passion and their dedication.
To our mission that in fact, because certainly never mattered more.
As I mentioned earlier I'm Super excited about what lies ahead for our for our business and for <unk> and look forward to updating you when we.
Meet again soon until then take care and be well everyone.
Ladies and gentlemen, this concludes today's conference call for <unk>.
You may now disconnect.
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