Q1 2021 Avantor Inc Earnings Call

Good afternoon. My name is Annie and I will be your conference operator today at this time I would like to welcome everyone to Atlanta first quarter 2021.

The conference call at this time, all participants are in and you can only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being reported.

Let's turn to full operating Mr. Tommy Thomas Vice President of Investor Relations. Mr. Thomas You May begin your conference.

Thank you operator, and good afternoon, everyone. Thank you for joining us on today's call on.

Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Thompson, Executive Vice President and Chief Financial Officer.

The press release and a presentation accompanying this call are available on our Investor website at IR on tour Sciences Dot com.

A replay of this webcast will also be made available on our website after the call.

Following our prepared remarks, we will open up the line for questions.

During this call we will be making some forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments 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 day that they are made.

We do not assume any obligation to update these forward looking statements whether as a result of new information.

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 I'm starting on slide three.

Come on towards first quarter results provide a terrific start to the year and underscore the value of our fully integrated business model and the relevance of our diversified portfolio.

Driven by the of onto our business system, we delivered strong results across all core financial metrics we.

We achieved 13, 5% organic revenue growth in our core growth rate, excluding COVID-19 tailwind improved for the third consecutive quarter.

We continued to play a critical role in providing solutions and services to support the global response to the COVID-19 pandemic and these COVID-19 tailwind accounted for approximately 700 basis points of growth in the quarter.

We realized substantial EBITDA growth expanded margins more than 300 basis points and more than doubled adjusted EPS.

Additionally, our leverage position continues to rapidly improve and we received upgrades from all three rating agencies in the quarter.

On April 12, we announced the definitive agreement to acquire Ritter G M B H and its affiliates a technology leader in high precision consumables <unk>.

Expanding our proprietary offering for diagnostic and drug discovery workflows.

I will share more details about the transaction in a moment.

We continue to actively invest in biopharma production capacity supporting our core business as well as COVID-19 vaccine production.

This quarter, we advanced several important expansion initiatives, including projects at our Morrisville, North Carolina, and Devins, Massachusetts facilities.

We're also adding a second European single use facility in the Netherlands.

In total we will increase our single use manufacturing footprint by 30% and double our clean room space in the United States and Europe.

We remain focused on driving innovation and growth across our core businesses and recently enhanced our bio production offering with the launch of J T. Baker Baker bond chromatography columns to support downstream protein purification.

These new columns have unique selectivity and enable higher purification performance across a wide range of platforms.

Consistent with our integrated discovery to delivery model.

Ive on towards Baker bond resins are available to support scientists from early phase discovery through full scale production and will drive long term recurring revenues across multiple biopharma therapies.

In our advanced technology platform, we created a unique space grade silicone formulation that was used on the Lockheed Martin Aero shell, which helped protect masses latest Rover perseverance.

During the day sent into the Martian atmosphere earlier this year.

Our silicone materials performed a critical role in protecting perseverance from extreme heat in particular contamination.

A great example of our proven ability to customize solutions for the most stringent and demanding applications.

Looking forward, we expect our end markets to steadily improved throughout the year.

Growth in April has kept pace with the first quarter and the order book in our longer cycle businesses, including Biopharma production continues to grow.

Based on these favorable market dynamics and our strong first quarter performance, we are raising our full year revenue EBITDA and EPS guidance.

We will share details on this in a few minutes.

Moving on to slide four.

I'd like to reiterate some of the highlights from the announcement of our definitive agreement to acquire Ritter G M B H and its affiliates.

Ritter as a fast growing technology leader in high precision consumables for automated liquid handling in clinical and research applications.

We've noted in prior presentations that M&A offers opportunities to accelerate growth enhance our portfolio of proprietary offerings and ultimately provide more comprehensive work flow driven solutions for our customers.

In that context renters platform is an excellent strategic fit with them on tour.

As it addresses all of these dimensions on applications and end markets that we know well.

Additionally, our combined businesses share similar characteristics, including a highly recurring specification driven revenue profile.

One important element of this acquisition is the attractive end market dynamics and the addition of approximately $7 billion in total addressable market and application areas, such as clinical diagnostics drug development and clinical trials.

We're excited to bring together renters proprietary offerings and manufacturing capabilities with a van towards broad reach and deep customer relationships to generate incremental growth and margin expansion.

The transaction is expected to close in the third quarter and we anticipate that it will be immediately accretive to adjusted earnings per share.

For further information about the acquisition. Please see the recorded presentation on the investors section of our website.

Turning to slide five of the presentation I'd like to summarize our first quarter financial results.

Organic revenues increased 13, 5% all.

All regions and all product groups experienced double digit organic growth.

Overall performance continues to be driven by our Biopharma end market, where organic revenue growth once again exceeded 20%.

We are encouraged to see several leading indicators that point to the ongoing recovery of our end markets, particularly in the United States, including the resumption of clinical trial activities.

The return of scientists and researchers to R&D labs, and the rebound in elective surgical procedures importantly, our elective procedure related revenues returned to pre pandemic levels in the quarter.

COVID-19 related tailwind contributed approximately 700 basis points of revenue growth.

We play a critical role in providing solutions and services to support COVID-19 testing workflows head to toe personal protective equipment.

On customized materials needed to produce vaccines and therapies.

There was continued demand for our testing and PPE solutions during the quarter and we realized a significant step up in the contribution from our support of vaccine production.

We are proud to play a role in the global COVID-19 response, and we see opportunities to participate in future mrna and viral vector based vaccines and therapies for other applications.

Adjusted EBITDA in the quarter was up 38%.

Leading to adjusted earnings per share growth of 101% to 35 cents.

Our EBITDA margin growth continues to reflect the impact of volume growth productivity and the favorable mix from our proprietary offerings.

Tom will provide more details on adjusted EBITDA and EPS growth in just a few minutes.

We generated $112 million in free cash flow in the quarter.

And are reiterating our full year free cash flow guidance of over $800 million.

Our cash performance and earnings momentum enabled a reduction to our adjusted net leverage from four times EBITDA at the end of last year to three and a half times EBITDA at the end of the first quarter.

We now expect our leverage to remain under four times throughout the year, even after we close on return.

You will recall that our long term leverage target is two to four times EBITDA.

In summary, our results reflect our resilient portfolio relevant market position and unwavering focus on execution.

As always we remain committed to building trusted and collaborative relationships with our customers and driving a culture of continuous improvement and execution through the of on tour business system.

With that let me turn it over to Tom.

Thank you Michael and good afternoon, everyone slide six shows our organic revenue growth by end market and product group for the quarter Biopharma, representing approximately 50% of our revenue experienced double digit growth in the first quarter.

Our biopharma production business grew over 30% in Q1, driven by strong contributions from both chemicals and single use technologies. Our lab products business also experienced strong growth in chemicals consumables and equipment driven by positive trends in R&D activities.

Health care, which represents approximately 10% of our revenue also experienced double digit organic revenue growth.

Strength was driven by continued COVID-19 testing momentum and a strong rebound of elective procedures as Michael mentioned, we saw our medical implants business for elective procedures return to pre pandemic levels in Q1.

Education, and government, representing approximately 15% of our revenue experienced mid teens organic revenue growth in the first quarter.

Growth was driven by strength in government COVID-19 related sales and an incremental improvement in education as more University research activities resumed.

Advanced technologies and applied materials, representing approximately 25 per cent of our revenue declined by about 1% in the first quarter. This business continues to show modest signs of improvement and we are encouraged by macroeconomic signals pointing us to a broader industrial recovery. We saw strong contributions in the quarter from both our EMEA.

Our industrial sector, and our microelectronics business offset by weakness in other sectors, including food and beverage.

By product group, all our product categories experienced double digit revenue growth, including our proprietary materials and consumables driven.

Driven by strong demand for our Biopharma production platform, notably equipment and instrumentation experienced a significant recovery to double digit growth.

On system with industry trends, and reflecting an increase in capex investments as lab activities resume.

Let's move to slide seven looking at growth from a regional perspective, Americas, which represents approximately 60% of global sales reported 14.6% organic revenue growth and sequential improvement in daily rate of sales from the fourth quarter highlights were double digit growth in biopharma.

Including approximately 40% growth in Biopharma production.

And greater than 20% growth in health care, driven by hospital and clinical reference lab customers as well as the rebound in medical implants used in elective procedures education.

And government grew double digits, driven by COVID-19 related government purchases and education growth from COVID-19 diagnostic demand.

Europe, which represents approximately 35 per cent of global sales reported 10.1% organic revenue growth growth was driven by Biopharma with Biopharma production growing double digits. We also experienced continued COVID-19 diagnostic tailwind given the ongoing COVID-19 challenges in the European.

Region Health.

Health care and education and government, both experienced double digit growth supported by a recovery in elective procedures and strong consumable sales.

EMEA, representing approximately 5% of global sales reported 27.2% organic revenue growth driven by Biopharma as well as a moderate comparable given the early impact of COVID-19 in the region in 2020.

Our biopharma production business in EMEA grew nearly 70% in the quarter and our order book has grown significantly reflecting strong demand for both chemicals and single use products.

On the right hand side of the slide you can see the expansion of our core growth rate, meaning organic growth less the estimated COVID-19 tailwind.

Vs Q1 last year rising from approximately 4% to approximately 7% this quarter.

As Michael noted this represents the third consecutive quarter of acceleration. This trend reflects positive end market trends as well as the resilience of our business model and relevance of our market position.

Slide eight has our segment results.

Americas reported 24.3% and adjusted EBITDA margin rate of approximately 320 basis points higher as compared to the prior period.

Key drivers include strong volume and productivity ongoing favorable mix driven by growth in proprietary materials and consumables and commercial excellence.

Europe reported a 20.2% adjusted EBITDA margin rate of approximately 330 basis points higher as compared to the prior period.

We continue to experience favorable margin impacts from strong volume productivity and commercial excellence.

EMEA reported a 22.7% adjusted EBITDA margin rate, approximately 500 basis points higher as compared to the prior period driven by strong volume growth in proprietary biopharma materials and productivity.

Turning to slide nine let me start with our first quarter adjusted EBITDA.

We achieved approximately 34% growth in adjusted EBITDA, and 300 basis points of margin expansion.

As I indicated on the prior slide all three regions achieved strong margin expansion, reflecting volume growth productivity commercial excellence discretionary cost containment and modest mix tailwind.

These mix tailwind are tied to strong growth in biopharma production and proprietary consumables as well as returned to growth in our biomaterials offering partially offset by strong equipment and instrument growth.

Regarding earnings per share, we achieved approximately 101% growth in our adjusted EPS for the quarter primary drivers were strong operating performance ongoing reduction in interest expense from our deleveraging and refinancing and improvement in our income tax rate to 22.4%.

We continue to forecast a 24% tax rate for the full year.

Turning to free cash flow as Michael mentioned, we generated $112 million of free cash flow in the first quarter compared to $240 million in the first quarter of 2020.

The year over year difference, primarily relates to the timing of interest payments investments in working capital and Capex to support our growth strategy and higher incentive compensation payments related to our strong 2020 performance. We are reiterating our full year free cash flow guidance of over $800 million.

Moving to slide 10, as Michael indicated we are raising our guidance for the full year to reflect strong Q1 performance improving end markets and COVID-19 dynamics based on the outlook for our core business together with COVID-19 tailwind of approximately 350 million to $450 million.

We are now guiding to 6% to 9% organic growth for 2021 as compared to the original 4% to 7% guidance.

Reported growth guidance is approximately 8% to 11% for the year grew.

Growth in April has kept pace with the first quarter, but we do expect moderation in growth rates in the second half of 2021, given the extraordinarily strong comparable in the second half of 2020.

We're also increasing our adjusted EBITDA margin expansion expectations to be approximately 75 basis points versus the original 50 basis points.

This improvement reflects our strong first quarter results continuation of higher growth in our proprietary offerings productivity and commercial excellence also as global economies begin to open up we are including in our outlook of return of certain operating costs, such as travel and entertainment in the second half of 2021.

One that were previously put on hold through the global pandemic.

We now anticipate adjusted earnings per share growth of approximately 40% up from our previous guidance of approximately 30%. This guidance reflects our strong first quarter results continued operational improvement lower interest expense from deleveraging and refinancing and an effective full year tax rate of 20.

4%, we also maintain a flat share count for guidance purposes.

As stated before we are reiterating our full year free cash flow guidance of over 800 million on.

Our full year outlook is based on ongoing EBITDA growth and lower interest payments with some modest offsets from increased working capital needs to support our growth.

Earlier, Michael mentioned, the leverage ratio improvement, we achieved in Q1 to 3.5 times EBITDA and an expectation that will remain under four times EBITDA, even after funding the Ritter acquisition.

On that pricing, we are pursuing opportunities to further reduce the cost of our term loans enabled in part by our credit rating improvements and leverage reduction we.

We expect to share more details about these repricing actions as well as about the Ritter acquisition financing in the coming weeks. Please.

Please note that we have not reflected the impact from the rider acquisition and this guidance commentary.

This concludes my prepared remarks, I will now hand, the call back over to Michael.

Reflecting on our first quarter, we are encouraged by the strong financial results and the continued improvement in our core growth rate.

We continue to execute well as evidenced by our significant margin expansion EPS growth and deleveraging.

We remain steadfast in our focus on executing our long term growth strategy and our definitive agreement to acquire Ritter marks an important milestone in our transformation.

We continue to capitalize on our exposure to the attractive biopharma end market by making additional investments to expand our manufacturing capacity.

These investments will support vaccine and therapies to combat the COVID-19, pandemic and support our growing core business.

Our Biopharma order book continues to expand further underscoring the relevance of our integrated discovery to delivery business model.

As we look ahead, we are well positioned for continued growth and expect to deliver strong results for the full year.

Of on towards mission of setting science in motion to create a better world has never mattered more.

I want to thank you for your interest and investment and have on tour and for your ongoing support.

I'll now turn it over to the operator to begin the question and answer portion of our call.

Thank you.

A question you will need to press star one on your telephone keypad.

Your question.

Keith we only allow one initial question and one follow up please.

Yes.

We have a question from the line of Peter.

From JP Morgan Your line is open.

Awesome.

Credit Suisse to Inc. First on the COVID-19 tailwind geography, you're bumping into guidance here.

Obviously fading pretty quickly. So can you just talk a little bit about how you're thinking about the relative mix and you know, what's really kind of prompting the increase and then bioprocess great. Great numbers. Just curious was there any element of stockpiling and then also how are you thinking about potential kind of mrna in viral vector.

Therapeutics beyond COVID-19 given your current capacity.

Thanks, Tycho, it's Michael I appreciate the question.

Taking your first question here around the COVID-19 tailwind as you noted we've increased our outlook for the full year by at the Centerpoint roughly $100 million.

Our mix continues to to reflect kind of our original assumptions around the vaccine being.

40% to 50% of the.

You know on total tailwind for the year.

Obviously, we've seen that ramp aggressively Q4 last year, certainly start ramping again in Q1, and you would anticipate based on the order books and the improved vaccines that are out there.

For that next to hold throughout the year.

Testing for US was certainly strong in Q1 and as we're into the early days on the second quarter, we see a strong that strength continuing.

And in this embedded in our kind of $3 50 to 450 guide on tailwind for the full year, we would anticipate on the diagnostic solutions that we offer in that.

40% to 50% a book.

Total contribution.

Evel.

Embedded in that is kind of the midpoint of course would would still be as you suggest.

On expectation that we would see.

On a decline in the second half of the year, which we can trial, we've been pretty consistent about that view.

You know even in our initial guidance.

How that plays out obviously is a little bit of an unknown with infection rates, where they are at around the world.

We're still seeing continued strength of the diagnostics workflow.

From a processing perspective.

Business continues to run on a very high level as I mentioned in my prepared remarks order book has continued to advance a pretty impress.

Impressive clip.

And it's it's Paul no vaccine revenue as well as.

Continued strength on our our core business.

Growth in monoclonal antibody production is now.

Continuing at a mid to upper teens level around the world and we're certainly getting our share of that so.

Well positioned for a fantastic year and as I mentioned in my remarks, we're focused on significant investments in capacity.

<unk> continued to keep pace with the growth that we're saying we're excited about.

The expansion to all of our chemicals as well as our clean room capacity for single use and innovation continues to be important theme, you mentioned mrna and viral vectors.

We on COVID-19.

I think when you look at the application, particularly from on a two other non COVID-19 vaccines, we see that as a real opportunity longer term for the business.

We'll add too.

And already eaten a pretty important addressable market for us. So we're encouraged by not only the the momentum in our current business, but we're excited by continued strength of funding as well as the application of some of these technologies to some new indications.

Going forward.

Great. Thank you.

Yeah.

Thank you Sir we have another question from the line of.

From Bank of America Your line.

Okay.

Hi, Good afternoon pick me question.

Basically yes.

Basically.

A little bit more color on when the Tiger just that when we sort of think about pacing for COVID-19 for the rest of the year I mean can we book at current level.

It's more of an EBIT EBIT.

Drop off but it's more steady revenue sharp drop off in the back half of the years from here.

Bioprocess, Inc.

The first day.

Yeah. When you look at you know at the midpoint.

Derrick it at roughly $400 million of total wins for the year and if you look at what we did in Q1.

Your point about it being relatively consistent throughout the year I think is fair.

The next day in Omega book, a little bit different, particularly as we get into the back half of the year I think you know our.

Tycho, our expectation would be that the diagnostic testing workflow.

You'll be a little bit weaker in the second half of the year.

In the first half of the year.

And we anticipate.

The strength of our vaccines and I think the P. P E contribution should be relatively stable throughout the year.

Got it.

Repeat the question I mean, so should we think about the margin expansion, you're obviously going to be up year over year.

Britney commanded the BIA approval should be higher margin than the.

And then the diagnostics that we share the major driver.

When you look at on proprietary materials, and consumables solutions of which most of our of our production solution would fall into that category, but honestly is the highest margin part of our business so strength there.

Is certainly an important driver of margins.

Must be on bio production on we've talked a bit about urban zone platform.

You know it wasn't a boss in my prepared remarks, there that we.

We saw that business returned to kind of pre pandemic levels in the first quarter, which is going to be an important.

Platform force going going forward, but our testing workflows, we do have a fair bit of content on those are both from a chemical standpoint, as well as the consumables standpoint.

So the margins in that part of our workflow.

Come in above the group average dark.

But even Derek when you get to the net.

The margin expansion point.

There are other factors besides the COVID-19 mix that are driving that for the full.

Full year, and we've got a really strong.

Open order book, you'll be on COVID-19, particularly in Biopharma per option.

Those margins are are superior to the overall weighted average auto portfolio.

So it's it is it's a you're.

You're right. It's on it's a mix factor, but it's.

On COVID-19, given the growth dynamics on the portfolio.

Thank you.

Next question comes from the line.

From Cowen Your line is open to answer your question.

Good afternoon, and thank you for taking my questions.

First on M&A subsequent to the reader deal one what's your capability for more given youre going to be well within your target leverage range for the year to beyond financial constraints, how would you characterize the organizational readiness for more than three.

How would you describe the deal pipeline at this point so that the first topic on M&A and then on guidance I was hoping that you'd be able to share more on your assumptions by end market in terms of what's incorporated into our revenue guidance for the year.

It would be great to get those assumptions for all end markets that said in particular I think it would be interesting to hear more about biopharma and also advanced technologies and applied markets. Given there are some signs of cyclical improvement. Thank you.

Okay. Thanks, Doug This is Tom Thanks for the question.

Yes so.

The winter deal when it when it closes call. It early hopefully early to mid July.

That'll be just north of 1 billion.

M&A capacity in U S dollars to Euro dollar deal.

But we think we have the capacity.

Two for the rest of the year to have less aggregate spending or spending on an individual deal roughly at that same number so there's somewhere between $1 billion and 1 billion and a half.

Capacity for this year net when you get into 2022 that that continues to grow depending on what you've done.

The.

In terms of the organizational readiness the I would say that this this is the first.

The deal that we've done since that since the large.

On tour VW, our deal, but we.

We had a program management office in place.

It has winded down because we've <unk>.

<unk> addressing that but you certainly have the capacity from an integration perspective that we've demonstrated to be able to integrate deals that are three times the size of a renter.

And we've been able to sustain the ongoing business as well doing well generate $300 million of <unk>.

Synergies on on that.

You are so.

Pretty good track record.

I'll go back further we've kind of sustain that over the years.

So I would say it is a fairly high degree of confidence.

Doing simultaneous multiple integrations I mean, there does come up.

On a stretching point right.

But I don't think per their day there.

I think we.

Consistent with the capacity discussion in dollars I think we have the capacity.

Two two.

Integrate something of that size.

In terms of the deal pipeline as you know.

We're focused on concentrating.

On the areas, where we have.

Superior growth rates relative to evolve the portfolio and I think demonstrates that very nicely.

And also.

Better overall margin rates both on gross margin.

EBITDA margin that points us to a proprietary offerings.

And you know.

In both on the lab space type assets.

On the diagnostic.

Opportunities as well as.

In Biopharma production would be areas that are of most interest to us.

And we were looking for deals that have existing profitability and existing cash flow that will help us to delever quickly. So.

We are excited about.

Continuing on flow all the businesses are engaged how have a regular pipeline review we have capacity.

In place.

In terms of the.

On the guidance on.

On the end markets. So just.

Just to remind you overall were.

Guiding to 6% to 9%.

For the year.

For Biopharma in total that's probably close to.

Yeah.

The high single digits to low double digit kind of growth from a health care perspective.

It would be similar.

From an education and government perspective.

Is the area, where we're seeing the most improve.

The improvement year over year given the.

The decline in education last year, so that that would be clearly in the double digits in terms of the advanced technologies and applied materials, we're not we're not forecasting a breakout like we're not including.

You have a massive return to growth just yet.

And so you can kind of consider that to be low single digits to mid single digit kind of.

Growth expectations.

Thank you Sir.

A question from the line of Vijay Kumar from Evercore. Your line is open.

Hey, guys. Thanks for taking my question.

One on guidance out here, Michael it looks like the base ex exco legs, it's about three and a half day six and a half one.

Is my math correct on the base assumptions in the low end is that just out in a conservatism because I think most of your peers are looking at mid to high I'm curious what would cause us to get to the low end.

Yeah. Thanks, Vijay for the question I think it's important to recognize firstly.

We're out of the gate strong on Q1, three straight quarters now of.

Sequential improvement in the in the.

On the core business.

We were down on business day in in Q1, if you adjust for that.

Our core growth rate in Q1 was on call it 8% to 9%.

In the quarter, so really strong.

Performance in the base business.

You know, we're heading into a period here, obviously, where the comps on the base business are going to get.

A little bit easier here at least for the next.

A couple of quarters before you run into a tough comp again in <unk>.

In the fourth quarter here, so when we break down the 6% to 9%.

Vijay.

Midpoint on our COVID-19 tailwind, you're talking a couple of points of growth. So.

I would point you to kind of four to seven per cent or so on.

On the base business.

That's helpful, Michael and maybe one for you Tom.

The margin performance in the quarter was extremely strong.

It looks like proprietary products, who work in it came in strong interest mixed driven like why shouldn't that mix effects are continuing on at the back half I'm curious that in on the free cash flow side, our guidance wasn't chain, but.

That Q1 free cash was very impressive to 40 million, that's almost 30% with the annual guide so was there any timing impact on non free cash.

Yes so.

Just on the on the margin performance, Yes first quarter was a was outstanding 300.

Basis points improvement on EBITDA, I would say about half of that came from gross margins.

And the rest was just really good.

Controls around SG&A spending.

And the volume leverage on that on those fixed costs, but beats.

Between mix.

And productivity as well as good commercial.

Attention to pricing relative to inflation.

You had about 130.

Uh huh.

Basis points or so on on gross margin you had the rest.

The growth on SG&A.

I would say that.

Relative to the rest of the year you have to consider the significance of that in that volume leverage.

When when we printed 15% or so growth in the in the fourth quarter of 2020, we created a tough base line for ourselves.

And so we so first quarter and second quarter as we've said.

They are going to be the star one for this year and you will see real strong margin performance as well.

I think in the second half of the year, we won't have quite that low.

Leverage at least as we see it right now.

On the upper end of of the guide, which knock on wood volume will be then I would expect us to be closer to you.

On the kinds of margin expansion that we got in the <unk>.

First quarter and for what you would reasonably expect for the second quarter.

On on free cash flow P J D.

The number for the first quarter of 2021 was $112 million.

We were at 240 <unk>.

In 2020.

So we did have a bit of a decline I would say it's two factors.

One is.

Yes.

The growth in the business.

That necessitated the inverse.

Assets in working capital.

We probably added in the quarter roughly $50 million of inventory as I can see but when you look at the inventory.

Days the number of days that we have in inventory days sales, it's roughly the same as what we had what we've been carrying throughout 2000 and.

In 'twenty. So we're in good shape on that and on receivables there was a sizable investment but the March.

<unk>.

Relative to last year, they were up about $100 million.

And so you would have you would have expected to see a significant.

Both.

So between receivables and inventory.

You did have.

Hey.

A bit of dilution on on.

Free cash flow, but we think that's going to support the future growth. We also had a couple of other elements I mentioned the <unk>.

Net of comp payments.

Pay offs. This year were twice what they were in the first half last year. So all in the the number that we are.

Yes. The number we mentioned also includes investment.

Our capex continues to be an area of focus we mentioned several of the single use.

Investments made to support the growth on that business.

All in we're this is the performance is pretty much what we had expected we didnt give guidance by quarter.

But if we had showed you our plan you would say that.

Before for Q1 was pretty much dead on what we would have expected and that's.

In line with the.

The 800 for the full year could that be better.

I hope, so, but we wanted to kind of get another quarter or so behind us before.

And working on this one other point that I mentioned P. J I should mention is.

You might youll recall, the refinancings, we did last year.

Are those we ended up moving the interest payment dates from.

From the second quarter on the fourth quarter for the first quarter in the third quarter.

So we pulled in about $50 million to $60 million.

Of interest payments into.

Into the first quarter.

We're paid last year last year, so we'll get that back in the second quarter should be a real strong quarter from a free cash flow perspective.

Looking forward to.

Making you happy once again on cash with $800 million.

Thanks.

Thanks for clarifying on the free cash flow items.

Thanks, guys.

Thanks, Dave.

Thank you Sir we have another question from the line of.

From this line.

Your line is open you may ask your question.

Great. Thank you good afternoon.

Just wondering if you could start by just giving a little bit more granularity on the proprietary versus third party sales in the quarter both double digit.

Just any additional color there and as you look at two Q I think you have some pretty easy third party comps is that right. What's the current immune for margin to Q.

Thanks, Jack good to hear from you on that.

Your first question here regarding the strength of both proprietary as well as our third party offerings in the quarter.

Both well into the double digits obviously.

I think it reflects a couple of things one when you look at the proprietary piece.

Really.

Angled towards our bio production offering so we're tracking strength in both our core business there as well as in our vaccine production.

No. We're also.

For the first time in a year seeing growth in some of our other important proprietary offerings, including our bio materials offering for example.

On the third party side of things, obviously strength, there being driven by.

A lot of the diagnostic testing workflows and these are chemicals on consumables.

We have.

From some structurally from strong agreements there that also yield.

Well above group average margins for us so the growth being driven by.

Kind of a return to lab on just general strength across our Biopharma and act.

Kadima in health care, but also from a margin standpoint.

Contributing to.

The 130 basis point of gross margin expansion of Tom reference.

So both trends in the quarter or pretty favorable for us.

Great and there's one follow up on COVID-19 testing it seems like you're expecting a little bit more durability here than some of your peers is there any color you can give around what the international mix you guys have there is that one reason why you are expecting more kind of relative steadiness.

And it's a good question.

But if you look at where our.

Where our strength in testing has been we've probably been a bit stronger throughout the pandemic in Europe than we have.

On the U S and clearly there's a different level of infection rate in Europe, that's been persisting there.

Which which we do see continuing.

I think.

We have been.

Pretty consistent in suggesting maybe even comparing total.

On the data points that were out there and that we would anticipate a bit of a falloff in the second half of the year and that's that's still.

Continues to be modeled into our.

Into our outlook here.

But Q1, probably held up a bit stronger than what we had anticipated and.

We're a month into the second quarter and we see.

Continued strength.

We do see durability to testing that probably even occur beyond this year. If you look at just the U S. A.

Funding thats going to be available too.

Support.

Testing for K 12 schools and.

Employers testing plans and getting associates back to work.

Just to name a couple of examples we do think testing is going to be.

On a sustainable for the foreseeable future, albeit at perhaps a more modest level than what we've seen here at the height of the pandemic.

Thank you Michael.

Thank you Sir we have enough from question from the line of Inc.

Donnelley from Citibank Your line is open.

Thanks for taking the question guys, Michael maybe one for you just on the advanced technology piece down low singles. This quarter I think it had grown at <unk> I think Tom noted maybe expected low single digit growth for the year can you just talk through it sounds like you guys are encouraged by the macro signals pointing to a broader recovery can you just talk about the.

The outlook there how conservative is that low single and what we should what should we be looking for in terms of kind of the macro northeast.

Things are inflicting higher there.

Yes. Thanks for the question Patrick first day, it's important on kind of maybe put a quick on part of our business in context.

About a quarter of our overall revenues with about half of that being in what I would consider to be defensive growth oriented platforms like our semiconductor exposure.

And that piece of the business continues to be.

Pretty resilient.

Our both our proprietary offerings with both her third party offerings into.

Semiconductor manufacturing.

Continues to be a strength for us.

We then have maybe 10 10 or so per cent of the business that is linked to more cyclical end markets like pet Chem oil and gas food and beverage.

For example.

Net net we were down on it was just a tad below flat.

In absolute terms I think it was low.

Less than 1% off them on in a corner so modest.

Year over year decline certainly not contributing.

The results significantly here.

So I think plus or minus the business is on track from where it's been performing.

Even in pre COVID-19 times Youre expecting on part of the business footprint kind of low single digits. So.

PMI is holding up where they're at and outlooks around the world, We would anticipate that business kind of sequentially improving drought in Europe.

Certainly before the end of the year getting to kind of a low single digit low pattern.

That's helpful and then maybe just on the bio production expansion.

Was that always in the plan can you guys just pulled it forward a couple of years due to the strength of COVID-19 on the on the cash flow side as well as the demand and then secondarily I think.

Just following up on maybe Tyco's question earlier, how robust is the demand there in terms of your confidence level that this expansion will get filled relatively quickly in terms of the capacity you're building out there. Thank you.

Great questions.

So.

This part of our business the single use part of our portfolio.

Describing for a couple of years now is growing north of 20%.

And certainly that's accelerated as we've worked through the pandemic.

The base business itself continues to be strong and then you add to that.

The demand coming from from COVID-19 are single use offerings are very prevalent.

Across these.

<unk> production on a vaccine modality.

So we had an investment plan in place that we definitely had to accelerate.

To account for.

On the tailwind that we're seeing in our order book, which we continued to reference as you know.

Growing significantly.

A significant part of that order book growth is.

In our single use business and.

It really is necessary to keep up with our growth as well as to establish more normal.

Lead times for our for our base business and for our offerings.

The capacity in place so the capacity will get utilized pretty much instantaneously.

Hiring ahead of.

The construction being completed so that win win.

We turned the lights on.

We're ready to go with full teams in full shifts.

That can meet the demand that we do have an <unk>.

In place I referenced in my remarks.

To help.

To help to keep up with the demand not only expanding existing facilities.

But we were excited this week to announce the addition of a second.

Site, there in Europe that we've taken taken possession.

That will.

It'll take us two or three months to get the facilities ready to run.

But by certainly by July we'll be producing.

Single use assemblies on that facility.

It seems on a great job keep.

Keeping up with our growth and making sure we've got capacity to sustain it.

Very helpful. Thanks, so much.

Okay.

Thank you, Sir we don't have any.

Another question from the line of Luke.

Thank God from Barclays. Your line is open you may ask.

Yeah.

Thanks.

A follow up on Patrick's question on the capacity expansion can you give us an idea how big your single use businesses now and then what we should expect from an incremental.

Sales perspective over the next couple of years as those as that business comes on line on that capacity start filling out.

That's part of our business.

In the probably 20% to 30% of our total oil production.

Platform.

And has been growing pre pandemic north of 20%.

Obviously, we're seeing tailwind on top of that this year.

No reason why that type of growth rate won't persist for.

Through the mid term here.

Okay. That's helpful.

And then lastly on on Ritter I know it has strong diagnostic exposure.

Precision manufacturing that teams.

Uh huh.

Right down the middle for Biopharma and give us a sense of your early strategy here on expanding this customer base and again like the incremental opportunity as you guys see it over this first couple of years post close.

And we're really excited obviously about the opportunity to bring these.

These manufacturing capabilities into our portfolio.

Really fits in the sweet spot here of our consumables offering too.

Our.

Automated lab workflows across a number of end markets.

Mentioned Biopharma. These products are used extensively in the clinical trial workflows as well as in drug discovery and when you look at our customer set.

Sat there we're excited about the ability to expand.

The offering the router has beyond kind of their core OEM focus that they've had historically.

And when you look at.

Kind of the clinical diagnostics.

Exposure that the business has another area, where we've got great customer overlap and great customer exposure here.

And we're selling significant content.

On to these workflows already.

And so the products coming operator are going on.

Straight drop into our channel.

Our sales associates are excited to be able to add it along with the rest of the content that they provide and certainly our customers.

Since the announcement have expressed their excitement for us having this as part of our offering going forward. This is an area that's structurally been constrained.

Throughout the pandemic, but probably even before that.

And having.

Not only the scale on the reach to that.

To it but the ability to accelerate the investments to expand the business over time is going to be.

Part of that.

The target here.

Great. Thank you.

Thank you next we have Dan you on either.

From Wells Fargo. Your line is open you may ask your question.

Jim.

Thank you a couple one ripping off Jack's question could you characterize your COVID-19 diagnostics exposure in terms of how much is lab based on testing versus how much is the point of care testing you distribute just as I think all of US are trying to understand that COVID-19 views out there.

Yes, Dan Thanks for the question. So as we've mentioned before we're going to have offerings that are going to span kind of the three major categories of.

Of the testing workflow with PCR testing certainly being.

The most important for us but.

But we do have significant content on the <unk>.

Gene based.

Tests that are out there.

Even at the point of care as you as you mentioned, both on providing content to Oems and their production of these tests and these kits.

As well as in distributing that.

Test kits and the tests themselves.

And then as well.

From the beginning we also have.

I think a pretty robust offering for serological testing, which today hasn't had much traction as a workflow.

And you know how that plays out longer term is as yet to be determined but.

Today, the audience of our exposure, we're being on PCR on managed space testing that.

Okay. Thank you and then my follow up can you offer more color on your outlook for the APAC region Youre strongest region on the quarter wondering if you foresee any issues with the COVID-19 outbreak in India or anything else worth flagging. Thank you.

No. It's a good question obviously are following.

The developments in the region pretty closely.

Yes.

On the human perspective, it's obviously challenging to see what's unfolding in India for example, with.

The infection rate that we do see there.

We see most of the.

Concerns have been centered on India, and China continues to be strong southeast Asia around Singapore.

And Korea continued to be pretty strong, particularly from a bio.

Production standpoint, we have a significant order book to support all three of those regions.

<unk>.

Continued momentum there.

India for us is probably less than a percentage of the overall.

Business today for us so, it's a pretty modest impact and I can imagine the return to pre pandemic levels for some of the.

And markets that we serve that are being.

Stunted a bit here given the outbreak that they're experiencing at the same time, though we're seeing obviously very very strong demand for things like PPE and.

Diagnostic testing solutions, which obviously, we're well prepared to provide so the mix of the business probably unfolds, a little bit differently than what we had imagined.

But the business continues.

On to run well, but.

Now we're following it quite closely but so I would anticipate.

Continued momentum in the region.

Just add a little more color that then.

Yes, 27% in Q1, I wouldn't take that to the bank for the year.

As Mike said, it's going to be strong but.

And we've kind of got dialed into our numbers just right around double digit.

Yes.

The increase for the year for the region, we had a really strong Q2 last year.

Driven in part by some of the COVID-19 testing that.

As Michael mentioned.

And so there is there are some comp things.

We have two that are actually counter cyclical to our overall.

For Q2.

<unk>.

I would expect.

Really strong overall number for the year, but I would just want to temper your enthusiasm based on.

The Q1, the outstanding Q1 results.

Okay. Thanks, both for the color.

Thank you Sir we don't have another question from the line of my day.

Evan <unk> from Morgan Stanley Your line is open.

Thanks for squeezing me in here.

Just one.

Sort of.

Follow up.

Michael for you on on the vaccine front I mean, there's growing chatter around the need for book stores and so on.

It does the vaccine portion of COVID-19 forecast still essentially only accounts for the current order book than any sort of future forecasting.

And then second on a related note.

Last quarter, you had noted that the timing of the vaccine ramp.

It is important and if it ramps sooner than you on capacity does you may not be able to capture all of that sort of upside that you think are eligible for so in light of this.

Recent capacity expansion et cetera can you just give us an update on that situation.

Great question. So I appreciate you joining the call Tonight.

From our outlook standpoint, built into the $3 50 to $4 50 guide there.

At this stage certainly reflects the approvals that are in place as well as the order book that we that we do have.

Sure.

Pretty significant.

Continue to build aggressively in the quarter.

And not only do we have strong orders that extend.

Throughout 2021, but we're also starting to now get orders that are.

Destined for delivery in 2022, so I think on that part of the business, we certainly have.

Goodbye in a site that I think it's becoming almost the prevailing.

Wisdom that.

There will be a need for a booster shot this fall.

To address the various variants or mutations that are that are out there and I think as you start to see that go into the planning.

One of the implications as you noted.

From.

Vaccine ramp is just.

Whether or not you have instantaneously enough capacity to support that as well as.

Our really robust base business order book and certainly one of the things that us as well as our peers in the space have been challenged with.

As we move through the quarter is the.

Okay.

These so called rated orders status that comes with a vaccine orders.

Net.

Based on the Department of Defense Prioritization protocols require you to place those orders.

At the front of the line.

And so there are certainly instances here, where some of the.

Our core businesses.

Delivery dates have had to to get pushed out our adjusted to reflect that.

We've had a series of expansions coming online.

Date, and we have a number of more that are planned throughout the year.

That will certainly provide relief to some of the balances, but the supply chains.

Across the industry are going to be strained I suspect well into next year.

Got it Super helpful. Mike Glenn one one separate follow up on on your remarks on your on advanced technologies and materials.

How are you thinking about the impact of the semiconductor market supply demand disruption that's underway or unexpected this day with us through 'twenty two could that.

Essentially potentially be a tailwind for you guys from what you do there with the move to <unk>.

The lower nanometer nodes and so on.

Yes, we like that platform, an awful lot and historically its been quite resilient and pretty frothy from a from a growth perspective.

Right.

<unk>.

Quite reasonable for that platform to grow high single digits double digit type levels and it's not lost on us the strength of that of that space.

And we see that in our in our numbers on business continues to run at a high level on we have great technology and.

A footprint that allows us to serve.

On the.

The growth from.

The Fabs in Asia as well as in is in the U S. Here. So certainly one of the strength of the advanced technology part of our business.

Got it Super helpful. Thanks, So much guys.

Thanks Ted.

Yes.

Thank you Sir there are no further questions at this time I would like to turn back the call to Mr. Michael <unk>.

For any closing remarks.

Thank you again for participating on our call today.

I wanted to take the opportunity to make you all aware of our intent to host an analyst and Investor day.

On Thursday September nine.

I'll be sharing more details, including registration information on that in the coming weeks.

But as we close here. This evening just want to express my continued gratitude.

Are all of the efforts that our associates are putting in around the world who are living our values every day and helping US live our mission on studying science in motion to create a better world.

His team and the resolve and steadfast support of our customers is super critical to our mission and our success.

We're excited about what lies ahead for our business and four are on tour and look forward to updating you. When we meet next until then take care and be well everyone. Thank you.

Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you for participating.

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