Q2 2021 Avantor Inc Earnings Call

Good afternoon, My name is Brian and I'll be your conference operator today.

This time I would like to welcome everyone to day L bond for second quarter 'twenty to 'twenty, 1 earnings missiles conference call.

At this time all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star 1 on your thoughts on that since he's been advised today's conference is being recorded.

If you require any further assistance please press star zero.

I'll now turn the call over to Tommy Thomas Vice President.

Investor Relations Mr. Thomas you may begin good.

Good morning in light of the significant overlap of earnings calls in the life Science space during our previously announced time.

We made the decision to adjust the timing of our call to better accommodate the investment community.

We appreciate your flexibility and thank you for joining us today are.

And 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 Relations website at IR Dot of onshore Sciences dotcom.

A.

Our speaker 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'll 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 we.

We do not assume any obligation to update these forward looking statements.

A replay of other 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 morning, everyone. I appreciate you joining us today I'm starting on slide 3.

As you have seen from our press release, we had an outstanding second quarter that reflect strong momentum across each of our end markets and highlights our team's continued track record of execution.

In the second quarter, we achieved.

20.5% organic revenue growth and.

In our core growth rate improved for the fourth consecutive quarter to 18, 5%.

Covid <unk> contributed approximately 2% to growth.

Driven largely by sales of raw materials and single use solutions for Covid vaccine production.

In addition.

Chief touring exceptional top line results, we expanded EBITDA margins approximately 125 basis points grew our adjusted EPS more than 80% to 35 cents and more than tripled free cash flow.

We also realized incremental interest expense savings through successful term loan repricing actions.

We continue to progress our long term growth strategy and were successful in closing 2 acquisitions in the quarter in.

In mid June we completed the acquisition of Ridder, which adds high precision proprietary consumables to our portfolio.

And we recently launched <unk> products under the J T Baker brand name through our differentiated customer channel.

To deliver we also closed on rim bio.

A China based manufacturer of single use solutions to support our bio processing platform.

This acquisition extends our single use manufacturing footprint to China.

And adds critical technology to our portfolio.

The addition of rims manufacturing facilities doubles.

<unk>, our single use clean room capacity globally and enables a foreign tour to serve customers in the EMEA region with best in class lead times.

Also of note for the EMEA region, we were recognized at the Korea Bio processing Excellence Awards in June for both our upstream processing capabilities and our single use solutions.

A nice validation of our bio processing offering and innovation capabilities.

We continue to invest in Biopharma production capacity to support the strong growth in our business. We completed several capacity expansions in the second quarter, including a single use expansion at our facility in Devins, Massachusetts, the startup of a new single use logistics fulfill.

Facility in North America, as well as several expansion projects at our raw materials manufacturing locations in Aurora, Ohio and St. Louis Missouri.

As we have discussed previously.

Access to early Phase research and discovery activities is essential to our business model and our sustained growth in the Biopharma space.

1 other ways that we access this critical customer segment is through our supply agreement with a biotechnology innovation organization known as bio <unk>.

<unk> is the largest trade organization in the world that represents the biotechnology industry and gives us preferred access to more than 3700 companies engaged in life Science research.

In the second quarter, we proactively extended our agreement with the bio consortium through 'twenty 'twenty 9.

We also issued our inaugural sustainability report this month, a key milestone in our sustainability journey I will talk more about this reported a minute.

Looking ahead, we expect the momentum in our base business to continue.

<unk>, a strong fundamentals across all of our end markets.

Revenues in July have kept pace with first half results and our order book for long cycle proprietary materials continues to grow.

We are again, raising our 2021 full year guidance, which Tom will cover in more detail later on our presentation.

Driven by on to slide 4.

We are excited to have published our inaugural sustainability report.

This is an important milestone for us and affirms our long term commitment to corporate responsibility and improving the world through science.

The report includes clearly define sustainability goals and describes initiatives underway.

Moving salary of on towards mission of setting science in motion to create a better world.

Of onto our science for goodness sustainability platform enhances our framework for creating long term value by embedding sound environmental social and governance practices into our business strategy.

They took form also enables us to continually measure and report progress against 4 key commitment pillars.

People and culture.

Innovation in environment.

Immunity engagement and governance and integrity.

This report also highlights our progress to date.

Of note, we've continued to advance the diversity of our leadership.

But at the end of 'twenty 'twenty women represented nearly 35% of our management team.

We also began to integrate sustainability practices throughout our supply chain and established a goal to reduce scope, 1 and scope 2 greenhouse gas emissions, 15% by 'twenty twenty-five.

To support stem education.

<unk> and health care programs worldwide, we donated a variety of products as well as funds from the of onto our foundation.

And we continued to adopt best in class governance provisions, including several enhancements to shareholder rights.

I'm encouraged by the work our team has done in this area and keenly aware of the work ahead of us.

I look forward to our ongoing progress and remain deeply committed to our global sustainability efforts.

Turning to slide 5 I'd like to summarize our second quarter financial results.

Organic revenues increased 25% 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 also experienced strong growth in our other end markets Inc.

Including sequential improvement in advanced technologies, and applied materials, which grew high single digits.

COVID-19, <unk> contributed about 2%.

2 our organic growth with the largest driver being raw material in single use sales to support the production of Covid vaccines.

Aggregate Covid tailored revenues were similar to Q1 on our outlook for the full year remains unchanged.

Adjusted EBITDA in the second quarter was up 34%.

Leading to adjusted.

Adjusted earnings per share growth of 87% to 35 cents.

Our EBITDA margin growth reflects the impact of volume growth commercial excellence and the favorable mix impact from nearly 30% growth in proprietary materials and consumables.

We generated $265 million in free cash flow in the quarter driven.

Given by strong EBITDA results working capital leverage and lower interest payments.

Our adjusted net leverage ended at 3.8 times.

Within our target range of 2 to 4 times and modestly above Q1 leverage of 3 and a half times, reflecting the ritter and rim bio acquisitions.

Absent the.

<unk> average would've been approximately 3.2 times.

In summary.

Our financial results reflect the strength and relevance of our portfolio.

Our integrated offering and exposure to the Biopharma space and our unwavering focus on execution enabled by the of on tour business system.

I'm proud of our team for the.

<unk> on our results they delivered this quarter and I'm confident in our outlook for the rest of the year and beyond.

With that let me turn it over to Tom.

Thank you Michael and good morning, everyone I'm, starting on slide 6 as Michael noted organic growth was 25% this quarter leading to year to.

To date organic growth of 17% our.

Our core growth rate, meaning organic growth less the estimated COVID-19 tailwind.

Rose from negative 8% in Q2 of last year to positive 18% in this second quarter, representing the fourth consecutive quarter of such acceleration.

From a regional.

Exceptionally of Americas, which represents approximately 60% of global sales reported 23.6% organic revenue growth in Q2 and sequential improvement in the daily rate of sales from the first quarter.

End market performance in the Americas was driven by greater than 20% growth in Biopharma with our Biopharma production.

Prospect sales growing more than 30% this quarter.

Health care also had a strong quarter growing above 30% driven by materials and consumable sales to hospital and clinical reference lab customers as well as over 50% growth from our proprietary materials offering and the medical device space.

Education and government grew double digits as University research and K through 12 activities resume to more normalized levels advanced technologies and applied materials sales were also up mid single digits. This quarter, reflecting the continued recovery of the industrial sector and strong growth of our proprietary materials.

Production on my conductor market.

While all product lines in the Americas grew at double digit rates proprietary materials and consumables grew at double the rate of third party materials and consumables.

Europe, which represents approximately 35 per cent of global sales achieved 16.5% organic revenue growth driven by lab.

For the <unk> sales, including materials consumables and equipment.

All end markets in the region grew double digits with notable contributions from Biopharma and advanced technologies and applied materials, where we've seen a pickup in lab and QA QC activity.

As was true in the Americas sales.

<unk> a proprietary offerings grew faster than that of third party driven by Biopharma production single use assemblies and medical grade silicones used for implantable medical devices.

EMEA, representing approximately 5% of global sales achieved 16.4% organic revenue growth driven by Biopharma production.

<unk> and lab products sales of Biopharma raw materials and single use assemblies were particularly strong in China and Korea.

Sales in lab consumables and equipment in India also contributed to the EMEA growth for the quarter.

Let's move to slide 7 which shows our organic revenue growth by end market and.

Group for the quarter Biopharma, representing approximately 50% of our revenue experienced over 20% organic growth in the second quarter, including over 25% growth in the production business driven by sales of process ingredients and single use assemblies.

The R&D portion the Biopharma end market also.

<unk> experienced strong growth driven by lab reopening.

We continue to witness favorable market indicators, including solid funding from private and public sources robust clinical trial and F. D. A activity and strong therapeutic pipelines across maps cell and gene therapy and mrna.

Health care.

Product presents approximately 10% of our revenue experience more than 25% organic revenue growth driven by strong recovery of our medical grade silicone offering.

We continue to benefit from our global resurgence of elective surgeries driving end market demand for our market leading materials.

Lab product.

Our withdrawals to support research and diagnostic workflows also contributed meaningfully to our healthcare results this quarter education and government, representing approximately 15% of our revenue experienced over 40% organic revenue growth in the second quarter, driven primarily by the education market as University Research Labs continue.

<unk> reopen and K through 12 activities ramp up in North America.

The funding environment for academic research is favorable with ongoing increases in NIH outlays in 2021.

Government sales grew mid single digits, despite facing some difficult comps which included substantial.

Say agile government purchases of diagnostic supplies and personal protective equipment relating to Covid advanced.

Allergies and applied materials, representing approximately 25 per cent of our revenue increased about 9% on an organic basis in the second quarter.

Growth was driven primarily by lab products sold to advanced technology.

Substantive applied materials customers engaged in similar workflows as the other segments of our business, including research and QA QC.

We also benefited from strong demand for our proprietary offerings in the semiconductor space.

We view the positive macroeconomic signals regarding industrial activity as.

Truck drivers for our business and expect the advanced technologies applied materials recovery to continue throughout the year.

Byproduct group all of our product categories experienced double digit revenue growth. This included almost 30% growth on our proprietary materials and consumables driven by strong demand for our Biopharma production.

<unk> in raw materials, and single use offering and our biomaterials platform services had a strong quarter driven by recovery on our market source offering lab and production services and equipment services again reflective of increasing lab activities across our end markets equipment and instrumentation also grew double.

Double digits, resulting from a strong funding environment and a recovery in equipment sales deferred during the pandemic.

Turning to slide 8 we achieved 34% growth in adjusted EBITDA, and 125 basis points of margin expansion from 18.5 per cent to 19.7% including over.

Production basis points of gross margin expansion, all 3 segments achieved strong EBITDA margin expansion, reflecting productivity commercial excellence and a favorable mix contribution driven by our proprietary products growing at nearly 3 times the rate of our third party products.

Adjusted earnings per share were 35.

50 minutes up 87% and reflecting the strong operating performance and ongoing reduction in interest expense from our deleveraging and debt refinancing and repricing activities.

Free cash flow on non-GAAP financial measure, which we define as cash from operations excluding capital.

Expenditures and onetime acquisition cost was $265 million compared to $76 million in the comparable prior period.

<unk> was driven by strong EBIT performance working capital leverage and lower interest payments, partially offset by increased capex to support our growth strategy.

We have excluded.

5 set approximately $25 million of 1 time acquisition costs for Ritter and rim bio from free cash flow moving to slide 9 as Michael indicated we are raising our guidance for the year to reflect strong first half performance improving end markets and confidence for the second half of the year, we now expect organic sales.

<unk> growth of 9% to 11% for 2021, which includes 1% to 2% from COVID-19 tailwind.

Our overall guidance for Covid tailwind remains unchanged at a range of 350 million to $450 million for the year consistent with our previous messaging on this topic, we believe vaccine.

Excluded will continue to grow in proportion to our total COVID-19 related tailwind and continue to forecast an overall decline in contribution from diagnostic product sales in the second half.

Layering in projected impacts from FX of approximately 2% and M&A of approximately 2% we are estimating total growth.

<unk> of 13% to 15% for the full year our growth in July remained strong and end market dynamics are favorable across the board.

While we expect moderation in growth rates in the second half of 2021, given the strong comparable from 2020.

The average 2 year core organic growth.

Growth rate, excluding Covid tailwind is expected to improve in the second half from 5% in the first half.

We are also increasing our full year adjusted EBITDA margin expansion expectations to be approximately 150 basis points, reflecting our strong first half continued core.

Business momentum and a modest benefit from M&A.

The expansion in the second half, maybe slightly less robust than that of the first half, reflecting the potential for less favorable sales mix as sales of non proprietary equipment and instrumentation continue to rebound and higher operating costs reflect.

<unk> investments to support growth and the gradual return of certain operating costs deferred during the pandemic such as T N E and employee health care.

We now anticipate adjusted earnings per share growth of approximately 50% up from our previous guidance of approximately 40%. This guidance reflects our strong first half results continued.

Corvid operational improvement and lower interest expense from deleveraging and the 2020 debt refinancing and subsequent repricing actions.

In 2021, we have completed additional debt repricing actions, including 1 at the beginning of this month that collectively will reduce annual interest expense.

<unk> by $10 million.

Adjusted earnings per share also includes an approximate 5 cents per share contribution from M&A.

We are also raising our full year free cash flow guidance to approximately $850 million.

Our full year outlook is based on ongoing EBIT growth and low.

Interest payments with some modest offset from increased capital expenditures and working capital needs to support our growth.

1 final comment regarding leverage as noted earlier in the presentation. We ended the second quarter at 3.8 times leverage, including the impact of reader and rim bio or 3.2 times.

<unk>, excluding these acquisitions down from 3.5 times at the end of the first quarter. We are confident in the attractive cash generation capability of our business model and the capital allocation flexibility. It provides this concludes my prepared remarks, I will now hand, the call back over to Michael.

Thanks, Tom.

I'm now on slide 10.

The relevance of on towards business model and the importance of our mission is evident and our exceptional second quarter performance and the overall momentum in our core business.

We continue to execute well as evidenced by our margin expansion EPS growth and our free cash flow results.

We remain committed to.

<unk> strategy, including the ongoing integration of Ritter and rim bio.

We will continue to focus on Biopharma as a key growth driver for our company and will support our growth of ongoing investments in raw material and single use manufacturing capacity.

We're also committed to advancing our sustainability initiatives through our science for goodness platform.

<unk> as we look ahead, we are well positioned for continued growth across each of our end markets and expect to deliver strong results for the full year.

The role of on towards products and services and enabling scientific breakthroughs has never been more important.

And 1 final note before we conclude our prepared remarks, we are hosting a virtual investor.

Our on Thursday September 9th at 9 a M eastern time Reggie.

Registration is live on our Investor Relations website, and we look forward to sharing more detail about our business and our long term growth strategy at this event.

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

And for your ongoing support.

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

Ladies and gentlemen, as a lender to ask a question you will need to press star 1 again to other felon do we draw a question press the pound key.

Please stand by while we compile the BNA roster.

First question, we have Tycho Peterson with JP Morgan Your line is open.

Hey, good morning, guys, great great quarter, 30% gross and proprietary consumables certainly stands out Michael I'm. Just wondering if you could talk to that dynamic obviously, that's part of the long term future share gains.

That will outgrow third party distribution on we'll get the net.

Margin lift so.

Are there any other things you're doing different from other kind of go to market strategy.

On the kind of drive the higher gross and proprietary products.

Yes, thanks for the question Tycho and good morning to you.

Youre correct proprietary content is an important part of our overall long term growth thesis.

As we've talked historically.

Our proprietary content would grow kind of 2 to 3 acts at the rate of our third party content on our portfolio and much of that is owed to the fact that our proprietary content is preferentially oriented to our production platforms.

Which grow significantly faster than our R&D platforms, and I think the what youre seeing here play out it's just.

You know the access that we have in early phase on <unk>.

Discovery and process development.

And it gives us the opportunity to seed our proprietary content.

On more platforms than we have had historically I think you're really starting to see the benefits of our integration with VW or.

Play out here, our pipelines are more full than they've ever been we're working on more opportunities than we've ever had and I also think it speaks to the strength of our of our end markets clearly.

Clearly within Biopharma.

Health and strength of the core monoclonal antibody businesses is clear as well as the emergence of a number of new.

You know therapies and exciting areas like cell and gene therapy, and mrna and other so.

We really are leveraging the access.

First that the VW or gives us 2 are.

Development partners and very deliberately we're ceding more content on on more platforms.

The impact that that will have over time ultimately is to accelerate top line growth and.

Just given the margins associated with our proprietary content, but.

We'll also provide a nice margin lift to our business over time.

And then lastly, we're on the front end of our M&A strategy here, but as we've talked a lot about our algorithm and our filter for how we would screen for acquisition opportunities.

We will overweight the allocation of capital toward.

<unk> proprietary content and that will also have an accelerating an acceleration effect on gross margins as we continue to drive higher proportions of proprietary content into our portfolio.

Yeah.

That's a good segue to a question that I had on M&A when bio.

2% M&A contributions in the back half of the year.

How material is that to kind of a China strategy can you just talk a little more about the importance of that deal.

We're super excited about the opportunity to establish single use manufacturing capacity in the region.

Not only does it expand our presence, but it allows us to bring our business model with best in.

But lead times there too.

A pretty important long term growth.

For our business and so we would view this as something that will build around.

It gives us.

You know manufacturing capacity for our single use franchise.

With with local capacity now in all 3 regions of the World, which we think is a strategic.

Classic and it also brought to us some some incremental technologies that we'll be able to leverage.

Globally.

So while perhaps modest in scale relative to the rest of the business it is going to be meaningful.

To our to our China strategy and we're obviously in the early days here, but the customer response has been.

Strategic positive.

We're busy.

Seeding new opportunities and integrating them into our system.

Great if I could ask 1 last 1 on segments.

Called out debt some stockpiling in government.

Diagnostic suppliers I'm, just curious how COVID-19.

That was and then any segment level commentary you can give to the back half.

Half of the year just in terms of mix.

Yes, I think the comment there relative to.

Government was probably more of a comp issue as we think about.

On the trending over the last year or so.

Obviously, there was strong.

P P E and diagnostic.

Quite keen on purchases through various government sponsored agencies, what we're seeing is like the U S. For example.

We see subsiding over over time from an from an end market.

Perspective, there's clearly a lot of momentum across all 4 of our key end markets.

The growth that we delivered in the second.

And as you kind of screen that through our outlook for the second half of the year.

Obviously, not only baked in the overdrive from the second quarter, but we've also.

Elevated our outlook for the core business in the second half, which is a reflection of our view that we'll see continued momentum.

<unk> end markets for our for our core business and clearly it's headlined by.

Really strong environment for Biopharma, both on the R&D space, where we see.

Accelerated spend levels, including some catch up spend from.

Maybe some postponement of some other equipment and instrument purchases.

In Egypt were delayed during the pandemic to.

Pretty frothy production environment.

Our.

On.

Back orders, our open order book for our long cycle proprietary materials, which covers our offering into bio processing and it also covers are.

<unk> bring into the medical device space.

As strong as it's ever been.

I think when we were looking at.

Our bio production order book for example, we have essentially a full year's worth of demand and are sitting in our open order book and its debt.

At a level that's nearly 5 ex.

What we would have normally carried in.

On our open order book pre pandemic and it speaks to not only.

Our relevance in vaccine production, but more so.

It speaks to our penetration and.

The strength of.

The core Biopharma business education has.

Our offense and purposes kind of returned to normal levels at least at the University level.

In both Europe and the U S.

The procedures and.

Our kind of our core diagnostics offering into the health care space has been has been strong.

Very very nice recovery in that part of the business and we.

See continued strength there on the second half and then obviously, we drove approximately 9% growth in on.

Methodologies and applied materials end market in the second quarter and with PMI the way they look around the world semiconductor outlooks as strong as they are I think we're encouraged by continued.

Fraud recovery on that that part of the business as well.

Yes, if I could just.

Just to add to what Michael said.

If you consider the 9% to 11%.

Full year guide.

You can think of Biopharma as Michael said it's.

In mid teens for the full year.

Continued.

And the second biggest advanced technologies applied materials obviously.

Coming off a pretty robust second quarter debt will be.

Low to mid single digits.

And I think when you look at education government also mid teens.

And the health care business should be a double.

As well so that rounds out kind of what we're what we've incorporated into that 9% to 11%.

Thank you that's super helpful I'll, let other shopping.

Okay.

As a reminder.

Those people.

Digitation, you're only allowed to have 1 question and 1 follow up next much and we have de Bruin from bank of America.

Hi, good morning.

Good morning Derik.

Hey, Tom if I missed it my apologies, but the update debt.

Guidance for the.

Interest expense.

Good question per year.

Yes, I think the run rate for Q2 should be pretty representative.

For the full year.

Got it thank you.

Also.

You added in Alaska.

On.

Net it's sort of curious in terms of what's sort of the potential incremental revenue contribution from filling up that capacity.

Derek we've been pretty transparent I think that we've been investing over the last year and certainly.

So this year.

Across our Biopharma platform our.

Process.

Process ingredients excipient chromatography.

Ex expansions and certainly in our single use area and as we've been bringing them on on kind of a rolling basis.

If you think about single use for example.

Dramatically expanded our our capacity with.

Major expansions that are now online.

With us we have a brand new site in.

In Europe in the Netherlands debt.

We will be generating revenue out of this in the third quarter.

And then obviously, we have expansion in China with the acquisition of <unk> bio and.

And we have.

And we will continue to have.

Yeah.

Expansions playing out on a rolling basis that are necessary to fuel.

The sustainability of our.

Our growth outlook, particularly in Biopharma and so when you think about the strength that we are delivering in that business on our ability to keep up with the demand. That's really is on the back of.

The investments that our team is making and we've got a series of investments that will play out again over the next several years. So when we think about our long term growth algorithm.

These these investments.

Are in line with.

The outlook that we provided and certainly contemplated in guidance that we share today.

Thank you.

Thank you next question, we have Doug Schenkel with Covid.

Good morning, guys.

I guess just.

2 or 3 quick math, 1 on M&A.

Yes.

Talk about the financial parameters that we should apply when we are thinking about your capacity for M&A.

If we're thinking you could do maybe $1 billion in free cash flow over the next 6 quarters look at our EBITDA forecast and think that you might go to 4 times.

<unk>.

Net debt to EBITDA for the right deal is it right to conclude that you still have even after a couple of recent deals about $1.5 billion to $2 billion on capacity, excluding any equity potential.

Yes.

Thanks, a lot I think.

Your math.

We ended the quarter at <unk>.

And we continue that.

Trajectory that we're on as we said when we did the <unk>.

Our deal we expect to be on them.

Mid threes or better by the by the end of the year.

Yes, you can.

Can do the math and sales.

What's incremental if you just if you just take it up to 4 but.

It really depends upon the amount of EBITDA that you are acquiring.

And the multiples that you're that you are paying in terms of how that would impact on leverage levels.

But suffice to say that we think we have more capacity now.

Okay.

<unk>.

Even at.

On the end of the year because it grows every day that.

And we had at the beginning of the year.

And I think that I think the numbers that you mentioned are quite attainable assuming were going after deals that again have the kind of EBITDA.

Profile.

That we that we're targeting we're not going for a development stage companies or anything like that that can be operational.

Strong cash flow as in enhancing our own margin rates. So.

I wouldn't dispute the range that you articulated.

Okay. Thanks for that Tom and then.

I guess a couple on I guess, it's really just the operating margin and operating expense. The first thing I want to get out is on proprietary content I know Tycho asked the question about how things are evolving there and durability I'm just wondering if you could maybe take it down a level 2.

Kind of how the mix.

Of products within the proprietary content category are evolving.

I guess, what I'm thinking is things like bio processing bio production proprietary products are going to have a higher margin than.

You know maybe a proprietary equipment at the other end of the spectrum. So I'm just kind of wondering if.

Mix.

Maybe share a little bit more on how margin within net importing category is evolving and then.

The other thing I want to get at is.

Operating expense increased 17% year over year.

Obviously, we all know what's going on in Q2 of last year. So some of that comp, but I think what.

You could have starting to move into a period where.

And certainly what we're hoping for is a continued period, where travel is picking up conference schedules are normalizing more client details are occurring.

With that in mind.

I'm wondering over the balance of this year, but maybe more importantly, as we look ahead.

We are 2022, how are you looking about how are you thinking about operating leverage in a period, where from an operating standpoint things are hopefully normalizing a little bit more.

Okay, Doug, let's unpack there will we do.

The best answer your questions on your question around proprietary content.

Head to what's in there and a little bit around the mix and margin impact.

I would highlight within the proprietary materials category, which is going to be the predominant.

A contributor to the overall growth of proprietary content.

Really focused in probably 3 or 4 principal.

There is certainly bio processing is a really critical driver for that.

I think youre familiar with the margins in that part of the business..1 item that you didn't mentioned that really is important to call out here is our.

On leading medical grade silicone formulation platform for medical devices.

That's.

Clearly a lot of that is being driven by electric procedures or.

And when we look at kind of the trajectory of that business through the pandemic and on where we sit today I think Tom referenced in his prepared remarks that that part of the business grew nearly 50%.

In the second quarter and that business brings consider.

And margins into.

Into the mix and it is an important driver and certainly was an important driver in the second quarter and then the last area would be our customer.

Yeah.

Formulations on to support aerospace and defense in our semiconductor activities and those margins are very similar to.

The margins that we would have on our bio production business. So certainly the materials component of our proprietary mix.

Brings considerable margin into the business you were asking about other elements of our offering whether that be some of our services.

Particularly on the clinical services area, where we have a nice proprietary offering.

<unk> margins are going to be.

In and around.

The margins for our materials.

On an aggregate basis, maybe some of the kitting things, we do are going to be lower margin. But then you look at some of the things we do on bio repositories can be a little bit higher margin, but on an aggregate our clinical services offering is going to be.

Those are in gross margin as are the.

The rest of our proprietary content and then I think your instincts are probably correct on.

On the equipment and instrument piece, which obviously is a much smaller component of our overall offering is going to bring with it.

Better margins than on third party mix, but.

More than a little bit lower than what we would find in our materials portfolio, but I think you've got some more granular detail at that time.

I mean, Doug for you.

You look at it for the first half in its entirety and on gross margin did expand nicely in.

Roughly half of that has come from mixed benefits.

Michael referenced.

Okay.

That's obviously the part of the business model here is to try it.

To drive that achieve that relative to the.

The Opex increase I mean, I would say that.

17%.

In the second quarter.

Consider that in the light of.

Some of the performance based incentives.

Where we are.

We're required to accrue for we probably had a little bit heavier weighting of that in the second quarter and the first given the other performance as well as the outlook for the rest of the year.

As that normalizes as.

Go into the.

The second half is probably.

Probably $5.6 million worth of.

I call it just catching up the full.

Year to the.

To the midpoint.

Based on our updated view of the full year.

So that comes.

As you kind of on a bit and yes. There is there are some volume related cost in there as well so some of that scales up and down with volume and there had been some investments that we've made.

We continue.

We continue to reference some of the.

Capex investments that we've made but there.

Comes down SG&A costs.

Some of those.

And truthfully there is.

There is some inflation that we're seeing that.

Okay.

Showing up in the SG&A line, but we think we've contemplated that in our pricing approach.

As well as.

With some other productivity initiatives that we've got so overall I mean, we will give more perspective on.

2022 in terms of power.

Thinking about SG&A, but there will be it will continue to.

Vest and grow the business and Youll see some of that come through but.

We're as equally focused on.

Driving productivity.

We're trying to do things as efficiently as possible so more to come on that when we give our 2022.

Okay. Thanks very much.

Thank you. Our next question will be from Vijay Kumar with Evercore.

1.

On the line.

You May ask your question.

Hey, guys congrats on that strong frontier.

Okay.

Michael maybe.

1 for you on that.

Comments on Covid tailwind.

On the overall revenue of $2.50 to 450 was unchanged with.

I think the mix.

Between vaccine and diagnostic <unk> I'm curious what does what percentage is Maxine contribution now and given your comments on on the order book should we assume that connection tailwind should sustain into fiscal 'twenty 2.

Yes. Thanks.

For the feedback Vijay on.

Covid <unk>.

I think you've read it right obviously our outlook for the full year is unchanged at $3.50 to $4.50, which implies roughly 1% to 2% contribution to our organic growth guide and.

I will just highlight that overall this reflects represents less than 5% of our overall <unk>.

Revenues our views have base.

Basically unchanged from what we talked about at the end of the first quarter, meaning that the mix of the business would kind of play out 40% to 50%.

Diagnostics, roughly 40%, 50% vaccines and the balance PPE and I think we've been quite.

About our view on on diagnostics.

Certainly we.

We don't have a lot of visibility.

Visibility into that end market as we've talked about that.

We can really only see over the next 1 to 2 weeks and so we've been quite conservative throughout the year.

And highlighting that we had already baked in.

Very aggressive.

System ramp down of the diagnostic contributions in the second half of the year and I think thats consistent with what we're what we're seeing in.

And clearly with the lead times associated with our offering into.

On the vaccine space, we've got a very clear view of the order book in that in that space.

I mean, you know as.

As we've been able to bring on capacity I think our confidence is certainly.

Increased and we're maximizing what we can supply into that end market and so as we move through the year and that's certainly it played out this way in the second quarter.

And it would be our expectation in the second half of the year that.

And certainly the majority of our tailwind would be coming from from vaccines. As we then transition into into 2022, obviously.

We're going to have to put together our plan and we'll share that when we're done but when we look at our order book, which for bio production, which stands at nearly a year's worth of demand now.

We do have confidence going into 2022 that the.

Contribution from vaccines will be quite durable and I think there's a lot of drivers from that I think the prevailing view is that the.

On the virus is likely to be endemic.

We certainly see the impact of variance Theres a lot of data.

I don't know about.

The need for boosters and annual shots on these kinds of things. So I think we're.

At least on who's here today, our view would probably.

Support.

Ability of vaccines into 2022 and beyond and our order book.

We support that.

Going into next year.

B J.

That is helpful and maybe 1 for you on the guidance.

Taxane it looks like 24 percentage crept up I'm curious.

How we should think about tax and bigger <unk> contribution seems to be coming in above plan I'm curious.

If you are seeing.

Is that a better top line on a margin contribution on not the return per site.

Yes, yes.

Yes on the tax I think we've been conservative.

I think I think the rate will probably play out the way we guided at the beginning of the year.

And.

There's nothing new or different.

Relative to.

Tax that we've incorporated into.

<unk>.

So I expect something along the line says about 23%.

In terms of winter, it's pretty much up the middle Vijay in terms of what we talked about when we.

First went through the.

Yes.

Net in mid April.

Yeah, we're really excited about.

On the opportunity to accelerate our growth rates enhance our proprietary offerings.

Ill provide more workflow solutions for our customers.

We have.

When you look at greater ex.

It has a high precision consumable platform excellent strategic fit for us.

And.

The financials as.

As we said.

On April will be.

Accretive to our growth rate will be accretive to our margin rate.

And for 2000.

But for the rest of the year.

The revenue is pretty much that we've baked into the.

The plan.

Or to the guidance.

Pretty much in line with the business model that we articulated.

In mid April.

Thank you Nikki.

Next we have Jack Meehan the net.

Current research your line is open.

Thank you. Good morning, I was hoping can elaborate a little bit more on the early integration of greater.

Launching the operating under the GP Baker brand sounds like a good move just talk about the breadth.

Youre seeing in the channel and sorry, if this is a stupid question, but the deal closed a little early why was there no revenue contribution in the quarter.

Thanks, Jack good to hear from you.

We're super excited about.

On the closing of the transaction and the opportunity to integrate <unk> into our business.

Yes.

Just as a.

A refresher debt acquisition brings significant proprietary high precision consumables.

Into our business and gives us a much richer solution for the high growth lab automation workflows that.

<unk> are important to our business.

Also brings.

Pretty attractive financial profile with it it will accelerate our overall.

Our organic growth.

Given the proprietary nature of the offering is going to expand margins and as we talked about when we announced the deal we're confident in a low double digit ROIC.

By year 5.

The deal.

Deal did close.

At least a couple of weeks ahead of ahead.

Ahead of plan and we've been busy driving integration with probably the heavy emphasis on <unk>.

Getting the offering integrated and up and running in our channel.

And that included.

Obviously, making some branding decisions.

Indicated we have launched.

The products under the J T Baker brand name, which within our portfolio.

That is our flagship pre.

Premium per.

Proprietary brand within our within our portfolio and.

I think the winter products on a great fit under that brand given what they stand for high precision quality.

Performance.

And the product was just recently.

Made available into our channel, we've got inventory positions around the world now and our.

Our branding.

Our teams are fully activated quote levels are.

Super High and we're starting to deliver meaningful revenues through.

Through the channel in addition to supporting the legacy.

OEM business that came with that.

With that acquisition.

Relative to kind of the impact on Q2.

If we look at really just a couple of weeks.

Selling there.

And so you can kind of unpack what.

But the overall.

Size of the business would have been in a relatively short period of time.

And it was relatively immaterial to our results what we would anticipate doing going forward Jack on.

Honestly on the top line.

We report actual growth as we always do which would include the impact of both room and renter.

And we will also provide visibility into organic growth, which.

Starting in the third quarter would exclude the impact of.

Operator and Ram.

We obviously don't break out some.

These adjustments for M&A lower in the P&L, but we will.

Like we did with the guidance today.

Try to give you some visibility into the impact on.

On EBITDA as well as contribution from these acquisitions 2 to EPS.

As we look at our outlook for the full year on EPS. For example, we highlighted on things that we would anticipate.

M&A to contribute.

Approximately 52 to.

The earnings in the second half of that on the year.

Yes, Jack is that when you look at the reported guidance.

Growth rate, 30% to 15%.

That takes the 9 to 11 organic and factors in FX net M&A, it's probably split between the 2 of them.

So you can kind of get to get the math from there and as I said.

No.

Our our integration has has started in full throttle.

And you mentioned some of the branding that we're doing but financial modeling wise its pretty much on track with what we have we had originally modeled on articulated.

Great and then Tom you referenced.

Some of the inflation earlier, certainly getting a lot more questions about supply chain and raw materials could you just elaborate on any shortages you might be seeing and then on the pricing side.

Do you think you might be able to push that a little bit harder.

Some of these challenges persist.

Yes, great question Jack.

When you look at the.

Yeah.

But when I look at our.

Overall.

Financial algorithm, certainly managing net price cost dynamic has been something we've demonstrated.

Over time.

Yes that continues to.

To hold true in this environment.

So we'll talk about gross margin expansion certainly.

We've been talking about mix earlier on it but the commercial aspects of managing the price on the Cogs has been it's been playing out nicely.

With that said.

You are right there are.

Some some inflation that we're seeing.

And I think the.

It's probably.

More pronounced on some of the <unk>.

Categories, where it's just been known Theres been known.

So if you think about it.

Or was some of these PP&E categories, whether it was masks or glut.

Loves her apparel.

That's kind of migrated but you definitely are seeing some inflation, there and again that factors into the pricing that I talked about.

And then when you look at.

Our own.

Operating costs.

Certainly from a production perspective.

And our own supply chains and on our distribution centers there is a bit of inflation there that we're contending with.

I think it's.

It's been manageable, it's not it's not outrageous, it's higher than it's been in the past.

First I'd say marginally higher at this point.

But as we go into 2000.

'twenty, 2 we definitely need to be mindful of.

Both the purpose inflation that we have.

And the inflation thats within our own <unk>.

<unk> system.

And again manage that through productivity.

<unk> Ru.

Reising initiatives.

Thanks, Tom.

Thank you next we have Patrick Donnelly with Citigroup.

Your line is open.

Great. Thanks for taking the questions guys.

Maybe 1 on China.

You talked about the expansion there both organically and Inorganically with room bio it's an area, where you guys are a little bit under penetrated relative to peers can you just talk through trends there that you've seen and then the opportunity going forward again, it sounds like your maintenance capital Capex investments along with along with the deal. So would love just your thoughts on the opportunity set there.

Thanks, Patrick free opportunity to talk a little bit about our broader EMEA strategy, including China, maybe a couple of headline comments.

You are correct in that the EMEA region reflects speaking on approximately 56% of our overall.

Revenue, which you know relative to other peers certainly at least at.

At the outset appears somewhat.

Under represented.

When you unpack that and get a little bit under the details I think the probably the key driver here is just the.

On the lack of.

Pump.

Penetration, we have probably on the R&D side.

The business throughout the region. If you look at the proprietary content that we have seeded in the region for areas like final production for example.

That would represent well over 20% of our.

While production business globally, and so when we think about our strategy and where we're focused clearly biopharma.

Globally is important and that is certainly true of the EMEA region.

And we are very well represented in as well if not better represented than our peers in areas like Singapore and Korea.

To date are driving the bulk of the Biopharma revenue for the industry.

Region.

And I think we all see the.

The strong upside in on long term opportunity coming from China with the investments in.

Certainly the focus on Biopharma.

In China, we are in.

On the early days as an industry pipelines are building aggressively there is a strong focus on LNG.

Gene therapy.

There is a lot of investments and capital.

That's helping drive the acceleration of that that market and so as we've indicated we are very aggressively deploying our our playbook in our model to position us to capture our entitlement to that growth.

Growth and Thats.

From.

Commercial and technical resources to the.

The deployment of our application and technology capabilities in the region.

Now, we're getting to the point, where the business can meaningfully support localized production and you see us trying to accelerate that strategy.

M&A with the addition of <unk> bio and we will continue to look at.

What else, we can should and put there and the right timing to do those things.

The business is growing aggressively there the numbers are pretty impressive on a on a percentage basis, but.

It's off a relatively.

Eloquently small base at this point, but the fundamentals are strong.

And I think we're very encouraged about the trends that we do see playing out in China, and we're investing aggressively in mobilizing our model to ensure that.

That over time that we get.

Our entitlement level of growth.

Sir.

That's helpful. And then maybe just 1 more on the bio processing piece tied to the vaccine I appreciate all the color on the order book.

Some of your peers have come out and said 22, they feel pretty good about their vaccine revenue being flat, maybe even up relative to 'twenty..1 I mean is your order book.

Yes.

Enough to kind of make that commentary or any high level thoughts revenue could look like in 'twenty 2 versus 21, just tied to COVID-19 vaccine.

Yes.

Now that we would be able to offer any more color than maybe what you've heard others say.

We certainly have.

At this stage.

Sitting here at the end of the second.

Quarter very good visibility probably at least through the first half of next year just based on the lead times of some of our materials.

Gives us a lot of confidence.

In.

On the outlook and certainly.

There's a lot of data that would support the durability of what we're all doing here.

We've got the added dimension of you were bringing on incremental.

Capacities.

Throughout this cycle, there's a lot of capacity coming online in our system in the second half of this year and into next year that will allow us to.

Participate.

At whatever level that is required so I think we're certainly encouraged by what we're seeing in getting.

Getting down to is it going to be same or above.

Above its probably a little finer granularity than what we would have it at the moment, but.

I think we're certainly very encouraged and optimistic and we're well positioned for however, the.

Industry trend plays out here, Yeah, Patrick I would add that the interesting part of our open orders.

That was because of deep.

Rental per person some of the other U S prioritization, we've been serving.

On a priority basis.

The Covid vaccines.

So the order book itself is more heavily weighted to non COVID-19.

The major way.

Let's say the COVID-19 piece of it.

Pat.

Throughout 2030% of it.

But it comes and.

Those orders come in on a more frequent basis as I said, it's kind of.

It's handled on a prioritized LIFO type basis.

That's really helpful. Thank you.

Okay.

And that's it.

A question and answer session I will turn the call over to Michael.

Thank you Victor.

Thank you all for participating on our in our call today.

Certainly.

Be remiss if I didn't express my continued gratitude to all of our associates around the world.

Theyre superb execution.

Certainly for living our corporate values, each and every day.

Our team is resolute and steadfast in their support of our customers and this is certainly an important and critical element of our mission.

And our overall success.

I am excited about <unk> future and I look forward to updating you when we get an opportunity.

Vince to meet again next until then take care and be well everyone. Thank you.

Okay.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

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