Q3 2021 Avantor Inc Earnings Call

Good morning, My name is <unk> and I will be your conference operator today.

This time I would like to welcome everyone to <unk> third quarter 2021 earnings results Conference call.

At this time I'll, let them be so in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad.

If you require any further assistance. Please press star zero. Thank you I will now turn the call over to Tommy Thomas Vice President Investor Relations.

MS. <unk> you may begin the conference.

Good morning, Thank you for joining us today.

Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom <unk>, Executive Vice President and Chief Financial Officer.

The press release and a presentation accompanying this call are available on our Investor Relations website at IR <unk> scientists 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 the line for questions.

During this call we will be making some forward looking statements within the meaning of the federal securities laws.

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.

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, whether as a result of new information future events and developments or otherwise.

This call will include a discussion of non-GAAP measures a reconciliation of these non-GAAP measures can be found in the appendix to the presentation.

With that I will now turn the call over to Michael Michael.

Thanks, Tommy and good morning, everyone. I appreciate you joining us today.

Starting on slide three.

By now you've seen our press release highlighting of onto our third quarter results, which reflect strong business momentum across our end markets and our team's continued track record of execution.

We achieved 10, 2% organic revenue growth in the quarter.

Including a core growth rate of eight 5% and COVID-19 tailwind of approximately one 7%.

The COVID-19 tailwind for principally driven by our vaccine related offerings.

In addition to delivering double digit organic topline results, we grew adjusted EBITDA nearly 26%.

Resulting in EBITDA margin expansion of approximately 180 basis points.

Adjusted EPS grew 48% to <unk> 35 per share.

In September we announced a definitive agreement to acquire mass reflects a leading global manufacturer of peristaltic pumps and <unk> single use fluid transfer technologies.

Spanning our proprietary single use offering for bio production.

We have since received all required regulatory clearances.

We have secured the necessary financing and intend to close the transaction in short order.

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

We are committed to our role as a leader in life changing science and remain focused on driving innovation and growth with investments in capabilities and capacity.

This quarter, we advanced several expansion initiatives, including our production capabilities for key chemicals used in upstream and downstream applications in the bio production workflow.

We also advanced our hydration expansion strategy and recently opened our new European single use facility in the Netherlands.

Additionally, demonstrating our commitment to helping scientists realize the potential of breakthroughs through innovation, we announced a commercial agreement with Oxford Nana poor technologies, a market leading manufacturer of next generation sequencing instruments kits and consumables.

The agreement combines the breadth and depth of von towards Global laboratory customer relationships across all of our end markets with the sequencing technology from Oxford <unk>.

That will provide scientists broader access to Oxford menopause portable real time manner poor sequencing device, along with associated consumables and reagents through <unk> channel.

Looking ahead, we believe our role in the innovation ecosystem positions us for continued business momentum.

We expect our core business to remain strong in the fourth quarter and are once again, raising our guidance for the full year.

Tom will share details on this in a few minutes.

During our recent Investor day, we described how our distinctive capabilities set us apart from our competitors and position us for long term sustainable growth.

Our third quarter results prove the strength of our business and how our products and services enable scientific breakthroughs.

We are in the process of finalizing our 2022 operating plan.

And anticipate delivering another outstanding year in line with our long term targets.

We will share more details with you as part of our fourth quarter earnings call early next year.

Moving on to slide four I'd.

I'd like to reiterate some of the highlights from our recent announcement about our pending acquisition of Master Flex.

Master Flex will further strengthen our single use offering for the high growth Biopharma end market.

For more than 50 years mastered flex has been providing industry, leading fluid transfer technologies that play a central role in Biopharma research and production workflows.

Master of Flex those technologies are relevant across all established and emerging biopharma platforms, including monoclonal antibodies and cell and gene therapy and mrna.

And support both vaccine and therapy manufacturing, including COVID-19.

More than 80% of Master Flexes revenue is concentrated in biopharma, giving.

Giving us access to a $5 billion addressable market that is growing high double digits and provides us a fully integrated solution for managing a septic fluid transfer throughout the bio production workflow.

The single use fluid transfer space is an area of significant growth for <unk> <unk>.

Supported by the expansion of our facilities and our previously announced acquisition of <unk>.

Our single use platform has been a key organic revenue driver of bio production sales to date and.

And we see this acquisition as they further accelerator of our overall organic revenue growth rate.

This transaction meets both our qualitative and quantitative acquisition criteria and is a great example of our M&A strategy in action.

Our customers will benefit from our fully integrated a subject fluid transfer for solution throughout the bio production workflow and our financial profile will be enhanced by master flex is double digit revenue growth and proprietary gross margins.

As I mentioned, we expect to close this transaction in short order and are looking forward to welcoming the master flex team to the onshore family.

Turning to slide five.

To summarize our third quarter financial results.

Revenues increased 10, 2% on an organic basis, and 14, 3% on a reported basis, including the impacts of foreign currency exchange tailwind and the Ritter and <unk> acquisitions.

All regions and all product groups experienced strong organic growth overall.

Overall performance was driven by our Biopharma end market growing high teens with nearly 26% growth in bio production.

We also experienced high single digit growth in the advanced technologies and applied materials end market for the second consecutive quarter.

Covid tailwind contributed about one 7% to our organic growth with the largest driver being proprietary materials and consumables sales to support the production of COVID-19 vaccines.

As expected aggregate COVID-19 tailwind contributions declined sequentially.

Reflecting a decline in revenues from diagnostic testing.

We continue to expect COVID-19, <unk> of around $400 million for the full year.

Compared to approximately $250 million to $300 million in 2020.

Adjusted EBITDA in the quarter was up 26%, reflecting strong top line growth favorable mix, including nearly 20% growth in sales of proprietary materials and consumables and outstanding execution enabled by the <unk> business system.

Despite ongoing inflation in excess of historical trends across a number of cost categories, including raw materials third party products transportation and wages.

We leveraged our ABS toolkit to expand EBITDA margin by approximately 180 basis points.

Adjusted earnings per share grew more than 48%, reflecting the strong EBITDA growth along with lower interest expense and a lower income tax rate.

We generated $229 3 million and free cash flow in the quarter more than 100% of adjusted net income while.

While at the same time, doubling our capex investment over the prior year to support our growth initiatives.

Our adjusted net leverage ended at three five times adjusted EBITDA down to <unk> three times from the second quarter, reflecting our strong cash flow and sustained traction and deleveraging.

The funding of the NASA Flex transaction will obviously increase leverage in the fourth quarter, but we fully expect that our strong cash flow profile will have us within our targeted leverage range of two times to four times adjusted EBITDA by the end of 2022.

In summary, our third quarter 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 supported by the of onshore business system.

I am proud of our team for delivering another strong quarter and confident in our outlook for the fourth quarter and beyond.

With that let me turn it over to Tom to walk you through our results in more detail.

Thank you Michael and good morning, everyone I'm, starting on slide six as Michael noted organic growth was 10, 2% this quarter, leading to year to date organic growth of approximately 15%.

Our core organic growth rate meeting organic growth less the estimated COVID-19 tailwind was nearly 9% and improved nicely from the approximate 2% core organic growth rate in the third quarter of 2020.

Proprietary materials and consumables grew nearly three times the rate of third party materials, and consumables, which as you know drives a favorable margin mix for the enterprise.

From a regional perspective, Americas, which represents approximately 60% of annual global sales.

<unk> nine 1% organic revenue growth.

Driven by double digit sales growth in Biopharma production offerings.

<unk> consumables.

Biomaterials and procurement services.

Biopharma production sales grew about 30% in the Americas, driven by sales of chemicals and single use consumables, including those used to support COVID-19 vaccine.

We also achieved record sales of proprietary silicone formulations for our biomaterials platform as demand for elective procedures fully recovered in the quarter.

Europe, which represents approximately 35% of annual global sales achieved 10, 9% organic revenue growth.

Driven by double digit growth in lab consumables biopharma production offerings and biomaterials grew.

Both in Covid vaccine related revenues.

Were offset by anticipated declines in revenue from diagnostic testing, resulting in limited net COVID-19 tailwind in the quarter.

EMEA, representing approximately 5% of annual global sales.

<unk> 16, 4% organic revenue growth.

Which included a modest offset from Covid headwinds.

Growth was driven by especially strong demand for our proprietary offerings in bio production and semiconductor manufacturing.

Let's move to slide seven which shows our organic revenue growth by end market and product group for the quarter.

Biopharma, representing approximately 50% of our annual revenue.

<unk> high teens organic growth in the third quarter, including roughly 26% organic growth in bio production driven by exceptional growth in single use consumables as well as double digit growth and production chemicals.

Demand patterns continue to be impressive and open orders in Biopharma production are now 65% higher than the beginning of the year.

On the research side, the Biopharma end market grew in the mid teens, driven by lab consumables and supported by customer reopening.

Health care, which represents approximately 10% of our annual revenue experienced mid single digit organic revenue growth driven by record demand for our medical grade silicone offering and the elective surgical market offset by lower Covid diagnostics testing sale.

Education, and government, representing approximately 15% of our annual revenue experienced low single digit organic revenue declines in the third quarter.

Our education market experienced a low single digit growth driven by ongoing recovery and University research labs, and K through 12 activities government sales declined double digits on lower sales of Covid related test kits and personal protective equipment.

Advanced technologies and applied materials, representing approximately 25% of our annual revenue achieved high single digit organic revenue growth driven by broad based growth in lab products sold for research and QA QC, especially in Europe and EMEA.

And a proprietary chemical formulations for semiconductor manufacturing.

By product group as I mentioned earlier, our proprietary materials and consumables offerings achieved high teens organic revenue growth.

And by strong demand for our Biopharma production materials and single use consumables as well as by our biomaterials in electronic chemicals platforms.

We also achieved double digit growth in our equipment and instrumentation portfolio with good growth in both Americas and Europe against a favorable prior year comparison.

Services had a mid single digit growth quarter, driven by strong global lab and production services.

Let me turn to slide eight for key financial performance metrics, we achieved approximately 26% growth in adjusted EBITDA and 180 basis points of margin expansion to 19, 6% from 17, 8% and comparable prior period.

The margin rate expansion was driven almost entirely by gross margins, which expanded to 33, 6%.

We continue to generate strong productivity sound inflation management, and a favorable mix as our higher margin proprietary materials and consumables. Once again achieved superior growth rates relative to those of our third party materials and consumables.

Adjusted earnings per share or <unk>, 35, up 48%, reflecting ongoing operating performance and reduction in interest expense from our deleveraging.

And debt refinancing and repricing activity.

Our income tax expense was higher than the prior year, we did have an effective tax rate of approximately 19% in the quarter.

Reflecting a catch up for the now expected 22% rate for the full year driven by the impact of higher than expected deductions as well as U S tax credit planning.

Our tax rate for the full year was previously expected to be 23%.

Free cash flow are non-GAAP financial measure, which we define as cash from operations. Excluding one time acquisition cost less capital expenditures was $229 million compared to $266 million in the comparable prior period.

The decline was driven by higher cash taxes, reflecting higher income and the expiry of cares Act provisions.

Working capital investments to support our growth and more than $30 million in capital expenditures in the quarter, mostly related to growth driven initiatives more than doubled the 2020 Capex, we continue to forecast $850 million of free cash flow for the full year.

Moving to slide nine as Michael indicated we are raising our guidance for the year to reflect strong year to date performance stable core end markets and confidence in the fourth quarter outlook.

This represents our third raise to the annual guidance this year.

We now expect organic sales growth of approximately 10% to 11% for 2021, which includes approximately 2% from COVID-19 tailwind.

We continue to expect roughly $400 million in Covid related revenue for the full year, which includes modest COVID-19 organic revenue headwinds in the fourth quarter, which are expected to continue into 2022.

The evolution over the course of the year to a higher proportion of vaccine related tailwind and a lower proportion of diagnostic testing tailwind has also played out as expected.

Layering in projected impacts from M&A of approximately two 5% and from FX of approximately 2%. We are estimating total reported growth of approximately 14, 5% to 15, 5% for the full year.

We are increasing our full year adjusted EBITDA margin expansion guidance from 150 basis points to more than 170 basis points, reflecting our strong year to date results continued core business momentum and a modest benefit from master flex the.

The margin accretion from Ritter was already reflected in prior guidance.

We now anticipate adjusted earnings per share growth of approximately 55% up from our previous guidance of approximately 50%. This new EPS growth estimate incorporates impacts from M&A, including Master Flex and an incrementally lower income tax rate offset by higher interest expense and a slightly stronger U S. Dollar.

Adversely impacting foreign currency translation.

We are maintaining our full year free cash flow guidance of approximately $850 million, which we raised at the end of the second quarter by $50 million, we expect the EBITDA upside reflected on our earnings and free cash flow guidance to be offset by higher investments in working capital and capital expenditures to support our growth initiatives.

One final comment regarding leverage.

As noted earlier in the presentation. We ended the third quarter at three five times adjusted EBITDA an improvement from three eight times at the end of the second quarter.

The net debt in the three five times adjusted EBITDA calculation conservatively excludes the $967 million.

The net proceeds we received from the Master flex related equity issuance in September.

Upon the close of the Master Flex transaction, we expect leverage to be approximately four seven times adjusted EBITDA.

We are confident in the attractive cash generation capability of our business model and are committed to be within our targeted two to four times adjusted EBIT leverage range in 2022.

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

Thanks, Tom Im now on slide 10.

The relevance of von towards business model and the importance of our mission of setting science in motion to create a better world is evident in our strong year to date performance and the overall momentum in our core business we.

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

We remain committed to our growth strategy, including the ongoing integration of Ritter and <unk> and soon master flex.

We will continue to focus on Biopharma as a key growth driver for our company and will support our customers and ongoing investments in manufacturing capacity.

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

As we look ahead, we are well positioned for continued growth across each of our end markets and expect to deliver another solid year in 2022.

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

I want to thank you for your interest in <unk> and for your ongoing support.

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

Thank you and as a reminder, if you wish to ask a question simply press Star then the number one on your telephone keypad you go.

First question is from the line of sight.

Peterson from Jpmorgan. Your line is now open.

Hey, good morning.

I'd like to start with the EBITDA margin expansion, which was certainly impressive you talked about inflation management can you maybe just talk on how much of that gross margin expansion, which drove most of it was from pricing versus mix and maybe some of the productivity initiatives.

Yes. Thanks.

Thanks for the question.

I think you're referring to the.

The growth in the <unk>.

EBITDA margins.

About 180 basis points, most of which as we said came from.

Gross margin expansion.

It was an equal mix, we had very mixed sorry to use that.

Okay.

The upon there.

The combination of three different items.

The favorable proprietary mix continues to be.

Have a nice driver for us.

As we said growth in our proprietary products.

With almost three times the growth in third party products and that's not to say that growth of third party products with Chevy.

The mid single digits as well so it was overall.

Mixing favorably on the sales mix.

Secondly was <unk> had strong.

<unk> impact.

Impact of managing price over Cogs.

Did contribute to the margin accretion so of course in Cogs.

And inflationary impact did have a modest impact, but commercially and through other means we were able to offset that.

The third thing was.

Just our ongoing productivity initiatives, which includes the leverage that we get from the additional volume I'd say those three factors were.

Equally weighted in the.

And the margin accretion on gross margin.

Okay are you able to quantify what the pricing quite contribution wise I mean, I guess, obviously with Costco.

Costs growing operating costs et cetera are you able to kind of how much of that are you able to pass along.

More questions one on pricing is kind of the spirit of the question.

Yes, I think the yes.

If you look at our.

Our history.

Over the years.

Both.

Okay.

The proprietary the proprietary business as well as the third party business strong acumen and doing in managing the balance between the inflation we experience.

In our product costs.

Against.

Commercial.

So the pricing that we have in this quarter was no different.

You talked about inflation.

Since since.

It started COVID-19 we've been.

<unk> been experiencing.

Inflation and for that matter.

The supply chain challenges, so it's not as if it suddenly.

Emerged on the same for us in the last quarter or so.

So I'd say the cadence that we have is continue to work even with the modest uptick here in this quarter.

And I wouldn't say that the the.

The overall impact was.

Yes.

And if pricing over Cogs inflation was materially different than it's been in any quarter in the past in terms of its contribution to gross margin.

Okay, and then for Michael just curious if you could comment on Ritter and <unk> performance, I know M&A, which reached two 2% or so for the quarter, but how does the integration cost and those too and then separately I know you noted launching a handheld scanner secrets here I'm, just curious to hear a little bit more about the strategy around that.

Thanks.

Thanks Tycho.

Sure.

Obviously early days for both.

June Ritter Act.

Physician.

Integrations on both fronts are integrating.

The new capabilities into our into our channel.

Presenting those offerings to our customers.

In the quarter.

With our expectation.

Similar trends in the.

Covid exposure, which is somewhat modest ritter.

Yes.

Okay.

Yeah.

We saw somewhat of.

On a sequential declines.

Premium.

Revenues.

To COVID-19 related applications or better, but generally the business performing ahead of plan.

You shouldn't driven products.

Which require our customers.

These products into their processes and applications.

Our teams are busy and Sam.

Good morning, and qualifying these opportunities have a pretty full pipeline that were working on.

Alrighty.

Okay.

First of all in key I think is just another great reflection of the power of our channel.

Sure.

Yes.

Opportunity. It gives our third party partners to see their innovation through our through our channel obviously theirs.

Lot of excitement around this.

Innovation and technology stack.

The access that we have to labs around the world once again, showing the power of our model.

And leveraging our access to seed.

Alongside the rest of our capabilities and we've had tremendous uptick.

In the early days of event.

Launched through our through our channel.

Thank you.

We highlighted it really just is another.

Example of.

Innovation that we've taken to the market.

And the important role that we play in.

The innovation ecosystem, and bringing relevant technology to our customers.

Hello.

Your next question is from the line off from Derik de Bruin from Bank of America. Your line is now open.

Hey, good morning.

So if.

You could I know youre, not giving specific <unk> guidance, but could you just clarify something.

When you mentioned that your 'twenty two planning is under way you expect it to be in line with long term objectives.

When you think about that 4% to 6%.

Target put out there is that we're looking at 'twenty two is that going to be inclusive of COVID-19 or is that just the base business.

We expect the COVID-19 it to be down in 2022.

Because the contribution be down 20% versus 21, one clarification.

Talked about at Investor Day.

And do we expect.

Yes.

Targets of.

Oh.

The COVID-19.

We will get more specific when we do the guidance.

Okay.

In January but I think.

Probably not a bad way to model it at roughly 2% headwind.

For Covid and our business next year and that would be reflective of.

Boeing durability of the vaccine revenues that we enjoy today.

Sequential down downturn decline in contributions from PPE in diagnostics.

In our mid single digit.

Outlook.

We feel confident that we can absorb.

The headwinds that this would reflect.

The next year, but we'll get a little bit more specific for you.

Alright.

Great.

Okay.

That's pretty bullish.

Along those lines.

And are you, having any issues with supply chains or just your customers not your suppliers, having issues delivery and like that is there any shortages.

Sure.

This is in the channel.

Doug I would say there are but I wouldn't necessarily say that there are different or more acute than we've seen throughout the year.

Seems to move from new categories, We're certainly seeing some improvements in things like PPE availability and better part of 18 months, we're starting to see some improvements.

Availability of supply in some of those categories.

Some of the other categories like some of the resins for example that they go into.

Yes.

Well into the <unk>.

Double digit levels continue to be constrained so it's a bit of a balance but I wouldn't say it's months difference in nuc experienced throughout the year and the teams are doing a great job.

Managing to leveraging the.

ABS toolkit.

Problem solved on a real time basis and keep things.

Moving.

Certainly.

Turning to weather.

Thanks variability or service with labor constraints.

Everyone is facing in the U S. Those are certainly.

In our business today, but not as many different levels than we've seen.

Yes.

Previous quarters.

Great and then just.

One housekeeping question.

What's the.

What are your expectations on share count for Q4.

Full year, just given the equity raise.

Yes.

You know from the from the equity raise that we did in mid September.

Related to VNS reflects transaction.

Which raised roughly roughly 1 billion.

Dollars.

At $42 share price.

The shares that came with that including exercise of the green shoe because we were oversubscribed by about five times on the on the offering but it came in about $23 24 million shares on that.

So as we reset 2022.

Eric what we're going to do is.

Reset this adjusted share count as you know we've been we've conservatively maintained a standard number.

Adjusted.

The share count that includes a presumed conversion of our mandatory convertible preferred stock so.

Even though the share count is at.

Average around $5 $85 90.

For reporting purposes.

All of you in our discussions.

Episode on the conversion of mandatory convertibles.

What's behind the 642, I think we've used but we will adjust the 642.

To reflect the.

The issuance of the shares from asking flex as well as the other.

Theyre minor changes.

Changes in share count has happened.

Of course, you can always see it.

Outstanding shares diluted outstanding shares on a GAAP basis and in our 10-K.

Thank you.

Your next question is from the line of Vijay Kumar from Evercore ISI. Your line is now open.

Hey, guys congrats on the print and thanks for taking my question, Michael just to clarify.

The prior question from Derrick.

The fiscal 'twenty two commentary what's inclusive of.

Two points of fab.

Headwind from Colby <unk>.

Assumption as your base business for next year, excluding Covid is is that tracking.

I shouldn't say tracking perhaps the expectation is up high single digits.

Yes happy to.

Provide some clarification there Vijay.

The mid single digit guide or target that we have.

Outlined there at our Investor day.

We said then and reiterate again today certainly is inclusive of how we see COVID-19 playing out next year, which would include the roughly two points of headwind for us.

And I think consistent with how the business has been.

Running over the last.

Two or three years I think the growth that youre talking about there for the core business is in line with what we've been.

Livery each of the last several years, including this year.

Lynn.

So inclusive of that.

Covid headwinds were probably up 5%, excluding headwinds somewhere around seven ish for the base.

One on the Covid Calvin's itself up can you remind us.

I know the prior range of $3 50 to $4 58.

And now we are fine tuning into 400, what percentage was.

This vaccine and not what personal diagnostics and others for fiscal 'twenty one.

Second maintenance at Kip, sorry, and should vaccine kelvin's be higher in fiscal 'twenty two similar to your peers.

And so if you look at the mix that we've been talking about I think it's playing out in line with what we've described roughly 40% 50% of our tail winds are.

Vaccine, probably 40% to 50% of our diagnostic testing and then the balances as PPE and.

Matt.

It's kind of be aggregated view across the year here, obviously as we move throughout the year the contribution from vaccines becomes the majority of the.

The benefits that we're getting here as we've said before we expect that to be durable and continuing.

To increase as we move.

Into next year, both as production internally here, we're bringing on some of our.

Capacity expansions as well.

More capacity for.

Your vaccine production being available globally as we as we move forward.

And in line with our expectations.

Diagnostic testing and PPE, we would expect us to continue to decline over time.

Gotcha.

I guess on the share count just to be clear of what Youre, saying is base of 640.

Plus plus another 23, so that's around mid $6 66, 65, something like that is it for the appointment on share count.

Yes.

Vijay we've used $6 42.

Since the IPO.

Since the IPO theres been other equity transaction with minor ones like option exercises and restricted stock unit.

Continue.

Continue to update this exposure we've kept it flat just for simplicity purposes.

But we'll re baseline.

642 to reflect the master flex as well as to reflect any other.

The transactions that have happened.

Good.

Yes.

B.

We will cover in the.

And the earnings earnings guidance call.

Late January early February.

Thanks, guys.

Your next question is from the line of then Brendan if I'm. Following your line is now open.

Okay.

Alright, thanks for taking the questions just wanted to start off on Biopharma.

Typically for bio production, obviously solid growth revenues and orders can you just give us a flavor for like ex Covid.

That number looks like both on the revenue and order time, just give us some color on what youre seeing in that business.

Yes, Youre correct in that we continue to see great momentum.

Biopharma.

And market both at the R&D.

A portion of our business as well as that production and just.

Mind, you Biopharma is roughly 50% of our overall revenue and about two thirds of our revenue is captured R&D space and we see.

Continued momentum.

Momentum there is flat to start.

Turning to more normalized operations higher levels of activity.

Driving strong growth in that part of the business.

Awfully one third of the platform is our offerings into bio production, where we continue to see.

Very very strong growth is lumpy.

Reflected in our prepared remarks.

Just under 30% growth.

In the quarter with a very very strong order book Order book continues to grow as we said in previous quarters were sitting on roughly a year.

Open orders for that.

The platform, which is a bit unusual quite unusual.

It continues to grow on a day by day.

Interesting.

The makeup of that order book continues to be dominated by our core business I would say over 80% of the order book is.

In fact.

Related to our offerings into.

Our core monoclonal antibodies LNG therapy business.

Excluding COVID-19.

Great momentum in both the core and honestly, we're well positioned to capture.

The ongoing.

<unk>.

Covid vaccine exposure.

But the business overall is quite healthy.

Contributing at a high level organic revenue growth as well as margin expansion given the.

The proprietary offerings that we have in the production portion of that platform.

Dan I would also add to what Michael said.

Yes, if you look at the high end.

The.

At a high teens growth for Biopharma in the quarter.

Two thirds of the growth was the base business.

Third.

Michael.

Great. Thank you, Tom and maybe just one on kind of education and government obviously, the government looks like it was a.

The depressed just given some of the Covid kind of a natural slowing on the education side, just wondering what the outlook is there given the funding environment juxtaposed against colleague.

Some near term pressure from lab acts such as.

As we were in the fourth quarter and we're looking ahead to that would be a nice tailwind as we get into 'twenty. Two maybe is that lab press release.

So.

Education government portion of our business with approximately 15% of our revenue with two thirds of that baking in education and government.

Government was certainly a headwind for us really reflecting.

The strong COVID-19 related revenues, we enjoyed in the prior year period for things like PPE and diagnostic testing that.

It didn't repeat in this particular quarter on the education front, while there are certainly some level of COVID-19 headwinds on a year over year basis in the quarter reflected there.

We do see continued improvement.

Lab Utilizations.

At the University level.

Getting to what I would characterize as kind of low single digit growth for that part of the platform and then the science education portion of our business, which is roughly 2% of that overall education and government.

Platform.

To be a bit sluggish and we haven't really seen much of a pickup this year in line with our what we would normally expect for curriculum deployment at K 12.

Districts across the United States.

<unk>.

The next opportunity probably there for.

That should recover will be going into.

For next year, but.

Please.

Pleased with how things are developing in education portion of that business.

The government portions running in some pretty tough comps just given the role that governments around the world played in deploying COVID-19 related offerings.

Prior year periods.

Great. Thanks, Michael Greg just one housekeeping item just.

Whats the base ex Covid organic <unk>, that's implicit in the new 10 to 11 full year range can you just give us that number.

So we're doing our math right.

Yes.

For Q4, I think it works out too.

Correct me here, but it does.

I was going to say three 5% tailwind.

Tailwind for the year for the quarter.

As you recall thanks al.

Quarter of 2020.

Close to our high Mark in terms of Covid related revenues.

As Michael mentioned, while the vaccines continue to have durability in will have durability in the next year.

Impact in the Q4 starts to.

Turn a bit.

Because of the.

This reduction in the peak of diagnostic testing as well.

PPE usage.

Got it thank you.

Next question is from the line of Jack Meehan from the fund Research. Your line is now open.

Thank you good morning.

I wanted to start just got a little bit more color on the Ritter do you feel like they are still on track for $225 million of sales. This year I look at the M&A contribution of $50 million or so it was a little below what I was thinking.

And then one other Ritter question it looks like most of the M&A came in Europe.

Just thoughts on geographic expansion.

Yes, great Great question subject it to everybody this morning.

I mentioned to responding to one of the earlier questions. I think we continue to be very very excited about.

A couple of months into the <unk>.

Acquisition here integrations going quite well.

Go back to what we've talked about.

Now some of that transaction relative to end market exposure. We did acknowledge that there was a modest exposure to COVID-19 related.

Application needs.

I was kind of a market exposure there somewhere in the 10% to 20% range.

And as we had modeled that at the time I think we had.

We would have anticipated that coming off perhaps in 2022 time period.

As we got into the third quarter here, it's come off a bit quicker than we had.

Initially anticipated.

But the core of the business continues to run very.

Very strongly.

It's enabled us to accelerate our synergy capture.

You might be able to devote more of the capacity towards.

Samples.

Initial stocking.

<unk> for customers in our channels our teams are being very aggressive very very.

Energized about.

Facing these products in the hands of our.

Healthcare.

Biopharma customers around the world.

As I mentioned earlier.

These products are specification driven so you have kind of a multi month process of qualification and sampling before you can start to appreciably ramp.

The synergies are.

Commercial quantities.

So what youre seeing there in the third quarter is really reflective of kind of the legacy business and over time, you should start to see.

Heavier contribution outside of Europe, as we have success and seeing that in our channel.

A lot of efforts in stocking supply chains in Asia as well as in the U S. Both airfreight in Q3.

To get.

Inventories can position outside of Europe to support the growth that we anticipate.

Got it that makes sense.

And then just another question on 2022.

Your initial planning just any thoughts around whether the historical algorithm.

<unk> growth outpacing third party should hold.

Theres, obviously, a lot of moving parts just trying to think about the implications for margin expansion.

I think we're comfortable with our historical algorithm continuing.

Mid single digit organic growth.

<unk>.

Revenue to EBITDA and it's one five to two times range that we typically fleets CNN is honestly.

Driven in part.

By very.

Very very strong proprietary growth with the investments that we've made this year and momentum that we have in our proprietary offerings.

We don't see any reason why that wouldn't.

Play out.

Next year as well.

Great. Thank you.

Sure.

Your next question is from the line of Teahouse advanced from Morgan Stanley. Your line is from Wilton.

Hey, guys. Good morning, and thanks for taking the question Jack.

Michael I was just curious.

On Jack's earlier question as well on margins for 'twenty two.

Your comment on your ability to or rather your confidence in passing through inflation on the distribution side of the business, particularly given rising freight costs and on a somewhat related note are you guys seeing any sort of deterioration in your on time delivery metrics at all.

Yes, great great questions on your first point around inflation management clearly the team has done.

<unk> done a nice job managing that.

This year as Tom indicated deflation to just show up in the third quarter, it's been high.

And historical trends.

For the better part of the year.

Yes.

On the raw materials side or on.

The wage front, we certainly see escalations they are above historical levels.

You can see the execution of the team and the team has been offsetting these through a number of means including pricing.

Evidenced by our strong margin expansion this year.

Typically this time of year is quite busy and the teams are focused on driving.

Price adjustments into the market.

Going into the new year.

I would say one of the differences this year compared to previous years, perhaps as the process has started probably a little bit earlier.

And then you see it.

From our suppliers as well as the market at large here.

Yes folks getting trying to get ahead of this and get prices effective as early as they can to reflect.

The rising.

Cost environment that we face and so we're very active.

Indicating with our customers.

About.

2022 pricing as well as presenting I think a number of alternatives here it really offering choice, which is one of the.

Strength of our business model here is.

Okay.

Where customers have flexibility on branding.

Being able to take advantage of.

The flexibility that our channel provides and trying to offset some of the inflation but.

Net net.

Price increases will be higher this year than maybe historical to reflect.

The environment very hard going into next year excuse me to reflect.

The inflationary environment that we see but we are.

Conversations with with our customers and I think.

At this stage are comfortable with.

Just given the macro backdrop.

We're going to be able to manage the inflation as we as we normally do.

Got it and on your question on my question on on time delivery metrics.

Yes so.

Certainly the supply chain has been strained over the last 18 months given the.

The rapid run up in demand.

Say necessarily that we've seen.

A deterioration of our on time metrics, where we are seeing the impact is.

Is the lead time for many of our products have been pushed out to reflect that.

The constraints.

And so.

With regard historical lead times certainly.

Unable to keep pace with those levels.

With the increased lead times that we have for most of our products, which gets reflected in our order book then.

<unk> holding up well.

Got it and one final one on the single use capacity expansions, you've announced recently, obviously, the Netherlands site as they were.

Recent but can you give us a sense for capacity utilization at.

In Massachusetts, and your other facility in North Carolina.

Great Great questions. When you look at what we have done here from both kind of an organic expansion in both North Carolina as well as the Devins, Massachusetts site together with.

The.

Launch of the Greenfield site in.

In Europe and.

The acquisition in China, we've increased our clean room capacity by more than four fold. This year, which is going to give us a lot of flexibility here.

To recognize significant growth over the next couple of.

Of years, but.

It was needed.

Our backlog has been growing in single use the demands for our technology.

Efficacy and so are our factories are.

Are quite busy.

Looking ahead here, we think when we talked about the master Flex acquisition, our prepared remarks, that's going to be a nice complement to our existing single use offering and give us a complete end to end integrated solution for ACR fluid transfer technologies.

And there are some complementary capabilities on the.

The assembly side of that business.

We will have.

Opportunity too.

Incorporate the master flex clean room capabilities into our own footprint.

And then integrated in width.

Jumping into being capabilities that massively springs, but were.

Super excited about.

The developments of our single use.

The capabilities that we'll have in the offering.

Two.

So the market here, but yes no.

No doubt our factories are pretty busy.

Got it I appreciate the time this morning.

Yes.

Yeah.

Your next question is from the line of Patrick Donnelly from <unk>. Your line is now open.

Taking the questions.

Maybe just on the M&A side, obviously, a little early with Masters, recognizing closing, but Tom you talked a little bit about where the leverage is going to be after this deal where youre heading next year I mean, how are you guys thinking about.

The activity is there a certain threshold, where you want to be below before you look at the next deal.

And maybe just talk a little bit about the pipeline how active how active things actually right now.

Yes, good morning, Patrick and thanks for the thanks for the question.

Yes.

I said in our prepared comments.

And when we close master flex, which we expect it to be really any day now.

That will obviously take our leverage up a bit.

Think of it as well.

$4 five kind of range I think I said 47, my prepared remarks, but.

It's in that range.

We believe that.

Very rapidly as we've demonstrated the last three years, our cash flows will enable us to take.

Full turn off of that within a year or so so.

If you think of us as.

Less than four or closer to three by the end of 2022 and.

We're squarely in the middle of our targeted leverage range of 2% to four times.

Adjusted EBITDA from a debt perspective.

And.

When you look at that and look at where we were at the beginning of this year, we're roughly four times and we are able to deploy.

Capital of.

$4 billion and kind of get ourselves back to acceptable leverage range, our targeted leverage range.

We sort of feel like we're in the same boat, but we're not at a much different position in terms of our M&A opportunities.

And with that said it is.

The types of things, we're looking at a very consistent what we've talked about before we talk about proprietary.

Talk about some of the.

Proprietary spaces, particularly in Biopharma production some of those unique lab workflows.

As well as a service all of those would be attractive areas. We go on investment, but obviously, we're going to do it in a disciplined way we're not we're not in a hurry.

One of them.

Achieve returns that are attractive to our shareholders.

It gave us accretion on the top line as well as on our on our margin rates.

Keep up on the cash flow so.

I think it's full steam ahead, but.

With the idea that we're fully focused as well on.

Getting to our stated targeted.

Leverage levels between two and four times.

I understand okay.

Michael maybe just on the advanced technologies applied materials pretty nice result, there can you just talk through the more industrial pieces and I know, obviously, that's not the biggest piece of it.

Are you seeing any difference in geographies any slowing in kind of those core industrial markets, maybe just an update on what youre seeing out there.

Yes, we were.

Pleased to see the momentum that we had.

And that business continuing to build.

We had a second consecutive quarter of year of high single digit.

Growth and I would say I'm looking at.

The trending.

We've moved through the year, we've seen nice progression in all three regions of the world.

And.

Most notably we saw.

A nice uptick.

EMEA region in the third quarter.

Maybe to call out there, but I would say.

<unk> in Europe, and the Americas was in line with.

Kind of the sequential improvement that we saw.

On particular note here.

In the semiconductor space.

It gets a lot of attention to that at a macro level just given the chip shortage in the fabs are producing it at <unk>.

Record levels.

That's having a nice impact on the formulations business that we have in support of.

Wafer manufacturing really around the world.

But especially.

And in Asia.

In the U S. So good good good.

Backdrop, but I would say positive fundamentals for us overall.

Great. Thanks, guys.

Okay.

Yes.

Your next question is from the line of Catherine Hu from Bank. Your line is now open.

Hey, guys. Thanks for the question I guess first.

First on proprietary materials and consumables you had another strong quarter here with high teens growth can you just break that down between COVID-19 versus core and kind of how you think about the long term growth rates.

Yes.

Yes.

Yeah. Thanks for the thanks.

Thanks for the question Catherine.

When you look at our.

Covid offerings.

As we said there.

Absolutely 40%, 50%.

Vaccine related which is almost entirely proprietary.

Yes.

The other piece of that 40% to 50%.

Diagnostic testing that has a higher mix of third party. There is some proprietary proprietary.

There.

So when you go to our overall proprietary.

Growth.

Yes.

High teens growth that we talked about it.

Does the Covid impact was.

Probably similar to what you saw in the overall.

Growth rates for 10, 2%.

I'd say roughly a couple of.

A couple of percentage points.

Okay great.

And then maybe just on the guide you talked about now assuming some master FX contribution in there.

Are there timing assumptions around the deal earlier than expected revenue contribution in the fourth quarter. It seems like maybe somewhere around $40 million.

Yes, Sir.

Kathryn <unk>.

<unk> been getting inside information here.

Youre pretty spot on in terms of what we expect for the fourth quarter that would assume a very eminent closed. So you can think of it as roughly two months worth of revenue.

Pretty much in line with what we've talked about I think you probably calibrated based on that.

We talked about the size of.

That discipline.

So yes.

It'll be.

Take it away.

Pretty quickly here and contributing on that.

In that magnitude.

The margin rates are quite attractive for us.

Certainly accretive to EBITDA.

Non term March rates, we're looking forward to good impact starting.

Sure.

Alright, great. Thank you.

And that concludes our Q&A for today I will hand, it over back to present this for closing remarks.

Thank you again for your participation in our call today, everyone. As we close I want to express my continued gratitude to our associates around the world.

Who are working hard to live our values and serve our customers each and every day.

Resolute and steadfast support of our customers is certainly critical to our mission and our long term growth strategy and our overall success.

Im really excited about our future.

We're looking forward to updating you when we get the opportunity to meet up till.

Until then take care and be safe everyone. Thank you.

<unk>.

Okay.

And with that this concludes today's conference call. Thank you for attending you may now disconnect.

[music].

Yes.

Yes.

Sure.

Yes.