Q4 2021 Avantor Inc Earnings Call
Good morning, My name is for a while and I will be your PON principally there today at.
At this time I would like to welcome everyone to <unk> fourth quarter and full year 2021 earnings results Conference call.
All lines have been placed on mute to prevent any background noise.
Third the speaker's presentation, there will be a question and answer session and to ask a question. During the session you will need to press star one your telephone keypad now I would like to handle vertical. It's you Mr. Tommy Thomas Vice President of Investor Relations. Mr. Thomas 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 Thompson, 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 that of onto our scientists dotcom.
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'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, 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 I'm starting on slide three.
As you saw in our press release, we delivered another strong quarter with above planned performance on all key financial metrics, concluding an outstanding year that reflects strong momentum across our end markets disciplined execution of our operating plan and the value of our long term growth strategy.
In the fourth quarter.
We achieved mid single digit core revenue growth.
Given by continued strength in our two largest end markets Biopharma and applied technologies and advanced materials.
COVID-19 revenues were in line with guidance as vaccine related demand continues to be strong.
And revenue associated with diagnostic testing improve sequentially, reflecting increased testing associated with Yamal Crown variant.
Despite continued inflationary pressures, we expanded margins by more than 150 basis points.
Including the favorable impact of our acquisitions in 2021.
Free cash flow grew double digits, and adjusted EPS increased more than 20%.
In addition to generating solid financial results in the quarter. We also made significant progress in executing our long term growth strategy.
Most notably we closed the master of Flex acquisition in November and are making good progress with the integration.
Similarly integration of Ritter and rim by all remain on track and we are starting to realize the anticipated commercial synergies from both of these transactions.
Representing more than 50% of our revenue.
Biopharma remains a key growth driver for our company and we continue to drive innovation and growth with investments in manufacturing capacity people and capabilities.
In the fourth quarter, we advanced our expansion initiatives for key process ingredients used in upstream and downstream applications in the bio production workflow.
Inaugurated our second European single use facility in the Netherlands.
And opened a new single use logistics hub in Massachusetts.
Located near our single use manufacturing site in the Boston area.
The new logistics hub serves as a central for raw material storage quality control and finished good distribution.
And as a critical enabler to the continued double digit growth of our single use platform.
An important element of our growth strategy is helping scientists realize the potential of breakthroughs with the ongoing introduction of new products to keep pace with our research and development advances.
We recently announced a commercial agreement with adjuvant to provide customers with sample preparation content that can be paired with our extensive line of kits and consumables to enhance our liquid chromatography and mass spectroscopy workflow solution.
The agreement supports our strong customer relationships across all of our end markets and will provide scientists broader access to <unk> content in these fast growing applications.
Looking ahead to 2022.
We are poised for another great year of on tour.
We have good momentum in our end markets and the order book for our proprietary materials remains strong.
Consistent with our long term growth algorithm, we expect mid single digit organic growth more than 125 basis points of adjusted EBITDA margin expansion more than $1 billion in free cash flow and mid teens adjusted earnings per share growth.
And as you would expect we are hard at work of integrating our recent acquisitions, while continuing to consider future M&A opportunities.
Moving on to slide four I'd like to summarize our fourth quarter financial results.
Core revenue increased nearly 5% on an organic basis and six 5% on a reported basis, including revenue contributions from master Flex Ritter and rim bio offsetting the impact of foreign currency exchange headwinds.
As anticipated core growth was partially offset by COVID-19 headwinds of approximately 2%.
Reflecting strong growth in COVID-19 vaccine related revenue and.
And year over year declines in diagnostic testing and PPE related revenue.
From an end market perspective, our performance was driven by mid single digit organic revenue growth and advanced technologies, and applied materials, and biopharma, including more than 20% growth in bio production.
Reflecting the impact of lower year over year, COVID-19 testing M. P. P revenues.
We experienced mid single digit declines in both healthcare and education and government.
Adjusted EBITDA in the quarter was up 16%, reflecting volume growth favorable mix, including low double digit growth in sales of proprietary materials and consumables productivity and outstanding execution enabled by our of onshore business system.
Similar to the third quarter, we were able to absorb inflation in raw materials third party products transportation and wages and still expand adjusted EBITDA margin by more than 150 basis points, which included an approximate 90 basis point benefit from M&A.
The strong operating results coupled with continued traction on borrowing costs and income taxes resulted in adjusted earnings per share growth of more than 21%.
We generated free cash flow of $314 million in the quarter over 137% of adjusted net income.
Strong working capital performance, partially offset higher capital investments to support our growth initiatives.
Our adjusted net leverage ended at 4.2 times adjusted EBITDA essentially flat from the same point in 2020, despite deploying more than $4 billion in M&A capital during the year.
Slide five provides an overview of our full year results for 2021.
Compared to our initial guidance, we essentially doubled organic growth nearly quadrupled EBITDA margin expansion and just about doubled adjusted EPS growth.
For the full year or 11, 3% organic sales growth included 2.1% in COVID-19 tail wins, yielding core growth of nine 2%.
On adjusted EBITDA, we were able to expand margins by approximately 190 basis points, including 30 basis points from M&A.
The operating results combined with continued progress on interest and income tax expense resulted in approximately 58% growth in adjusted EPS.
And lastly, free cash flow grew to $920 million in 2020 , one reflecting more than 100% conversion of adjusted net income.
Our continued strong free cash flow supports rapid deleveraging and is an important enabler of our M&A strategy.
In summary, 2021 was another outstanding year in our financial results reflect the value of our business model, our significant exposure to the high growth Biopharma space and our team's relentless focus on execution enabled by the of onshore business system.
I'm extremely proud of our team of more than 13500 global associates.
And I remain confident in our outlook for 2022 and beyond.
With that let me turn it over to Tom to walk you through our financial results in more detail.
Thank you Michael and good morning, everyone I'm starting on slide six.
Organic growth in the fourth quarter was 2.5% or 4.6%, excluding COVID-19 related headwinds for the full year organic growth was 11.3%, which exceeded the high end of our final 2021 guidance.
Our two year average Q4 organic growth rate, meaning organic growth, excluding the impact of COVID-19 related revenue was approximately 5.5% and approximately five 1% for the full year with both measures ahead of 2020 comparisons.
From a regional perspective, Americas, which represents approximately 60% of annual global sales achieved 3% organic revenue growth in the fourth quarter.
Excluding COVID-19 related headwinds Americas core revenues.
Increased nearly 6% driven by high single digit sales growth in both Biopharma and applied technologies and advanced materials end markets.
Within Biopharma strength continued in our bio production business with high teens growth powered by sales for our single use offerings and process ingredients.
Strength in research materials consumables and services led to high single digit growth in Biopharma R&D as funding remains robust and customers continue their emphasis on discovery work.
Within advanced technologies and applied materials, we continued to experience strong demand for proprietary content, particularly for aerospace and semiconductor customers.
Europe , which represents approximately 35% of annual global sales achieved 0.5% total organic revenue growth in the fourth quarter or 2.5%, excluding COVID-19 related headwinds.
Europe experienced strong double digit growth in Bioproducts, <unk>, driven by single use offerings and process ingredients and excipient.
Within Europe health care or medical implant platform grew more than 40% in the fourth quarter, partially offsetting the year over year decline in revenue from COVID-19 testing.
EMEA, representing approximately 5% of annual global sales achieved 9.3% organic revenue growth in the fourth quarter.
Driven by strong demand for our proprietary offerings in Bioproducts <unk> and electronic materials.
COVID-19 related sales delivered a modest tailwind net of which core revenue increased approximately 8%.
Slide seven shows our organic revenue growth for the quarter by end market and product group.
Pharma, representing more than 50% of our annual revenue experienced mid single digit organic growth in the fourth quarter, including more than 20% organic growth in bio production driven by continued strength in our single use platform as well as double digit growth in processed ingredients an excipient.
Bio production demand continued to be strong with year end open orders up more than 70% from December 2020 health.
Health care, which represents approximately 10% of our annual revenue experienced mid single digit organic decline in the fourth quarter driven by lower COVID-19 diagnostic testing sales offset by continued double digit growth in our medical grade silicone offerings.
Education, and government, representing approximately 15% of our annual revenue experienced mid single digit organic revenue decline in the fourth quarter driven by mid teens decline in our government customer base as COVID-19 related demand, particularly for diagnostic testing and PP&E offerings moderated as expected.
In the education market sales were down modestly as recovery and University research labs, and K through 12 continued, albeit slowly with a modest negative impact from lower COVID-19 related sales.
Advanced technologies and applied materials, representing approximately 25% of our annual revenue achieved mid single digit organic revenue growth in the fourth quarter driven by growth in lab products sold for research and QA QC.
Particularly in the Americas, and EMEA and in proprietary materials used in aerospace and semiconductor manufacturer.
By product group proprietary materials and consumables offerings achieved double digit organic revenue growth driven by strong demand for our process ingredients chromatography resins, excipient and single use solutions as well as by our biomaterials in electronic chemicals platform.
Sales of third party materials, and consumables declined mid single digits, reflecting year over year declines in the COVID-19 related testing and PP&E offerings previously mentioned.
Let me turn to slide eight to offer some perspective regarding our key financial performance metrics in the fourth quarter, we achieved approximately 16% growth in adjusted EBITDA and over 150 basis points of margin expansion to 19, 4%.
Our strong margin rate expansion was again, driven almost entirely by gross margins, reflecting commercial excellence and the impacts from M&A.
Adjusted earnings per share in the fourth quarter were 36 cents up 21%, reflecting the 16% adjusted EBIT growth and lower interest expense, resulting from the series of repricing and refinancing activities over the last year.
Our approximate 20% tax rate for the quarter was flat to 2020, but for the full year our rate improved from 23% in 2020 to roughly 21, 5% in 2021 for the full year adjusted earnings per share of $1.41 grew approximately 58%.
Free cash flow in the fourth quarter was $314 million compared to $286 million in the prior period.
The increase was driven by stronger EBITDA growth and lower working capital requirements offset by higher capital investments to support our ongoing growth as highlighted throughout the year.
We finished the year with free cash flow of $920 million with free cash flow conversion well over 100% of adjusted net income.
The $52 million in free cash flow growth for the year or 6% was closer to 15% normalizing for the cares Act and other nonrecurring benefits we received in 2020.
Turning to slide nine I wanted to touch briefly on our expected share count for 2022, I'll start with a non-GAAP adjusted share count of $642 7 million that we've used for calculating our adjusted earnings per share since the IPO.
This is the shares outstanding at the time of the May 2019, IPO plus the pro forma conversion of the mandatory convertible preferred shares as if the conversion occurred at the time of the IPO.
Since conversion will not actually occur until May 2020 to the $642 7 million adjusted share count has historically been higher than the U S. GAAP share count, making our adjusted EPS conservative relative to the U S GAAP EPS as.
As we have previously communicated we are changing the adjusted share count to 685 million shares in 2022 to reflect two changes.
First an increase of 23.8 million shares to reflect the shares we issued on September 13th 2021 to partially fund the Master Flex acquisition and second an increase of $18 5 million shares to reflect the stock option exercises and restricted stock vesting under our stock based employee compensation.
Nation programs.
This amount covers the period since the IPO and includes an estimate of activity for 2022 based upon historical exercise patterns and known vesting date.
By incorporating the changes we anticipate the $685 million adjusted share count will equate with a share count for reporting U S. GAAP earnings per share by the end of the year.
Beginning in 2023, we no longer expect to utilize adjusted share count.
Moving to slide 10, we are reaffirming the 2022 guidance that was issued in January at the JP Morgan Healthcare conference. We expect organic sales growth of four 6%, which includes an approximate 2% headwind from reductions in COVID-19 related revenues from diagnostic testing and P. P.
D.
Assumed in this guidance is biopharma growth of high single digits applied technologies advanced materials growth of mid single digits education, and government growth of low single digits and health care growth of mid single digits, we expect M&A to add approximately 5% and FX to be an approximate 2%.
Headwind, resulting in reported revenue growth of 7% to 9%.
We expect to achieve more than 125 basis points of margin expansion, resulting in a nearly 21% adjusted EBITDA margin rate.
This reflects strong commercial excellence continued favorable mix of higher margin content ongoing productivity and integration benefits from M&A offsetting the inflation pressures impacting most of our cost category.
For adjusted earnings per share, we are forecasting a range of $1 45 to $1.53, representing approximately 13% growth at the midpoint using a share count of $685 million in both 2021 and 2022 with.
We model approximately $260 million in annual interest expense, reflecting the current forward yield curve for the portion of our debt that carries a variable interest rate.
Our tax rate is expected to be approximately 22%.
Finally free cash flow is expected to be more than $1 billion. Once again, representing nearly 100% conversion of adjusted net income.
Incorporated in this guidance is capex of approximately $150 million for ongoing capacity expansions and higher working capital to support our growth.
One final comment regarding leverage we are confident in the attractive cash generation capability of our business model and are committed to approaching the midpoint of our targeted two to four times adjusted EBITDA leverage range by the end of 2022.
This concludes my prepared remarks, I'll now hand, the call back over to Michael.
Thanks, Tom I'm now on slide 11.
Despite the challenging operating environment 2021 was clearly another outstanding year and voluntary due to the relevance of our business model the importance of our mission and our team's ability to execute.
I am encouraged by the growth momentum, we have in our end markets and by our traction with commercial excellence and productivity initiatives that will enable continued margin expansion despite expected high levels of inflation.
We remain committed to our long term growth strategy and we'll continue to make investments in manufacturing capacity and innovation to ensure we have the capabilities to support our global customers.
We continue to integrate the three acquisitions, we closed in 2021 and are encouraged by the progress thus far.
Our strong free cash flow and rapid deleveraging position us to consider additional capital deployment opportunities in our pipeline of potential M&A is robust.
And we recognize our immense responsibility to our of onshore associates customers supplier partners lenders investors and the communities, we serve and are committed to advancing sustainability through our science for goodness platform.
As we look ahead of onshore is well positioned to deliver another outstanding year in 2022.
All of our products and services and enabling scientific breakthroughs has never been more important.
And we're helping scientists every step of the way.
We remain focused on meeting the evolving needs of our customers and relentlessly advancing life changing science and we are committed to achieving our 2022 and longer term financial objectives.
I want to thank you for your interest and have on tour and for your ongoing support.
I will now turn it over to the operator to begin the question and answer portion of our call.
Thank you, Sir and we will now begin the question and answer session. As a reminder, if you wish to ask a question simply press Star then the number one on your telephone keypad and please limit yourselves to one question and one follow up question only your first question is from the line up.
Joel Peterson from JP Morgan Your line is now open.
Good morning. This is Rachel on for Tycho, Thanks for taking the questions.
So first off can you just walk us through your call that expectations for 2022 I know Europe previously.
Backlog at 200 basis points of headwinds and just given the testing dynamic, but can you just give us an update there.
And then also the vaccine and therapy for what Youre expecting for the year, yes.
Yes. Thanks, Rachel this is Tom I'll take that and by the way Youre and Lorie says Hello.
But anyway I used to work with our ratios.
When you look at 2021 pretty much came in line with what we had expected.
Roughly $400 million or so of Covid related.
Tailwind.
It was probably half.
Back in the.
Split between testing.
<unk>.
The mix is kind of varied a little bit over the course of the year, but.
For the fourth quarter, we came in.
About where we expected.
In aggregate for 2022 as we've.
We said, we've got roughly 2%.
Headwind.
From Cowen.
We're expecting.
About.
Between.
Relative to the 400 for the.
For the full year.
It'll be it'll be somewhere around $2 50.
In terms of.
<unk> revenue in there.
The mix continues to shift.
As I've said, it half and half between testing and vaccination in the.
In 2021.
And it should be have a higher vaccination.
Content in 2022.
Great. Thank you and yes, so I'll make sure to stay idle Laurie.
So next up can you just talk about master flax Ren.
By outperformance in the corner and nathans repeat it.
During 14, which is a little lighter than we were modeling. So is there anything to look into there and then you mentioned integration is going well for all three can you just give us some additional color on early integration progress.
Excellent rates of as Michael I'm happy to take that question as I indicated in my prepared remarks, we continue to be excited about the progress we're making on integrating really all three acquisitions in the quarter I think it came in essentially in line with our with our expectations.
In the early days with with mass reflects the contribution in the quarter reflects two months.
I'm, having them in our portfolio.
Strong performance on the gate in line with expectations has got a great order book similar to.
Our own bio production order book.
We're off to a great start there on the other two acquisitions I would say more modest in.
And size.
But again, we're also starting to realize some of the commercial synergies that we had anticipated under some great technology, there isn't room bio acquisition that we're now starting to leverage, particularly some of the bag technology that we're now.
Moving into.
Our European business for example.
In the case of <unk>, we've got some really great progress there not only with the pipeline.
Specification work that we're driving.
We mentioned early on that one of the things we were planning to do is obviously to embed our quality and regulatory capabilities in that business.
We were able to launch our sterile product line as well as.
Earn.
IBD certification in Europe for example, and we're making good progress on expanding the production.
Alex.
Capabilities in that business.
To increase not only.
The scope of tips for example that we provide but also introducing a number of other new product categories. PCR plates. For example, so we have pretty clear line of sight for 2022 to a number of <unk>.
Vessels that we're making to continue to progress the capabilities of that platform, which we remain extremely excited about.
Great and then last one for me.
And not just for the time, Thank you were targeting.
Roughly 4.7 lots are flat.
That was just a bit faster than you expected I think.
You said you were targeting to reach that two to four times leverage range by the end of 2012 <unk>. So first off is there a possibility to bring that forward and then how should we think about that with your capacity on M&A.
And then one follow up on M&A, just given valuations that we're seeing in the markets right. Now can you just talk about how youre thinking about the pipeline.
Kevin.
Management teams, so I prefer to sell at a higher range.
Perfect.
Yes, yes sure.
Thanks, Steve.
The leverage rate it came in as Michael said.
Pretty close to where we were at the beginning of the year.
That's despite having.
Deployed $3 billion worth of capital that was funded by.
Borrowings.
And it came in at four two times at the end of the year pretty much in line with our expectations, we should probably connect offline on the $4 seven that was probably the leverage as of the.
The acquisition date.
When we when we had.
Initially funded but we can we can talk more about that.
The.
The expectation going forward is really strong free cash flow as you've as you've seen.
Probably $1 billion or so.
Free cash flow that would that's available and the other nice thing that we've got going for US is in the second half.
'twenty two.
No longer be paying the dividend.
Mandatory convertibles, so thats, probably another 65 or $70 million.
Available cash for Delevering as well.
So if you if you take that into account and you look at our EBITDA and expected debt levels.
We expect to be somewhere in the middle of that.
Our targeted two to four leverage range by the end of the year that does not anticipate any.
Realizations deployment towards M&A.
I know Michael wants to touch on the second part of your question Yes.
Yes, you mentioned.
Right.
Valuations and expectations from sellers, clearly theres been higher.
Higher level.
Volatility in the capital markets.
We get into 2022.
I think my perspective is probably a bit early.
To see expectations change meaningfully.
One way or another at this stage.
Vincent.
<unk> been only a few weeks probably at these levels I would anticipate us needing a bit more time to season before you might see.
Things settle out in terms of.
And by our expectations coming together here, so I'm, probably a bit early to.
To make a call on how we see valuations changing in the M&A space.
So the question for Joe.
Your next question is from the line of Derik de Bruin from Bank of America. Your line is now open.
Hey.
Just wanted to ask some of the obligatory questions on supply chains, and what are you sort of seeing I think some of your peers have seen some headwinds and this was sort of wondering what's that given your.
Youre.
Such a broad network does any sort of issues with suppliers any issues or disruptions. Thank you.
Good morning, Derik, Thanks for the question.
We've mentioned I think probably since the beginning of the pandemic.
Supply chains have been.
Certainly strengthen.
The hotspots, if you will probably moves around a bit over the course of the last couple of years.
Transportation has been strained labor availability, particularly in the U S has been an issue.
More recently things like.
Just workforce availability.
Covid for example.
And then various raw material and product constraints.
Load across the periods, so I think.
In the fourth quarter probably in aggregate.
Really different impact on the business.
And what we have seen maybe in previous quarters.
You said the hotspots probably have.
Moved around a bit.
We've said that for us.
Last call.
One of the single use components for example are probably a bit more.
Right.
And maybe they were earlier in the year.
On the heels of.
Really strong growth throughout the year, but in aggregate I don't think we're seeing any more strain on the business and what we have.
In seating and certainly.
When you look at the.
Our global manufacturing network, the global supply chain, and we have certainly favor.
Papers our.
Our current footprint.
Adding flexibility and optionality to our customers to keep.
To keep supplies moving so I think net net we're in pretty good shape here, but.
The team does a lot of work to do.
<unk> a lot of inefficiencies throughout the room.
Great and then just one follow up so what are you assuming for inflationary pressures in <unk>.
Margins in 'twenty, two and what are your pricing expectations. How are you, helping to offset that or you'd be able to pass price on your customers.
So.
As Tom mentioned in his remarks, we're seeing inflation across most cost categories whether that be.
Wage and labor inflation for sure and transportation costs are up.
Pretty significant significantly and then.
Product raw material costs are also up meaningfully.
We do think though that are long term.
Expansion algorithm continues to hold even in this environment.
Just for context, our base business as we've indicated before should expand margins, we should expect it to expand margins 50 to 100 basis points a year.
Doing things like.
Driving price to offset.
Cost of goods sold Onboarding productivity initiatives, we certainly benefit from.
The mix impact in our business and we saw that again in the fourth quarter with proprietary content.
Significantly outgrowing, our third party content in the corresponding margin benefit that comes from that and we see 2022 shaping up no differently.
Got it.
The record 50 to 100 basis points.
Amgen on our in our base business and then we will.
Add to that the benefit from the three acquisitions that we closed last year and so between the two of them.
You get to the guide that we have out of the gate here.
More than 125 basis points pricing as you mentioned is going to be an important enabler for the expansion this year.
Historically about one third of our revenue growth will come from pricing, we're probably looking at something on the order of.
To access this year.
To account for the inflationary environment that we're seeing.
I don't think anybody surprised by that.
Given the macro environment.
We've got good traction on the gains on delivering that.
Thank you.
Once again as a reminder, please limit yourselves to one question and one follow up question <unk>. Your next question is from the line of Vijay Kumar from Evercore ISI. Your line is now open.
Good morning, Michael and Tom Thanks for taking my question.
One.
One maybe comp U.
Or perhaps Michael on the guidance here.
Just to clarify your organic of four to six that includes 200 basis points of fast forward.
But with headwinds ex that that number is six to eight on an underlying basis.
That's right.
Your revenue guidance range, that's a 200 basis points of branch right with your earnings there's a six point out to ask maybe just walk us through why earnings range is wider than not revenues.
Yes. Thanks.
Vijay I think your math is right.
Yes.
Our long term growth model is 4% to 6%, but when you.
Consider.
The impacts of.
But we're still committing to that 46% of uncovering.
Of those Covid headwinds I mentioned.
In the call earlier.
In terms of the.
The fall through to through two.
EBITDA.
To earnings per share.
There's a number of.
Dimensions.
Need to give consideration to.
Including.
The environment that were.
Yes.
Living with in the context of <unk>.
Inflation.
And getting the right assumptions on that.
And also managing.
The.
Okay.
Supply chain aspects of.
Got it.
Topline I think both of those.
We just want to be.
True.
Conservatives in terms of <unk>.
Fitments that we're making I think the when you look at what we've done in the last two or three years.
We've been pretty prudent at the outset.
The Euro has gone on.
No.
Yes.
Sure.
Impacts of both the current quarter and expectations. So I would expect that over the course of the year Youll see ongoing improvement in EPS.
Margin expectation.
Understood and then one follow up.
Your margin expect to kind of expectations for the year 120 basis points of expansion.
Tom can you talk what is base margin expansion versus M&A contribution.
And I ask this.
Once these deals.
Annualized L.
L. R. P implies a 100 basis points of annual expansion to hit the 24%.
Targets, so what's the visibility in the triple digit margin expansion, yes.
Yes, great Great question.
Just to remind you in 2021, we had.
Roughly 30 basis points impact from the M&A on the.
On the margin expansion so.
So it is having its intended effect and when you look at the fourth quarter. In particular was really strong in terms of the impact on the margin rate. So.
As we as we go forward and planning.
And this is probably.
Factor for you to consider the roughly 125 basis points I think we consider that to be a floor.
And I would consider that a composition of our normal 50 to 100 basis points on the organic.
Business call that 75%.
And then with the difference.
Made up by M&A.
And I do think that.
<unk>.
Execute well and probably deliver higher than.
The floor there.
As we go as we go forward the business becomes.
<unk>.
Has more scale to it has a higher proportion of.
Proprietary content.
That bodes well for our margins and our margin expansion so as we get into.
The.
Proprietary areas, whether it's in Biopharma production in biomaterials.
Some of the advanced technologies applied materials parts of the business.
With the growth that we expect and with the investments that we're making both in capacity.
And then and in integrating some of some of the M&A.
Very confident in that long term projection of margin rate expansion that you mentioned.
That's helpful. Tom Thank you guys.
Your next question is from the line of Dan Brennan from Cowen. Your line is now open.
Guys. Good morning, congrats on the quarter.
So I wanted to ask first question is from bio production.
So assume like $45 million to $50 million from batch revenue in fourth quarter.
Our math implies that your base business and bio production could've grown like north of 20%. So I'm just wondering if you can comment I'll make the base business.
It did in the fourth quarter.
And I know you gave the order trend I think on an annual.
Annual basis could you tell us what the order trend was in Q4, and then related to that you mentioned the single use technology expansion overseas and in the U S. Could you comment how that's going to impact the growth rate of that sub segment.
Great Great place to start then.
While production is.
Quite important obviously to our business model, it's the fastest growing part of our of our portfolio.
The majority of that solution set is comprised of proprietary content. So it carries an important contribution to margin expansions as well.
Just.
Perhaps put in context as you all know Biopharma is.
In aggregate, a little bit more than 50% of our total revenue and of that.
Master box.
The books, you are talking about production being about 40% of our.
Biopharma revenue overall, so it's growing in importance.
To the business in the quarter.
We delivered another very strong.
Performance from them on that platform.
More than 20% growth as you as you suggest and that really is comprised of vaccines continuing to.
You can run it at a high level and kind of in line with expectations.
And order book, there, that's been pretty robust and great visibility too.
But I do think it is important to recognize that the core business.
Continues to be the key driver of growth in our bio production platform. Our order book also reflects that we are sitting with.
Approximately a year's worth of orders on the books for bio production and as we know.
Chance to see the Master Flex order book is also similarly.
<unk>.
And the composition of that order book.
Reflect probably 80% of that being.
Our core business, so and whether that's in.
Historically strong monoclonal antibody modalities or more recently some of the traction we're getting in cell and gene therapy.
Our core business continues to be an exciting growth opportunity.
Long term as we indicated in some of our recent comments.
Part of the business continued to grow mid teens plus over the long term and we've probably been doing better than that more recently within production single use has been leading the way over the last couple of years growing more than 20% on a core basis.
<unk> significantly with expansions at virtually every one of our facilities and we've been pretty transparent about that I think we more than doubled our.
Footprint last year our capacity.
To fuel the growth that we see in that part of the business. So we're very well positioned will continue to drive.
Expansions.
Excipient process ingredients capacities as well as single use but the core businesses in <unk>.
Great shape and performed again quite strong.
Great. Thanks, Michael and then I mean, do you guys. It related follow up which maybe you kind of answered it.
So looking at that.
Materials and consumables business and that's a really important driver of the gross margin I know you guys talked about growth of double digits in the quarter, we were calculating north of 20% of that in the right ZIP code and how do we think about.
That segment growing within your 2022 contexts.
Thanks.
As I mentioned earlier around.
Our margin expansion algorithm on the base business, which yields.
50 to 100 basis points a year of.
Of expansion.
A number of things that go into that including mix.
And historically, our proprietary content, our proprietary materials and consumables specifically.
Have grown at a rate of kind of two to three times.
Third party materials, and consumables, which tend to be more oriented into the lab.
<unk>.
Area of the lab R&D space.
We're benefiting from our exposure to the production space with our proprietary content.
And that certainly held true in.
In the quarter, we expanded proprietary content in the quarter doubled.
Double digits.
And certainly probably outperform even our historical two to three times differential.
And third parties.
Strong margin expansion in the corner and certainly mix is an important partner.
Great. Thank you.
Your next question is from the line of Jack Meehan from Nephron Research. Your line is now open.
Thank you and good morning.
Wanted to just go back to M&A in the quarter is it possible to get a breakdown of the $92 million between the three deals you did last year and then on Master Flex is that still on track for $300 million of sales in 2022.
Yes, I think.
When you look at your second part of your question there around the $300 million that we provided visibility to at the time that we did the deal we're still very confident.
Are you more confident now that we've had the opportunity.
To have the business.
In our hands now for at least.
In two days or so.
Great Order book Greg.
A great innovation pipeline.
Pretty good visibility to how that business is going to perform.
And given the single use focus in that business. It will continue to perform in line I think with the growth that we've been seeing in our in our own single use business.
So very confident in the.
Outlook for that and certainly in line with our expectations and when you then kind of translate that backwards into.
The two months contribution we got from that business.
It certainly came in line with our expectations.
The other two deals that we had in the quarter.
Specifically, we saw some months some nice sequential.
<unk> step up in that business.
<unk>.
Assuming a much much smaller deal than the other two.
I would say came in line with.
With our expectations, but contributing in a much more modest.
Got it.
And then one more on bio processing spa.
Specifically related to the Covid vaccines could you call out just how the order book trends compared to the revenue growth in the quarter.
And I guess, just it would be great to get your latest thoughts on the handoff.
Non COVID-19 overtime, and just kind of confidence in that.
When you look at the contribution that we had to the roughly $400 million.
Okay.
Tailwind in the year.
Approximately half of that.
Came from.
Coca vaccines.
<unk>.
Given the lead times four.
Those products go into those vaccines.
<unk>.
All of them, but some of them are approaching.
A year lead time, just given some of the constraints that highlights.
The supply chain so.
When we look ahead and we obviously have a pretty clear line of sight to 2022 and the contributions that we anticipate getting from vaccines in this year and I think as we look at it.
We're expecting similar contributions this.
This year as compared to last year from the vaccines.
And then I'd say on that.
Your question on the comparator comparisons the sales to the.
The order book.
The order book has continued to.
To grow significantly as we mentioned before I mean, it's it's more.
Just on Biopharma production.
It has nearly doubled since the beginning of the year.
As Michael mentioned, the proportion of those open orders related to.
Covid.
<unk> continues to appear.
Less than 20% or so of it so that the shifts through the migration that you've referenced shack I think.
It stands out.
Pretty well.
And those dynamics.
Thank you guys.
Your next question is from the line of SaaS solvent from Morgan Stanley . Your line is now open.
Hey, guys good morning, and thanks for the time here.
One for you.
On China.
Can you just talk a little bit about any sort of customer access issues and impact youre seeing from the zero tolerance policy and then thoughts on how long this stays in place given sort of the low level of natural immunity and vaccine that hasn't worked as well as the mrna modalities and.
And if and when I mean, China to thanks to relax that policy.
Are you concerned at all that there might be sort of disruption from our case. So there were some such.
Thanks for the question good morning.
I think it's probably first important to.
China in context for our business the entire region has been over 5% of our revenue in China would be.
Subset of that so we're working off.
A relatively small base, but we continue.
To generate some pretty impressive.
Gross numbers off of that small base and the master Flex acquisition will only help accelerate that giving given the footprint.
Capabilities.
That business brings us.
In the region.
Our solution set and that gives us from for our customers. So we're certainly excited.
About our positioning there.
And.
I think we have.
A pretty optimistic outlook for that in terms of <unk>.
How we're interacting with our customers.
I don't know that China is any different for us.
<unk>.
Other regions other than we're obviously not able to.
Send a lot of our.
Experts from Europe , and the U S into the region needs to be there physically.
I don't work around that.
And some of the video conferencing technologies.
But it was certainly a timely that we had opened up a innovation center there just prior to the.
Onset of the pandemic.
And as we do reviews on.
Utilization of that facility in the program.
Pipeline that they are working on a pretty impressive contribution coming from the work of our teams are doing there so despite.
Some of the restrictions that we face in China as well as around the world. Our teams will continue to find ways to interact and engage with our customers in meaningful ways and progress on our pipelines and continue to support their efforts to bring.
Critical therapies to the market.
Got it that's helpful.
Quick follow up on education, and government I think Tom you mentioned expecting sort of low single digit growth. There in 'twenty. Two I was just curious as to what youre baking in into that assumption in terms of.
The NIH funding outlook et cetera, being pretty robust obviously, there's the testing MTBE sort of COVID-19 related decline that you have to factor in as well, but curious to get your take on that.
Yes. Thanks.
Yes, no doubt.
Yes, the environment.
It was pretty strong in some of these new potential.
Offshoots of NIH also look promising if they can ever get funded.
The environment is definitely improving for us from an education.
Government perspective.
I don't think we are.
We consider it to be all the way back, but we've seen gradual improvement in the way. We're looking at 2022 is it roughly mid single digit kind of growth in the in the group in its entirety.
Very helpful. Thank you.
Your next question is from the line of Patrick Donnelly from Citi. Your line is now open.
Hey, good morning, guys. Thanks for taking the questions.
Maybe just one of an advanced <unk> materials segment continues to put up pretty strong results can you just talk about the outlook into 'twenty to your visibility of that tends to be a little shorter cycle.
The bio production, where you talked about a year long order book.
Maybe just talk about the strength of the underlying market, where youre seeing pockets of growth, there and again confidence and visibility into 'twenty two would be helpful.
Yes. Thanks for the question, Patrick obviously that part of our business is highly fragmented across a number of different end markets and application areas, but certainly work. Some we address a lot of the same workflows that we have in our life science businesses around testing, particularly around QA and QC work as well as.
And providing proprietary content and formulations to production environments and things like semiconductors.
Aerospace and defense for example.
You suggest pretty strong finish to.
To the year.
I think reflecting pretty strong PMI.
Index indices around the world.
Pretty strong production backdrop that we're that we're supporting them.
And.
<unk>.
Pretty well noted some of the.
Frothiness in markets like semiconductors for example, with.
The demand that.
Driving is as meaningful so I'd say pretty.
From.
Macro backdrop supporting pretty strong output across most if not all of the application areas that we support visibility.
At least on the.
Testing side of that business of QA QC work is looks a lot like the rest of our business, which is to say a lot of that is kind of book and ship.
Type revenues that you can be talking days to a few weeks certainly the production platforms in some lines. For example, we would have a much longer.
And to those trends.
I think continues to support a pretty bullish.
Outlook for the platform overall, but when we look at it from a year over year perspective, I think something in the mid single digits.
<unk> feels right under the new terms.
Okay. That's helpful. And then just a housekeeping one for Tom.
Adjustments for EBITDA flat it looks like corporate expense might have jumped a little bit which pushed EBITDA.
Just talk through what that was.
I just wanted to clarify what we saw there.
Yes, actually when we look at overall expense.
<unk>.
For the quarter in aggregate.
Actually came in a little bit better than our expectations I mean, the environment is.
Not.
Not an easy one when it comes to.
No inflation.
Both are.
Salaries.
But also when you look at some of the indirect spend that we would have in corporate.
I don't think theres anything unusual or any any trends or one offs or anything in there.
I think it's well managed and.
Got it could be on it for next year as well.
Okay. Thanks, guys.
Your next question is from the line of Matt <unk> from Goldman Sachs. Your line is now open.
James.
Maybe my first question just one lines the bio processing questions have been asked just given the supply demand picture and the growth Youre seeing just wondering in terms of customer behavior, what you're seeing is there some additional stocking going on or is it demand been pretty steady.
Throughout.
Last year in the beginning part of this year.
Thanks for the question demand continues to obviously be very very strong.
Supply chains continue to be relatively tight to keep up with all of the demands. There is really not a lot of excess capacity in the system to support.
Incremental buying or inventory and it's a little bit unique in that there is.
Shelf life considerations and storage considerations for.
Sensitive regulated materials that we're providing so.
Demand patterns have been strong and lead times for our materials.
Been extended as we've moved through the year.
So kind of transitory or incremental buying.
Within a relatively tight timeline it really is.
Something that can be accommodated easily so.
I think the demand that we're that we're servicing is pretty well in line with production levels of our customers.
Great. Thanks for that and then just one more on.
Just China EMEA.
Obviously, you've mentioned before you want to increase exposure there you've made an acquisition of <unk> bio.
But you also mentioned that Master Flex gives you some exposure there as you kind of look at building out your exposure there inorganically.
In terms of your pipeline is it sort of more of a local company that you'd be looking at or do you think you can get enough exposure until that exposure through.
A multinational company with larger exposure to China, how are you thinking about building that exposure inorganically.
Yes, thanks for coming up can you talk about our strategy. When you look at the way we approach serving these markets we take.
Workflow driven approach to this and looking at what content and solutions that we need to provide.
We then go to work to build a <unk>.
Selling offering to serve our customers and so when we look at the core workflows in bio production for example.
Sure.
Looking to to take hold and participate in particularly in a place like China.
You look at cell and gene therapy is an area that they are.
Moving aggressively in some of the tech transfers on monoclonal antibodies for example.
Well positioned.
So up until now with demand levels, where they have been for production in China, we've been able to satisfy the requirements by importing product from our sites and in.
In Europe , or the Americas, and I think over time. This strategy has always been to localize case.
Capabilities as the market.
Dictates to help shorten supply chains.
Derisked.
The supply for our customers and make it a bit more agile and so it certainly <unk> gives us.
An initial footprint.
In that direction.
We'll continue to look for opportunities too.
It's inorganically or organically continue to add capacity in region in line with kind of the ramp of demand in the region. So it'll be a combination.
A lot of these capabilities don't exist locally so.
If you can find things that will.
Wow us to execute our strategy, we'd certainly be interested but we're also.
Cognizant that some of these things might have to be built.
Infield.
By our by our own investments organically, so it'll be a mix.
Great. Thank you.
Your next question is from the line of Danielle <unk> from Wells Fargo. Your line is now open.
Thank you and good morning, a quick clarification on bio production and then a follow up on medical grade silicone. Some bio production you mentioned the 70% growth in your backlog I'm curious if that includes master flex or is that an organic number and then on medical grade silicone you've called out the growth there just wonder.
How big is that business now and what's the growth outlook going forward. Thank you.
Yes.
I'll take them in reverse order for you. If you look at our biomaterials platform, which is an area that we're incredibly excited about there's a tremendous amount of innovation.
Thanks.
As in that part of our business, we've got a very rich and deep pipeline of opportunities that we continue to progress with our with our customers and the growth outlook. There is significant and when I look at the contribution of.
That business on a full year basis. It was it was a very nice.
Sure.
It's a very nice year for us for that part of our business rebounded strongly from.
Well well into the double digits.
I can start relatively weak comparison in 2020, given some of the COVID-19 related restrictions.
Strong contribution both from a top line as well as margin impact from our business. The revenue from that platform gets reported in our healthcare segment.
As we've talked.
Before that's about overall about 10% of our revenue.
Roughly.
50% of that platform would be our solutions that we provide for diagnostic testing.
And roughly half of that the other half would come from our biomaterials platform.
Your second question around the growth of the order book.
As we have been anchoring numbers.
Throughout the year here, what do you think Tom shared with you would reflect just our organic order book.
<unk>.
Sure.
We will start to add in the other order books as they enter those numbers as they become part of.
Our organic story, the 12 month milestone, but now that we've quoted here, but just kind of an organic basis, but.
The order book formats <unk> is indeed significant.
Thanks, Michael.
This concludes our question and answer session I will hand, it back to Mr. Michael Stubblefield for closing remarks.
Yes, Thank you and thank you all for participating in our call today.
I think I would like to engineer by just reiterating.
My confidence in where we're at here.
Heading into 2022, we're extremely well positioned to deliver another very strong year with strong growth margin expansion and cash flows our end markets are strong and we started the year with.
Significant momentum so im.
Quite excited about the jumping off point.
I also want to express my continued gratitude to the ongoing efforts of our associates around the world who are living our values every day and in setting science in motion to create a better world.
Going to be another great year I'm excited about what lies ahead for <unk> and look forward to updating you. When we meet next until then take care and be safe everyone.
And with that this concludes today's conference call. Thank you for attending you may now disconnect.
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Okay.
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