Q1 2022 Avantor Inc Earnings Call
Good morning, My name is Katie and I'll be your conference operator today.
At this time I would like to welcome everyone to advance towards first quarter 2022 earnings results Conference call.
I would like to ask a question during the presentation you may do so by pressing star one on your telephone keypad.
I'd now like to hand, the call over to 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 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.
Thanks.
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, 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.
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 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 have hopefully seen in the press release, we issued last night with our first quarter results.
We started the year with another outstanding quarter.
Our strong results across all key financial metrics, including revenue growth margin expansion earnings growth and free cash flow generation.
Highlight our premium position in attractive end markets, our compelling product and service offerings.
<unk> of our business model and a dynamic macro environment.
And our continued track record of execution.
In the first quarter, we achieved seven 3% core organic revenue growth driven.
Driven by continued momentum across our life sciences platform as well as in our applied end markets.
We expanded EBITDA margins by approximately 140 basis points.
Putting the favorable impact of our 2021 acquisitions and.
An expansion in our core business, despite intensifying inflationary pressures.
We increased adjusted net income by approximately 15% and generated approximately $128 million of free cash flow.
We also made significant progress in executing our long term growth strategy.
We continue to invest in capacity and infrastructure to support our growth and currently have more than two dozen manufacturing expansion projects in flight.
All of which were completed in the first quarter.
Our 2021 acquisitions delivered strong core growth and margins ahead of our internal operating plan and we are pleased with our progress on integration, including commercial synergies.
Tom will provide additional M&A color later in the presentation.
We remain focused on helping scientists realize the potential of new breakthroughs and introduced several new proprietary products in the first quarter.
We launched multiple offerings targeting the cell and gene therapy market.
Including our proprietary cell licensed solutions for use in <unk> associated viral vector production.
And our reagent used to remove cross sell DNA and RNA impurities.
We also executed a partnership agreement that will enable us to offer custom cgmp plasma DNA for viral vector mrna and nucleic acid workflows.
To expand our offering in the CMS analytical workflow. We also launched a new line of J T Baker analytical syringe filters.
Additionally, we introduced new products and our formulated silicones platform, including a proprietary formulation for novel Institute surgical applications, and a thermal management solution for electronic applications.
Looking ahead, we have good momentum in our end markets. Our order book is growing and we continue to leverage the onshore business system to drive execution in a challenging operating environment.
We will continue to progress the integration of our recent acquisitions and are actively working our M&A pipeline.
We remain confident in delivering another great year with strong growth and robust margin expansion, enabling us to raise our EPS guidance for the full year.
Moving on to slide four I'd like to touch on some macro factors impacting our space.
Starting on the left with concerns regarding the strength of the global economy.
Encouragingly the vast majority of the end markets. We serve are growing mid to high single digits.
Fueled by continued strength of the core monoclonal antibody workflow and the emerging modalities of cell and gene therapy and mrna.
Biopharma activity in both R&D and production remains high.
Core healthcare continues to expand and growth in our advanced technology and applied materials business accelerated quarter over quarter.
Within our applied platforms, we have exposure to many different end markets, including semiconductors chemicals energy and food and beverage and we're not seeing any signs of slowdown.
Demand patterns in each of the three regions. We serve are also holding up well and we continued to benefit from our unparalleled customer access and a resilient highly recurring revenue model.
The geopolitical situation in Russia, and Ukraine remains volatile and our hearts are with those affected by this tragic conflict.
We have ceased all sales to Russia, which historically have averaged about $5 million per year, and do not have any cash or working capital exposure.
In keeping with our values, we donated nearly $1 $2 million in gloves and masks and we are working with our associates throughout Europe to collect critical items, such as food blankets and clothing to donate to Ukraine refugees.
Moving to Covid. The situation continues to evolve and we are encouraged to see sustained declines in severe infections and deaths.
Our covered related offerings, including personal protective equipment diagnostic testing kits and vaccine content.
Represent less than 3% of our total revenue.
And the strength of our core business will more than offset the 2% to 3% headwinds we anticipate in 2022.
Additionally, the fungibility of our bio production capacity to support both COVID-19, vaccines and therapeutics as well as our core business gives us flexibility to offset any incremental headwinds created from a transition to an endemic phase.
Also the ongoing Lockdowns in Shanghai have had limited impact on our business given our relatively modest exposure to the region.
Not surprisingly we are facing historically high levels of inflation in virtually all of our cost categories.
Nevertheless, our organic margin expansion in the first quarter as a proof point of our ability to manage through this cycle leveraging we have onshore business system to drive commercial excellence and productivity initiatives.
Industry wide supply constraints, including the supply of raw materials and ongoing transportation delays have been part of our reality since the onset of the pandemic.
Consistent execution and managing a complex supply chain are part of our DNA.
And we are confident in our ability to mitigate further challenges.
In addition to leveraging the ongoing benefits associated with our global footprint we.
We have undertaken several initiatives to ensure that we can continue to meet our customers' expectations.
We are increasing our manufacturing and distribution capacity throughout our network.
We recently approved additional investments on our Phillipsburg site that will nearly double our global capacity for salts and we're adding cgmp manufacturing capacity in Singapore to serve biopharma customers in the EMEA region.
We are expanding supply chain operations head count globally, and increasing recruiting and retention activities accordingly.
Finally, we continue to fortify our inventory levels broaden our supplier partnerships and optimize our transportation network to ensure that we can supply the products our customers need to continue their scientific work.
A final point I mentioned is the rising interest rate environment.
Despite the expectation of rising rates or debt financing strategy has enabled us to confirm our original 2022 interest expense estimates.
And we are well positioned against future rate increases given limited maturities over the next five years and the expectation of ongoing deleveraging.
Tom will take you through the details in a few minutes.
We acknowledge that the macroeconomic situations challenging in a number of ways. However, the resiliency of our business model and our track record of execution make us confident in our ability to continue to serve our customers and deliver our 2022 financial guidance.
Moving to Q1 performance on page five.
Q1 organic revenue increased five 1% and core revenue increased seven 3%.
Total revenue grew nine 2% on a reported basis, including revenue contributions from Master Flex Richard and <unk>.
Offsetting the impact of foreign exchange headwinds.
Revenues within approximately 90% of our end markets grew mid to high single digits, including Biopharma, where we realized more than 20% organic growth in our bio production platform.
Advanced technologies and applied materials also grew high single digits.
Driven by notable strength in our proprietary offerings into the semiconductor market and.
And healthy growth across most other customer groups.
Adjusted EBITDA in the quarter was up 16, 5%, reflecting approximately 140 basis points of margin expansion.
Resulting from the impact of our 2021 acquisitions strong proprietary materials growth and commercial excellence and productivity efforts to offset inflation.
Our strong operating results drove adjusted net income growth of about 15% in line with adjusted EBITDA growth.
We generated free cash flow of about $128 million in the quarter up about 14% from Q1 2021, despite increased investments to support our growth.
We remain on track to achieve approximately 100% free cash flow conversion for the year.
Our adjusted net leverage ended at four times adjusted EBITDA down from four two times in December and in line with our two to four times target leverage.
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 we generated total revenue of $1 95 billion in Q1, representing a nine 2% reported growth rate our underlying core organic growth rate was seven 3% and as you can see on the right.
Hand side of this page. This continues a multi year trend of accelerating core organic growth.
Our COVID-19 related headwinds in the quarter were two 2% in line with our expectations as.
As Michael mentioned, our Covid related revenues are less than 3% of our total revenue and will represent a 2% to 3% headwind to our organic growth in 2022.
The play within this range will be largely driven by global vaccine demand, which continues to be deliberated globally.
To the extent that vaccine demand changes over the course of the year as booster requirements and other factors become clearer. We are confident that our aggregate revenues will remain intact, given the fungibility of our bio production capacity to support both COVID-19 and non COVID-19 demand.
Revenues from 2021 acquisitions increased our revenues by six 6% more to come on this in a minute and the stronger U S. Dollar created FX translation headwinds of roughly two 5%.
On to page seven.
From a regional perspective, Americas, which represents approximately 60% of annual global sales achieved 6% organic revenue growth and seven 8% core organic growth driven by high single digit organic growth in Biopharma healthcare and advanced technologies and applied materials.
Within Biopharma, our bio production business grew more than 20% with strong growth across process ingredients excipient single use and Sierra and.
In healthcare, we saw a strong demand for our medical grade silicone formulations as elective procedures continued to rebound.
And within advanced technologies, and applied materials sales were driven by our proprietary offerings for semiconductor manufacturing.
Europe , which represents approximately 35% of annual global sales achieved two 6% organic revenue growth in the first quarter and six 3% core organic growth.
Production grew almost 30% in the region driven by demand for single use offerings.
Process ingredients and excipient.
<unk> technologies and applied materials grew mid single digits on an organic basis as a result of broad strength across all customers and product groups.
Within health care sales were relatively flat as double digit growth from our medical implant platform was offset by headwinds in COVID-19 diagnostic testing offerings that also impacted our European education, and government business, which declined mid single digits.
EMEA, representing approximately 5% of annual global sales achieved 11, 7% organic revenue growth in.
An eight 6% core organic growth in the first quarter driven by strong demand for our proprietary offerings and bio production and advanced technologies and applied materials.
Covid related sales delivered a modest tailwind due to ongoing sales of PP&E and vaccine related products in the region.
Slide eight shows our organic revenue growth for the quarter by end market and product group.
Biopharma, representing more than 50% of our annual revenue experienced high single digit organic growth in the first quarter, including more than 20% organic growth in bio production driven by strong demand across all of our offerings, including single use process ingredients excipient and serum.
Our bio production open order book continues to grow with non Covid orders now comprising approximately 85% of the total.
We see strong underlying industry fundamentals and bio production, including a healthy development pipeline across maps cell and gene therapy and mrna.
There has been some noise regarding the health of funding in the biotech space, particularly for early stage enterprises. These.
These customers comprise a small percentage of our overall sales and we remain positive on the biotech fundamentals given strong private funding sources multiyear cash reserves robust NIH outlays and high levels of clinical trials and pending approvals, we expect biotech customers to continue to play an important.
And strategic role for <unk> by providing early access to the Biopharma pipeline and see limited risks the near term R&D activity levels.
Health care, which represents approximately 10% of our annual revenue experienced mid single digit organic growth in the first quarter driven by continued double digit growth in our medical grade silicone offerings, partially offset by a decline in demand for COVID-19 related diagnostic offering.
Education, and government, representing approximately 15% of our annual revenue experienced a mid single digit organic revenue decline in the first quarter driven by a roughly 10% 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 with growth in our University and K through 12 segment offset by global Covid related headwinds and diagnostics and PP&E and supply chain constraints and our third party instrumentation offerings.
The funding outlook for universities remains strong we expect improving results as supply chain stabilize and research activities returned to normal levels.
Advanced technologies and applied materials, representing approximately 25% of our annual revenue achieved high single digit organic revenue growth in the first quarter driven by growth of proprietary materials to semiconductor and electronic device customers as well as broad strength across all customers and product groups in Europe and EMEA.
Many of our semiconductor customers are currently undertaking significant expansions and we are well positioned to increase our sales as they ramp up capacity to meet growing global demand.
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 single use solutions and serum as well as for our biomaterials in electronic chemicals platforms.
Sales of third party materials, and consumables declined low single digits, reflecting year over year declines in the Covid related testing and PP&E offerings previously mentioned.
Let me turn to slide nine to offer some perspective regarding our key financial performance metrics.
In the first quarter, we achieved 16, 5% growth in adjusted EBITDA and approximately 140 basis points of adjusted EBITDA margin expansion to 21, 7%, reflecting the contributions from our 2021 acquisitions and in our core business volume growth favorable mix, including double digit.
Growth in sales of proprietary materials, and consumables inflation management through commercial excellence and productivity enabled by our <unk> business system.
These positive factors were partially offset by increased cost of raw materials and freight as well as investments in our workforce made over the course of 2021 and into 2022.
Adjusted earnings per share in the first quarter was 38 and adjusted net income was up approximately 15% driven by higher operating income partially offset by higher interest expense as a result of debt issued to finance the 2021 acquisitions and increased income tax expense as a result of higher.
Pre tax income.
Free cash flow in the first quarter was $128 million.
Compared to $112 million in the prior period the.
The increase was driven by higher operating cash flow and lower working capital investments in 2021, offset by an increase in capital spending to support our growth principally capacity additions in our global supply chain.
Turning to slide 10, we have an update on the progress of our 2021 acquisition.
You'll recall that we deployed approximately $4 billion for M&A in 2021, principally for the acquisitions of <unk> and Master Flex, which collectively have expanded our addressable market by approximately $12 billion in.
In 2025.
These businesses have highly recurring specification driven revenue profile and expand our proprietary offering to the Biopharma and health care end markets.
<unk> is a leading global manufacturer of peristaltic pumps and a septic single use fluid transfer technologies that are used across all bio production platforms, including monoclonal antibodies and cell and gene therapy, and mrna and support both therapy and vaccine manufacturing as well as critical research.
Activities.
<unk> is a global technology leader in robotic liquid handling consumables, including conductive tips plates and other consumables and has significantly enhanced our proprietary offerings for critical lab automation workflows.
Collectively we expect the acquisitions to generate around $5 billion of revenue in 2022 at EBIT margin rates nearly double that of the core <unk> business.
In Q1, the business has generated $117 million of revenue $45 million of EBITDA and north of <unk> and earnings per share.
In terms of topline performance Master Flex grew in line with our broader bio production portfolio benefiting from the same healthy demand patterns across <unk> cell and gene therapy and other emerging modalities.
EBITDA contribution was ahead of our internal operating plan due to favorable mix and commercial excellence.
The carve out and integration process is progressing as planned and we expect to transition the business onto our ERP and business platforms by the end of the third quarter.
Ritter grew high single digits on a core organic basis, when comparing the first quarter of 2022 to the first quarter of 2021 and EBITDA came in ahead of our internal operating plan.
Although the business has faced more significant COVID-19 headwinds than originally anticipated the fundamental growth drivers remain intact, and we expect greater to continue growing high single digits on a core organic basis.
As a standalone business the integration of <unk> is nearly complete.
We're now focused on executing our commercial integration plan, which principally consists of driving the existing offerings through our commercial platforms into the aftermarket and leveraging the technology platform to develop new offerings, we have ongoing conviction in the strategic and financial rationale for these acquisitions and are confident we will achieve.
<unk> attractive returns on the capital deployed.
Moving to slide 11, I wanted to give you an update on the expected impact from the rising interest rate environment on a van tour, both in 2022 and in future years.
This is a good news story as the actions we have taken in the past and more recently will enable us to maintain 2020 to interest expense at our original guidance of approximately $260 million.
For starters, if you looked at the debt schedule in the appendix to the presentation Youll see that roughly half of our roughly $7 billion in debt is fixed rate denominated.
Further most of this fixed rate debt does not mature until 2028 or later so good protection there.
That leaves $3 3 billion of floating rate debt of which $2 2 billion.
U S dollar LIBOR based the remainder euro based all of this floating rate debt is freely repayable with no penalty.
As you can see on the left of slide 11, the U S. Dollar labor forward curve has steepened since we issued our original guidance in January creating upward pressure on future LIBOR based borrowing cost.
We have three levels of protection to offset the increases anticipated in 2022.
First our U S dollar LIBOR based loans have a floor of <unk>, 5%.
When the labor rate is below the floor, which was indeed the case for most of the first quarter.
Then our floating rate is set at 50 basis points plus the spread of 200 to 225 basis points.
All interest rate increases up to the 50 basis points floor have had no impact on our interest expense.
Second in April we executed a three year $750 million interest rate and cross currency swap that converted LIBOR based floating rate interest to lower cost.
Oh, a fixed rate interest.
Third we have ample capacity under our lower cost accounts receivable securitization facility LIBOR, plus 90 basis points.
To continue to manage down our outstanding LIBOR based floating rate debt again with no repayment penalty.
As a result of these company actions, our 2022 estimated interest expense remains $260 million, despite the rising rate environment.
Looking beyond 2022, the avant our debt maturity schedule calls for minimal mandatory debt repayments through 2024.
And with free cash flow north of $1 billion per year, we are in a strong position to continue to handle the 2025 required repayment and pay down some or all depending on alternative opportunities for cash deployment.
Of the 2026, and 2027% floating rate debt on an accelerated basis without penalty.
Our strong free cash flow model and strategic debt profile have enabled us to reduce our leverage by approximately one times adjusted EBITDA each year and leave us confident in our ability to continue creating significant value for our shareholders.
On slide 12, we provide an update on our full year financial guidance.
4% to 6% organic growth sales guidance is not changing we are encouraged by our momentum and remain confident in our ability to offset expected COVID-19 related headwinds by strong growth in our core business.
An adjusted EBITDA margin rates, we do anticipate continued strong margin expansion for the full year. However, we are exercising prudent given the dynamic macroeconomic environment and holding firm on the original margin guidance for now.
Given the strength of our first quarter results and strong momentum we have.
We are raising our adjusted earnings per share guidance to $1 48 per share to $1 54 per share approximately <unk> at the midpoint.
We also remain confident on free cash flow and fully expect to achieve more than $1 billion for the full year.
For the second quarter, a quick reminder, that we are up against the 20% growth comp our toughest over the year.
With that said, we expect year over year Q2 growth and margin expansion to be similar to Q1 with continued strong performance in Biopharma and advanced technologies and applied materials, Inc.
Including full phase in of 2022 pricing.
Set by higher Covid and FX headwinds than Q1.
This concludes my prepared remarks, I will now hand, the call back to Michael.
Thanks, Tom Im now on slide 13.
Despite the dynamic operating environment, we started the year off by delivering another outstanding quarter.
I remain encouraged by the strong fundamentals in our end markets and by our traction with commercial excellence and productivity initiatives that will enable continued growth and margin expansion.
The integration of our 2021 acquisitions is going well and.
In their first quarter financial performance has been well positioned to achieve their full year operating plan.
Given the continued momentum of our business and ongoing deleveraging, we have the flexibility to consider additional capital deployment opportunities and remain active in building a strong M&A pipeline.
We will continue to invest in our long term growth strategy.
Learned about our progress expanding manufacturing capacity earlier I'm, especially.
We are excited to add cgmp manufacturing capacity in Singapore for process chemicals raw materials, an excipient.
As I mentioned earlier the facility is designed to bring innovative solutions closer to biopharma customers in the region and boost supply chain capabilities, keeping breakthrough science moving forward.
As I've mentioned before we are committed to advancing sustainability through our science for goodness platform.
With that in mind, we will be releasing our second sustainability report next month.
Which will include a sustainability accounting standards Board index.
I Hope you will read it and see for yourself. The progress we are making in the areas of people and culture community engagement innovation environment and governance and integrity.
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.
If you would like to ask a question. Please press star followed by one on your telephone keypad now.
If you'd like to remove your question. Please press star followed by <unk>.
Please limit your questions to one question with one follow up and then show your phone is on mute.
Lee.
We'll take our first question from Derik de Bruin from Bank of America. Please go ahead Jack.
Okay.
Hey, good morning, Thanks for taking my call.
So can we talk a little bit about the pricing environment. There was some concern during the quarter about pacing I mean, you did call out that you expect full implementation can you just give us some perspective on what youre seeing in terms of.
Realized price increases this year, how does it compare to the past.
Full year end.
What.
What's really it's like the pushback from your customers or at all and sort of like how are your customers your suppliers.
Pushing that forward.
Yes, good morning, Derik. Thanks for the question Michael a couple of things to keep in mind here around.
Pricing historically as we've talked about.
Roughly a third of our growth would come from pricing is roughly two thirds of our growth would come from volume expansion.
As we entered the year in line with inflationary environment that we're facing and we anticipated that algorithm flipping, meaning roughly two thirds of our growth.
Pricing and when we look at.
Our results for Q1.
We see that.
That are coming into play.
Having said that.
The way that our contracts.
Our actions with our customers play out.
For all the new business that we earn in this year, obviously as price of Ishares pricing could you carry forward some of the orders from 2021 were in backlog into the new year.
'twenty one pricing.
That's pretty well worked its way way out as we move through the quarter. So.
Tom indicated in his remarks at this stage.
In the quarter.
All of our 22.
The initial pricing is in play.
Ted.
We have.
Additional increases.
Throughout the year.
<unk> laid out that we may need to go back to the market.
The future, but certainly have the flexibility to do that.
Given the macro environment.
We're certainly not doing anything that's unusual here and the customers the conversations with our customers are probably a bit more around the security of supply and leveraging our supply chain.
To keep volume flowing into their into their facilities.
Great. Thanks.
Can you give a little bit more.
Clarity on some of the performance of your deals.
Specifically.
$117 million for each.
In total can you get some specifics on what that breakout was and.
How much.
How big of a headwind as Colgate.
And those businesses this year versus your original expectations basically whats the whats the core base for last year ex Covid.
On these businesses and thinking about that because it looks like youre doing your growth rates on an ex COVID-19 basis. Thanks.
Okay. Thanks.
For calling out.
The value we're creating through these acquisitions, we completed last year, we remain very excited about all three of them.
And as we indicated in the remarks as well as in the presentation.
The three deals are running ahead of our internal operating plan in the quarter.
Well on schedule to achieve our full year plan.
Master Flex, obviously being the biggest of the three having the most impact on the numbers running in line with our own.
Production businesses and is on track to that.
The $300 million that we disclosed at the time of the deal for this year.
Whether it's the one where we've had a little bit of noise, we knew that about 15% to 20% of the revenue was COVID-19 related.
And had that coming out of our Geo model just want to quickly as has come out of it obviously came out relatively quickly in Q3 and Q4.
<unk>.
We're.
At this point, we're probably plus or minus worked our way out.
Matt So the underlying core business, then which is obviously what we acquired.
Rowing very much in line with our expectations year of high single digits.
Quite excited about the traction we have with the existing portfolio moving that through our channel into our end customers.
So very excited about the investments that we're making in leveraging the asset.
As a center of excellence for high precision consumables manufacturing and getting great traction on a series of new product launches that expand our portfolio there. So.
We are super excited about the contributions from all three of these deals and I'm very confident that we'll achieve.
The returns.
We would anticipate in how we deploy capital.
I would just add to your question on the split I mean, youll see it in our 10-Q.
For the quarter roughly $70 million for mass reflects roughly 54 for rent or the other thing I want to point out on greater is is it that we need to deal with.
Euro was about $1 20 now.
Now in the 105 range. So that is contributing to at least on a us dollar basis headwinds in addition to.
Michael mentioned, but the underlying core core organic growth.
It continues to be in line with our expectations.
The next question comes from Vijay Kumar from Evercore. Please go ahead.
Hey, guys. Thanks for taking my question.
Yes.
Congrats and thanks for all the detail there just given that the questions that investors will kind of heading into Q1, maybe one on the guidance here.
Big picture when you look at Q1, you guys split handy.
And like Tom mentioned, 20% conflict with Q, if you're still expecting it to be something similar to Q1.
Think about the back half.
Our upside here as you think about some of the moving parts here, whether it's pricing.
Supply chain.
Or perhaps on the macro and locked on fears and maybe just talk about that.
When you reiterated that four to six should we be looking at it towards the upper half.
Yes, thanks for the support P. J a couple of ways to think about.
4% to six firstly, we have a high conviction around being able to deliver on that guidance on a full year basis, obviously noticed that.
Increased our outlook on an EPS, which really is a reflection of.
Conviction around not only trending towards the upper end of our organic guide, but also.
Confidence in being able to deliver on our margin expansion guidance.
As well.
We called out in the quarter here.
Expectation and Covid headwinds on the year will likely fall in this 2% to 3% range.
Modestly higher than maybe where we were thinking about coming into the year.
And despite that.
The strength of our core.
<unk> is obviously able to absorb that in.
And we're pleased with the momentum that we.
We do have.
One note about those COVID-19 headwinds as Tom indicated in his note kind of the play and that range is likely going to be driven by.
Our vaccine demand ultimately land this year.
And.
We think we're well positioned there with.
Well bracketed.
Any potential downside, there and how we've accounted for or our outlook here.
Throw in a couple of factors Firstly, we obviously have an order book noncancelable, but we have good line of sight too.
And to the extent that.
Sure.
Additional demand doesn't materialize.
We obviously have a order book for our core business that continues to expand.
<unk> over time.
More prominently.
Shifting towards our core business.
Now stands at roughly 85% of our open order booking production as our as our core business.
It is fungible and so.
Potential.
Currency headwinds materialize.
The offset to our.
Redeploying that capacity to satisfy them.
Order book for our core business, so we're well positioned.
Continue to drive ahead here and certainly have a high confidence delivering.
That range or the upper end of that range.
That's helpful, Michael and maybe al.
One on perhaps what Tom.
The Q1 M&A contribution that's annualized thing again Mick.
They came with just Kevin.
The amount of focus that we've had on.
These issues I think it's helpful to be clear.
So the 100 <unk>.
17, annualize us too.
Something like $4 70 cash.
When you say, we're still on track for 500.
Is that a timing element here.
<unk> comp issue just talk about the confidence in that 500, and when you think about the free cash flow.
So growth of about 20% year on year, how much of this is timing Tom versus underlying.
Improvements.
Thanks Vijay.
First on the M&A.
I would say I mean your math.
I don't disagree with your math, but.
The incremental growth that we have.
<unk> seen in both the businesses quarter to quarter to quarter. It does support our view.
On that $500 million.
For example, if you looked at Q4.
I think our revenues were 90 ish or so of that was missing a third month or master flex, but we can put that in your around <unk> 110 in revenue in Q4 going to 117.
In Q1, so the incremental sequential growth.
What is giving us confidence in <unk>.
Can see adding $5 million or so.
Yes.
Quarterly performance you can easily get to the 500 wishes.
Our expectation.
On free cash flow, 20% growth.
I think.
A little bit more modest, but I would say that it is really operational and.
In fact, if you compared first quarter of 2021.
2020, so you'd see that we actually.
<unk>.
Favorable working capital.
In terms of dollars.
And the growth from the acquisitions is obviously, helping us as well.
And to the underlying growth of business. So there's nothing unusual.
Usual.
Except I think healthy healthy conversion of our profit Q1 is typically our low point of the year for free cash flow given.
<unk>.
Onetime payouts, whether it's tax or employee bonus et cetera.
Confident in $1 billion.
For the full year, which will be a nice increment.
From 2009.
'twenty, one and Vijay I know Youre, one of our bigger free cash flow fans.
Remember, we were less than $200 million. When we started three years ago, so to be five times that.
Thank you Sir.
Speaks to the.
Performance of the model.
We'll take our next question from Dan Brennan from Kevin. Please go ahead Sir.
Great. Thanks for thanks for taking the questions and congrats on the quarter maybe.
Maybe the first question just on the pacing if you don't mind.
So you are basically is going to be understand that clearly so you are saying basically Q2. Despite the tougher comps you are going to achieve similar growth rate as you saw in Q1. So basically you would have somewhere in the ZIP code of <unk>.
5% organic 7% ex COVID-19 organic so that would imply a pretty decent step up on a stacked basis I was wondering sure I'm understanding the messaging about pacing in Q2.
Yes.
Got it right.
Dan.
And remember the first sorry, the second quarter last year, we were at total organic growth was 20%.
And so.
We're up against as I said, the toughest comp of the year, but.
Underlying trends order patterns and so forth I.
He was confident in.
46% growth rate for the year.
Including.
Good growth for the year.
The second quarter.
Yes.
And a couple of times that.
We've got strong order books.
Particularly for our proprietary.
<unk>.
Proprietary grew in the.
In the teens in the first quarter expect that to continue.
We also have good momentum from a commercial side.
Pricing as we talked about.
Reached its point of full implementation by the end of the quarter.
So sequentially Q1 to Q2, you should get a little bit of lift on.
On the top side for Venezuela.
It is well supported.
And so far we're in.
And what we're seeing and we haven't closed April .
We are confident in the full quarter out.
Great. Thanks, Tom and then maybe.
On Covid, while certainly the contribution to your business is smaller than peers I just wanted to understand again might be updated.
View with the 2% to 3% so.
On the 3% that all comes out of the vaccine side. So previously we were assuming.
$200 million in vaccine related revenue initiatives.
Could be somewhere around $125 million in vaccine therapeutics at the low component would be just given the confidence in our funds.
<unk> your capacity to meet.
Any slowdown that kind of meet it with the base business would you be willing to share additional color on the size of the backlog on the base business <unk>.
Great.
On the base business, plus the autograph order growth rate at that level or is it higher or lower anything of that.
With further help instill confidence thank you Tom and Michael.
With headwinds for the year to get to the 3% range and probably also going to need some.
Testing side of things as well.
So.
And the worst scenarios.
<unk> 52.
75 of additional.
And that in that range I'm not sure I quite get to the high end of that but that would certainly.
Bracket that.
The core.
Side of our.
Order book umbrella production as we've said in previous calls.
And then.
As you sit here today, and perhaps even a bit ahead of that at this.
At this.
Demand to be able to soak up any additional catastrophe.
Not needs to support them.
<unk> outlook.
It was done.
But certainly supportive of our growth.
Is there going to be additional.
And that comes through associated with any fall booster seat or not.
And so that we've got here, we're very confident we can offset anything that.
Sure.
Sure.
Through our core business.
Next we have a question from.
Thank you good morning.
I wanted to ask again about just the cadence of the margin expansion specific is at risk.
Relates to the first quarter I think originally entering the year the model assumed.
The first quarter was going to come in lower given some of the factors you've laid out now.
Ultimately delivered 140 bps of expansion. So I was just curious if you could kind of articulate.
Where the upside came from in the quarter.
And then just maybe.
How much of that might have been related to how you exited the quarter towards the end of March.
Yes.
Thanks, Jake the original guide was 125 basis points of margin expansion.
Over the course of the year.
And 140 was what we delivered in <unk>.
<unk> from <unk>.
<unk>.
We're probably in the first quarter a little bit.
Higher.
On the M&A contribution then.
And the organic contribution.
And.
That was anticipated.
Even the <unk>.
Dynamics, we've talked about around the timing of pricing and inflation, but.
We look forward I think that balances out a little bit more.
As you see our expansion going forward.
Do fully expected.
The core business the organic business pre acquisition.
You're going to be.
Contributing as much as.
The M&A one.
Great.
Then in the prepared remarks, you called out kind.
Kind of.
The potential for increased demand on the semiconductor side with reinvestment of the market with and just talk about what youre seeing on the ground in terms of demand today.
And so Jack our exposure to the semiconductor end market.
Which.
Collectively is around 25%.
Our overall revenues within that on a semi is.
Probably a couple of percentage points.
And that range two to three points.
And we have a pretty comprehensive solution into that space.
Including.
A lot of supplies to help manage their clean room environment, a number of services that we supplied perhaps most importantly, though we supply.
A proprietary set of proprietary formulations that are used in the actual manufacturing of the wafers themselves.
That provide edging in cleaning functionality.
Most of the process steps that are.
Required to produce a wafer which today's technology to produce a way for you are talking.
More than a couple of thousand process steps to make that happen in our materials are going to be used as a function of the number of steps.
Clearly demand for semiconductors is very very strong we're growing double digits in that space.
Pretty high profile announcements.
Expansions around the world.
Including here in the United States, and we are well positioned in that space with the technology that we supply on a proprietary basis to continue to be an important supplier into that space clearly.
Lot of momentum and we are well positioned to continue to benefit from them.
The next question comes from Tejas Savant from Morgan Stanley . Please go ahead.
Hey, guys good morning, and thanks for the time here.
Maybe just a quick housekeeping one for you to kick things off what exactly is the FX headwind I am not sure you mentioned it.
In your prepared remarks, or maybe I missed it.
Yes.
For the quarter was roughly two two percentage points.
And when you look at it is you would call it $40 million or so on the top line and for the full year, we now expect that to be.
In the range of a couple of hundred million dollars 200 million or so.
What I said.
Got it makes sense. Thanks.
Mike.
Yes.
The two percentage I should have said, it's closer to two 5% so somewhere somewhere in that range, but it is a $40 million.
Okay.
Got it that's helpful.
And Michael one for you on.
On the Geos, obviously, China is relatively small for you here.
Any thoughts on when things normalize there.
And then more importantly on Europe , which is a significant region for you in light of the energy dependence that are on non Russian natural gas and some of these payment deadlines approaching in Russia that thing to turn off the supply.
What exactly are you contemplating in your guide in terms of the macro backdrop in the back half of the year.
And do you expect to be sort of essentially recession, Bruce given your proprietary product and consumables mix even under that scenario.
Yes, a couple of things Firstly on China, you read is correct. We are very limited.
Exposure there, although we are remain bullish on the long term outlook and we continue to invest.
Meaningful impacts to date and clearly.
No real insight as to when things might improve or how they might.
Evolve as we as we move forward, obviously, it's a tough situation that there that they are dealing with.
Year to date limited.
On the business.
And thinking about.
Europe .
It has come off.
Pretty strong quarter here, where.
It's important to recognize that as we've said from the beginning of the pandemic our team in Europe and from nationally.
The testing comes down.
Headwinds are going to be a bit stronger in Europe than in other regions.
So organic growth.
<unk>.
Hundred basis points on a core basis, we grew that business in Europe .
6% so.
<unk>.
Really strong performance in Europe .
In the quarter with strength really across each of our end markets, including some of the industrial areas.
We do have.
Assets and facility are important to our supply chain throughout the region there.
Normally we'll continue to watch the situation unfolds pretty dynamic.
But we're confident in that.
A large global footprint that gives us.
There's a lot of Optionality and certainly as we look at the things we've been able to do to keep our customer served throughout the pandemic leveraging this optionality.
<unk>.
We are confident in our ability to continue to do that in.
Take care.
Consolidated.
Got it.
No.
The first quarter.
We'll take our next question from Matt <unk> from Goldman Sachs. Please go ahead, Matt.
Thanks for taking my questions good morning.
My first one just on sort of the M&A plus the interest rate mitigation that you did.
It's good to see that floating rate risk has been mitigated for this year, but as you think about M&A and where you are what are your leverage ratio is now.
Is paying down debt still a priority just given that longer term theres still has that interest rate risk on the floating rate side or or or.
Are you kind of doubling down on the M&A is for this year in terms of the pipeline the valuations and everything it has compressed.
<unk>.
When I think about our capital allocation priorities.
Two elements thereof.
Continuing to.
To be focused on M&A and deleveraging I think we have.
Pretty clear algorithm on what it would take for us to do a deal.
Thanks for a great discipline to date and you should expect similar discipline.
Going forward.
We do have.
A strong pipeline that we continue to execute.
Deal comes comes through that we would be.
Thrilled to be able to get something done this year, but.
If if not clearly theres a lot of value that can be created by.
Turning to deleverage the business.
Great and then just on the education and government segment, you called out a number of Covid headwinds anything else in that end market that you would call out in terms of contributing to that mid single digit decline or is it mostly COVID-19 and we expect that to alleviate overtime.
Exactly you got it you got it right, particularly on the government side.
Where we participated in a number of government.
Government sponsored Covid relief efforts around the world.
Really in all three regions.
Whether it be PPE or testing supports.
Diminish over over time, so as we work our way out of that you should expect that.
That space, particularly the education piece to sort of reach.
Turning to more normal.
Normalized growth.
We'll take our next question from Patrick Donnelly from Citi. Please go ahead Patrick.
Hey, guys. Thanks for taking the questions.
Just another one on the deal side for litter I just wanted to see the visibility into orders I mean is it fully transparent from customers who are using the product for COVID-19 versus not just trying to get a sense for confidence on that Hiseq again, youre kind of thinking.
Anything that comes out is going to remain fungible on kind of the bio processing side I assume it's the same there, but just want to talk to that as well.
Let me, let me take those Patrick.
On the reader side.
The customer base that we had for that business at the time of the acquisition was primarily an OEM.
Driven model.
And given that this business.
<unk> follows the same business model as our other proprietary businesses and technologies that we have seen some product is actually specified into our customers' workflow by the by the customer.
We do actually have pretty good line of sight to Hal.
The product is being used and in this case, we were aided a bit in fact in that customer.
Our customer base was relatively limited on the acquisition the.
The benefit that we get now obviously is being able to translate.
These technologies across now.
So about 100000 customer locations around the world that are engaged in life Science research and diagnostic testing, where we can now reached the end markets.
On a direct basis. So we're certainly excited about the translation and being able to.
The second part of your question.
Yes, just on master flex in terms of how to think about the COVID-19 exposure. There is it fungible kind of similar to what you were talking about the other biopharma, yes, it's very very very similar.
In.
And how we think about our own bio production.
This really is.
Corporate exposure there.
As it relates to supporting some of the vaccines, but I'm very very strong order book similar mix as what we have in our legacy bio production business.
I think we think about it.
Good morning.
Next we have a question from Paul Knight from Keybanc capital markets. Please go ahead.
Hey, guys on the Bioprocess order book.
You talk about you are seeing accelerating demand. That's obviously in spite of Covid is it.
Our companies.
Taking up product.
As they kind of get off of vaccine programs and back to traditional monoclonal cell and gene and other programs.
So what are the dynamics youre seeing on this growth I guess, just a broad question.
Yes.
As we've indicated throughout the pandemic.
The underlying core business.
That we're supporting which we're agnostic to therapeutic area, we're agnostic to modality, we're going to have broad exposure across all.
Demand for those products has not waned throughout the pandemic and continues to.
Grow at pretty aggressive levels. So the demand has been there.
We have demands through some raw material and other capacity constraints.
We balance supporting both vaccines as well as the broad therapeutic base. So the demand has been there has been very very strong continued to build throughout the pandemic.
With a lean towards.
Okay.
As incremental.
Material availability through the value chain.
Okay.
Is made available as we transition away from.
The vaccine you can imagine.
Allows us to satisfy or.
Some of the orders that were that we have on the books for <unk>.
Our core business.
And then lastly are you able to see if the.
Okay.
As we've.
As we've experienced demand in four years.
It's still going to be largely driven by the monoclonal antibody workflow.
That's the lion's share of that.
Continued great momentum continues.
Build of the pipeline.
That's going to be the core driver and are starting to gain traction.
Cell and gene therapies, obviously a bit ahead.
And.
As a pretty exciting platform.
Okay.
As you.
Hurting my prepared remarks, we've launched some.
Specifically targeting that.
We continue to be.
Okay.
Well positioned to service what we do.
Covid has.
RNA market dramatically.
Yes.
Vaccines.
Development beyond Covid.
Probably going to front run the near term opportunities as well as the therapeutics.
Yeah.
Yes.
Tailwind for <unk>.
All of us in the biologic space.
The years to come but I wouldn't.
Still drives the lines.
Sure the revenue for it.
Yes.
Ladies session I'll hand, it back to Michael for any closing remarks.
For participating in our call today.
Okay as we close I would certainly be remiss if I didn't express my continued gratitude for the ongoing efforts of all of our associates around the world.
For living our values every day and setting science in motion to create a better world.
Hopefully you sense, our confidence and excitement about what lies ahead for our bond tour and we look forward to updating you. When we meet next until then take care and be safe everyone.
Thank you for joining.
Today's call. This now concludes the call. Please disconnect your lines.
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