Q3 2022 Avantor Inc Earnings Call
[music].
Good morning, My name is Harry and I'll be your conference operator today.
At this time I would like to welcome everyone to <unk> third quarter 2020 earnings results Conference call.
To ask a question during the Q&A. Please tell stoffel about one on your telephone keypad.
I would now like to turn the call over to Christina Jones, Vice President of Investor Relations. Mr. Mr. Jones, you may begin the conference.
Good morning, Thank you for joining us 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 dot of onto our science is dot com AR.
A replay of this webcast will also be made available on our website after the call.
Following our prepared remarks, we will open the line for questions.
During this call we will be making some forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These.
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. They are made we do not assume any obligation to update. These forward looking statements as a result of new information future events or other developments.
This call will include a discussion of non-GAAP measures.
Reconciliation of these non-GAAP measures can be found in the supplemental disclosure package on our IR website with that I will now turn the call over to Michael.
Thank you CJ and good morning, everyone. I appreciate you joining us today I'm starting on slide three.
As noted in the press release that went out earlier. This morning, our third quarter financial results came in modestly ahead of the updated guidance provided in early September driven.
Driven primarily by the ongoing strength of our core business.
In the quarter, we realized core organic revenue growth of seven 8%.
Led by strong performance in Biopharma, and advanced technologies and applied materials.
Within Biopharma, our bio production business remains strong delivering approximately 30% core organic revenue growth.
We expanded adjusted EBITDA margin by more than 100 basis points.
Reflecting contributions from our 2021 acquisitions.
Favorable impact from growth of proprietary products.
And our sustained focus on commercial excellence.
Through the first three quarters of the year, our core organic revenue growth of 7% and adjusted EBITA margin expansion of 130 basis points exceed our long term targets.
And our free cash flow has facilitated over $800 million and net debt.
Debt reduction.
We remain focused on executing our long term growth strategy, including advancing a robust innovation pipeline investing in our manufacturing and distribution capacity and leveraging the <unk> business system to enhance the performance of our business.
During the quarter, we had multiple new product launches to support nucleic acid mrna and cell and gene therapy, workflows, including cell lysis, and viral and activation solutions and multi compendium synthetic cholesterol.
We also entered the final validation phase for the hydration expansion at our Aurora, Ohio facility to support our bio production customers with ready to use buffer management solutions.
Additionally, we completed construction and produced the first batch from our new cgmp manufacturing hub in Singapore.
Looking ahead, we are updating our full year outlook to reflect our third quarter performance.
$400 million of expected revenue from our 2021 acquisitions and current market conditions.
Take you through our updated guidance later in the call.
Regarding capital allocation, we are concentrating our near term M&A efforts on improving the performance of recent acquisitions.
Also in this macro environment, we think it is prudent to use our available free cash flow to reduce debt.
We exited the third quarter with adjusted net leverage of three six times down from four two times at the beginning of the year and.
And we will continue to prioritize our strong free cash flows for deleveraging our balance sheet.
We remain focused on execution and are confident in our ability to navigate through the current environment drive our long term growth strategy and continuing to build momentum across our core business as we transition into a post COVID-19 environment 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 four.
Starting from the top of the adjusted P&L reported revenue was $1.857 billion for the quarter modestly ahead of the guidance provided in early September .
Our core organic revenue growth was seven 8%, reflecting the ongoing momentum in our core business across end markets and geographies.
Adjusted gross profit expanded to 35% driven by the favorable impact of our 2021 acquisitions.
Strong growth in proprietary products and ongoing commercial excellence.
These positive factors were partially offset by increased cost of materials and freight.
Adjusted EBITDA was $384 million in the third quarter, representing over 100 basis points of margin expansion and approximately 13% growth from last year after adjusting for FX headwinds.
Margin expansion was driven by our gross margin performance and continued focus on cost management.
Partially offset by investments to support our growth strategy.
Adjusted earnings per share came in at 34, driven by adjusted EBITDA performance, partially offset by higher interest expense related to master Flex borrowings in September 2021, and FX translation headwinds driven by the continued strength in the U S dollar adjust.
Adjusted net income grew about 9% after adjusting for FX, which represented a <unk> <unk> headwind to adjusted earnings per share this quarter.
We generated free cash flow in excess of $219 million in the quarter, representing approximately 95% conversion of adjusted net income.
Our adjusted net leverage declined to three six times EBITDA down from three nine in the second quarter underscoring the rapid deleveraging enabled by our strong free cash flow generation.
Page five outlines the components of our revenue growth in the quarter.
Our core organic revenue growth of seven 8% was modestly stronger than expected driven by approximately 30% core organic revenue growth in bio production and double digit growth in advanced technologies and applied materials.
As anticipated Covid related revenues represented a three 3% headwind for the quarter, resulting in four 5% organic growth.
The inorganic contribution from our 2021 acquisitions accounted for two 5% growth representing.
Representing only the revenue from mass reflects as both writer and rim bio lap their one year anniversaries in the second quarter and are now included inorganic growth.
Foreign exchange translation represented a five 8% headwind driven primarily by the strength of the U S dollar versus the Euro <unk>.
Resulting in reported revenue growth of one 2%.
As has been the case every quarter. This year, our core organic revenue growth was above our long term target of 4% to 6% and stands at nearly 7% through the first three quarters of the year, demonstrating the strength and resilience of our core business.
On to page six.
From a regional perspective, Americas, which represents approximately 60% of annual global sales achieved eight 8% core organic revenue growth driven by continued strength in biopharma and advanced technologies and applied materials.
Within Americas Biopharma, our bio production business grew double digits with strength across processing ingredients excipient single use solutions and serum.
Europe , which represents approximately 35% of annual global sales achieved four 8% core organic revenue growth.
Proprietary materials grew double digits outpacing growth in all other categories.
Production grew over 30% on a core organic basis, driven by demand for our process ingredients excipient and single use solutions.
Although industrial demand moderated somewhat in the quarter as we indicated in early September overall growth has been stable near the high end of our growth targets for the region.
EMEA, representing approximately 5% of annual global sales grew 15, 1% on a core organic basis, driven by a bio production and advanced technology and applied materials, both of which were up over 30% on a core organic basis in the quarter.
Slide seven shows our core organic revenue growth for the quarter by end market and product group.
Pharma, representing almost 55% of our annual revenue experienced high single digit core organic growth in the quarter, including approximately 30% core organic growth in bio production.
Health care, which represents approximately 10% of our annual revenue grew mid single digits on a core organic basis in the third quarter driven by ongoing momentum in our medical grade silicone platform.
Education, and government, representing approximately 10% of our annual revenue experienced a low single digit core organic revenue decline driven by low single digit growth in the Americas offset by a lower consumables demand in Europe .
Advanced technologies and applied materials, representing approximately 25% of our annual revenue achieved double digit core organic revenue growth in the third quarter driven by growth of proprietary materials, including those to semiconductor and electronic device customers continued strength in this end market reflects the value of the diversified application.
Customer mix and overall resilience of this platform.
By product group proprietary materials and consumables offerings achieved double digit core organic revenue growth driven by strong demand for our bio production offerings as well as for our advanced technologies and applied materials and biomaterials platforms sales.
Sales of third party materials, and consumables increased low single digits with strong chemical sales, partially offset by a moderation in lab consumables demand.
Services and specialty procurement grew mid single digits, driven by strength across all service offerings, including lab and production services clinical services and specialty procurement.
Equivalent instrumentation sales grew low single digits across all three regions.
Moving to slide eight I'd like to provide an update on our capital allocation strategy.
Since the IPO, we've been investing our available capital in the business deploying $300 million of Capex 4 billion for M&A and deleveraging by more than three turbines. We have also significantly reduced the cost of debt through deleveraging and effective interest rate management.
Currently deleveraging is our top near term capital allocation priority.
While our debt composition is 70% insulated from exposure to rising interest rates. We believe it is prudent in the current environment to focus on paying down our floating rate debt and continuing the positive trend of deleveraging for 2023, we believe the interest rate exposure on the remaining 30% will be largely offset by.
The impact of deleveraging.
M&A is still a key part of our long term playbook, especially to add attractive high margin proprietary content and increase our exposure to high growth applications and workflows.
However, the bar is high for deals in the near term given the current macro environment and the focus of our team is on optimizing the performance of our most recent acquisitions.
I will now hand, the call to Michael.
Thanks, Tom turning to slide nine.
To update you on our 2021 acquisitions.
Last quarter, there was some confusion regarding the numbers on this slide as compared to the numbers in the press release.
As a reminder, this slide reflects all revenue and margin from these three assets regardless of whether they were categorized as M&A or organic in a particular quarter.
We recognize the need to improve the performance of these businesses and I will share some of our action plans in a moment.
We remain convinced that Ritter master flex and <unk> are high quality assets that will accelerate our expansion in the growing biopharma and health care end markets.
In early September we reduced the estimated 2022 revenues from the 2021 acquisitions to $400 million.
This includes $240 million to $260 million for master Flex a reflection of topline pressures related to ongoing component availability for our peristaltic pump category.
As well as demand softness in our tubing category.
Extensive customer serving has confirmed that the key driver of current tubing demand is temporary and.
And related to elevated customer inventory levels that are expected to normalize over the next few quarters.
Master Flex has a leading market position the installed base remains strong and we continue to see robust demand from our bio production customers for our end to end fluid management solution.
The 400 million contribution from M&A in 2022 also includes $130 million to $150 million for Richard.
<unk> had a stronger than expected Q3, driven by modest shift in revenue from Q4.
While core growth was in line with our long term expectations.
As anticipated Q3 results and the outlook for Q4 reflect a moderation in European industrial demand and.
And in Q2 roll off of Covid related revenues.
We remain confident in our ability to deliver approximately $400 million of revenue from these businesses and.
And expect adjusted EBITDA margins of over 30% for the full year.
Additionally, we are taking aggressive actions to ensure that we deliver on the long term value of these businesses by enhancing proprietary content driving growth through our differentiated channel.
And delivering strong financial results, we have a detailed new product introduction roadmap that will enhance the proprietary content of our portfolio and capitalize on the technology leadership of the acquired assets.
We highlighted the master since product launch last quarter and plan to launch more than a dozen new master flex products next year.
At <unk>, there was a clear opportunity to augment the current product line and leverage return advanced manufacturing capabilities. We.
We are excited about the four significant product launches planned for the first half of next year.
Another important tenant of these acquisitions is the ability to drive incremental growth by leveraging our commercial reach and distribution footprint.
We have trained over 75% of our sales reps on both product lines and now have a pipeline of over 2000 unique customer opportunities.
We are augmenting our sales force with technical experts to accelerate master flex growth.
Including 35 fluid handling specialists across the globe.
Finally, improving the financial performance of these businesses starts at the top.
With strong leadership driving effective execution.
We have made organizational changes to enhance accountability and operational oversight perimeter.
And have engaged industry experts to lead sprint teams focused on delivering commercial synergies.
We will continue to focus on improving performance of these assets and will keep you updated as we progress.
Moving to 2022 guidance on slide 10.
Recall that our last full year guidance update was provided as part of the Q2 earnings call.
In early September we provided a revenue outlook for Q3 and updated our expectations of revenue from acquisitions.
We are now updating our full year guidance to reflect our third quarter performance.
<unk> $400 million of expected revenue from our 2021 acquisitions changes to foreign exchange rates and current market conditions, including softening industrial demand in Europe .
And inventory Destocking in select lab consumable categories like liquid handling.
Starting with revenue, we expect full year core organic revenue growth of six to six 5% and COVID-19 headwinds of about three 5%.
Resulting in organic revenue growth of approximately two 5% to 3%.
Including the inorganic contribution from M&A of 4% or roughly $270 million and FX headwinds of approximately 5% or roughly $350 million, we expect reported growth of one 5% to 2% for 2022.
For the fourth quarter. This reflects approximately 2% to 4% core organic revenue growth and about 4% Covid headwinds.
Resulting in flat to low single digit decline in organic revenue.
We expect reported revenue of roughly $1 775 to $1 eight $1 5 billion in.
In the fourth quarter.
On adjusted EBITDA, we expect to deliver 100 to 125 basis points of margin expansion for the year and 50% to 75 basis points of margin expansion in Q4.
Reflecting the impact of our revenue assumptions and persistent inflation.
As a reminder, fourth quarter margins only have one month of inorganic lift from Astro flex as the business laps. Its one year anniversary on November one.
We are updating our adjusted EPS range to $1 38 to $1 40.
Reflecting a <unk> <unk> impact from M&A outlook, a <unk> <unk> impact from second half organic growth and approximately <unk> <unk> impact from foreign exchange.
We have reduced free cash flow expectations to approximately $800 million to reflect these factors and the additional investments we have made in working capital to ensure the continuity of our supply chain.
As we wrap up I want to reiterate that there is nothing we are seeing that changes our deep conviction about the enduring attractiveness of our end markets or of <unk> ability to continue its long term growth and margin expansion trajectory by capitalizing on the many opportunities ahead of us.
And we believe our long term financial algorithm is firmly intact.
Looking ahead to 2023, we're facing some headwinds that are dilutive to our long term growth target of 4% to 6%.
Notably, we do see risk in European macro environment, as well as excess inventory in select lab consumable categories.
In 2022, we expect to realize approximately $180 million to $200 million of Covid related revenue.
Including $150 million to $180 million from our core business.
And another $20 million from our 2021 acquisitions.
We plan to remove all COVID-19 related revenue from our plan for next year, resulting in a 2% to 3% headwind to 2023 organic growth.
We also plan to retire core organic revenue reporting and returned to our pre Covid convention of providing reported revenue growth and organic revenue growth.
Also we are anticipating a $200 million impact from foreign exchange, yielding a 2% to 3% headwind to reported revenue and a <unk> <unk> impact to EPS.
Following our usual cadence we will provide 2023 guidance early next year.
And looking back over the last couple of years, we have operated in a very dynamic and somewhat unpredictable environment.
As we continue to work our way through these challenging times I am encouraged by the long term strength and performance of this business and the set up heading into 2023 and beyond.
Where we are experiencing challenges that are within our control, we're leveraging the <unk> business system, and taking decisive actions to strengthen our business and mitigate their impact.
We have a clear plan to improve the performance of our acquisitions and deploy capital in a way that maximizes value for our shareholders over the long term.
And we believe in the resiliency of our business and look forward to continued growth as we set science in motion to create a better world I want to thank you for your interest in <unk> and for your continued support I will now turn it over to the operator to begin the question and answer portion of our call.
Thank you to ask your question and please dial star followed by one on your telephone keypad now.
And our first question is from the line of Derik Debruin of Bank of America. Derrick Your line is now.
Hi, Good morning, everyone. Thanks for taking my question.
Hey, good morning, guys.
Sure can we can we just sort of like elaborate on.
The two points you talked about <unk>.
European macro and the excess inventory in the system just can you elaborate a little bit more on those and sort of what.
What youre seeing there.
<unk>.
Hi.
Just a little bit more color in terms of what's going on with it I didn't think that you had as much macro exposure in some of those markets. So any color would be helpful.
Yes. Thanks for the question Derrick I think relative to Europe , I think it's probably important to highlight that our European business performed actually pretty well in the third quarter. We grew mid single digits in the quarter, which is certainly aligned with ours.
Expectations and as you remarked, we do have a <unk>.
<unk> diversified portfolio that covers a number of end markets, including Biopharma and health care, which continued to perform well and run at a high.
<unk> for us.
Of course, the situation in Europe is a bit dynamic and something we're following pretty closely.
As we indicated.
In early September .
Within our industrial exposure.
That is closely linked to kind of production output and application of our end markets such as.
Oil and gas.
For example, there are pockets.
Softening there that.
Certainly were reflected somewhat in the third quarter end.
I think as we look into the fourth quarter, we see many of those same pressures continuing.
Regarding.
Consumables softness within the laboratory environment.
Yes.
An element that we see both in <unk>.
Europe as well as in our Americas lab business and Thats probably not.
Confined to any particular end market, we see that you.
Broad based.
Within certain setup consumable categories that were severely constrained during the pandemic.
And.
As we as we look back here to combat some of those constraints.
It's clear the customers opportunities to Opportunistically build inventory.
Outside the normal procurement channels.
Over the course of the pandemic.
Brought their inventories to an elevated level and this will be derrick for products like.
Emmanuel pipette tips and plates.
Things like centrifuge tubes for examples now.
Across most of those categories supply chains of normalized raw materials are more available lead times have been been restored.
We see customers being more comfortable.
Drawing down inventories back to normal.
More normal levels Destocking, if you will and that's the dynamic that I think we see certainly somewhat in Q3 and persisting probably for the next couple of quarters.
As those.
<unk> returned to normal stocking levels, certainly we view it as temporary the engagement that we have with our customers sort of indicate thats. The case and we're confident that the fundamental end market demand across all of our <unk>.
<unk> end markets remains strong.
Yes.
To clarify some of your initial thoughts on.
On 23 so.
You're still sort of see that.
46% as the long term algorithm right on the business so.
<unk>.
Is.
When you sort of think about 'twenty three.
I mean it.
Excluding headwinds so that would be.
That would be the right place to start right.
Total organic 46, because youre not going to breakout the core anymore right.
Yes.
As we approach any year.
Start with our.
Our expectations around our long term algorithm and as I indicated in my prepared remarks, our conviction around our ability to continue to grow at those levels is firmly intact.
We look at the first three quarters of the year, we're still running outside the high end of that range.
I think your perspective is spot on there Derek as we look ahead.
What we tried to do here today is just provide a few data points that we're certainly aware of.
Round, how we see COVID-19 being handled for next year, certainly from a reported standpoint.
FX is going to be a bit of an issue.
We see continued strengthen in our end markets.
Save a couple of these headwinds that we've referenced here in the second half of this year that.
They are likely to persist magnitude of which is a little bit of unknown at.
At this point around Europe .
And how quickly some of the consumables inventory comes out.
Round those the dynamics for those products are.
Short cycle as you are aware kind of book and ship type order dynamics and so we'll certainly take the benefit of the next several months here to see how that evolves here as we work through the fourth quarter and it will bake that into our outlook heading into the new year's week as we get into.
The early part of next year, but I would say the core business continues to be strong and will reflect.
These headwinds as we get a little bit more clarity on those moving forward, but your point around our conviction around 4% to 6% long term growth is accurate and we view it is still intact.
Thank you. Our next question is from the line of Vijay Kumar Evercore ISI. Your line is now open.
Hey, guys. Thanks for taking my question.
Mike Mike maybe my first question on this fourth quarter guidance.
I think the core organic ex Covid headwinds, we're looking at perhaps $3 five 4% somewhere in that range that the comp adjusted slowdown of 800 basis points.
Hi.
What portion of that is inventory stocking versus a slowdown in Europe .
And in.
When you think about the first half of next year, given your commentary about entities Destocking dynamics take about six months to <unk>.
Two should we expect a similar magnitude of impact in first half of next year.
Thanks for the question Vijay good morning.
As you've seen we've delivered more than 7% core organic growth.
Date, which certainly reflects the ongoing strength of the core business and especially our our biopharma platform.
We've reflected some of the headwinds that you've referenced around Europe industrial exposure in these liquid handling.
<unk>.
Our expectation for Q4 core organic growth is in that kind of 2% to 4% range, which it is important I think if youre looking at kind of a sequential comparison to Q3, you do need to adjust for the impact of.
Days' headwind that we have in the fourth quarter. There is a couple of hundred basis points in fact with fewer.
Billing days in Q4, this year as compared to <unk>.
Last year.
Consider that Youll see that our guide for the fourth quarter is certainly square in the middle of our.
Long term, Florida, 6%.
Algorithm.
As we look ahead with only two months.
To go in the EU.
Well positioned.
Yes.
On the guidance that we've outlined today in terms of.
The step down from Q3 or maybe even within this year.
Beyond just the structural headwinds of fewer days in the in the quarter.
The impact that were reflecting here on Europe .
The lab consumables.
Headwinds as you probably think about that as roughly equally split Vijay.
Okay.
Thank you. Our next question is from the line of <unk> of Morgan Stanley <unk>. Your line is now.
Hey, guys good morning, Michael.
Michael a couple of quick ones for you you're on first on pricing and then on margins I mean on pricing can you just talk to us about your confidence in your ability to pass through the inflation that you're seeing on your cost structure, particularly on the third party side of the business in 'twenty three and then.
Given the moving parts that you laid out here between.
The macro and the excess inventory in the Covid coming out in the FX.
How should we be thinking about sort of margin trajectory in 2003 at least at a qualitative level.
Yeah, good morning Tejas. Thanks.
Question.
Starting firstly around margins would reiterate the 130 basis points of margin expansion.
<unk> delivered to date, which is obviously well above our long term algorithms.
<unk> 52 to 100 basis points and the key levers.
That drive that are certainly how we manage price relative to.
The Cogs inflation that we take on as well as the.
The mix impact of outsized growth of our proprietary materials platform and clearly those levers have been fully intact.
Reflected in.
The margins that we've delivered.
The team has done a really terrific job I think reflecting the impact of inflation in our in our pricing and we've done a nice job of working collaboratively with our customers to get that.
Reflected in a productive way and as we look ahead I believe there is anything about the current inflationary environment or.
The pricing environment that would cause us to change our views in terms of.
The contribution of that that lever to margin expansion.
Going going forward.
In terms of.
The margin profile for next year, clearly, we will not have the incremental inorganic impact from our from our 2021 acquisitions as all of those will have.
Become fully organic here.
In the fourth quarter so you're.
Certainly targeting that 50 to 100 basis point range, our view on inflation would indicate that.
It's going to be certainly higher than normal and we'll have to get that reflected up and down the P&L.
We will look at the volume assumptions and the impact on operational leverage which is an important.
Element here.
And.
We'll obviously have to reflect the growth off of our.
The assets that we've that we've purchased here so I think.
Sure.
Our starting point and as we worked through the quarter here and complete our planning going into next year, we will.
See where we land but.
Margin expansion of 50 to 100 basis points continues to be.
Our expectation over the long term with some of the Covid revenues and the magnitude of those coming out next year.
A lot of those proprietary content.
<unk>.
We'll have to put all that together and see where we land here, but certainly the.
The margin expansion engine is still.
Charging it had fully intact.
Thank you. Our next question is from the non upfront and Cunard of Jefferies. Brendan. Please go ahead.
Hey, Thanks, good morning.
Mike a couple of follow up questions on the steps you've taken around grid or a master flex when you talk about improved accountability.
Does that exactly mean, what was suboptimal about how you approach that before and then the 14 products Master Flex plans to launch next year, how does that compare to its historical cadence is that substantially higher or is it more of a normal year.
Yes, thanks for the question.
I appreciate you joining us this morning.
Where I'd start is just reiterating.
Our perspective that.
Firstly these are super high quality assets that we purchased all three of them and our conviction around their long term contributions is as high as.
As the time that we purchased these assets particular to Richard.
I think we've spent some time talking about the strategy for that business is too.
Fans format from an OEM only model and to leverage our strong customer access and our channel to position the capabilities directly with the end.
And customers.
And.
We're very very active in how we're doing that.
Yes.
Very very targeted sales activities.
A lot of training.
Of our of our reps to help them position these products with our customers.
And.
We've got several thousand customer projects in flight.
I think the lead time to drive the qualifications has certainly been impaired a bit by the rapid roll off of Covid and the impact on <unk>.
Inventory through the channel for these liquid handling consumables that we produce but as we kind of transitioned from this year and into next year, we see that.
<unk> rolling off which should give us a bit more traction.
From an accountability standpoint.
The business has been tucked in under our.
Regional structure.
We've recently made some changes to pull it out.
And manage it alongside.
A dedicated.
Set of leaders that run.
Some of our proprietary assets to give it a more dedicated.
<unk>.
And help give it a bit more bandwidth and attention.
From a new product introduction standpoint.
You indicate that historically it was a fairly new.
Narrow in somewhat of a nascent.
Roadmap that was that was in place there just given the focus on servicing the Oems.
As we now leverage the high percent precision consumables capabilities that they do have an interact directly with our customers. We see a lot of opportunity to expand the portfolio to serve a broader set of our customers' needs and so the pipeline has been invigorated to a large degree.
Many of these investments that are necessary to support the launches that I referenced were initiated even up to 12 or 18 months ago.
And the timeline there to launch is really governed by just the timeline to put the assets in place to produce the expanded portfolio. So on kind of a rolling basis through the second half of this year and through the first half of next year.
Set of these NPI has come online and it will certainly.
Helped strengthen our positioning with the end customers.
Our next question comes from the line of Dan <unk>.
Stifel Dan Your line is now open.
Hey, good morning, guys. Thanks, good questions.
Master Flicks, it sounds like $2 40 to $2 60 for the year is still the outlook, there, which I think implies about a $20 million or so step up sequentially from <unk>. So can you just talk to the expected acceleration there and the extent to which there is.
The seasonality element that you think might play a role.
Yes. Thanks for the question so as we talked a little bit in early September .
Master Flexes.
Revenue in the third quarter was.
Impacted by some of the persistent supply chains, we're having around our peristaltic pump category.
Particularly around component availability from things like printed circuit boards.
And I think we'll continue to.
Deal with some of the challenges in that supply chain, we have a really terrific order book and backlog for that for that category.
As some of the supply chain challenges he's on that part of the offering will continue to see us.
Step up in growth of that of that category.
A key challenge in the business kind of linked to the steam of consumables destocking related to supply chain security concerns.
Persistent throughout the pandemic.
There was certainly a softness in the tubing demand associated with these.
That forms that started to become evident in the third quarter and we'll see that.
Continuing into the fourth quarter.
Nothing structural.
We're obviously pretty close with our customers on this and I think youll start to see them incrementally returning to the market here in the fourth quarter and as we move into the first half of next year.
Year so.
The guidance that you that.
You referenced.
Ultimately you will focus more on the lower end of that.
And just as we look ahead.
Which does imply probably a modest step up here in the fourth quarter, which is linked to a bit better supply chain conditions, perhaps end.
Similar if not incrementally better.
And in the tubing category, but it will be in and around that probably the low end of that range on master flags Hey, Dan This is Tom.
A little bit more on your question on seasonality.
As you know one third of the Master Flex business.
Pumping and the rest of it is the consumables.
<unk> so so.
On the on the pumps themselves.
<unk> got a decent open order book.
Objected to constraints, we talked about on the supply chain, but as you would expect Q4 tends to be a little bit.
A bigger quarter for us from a capital perspective that your customers are.
Senior consuming the rest of the capital budget so.
That element of it.
Supports incremental as well.
Great. Our next question comes from then on it Tom Brennan of Cowen Your line is unlikely.
Great. Thank you. Thank you guys for taking the question it sounds like it's a one question Q&A, maybe I'll ask a kind a multi parter.
If you don't mind, just so so Europe , obviously was solid this quarter mid single digit.
You did note obviously some of the pressure points there.
Are you thinking about like kind of what's assumed in <unk> and the jumping off point as we look ahead.
And then on bio production, obviously, a really solid quarter again, 30%.
Similarly kind of what's the right way to think about that growth rate, obviously, that's running pretty hot right now.
And as we look at it for killing beyond kind of what's the right trajectory. There and then the final one would just be can you just remind us what youre sit like what is it a bunch of cyclical exposure like like how much of your business goes into end market you can see the cyclical I know theres different definition today, given some of the semi business is probably more structural growth, but just if you could help us define that thank you.
Alright, I'll do my best to.
To stay on track.
Sure.
Question.
Let me take them in the order of written them down here.
Point around while production is an important one that's obviously been a really important driver of our of our growth and will continue to be so.
Year to date, we're running 20.
20%, we had a great quarter in the third quarter with more than 30% we continue to experience.
A healthy end market demand for our offerings and certainly are confident in the industry drivers behind that that we see is persisting. We've got a super strong order book, that's now at this stage by more than three times our.
Our historical level and we've got.
<unk> high backlogs as well, obviously, we're making a lot of investments in our.
And our supply chain raw materials are.
Coming a bit.
Easier to come by and we're really focused on improving service levels and lead times to our to our customers.
As I look ahead.
To have another.
<unk>.
<unk> fourth quarter and.
We will deliver.
I think good momentum going into next year is as well.
As it pertains to Europe .
Obviously, theres a lot of noise around Europe at a macro.
Environment.
And when I look over the last couple of quarters on a core basis, which is probably the right way to think about it given our COVID-19 headwinds are a bit more.
Allocation into Europe , giving we did more testing related revenues there in 2021 and in the other regions, but on a core basis.
<unk> been running the last couple of quarters and are right in the middle of our of our expectations for that region of up mid single digits.
Which I think compares pretty favorably to help the region has performed historically continue to get really good traction from a pricing perspective.
And we do see.
Strong momentum, particularly in Biopharma continuing.
What I would say we've seen probably the most pronounced headwinds has been a little bit in the academic sector in Europe .
Around some of the consumables destocking that we've that we've referenced and then certainly within our applied markets. The thing I like about our business at a high level is we talk a lot about being resilience.
Highly recurring revenue profile and Thats certainly the case.
Even within our applied markets. So it's a little bit of a mixed bag. There all of the production platform, where we would add content specified.
Into those platforms.
Platforms continues to run at a high level.
But some of the more.
GDP or macro sensitive applications like the QA QC workflows that we would support and things like oil and gas our pet camera, obviously being impacted by.
The price of energy and oil and some of the slowdown that you see in some of those.
End markets, but the diversification of the platform I think it comes through as we again reported double digit growth in our applied markets overall, but thats the pockets within Europe .
Most impacted.
As I've just indicated from a cyclicality perspective.
Okay.
A couple of comments I think to make there one I think it's important to recognize that FERC.
<unk> research business in the diagnostic workflows that we would supporting our health care application areas.
And then generally the work that we would do around QA QC. It is a function of the number of billing days in.
In a particular quarter. So from a seasonality standpoint, you do have some influence in terms of Q4 tends to be a bit.
Lighter in terms of number of days compared to some of the other other quarters and yes.
Certainly true this quarter. In addition, we have one less billing day this year than we did.
Even last year.
In the fourth quarter.
<unk>.
Get that somewhat offset by the so called year end budget flush, which we've baked in is.
Being normal for.
For this year, but.
Absent those factors.
The business doesn't have a lot of cyclicality to it.
Which I think adds to the resiliency and the just the.
Building off of the recurring nature of our of our revenue profile and the consumables focus of our of our portfolio.
Absent major shocks and Andrew macro input impacts.
It tends to be a pretty steady business obviously.
The other thing Dan just to put that back to Europe .
Yes, we're not talking about any significant step down I mean, there still is growth it does moderate.
Three quarters of the year, we were at 56% on a core organic basis, and we've we've modeled that lower single digits.
In Q4, so it's a moderation and not.
Anything else.
Yes.
Thank you. Our next question is from the line of Jack Meehan from Nephron Research. Please go ahead.
Thank you good morning.
Just wanted to focus on the balance sheet make sure. We're all aligned around interest expense expectations. So what is the fourth quarter guide assume for interest expense and if we follow the rate curve and assume.
The debt Paydown in 2023, just where would interest expense land in 2023.
Okay.
Yes.
Yes, Thanks Jack.
Couple of things to point out.
I know there has been some sensitivity to this.
We have our model continues to work on.
That we've we've actually.
Paid down over half a billion dollars.
That in the current year.
Okay.
We've taken actions to fix.
Our interest rate exposure, we're probably at roughly 70%.
Fixed when you consider corporate.
Impacts of speed yet.
Hedging that we've talked about so we've been we've been able to over the course of the year maintain.
Our interest rate our interest expense exposure in that $2 60 range in line with the original guide despite all of that the increase that you've seen and maybe a little north of $2 60.
By the time that you or.
Year rolls out, but it's been it's been well contained.
Particularly in light of those.
The increase for next year.
We've talked about.
Shift.
Got it.
Short term priorities of Delevering.
More delevering and we'll continue to do that.
And I think the impacts of de levering will give us.
A nice.
Offset to impacts.
Impacts of the rising interest rates on that 30% of the portfolio that is not fixed.
When you factor that in I would expect us to continue to.
And be able to maintain.
Triste rate expense below $2 60.
We will give you more refined guidance on that.
2023 got it.
Thank you. The next question today comes from jumps out.
John Your line is now open.
Hi, Thanks for taking the questions just maybe a little bit on M&A. It sounds like youre not going to do any deals here over the near term, but the deal model Hasnt changed I guess, what would it take for the company to become more active M&A over the next 12 months and any learnings additional or if you can provide from the recent deals that as you integrate them.
If you look to potentially do more on M&A.
Thanks.
Yes. Good morning, Thanks for the question.
I think Tom indicated in.
His prepared remarks M&A continues to be.
An important part of our playbook on our long term value creation.
Story, and so certainly something we're committed to doing and.
As you have seen us.
<unk> here in the last couple of quarters, we're continuing to invest in enhancing our capabilities there.
<unk> has joined the team and really hit the ground running and brings an incredible depth to the team also around organic as well as inorganic growth.
Growth experiences across the core end markets that we're focused on.
And as she can.
We use to build out her team and.
Start to refine our playbook here I think we're excited about the capabilities we have.
To support our strategy going forward. So that's certainly a big part of the focus but our and our team are actively engaged in supporting us with the.
Integration and synergy capture activities with the deals that we concluded.
Last year.
In helping support some of the sprint teams as I mentioned.
Our.
Matt.
Driving acceleration in our.
Commercial synergies that have been identified in those.
Businesses.
In terms of what would cause us to be able to conclude a deal and when we might be ready to conclude a deal.
It's a challenging macro environment for sure that market served.
More than dislocated that at the moment and continues to be I think a pretty meaningful valuation disconnect.
In the market, particularly for the private assets that would be in our in our pipeline. So.
With.
Some of the.
Macro concerns that are out there together with some of the challenges around the debt markets I think it's prudent in our case.
We've made great progress on deleveraging.
We'll finish the year, three five times levered or below and it will be able to drive that down meaningfully.
In the coming quarters, as we apply free cash flow to do that and Thats an important element of what Tom just described around managing interest rate expenses.
And we'll look to continue to.
Pipeline activity and enhance our capabilities and watch the markets closely and.
I don't know that we necessarily have a particular time on the calendar mark that would trigger us to to be more active here. We will continue to watch the markets as they as they develop and we will continue to work on our pipeline, but as Tom mentioned, the bar's high here in the near term and we think we can add a lot of value to our shareholders by.
Deleveraging and managing our interest costs.
Thank you. Our next question is from the line of Tim <unk> of Wells Fargo. Tim Your line is now open.
Great. Thank you I, just wanted to dig a bit more into the moving pieces around the margin outlook. So.
Michael You described two major factors in 'twenty three that we've gone through a lot in this call impacting the growth framework. The two big ones are European macro softness and inventory destock. So just thinking about those two buckets Europe has the lowest margin region in your business and outside of Master Flex.
Correct me, if I'm wrong. It seems like most of the Destocking, it's happening within but like CDW, our portfolio, which is lower margin than the proprietary book. So these two pieces.
Being kind of the headwinds to growth would suggest a bit of a tailwind the margin. So how should we think about.
Those two pieces the moving the other moving pieces obviously.
Going into next year, and then relative to the kind of margin accretion framework.
Guys have.
A multi year basis.
Yes, I think there's probably a couple of other factors worth worth pointing out.
The take down of more than $200 million of Covid related revenues in the year, which does bring with it.
Fair bit of proprietary content is important to consider and the impacts that that will have on.
On margin expansion.
And then.
On a comparative basis, we're not going to get the inorganic lift from from M&A like we experienced this year. So.
In front of you as well.
And then the other item here is just around inflation and kind of what the spread is that we can drive.
From a price relative to that inflation, which I think we're confident that we'll be we'll be positive.
I think we're still kind of refining those models to see how much expansion that's going to drive that will certainly be an important.
Contributor for next year. So those are probably the factors you mentioned.
Some of the revenue.
Winds around.
Liquid handling consumables and there might be some of the industrial concerns in.
In Europe .
And as I look look ahead.
We'll certainly see margin expansion next year given.
The confluence of these factors youre, probably on the lower end of our.
Historical algorithm, but we'll see where we land here as we work through the next couple of months and come out with some more fulsome guidance early in the new year.
Our next question is from the line of Andrew Cooper from Raymond James Andrew. Please go ahead.
Great. Thanks, everybody and a lot's already been asked but maybe just siding.
One more piece in fourth quarter, you mentioned the $20 million contribution.
The acquired businesses this year, but obviously that feels like its getting folded into the organic piece for <unk>. So can you give us a sense for how much.
Revenue was 80 coming out there and then just on the M&A at a higher level, obviously, the EBIT margins from <unk> year to date are nice, but as we think about some of these headwinds in those businesses.
How do you feel like Youre doing on the margin side, there, especially with some of the symptoms that are coming in.
Is that stable is it.
<unk> plan, what should we be thinking about for 2003.
Yes.
Andrew Youre talking specific margin specifically on.
The acquisitions.
Correct correct.
Okay.
Yes.
Those continue as you've seen this year.
Yes.
Gross margins on those proprietary.
Products in both Ritter Master Flex pet far superior gross margins too.
Two <unk> <unk> and.
And they scale very very nicely, if we get the sales engine going in each of those you'll see some nice.
Accretion so the growth rate there continues to be.
A nice driver for us but overall.
The EBITDA margins on each of them and you can see the impact.
They are in the mid <unk>, if not approaching 40, 40%.
Definitely.
Again, the volume and the scale on that it's pretty important.
Back to the.
Covid question.
To cope with revenues Youre right that.
Additional COVID-19 exposure.
The two deals that gets factored into our overall.
Covid headwinds.
At the point that each of those deals becomes organic so greater it was July June 12 of 22, it reached its one year Mark.
Going forward from that point.
Yes.
One with what the reduction in Covid related revenues for <unk> same thing for mass reflect that happens.
On November one.
The additional impact is more so related to domestic flex.
But youre right you got the numbers roughly right there.
Yeah.
Okay.
Thanks, and our last question today comes from Matt <unk> from Goldman Sachs. Your line is now open.
Great. Good morning, Thanks for squeezing me in just one long term question, Michael as you think about 'twenty.
'twenty two with it sort of in line of sight and as the jumping off point could you just talk about sort of how you feel about the progress towards the 2025 targets you set out last year at the Investor day, the 23% margin to 48, 9% nine 5 billion in revenue and just you mentioned that growth algorithm is intact, but obviously this can be a lot of macro challenges.
You also outlined maybe can you just kind of talk through how youre thinking about this 2025 targets we had set out.
Yes, thanks for the question.
Certainly.
An important one as we think about our long term algorithm mid single digit organic growth margin expansion of 50 to 100 basis points in kind of mid teens EPS.
EPS expansion coupled with.
Really strong cash flow and high conversion and that's the.
Central to model that.
We're focused on and running and as I've reiterated a couple of times today. There is nothing that we've seen in the end markets. Our experience of this year that would cause us to change that and clearly our growth strategy and the investments that we're making would have us.
Looking to find ways to even.
To accelerate.
Move higher than.
At some point in the fleet push those targets even higher.
But as we're sitting here today.
That's the algorithm that we're working and you see it playing out even through the first three quarters I think well.
Well in line with that.
Algorithm, so there's nothing around that.
That changes obviously.
The jumping off point here as we work through the Covid take downs in some of the macro pressures and such.
Could influence the absolute.
<unk> targets that are that are out there and something we'll revisit it.
Probably is in line with another Investor day.
At some point, perhaps later next year, but.
I think the key point here being.
Mid single digit growth strong margin expansion and strong flow through to EPS is.
Clearly in sight here in the model is in fact running on the high end of all of those elements today.
Great I'm afraid we have no more time for any further questions. So I'd like to hand back to Michael Stubblefield for any closing remarks.
Yes, Thank you and thank you all for participating in our in our call today.
As I close I just would.
I'd be remiss, if I didn't express my gratitude to the ongoing efforts of our nearly 15000 associates around the world that inspire me every day with their commitment and their contributions to our to our business and to our customers.
I am confident in the strength and resilience of our business.
And look forward to updating knack until then take care and be well everyone.
This concludes up until this third quarter earnings results Conference call. Thank you all for joining and you may now disconnect.
Yes.