Q4 2022 Avantor Inc Earnings Call
Yeah.
Speaker 1: Co.
Speaker 2: call. Our business grew 2.7% on a core organic basis.
Speaker 3: and we expanded adjusted EBITDA margin by over 60 basis points.
Speaker 4: As customer demand and supply chains continue to normalize, as we transition from the COVID-19 pandemic, the temporary headwinds we have faced largely played out as expected. For the full year, we delivered core organic revenue growth of 6 percent. At the high end of our long-term target of 4 to 6 percent, with growth across all geographies and product groups.
Speaker 5: We expanded adjusted EVID die margin by 110 basis points.
Speaker 6: above our long-term target of 50 to 100 basis points, and delivered $1.41 of adjusted EPS.
Speaker 7: outpacing our updated guidance of $1.38 to $1.40.
Speaker 8: We continue to execute on our long-term strategy and growth drivers, including advancing a robust innovation pipeline, expanding our manufacturing and distribution capacity, enhancing our digital capabilities, and leveraging the Avantor Business System to drive operational rigor.
Speaker 9: More than 70% of our revenue is in life sciences, and over the course of the year, we introduced a number of new products to support our customers in growing biologics platforms, including monoclonal antibodies, cell and gene therapy, and mRNA.
Speaker 10: We enhanced our proprietary consumable offering with the extension of our precision plastics portfolio under our J.T. Baker brand. We also introduced innovative kits and flow cells from Oxford Nanopore, which helped generate next generation sequencing data at the highest consensus accuracy.
Speaker 11: During the fourth quarter, we further augmented our global footprint and strengthened our ability to provide essential products and services to local biopharma customers as we opened our new CGMP distribution center in Dublin, Ireland, and produced our first commercial batches in our new CGMP manufacturing hub in Singapore.
Speaker 12: In addition, we continue to improve supply for bio production customers and reduce lead times for a broad range of products across our portfolio. We also completed a number of contract renewals with our largest customers.
Speaker 13: including our recently announced multi-year agreement with Catalynt that significantly expands our relationship, making Avantor their primary supplier across a broad range of lab supplies and services.
Speaker 14: Continuous improvement is in our DNA, and in 2022 we completed more than 450 Kaizen events.
Speaker 15: focused on improving critical business processes.
Speaker 16: a 50% year-over-year increase.
Speaker 17: We also introduced enhancements to our organizational structure to strengthen commercial leadership, and we made significant progress in building out our strategy and corporate development team.
Speaker 18: We remain focused on execution and our 14,500 associates are aligned with our enterprise priority of driving growth.
Speaker 19: We made significant progress in 2022 with our Science for Goodness platform, improving our ESG metrics from four major rating agencies.
Speaker 20: We are on pace to exceed our 2025 greenhouse gas emissions reduction targets and are accelerating our climate-related commitments in alignment with the latest science, and look forward to sharing updates on our progress in this area in the coming months.
Speaker 21: Looking ahead, our long-term algorithm remains fully intact and highlights the strength and resilience of our business.
Speaker 22: Our guidance for 2023, which Tom will cover shortly, reflects our confidence in the fundamental growth drivers for life sciences.
Speaker 23: as well as the headwinds we face in the current operating environment.
Speaker 24: With that, let me turn it over to Tom to walk you through our financial results in more detail.
Speaker 25: Thank you, Michael, and good morning, everyone. I'm starting on slide 4.
Speaker 26: Starting from the top of the page, reported revenue was $1.795 billion for the quarter, at the midpoint of guidance provided on our Q3 results column.
Speaker 27: Our core organic growth for the quarter was 2.7%. Reflecting ongoing strength in our core business partially offset by immatory destocking and liquid handling and single use tubing that we flagged in our third quarter call. A weaker than expected, your end budget flush.
Speaker 28: and approximately 170 basis points of headwind as a result of fewer selling days in the fourth quarter of 2022.
Speaker 29: For the full year, reported revenue was approximately $7.5 billion and core organic growth was 6%. Driven by over 20% core organic growth and bio production and double digit growth in advanced technologies and applied materials. Offset by approximately 70 basis points of headwind.
Speaker 30: as a result of fewer selling days in 2022. Adjusted gross profit for the quarter was 34.3% and 34.8% for the full year, an expansion of almost 90 basis points compared to 2021.
Speaker 31: This expansion was driven by the favorable impact of our 2021 acquisitions.
Speaker 32: double-digit growth in sales of proprietary products.
and ongoing commercial excellence, partially offset by increased cost of materials and freight.
Adjusted EBITDA was approximately 360 million in the quarter and 1.571 billion for the year, representing approximately 60 basis points and 110 basis points of margin expansion respectively.
The expansion was driven by our gross margin performance and our ongoing focus on productivity, while we continue to invest in growth.
Adjusted earnings per share came in at 32 cents for the quarter and $1.41 for the year, driven by adjusted EBITDA performance, partially offset by higher interest expense and FX translation headwinds. Net income grew double digits for the year on a constant currency basis.
This double earnings growth on 6% core organic growth demonstrates the powerful earnings conversion attributes of our business model.
We generated a free cash flow of $172 million in Q4 and $710 million for the full year, below our expectations of $800 million.
In the fourth quarter, we made investments to support customer contract renewals and extensions, which lowered our free cash flow, but which will support our growth profile in the years to come.
We also proactively built inventory levels as a countermeasure against global supply chain constraints and experienced higher accounts receivable balances throughout 2022. We have identified several opportunities to improve our working capital performance in 2023.
Our adjusted net leverage ended the year at 3.7 times adjusted EBITDA down from 4.2 times at the start of the year, putting us within our stated target leverage of 2-4 times adjusted EBITDA. Overall, we delivered the balance sheet by 0.5 times in 2022.
and remain focused on incremental deleveraging over the course of 2023. Slide 5 outlines the components of our revenue growth in the quarter and the year.
Our Q4 core organic revenue growth of 2.7% was in line with our guidance of 2 to 4%. Customer destocking in select product categories like liquid handling consumables and single use tubing played out as expected and Europe performed better than we anticipated.
COVID-related revenues represented a 4.8% headwind for the corridor versus our expectation of 4% as vaccine-related sales slowed further in the fourth quarter resulting in a 2.1% organic revenue decline.
We had a modest M&A in organic contribution of 0.7% in the fourth quarter associated with October sales from MasterFlex, which lapsed its one-year anniversary on November 1st.
4 exchange translation represented a 4.5% headwind driven primarily by the strength of the US dollar versus the euro resulting in a fourth quarter reported revenue decline of 5.9%.
For the full year, the 6% core organic growth ended at the high end of our long-term growth algorithm.
a testament of the health and resilience of our core business.
COVID headwinds finished the year at 3.6%. We achieved 190 million of COVID-related sales in 2022. M&A contributed 3.6% and FX represented a 4.3% headwind, resulting in 1.7% reported growth for 2022.
on to slide six.
For a regional perspective, America's which represents approximately 60% of annual global sales was flat on a core organic basis in the fourth quarter, with strong growth in serum, processing ingredients, and acceptance for bioprocessing and custom formulations for the semiconductor space.
offset by destocking headwinds in liquid handling consumables and single-use tubing.
On a full-year basis, America's grew 6.1% on a core organic basis.
driven by double-digit growth in bioprocessing and advanced technologies and applied materials, and strong contributions from biomaterials.
Europe , which represents approximately 35% of annual global sales, achieved 6.3% core organic revenue growth in the fourth quarter and 5.5% for the year, above our expectations for the region driven by strength in bioproduction and biomaterials.
Bioproduction grew double digits in the fourth quarter on a core organic basis, driven by robust demand for our process ingredients, excipients, and single-use solutions.
Although industrial demand in Europe continues to be moderate, as expected, our performance in this region reflects the value of our end-market exposure and diversified application and customer mix and highlights the overall resilience of our business.
EMEA, which represents approximately 5% of annual global sales, grew 5.7% on a core organic basis in the fourth quarter and 7% for the full year, driven by sales of proprietary materials to advanced technologies and applied materials customers and bioproduction strength in process ingredients and excipients.
Slide 7 shows our core organic revenue growth for the quarter by end market and product group.
Biofarmer representing almost 55% of our annual revenue grew low single digits in the quarter, including high single digit growth in bio production. Liquid handling and single use inventory headwinds impacted fourth quarter growth, primarily in the America's region.
For the full year, biopharma grew high single digits, led by over 20% growth in bioproduction.
Healthcare, which represents approximately 10% of our annual revenue, declined mid-single digits on a core organic basis in the four-quarter, and grew low single digits for the full year, driven by strength in biomaterials offset by inventory destocking and liquid handling consumables.
which was particularly pronounced in the fourth quarter.
Education and government representing approximately 10% of our annual revenue experienced a low single-digit core organic revenue decline in the fourth quarter and full year.
Advanced technologies and applied materials representing approximately 25% of our annual revenue achieved high single digit core organic revenue growth in the fourth quarter and double digit growth for the full year. Driven by growth in proprietary materials for semiconductor and electronic device applications.
partially offset by a moderation in industrial demand in Europe . By product group, proprietary materials and consumables offerings grew high single digits in the quarter and double digits for the full year, driven by strong demand across our bioproduction, biomaterials and advanced technologies and applied materials platforms.
Sales of third-party materials and consumables declined mid-single digits in the quarter and grew low single digits for the full year, impacted by a moderation in lab consumables demand relating to destocking.
Services and specialty procurement declined low single digits in Q4 and grew mid-single digits for the year, driven by strength in lab and production services. Equipment and instrumentation sales grew low single digits in Q4 and the full year, with growth across all three regions.
Moving to slide 8, I'd like to provide an update on the contributions from my recent acquisitions.
As a reminder, this slide reflects the 12 months revenue and margin from Masterflex, Ritter and Rimbio in 2022.
Fully-ear results included 393 million of revenue and 136 million of adjusted EBITDA, resulting in a 35% adjusted EBITDA margin.
Masterflex revenues were modestly below our estimates due to ongoing top line pressures relating to customer destocking in our tubing category and ongoing component shortages for peristaltic pumps.
Despite the transitory headwinds, we are highly encouraged by the Masterflex leading market position, pipeline of exciting new product launches, and robust demand from our bioproduction customers for our end-to-end fluid management solution.
Ritter revenue came in slightly above our revised expectations for the year, driven by a stabilization of the research and diagnostics platform as the COVID roll-off concluded in the second quarter. Europe industrial demand was slowed, albeit at a more moderate pace than anticipated.
The team is working to convert our pipeline of commercial opportunities and introduce new products in our technology roadmap including four significant product launches planned for the first half of this year.
RIMbio generated $10 million of revenue for the year. A supplier constraint pushed another $10 million of revenue from the fourth quarter to the first quarter of 2023.
We are excited with the traction and momentum we have built with this business, including the successful transfer of 2D and 3D bag technology from Rim Bio to our global customers.
Looking at 2023, we expect Masterflex tubing headwinds to subside by mid-year, with a return to double-digit core organic growth in the back half of 2023.
Ritter performance has stabilized and we expect sequential improvement in Ritter revenue throughout 2023 as the effects of our commercial synergy program and NPI investments take hold.
On the right hand of this page, we've provided an update on balance sheet leverage. We exited 2022 at 3.7 times leverage within our target range of 2 to 4 times leverage. We were able to mitigate the impact of rising rates on our 2022 interest expense through proactive interest rate management and debt paydown.
Given the interest rate environment, we will continue to focus on deleveraging as we move into 2023, while also actively building our pipeline of M&A opportunities.
During slide nine, I'd like to walk you through our 2023 guidance.
Beginning with revenue, we start with our long-term algorithm of 4 to 6 percent core organic growth, which is based on our differentiated position serving attractive end markets.
We continue to see strong demand in life sciences and expect another year of double digit, core organic revenue growth in bio production.
We are initiating 2023 core organic revenue growth guidance at 2.5% to 4.5%. We expect continued strength in bio production and a healthy overall pricing environment. Moderated by the near-term inventory destocking and lab and single-use consumables.
which we've discussed, as well as reduce demand from industrial applications globally, notably in our semiconductor and market.
Moving forward, we will not be categorizing revenue as COVID-related as it is expected to be immaterial. Consequently, the COVID headwind for 2023 is predetermined at about 2.5%.
This results in organic revenue growth of 0 to 2%. We expect FX to be neutral for the full year at our current planning rates, leading to a reported growth of 0 to 2%.
On adjusted EBITDA, we expect margin to range from 25 basis points of contraction to 25 basis points of expansion. With commercial excellence, growth in our proprietary offerings and productivity, tempered by the macro-emintory headwinds, the diluted impact of the COVID revenue rolloff and ongoing inflationary pressures.
We have a track record of delivering strong margin expansion and we are working diligently to find opportunities to offset margin headwinds, including leveraging our Avantor business system to execute on a robust funnel of productivity issues.
For earnings, we are initiating our 2023 guidance at $1.35 to $1.45 adjusted earnings per share, which reflects the range of our revenue and margin expectations, as well as interest expense a $270 million to $295 million and a 21.5% tax rate.
Our interest expanse estimate reflects the impact of current 4-deal curves on the roughly 30% of our un-hege variable rate debt.
The rate increases are expected to have an unfavorable year-over-year impact on interest expense of about $65 million, but will be largely offset by the impact of deleveraging. We expect to generate approximately $700 million to $800 million of free cash flow, which includes a modest improvement in working capital.
as our supply chain continues to normalize. Regarding pacing, the more pronounced 2023 first half COVID headwinds and inventory de-stocking result in more tempered expectations for the first half of 2023 compared with the second half. We expect first quarter core organic revenue declines of 1.5%.
to 3.5 percent and COVID headwinds of 4.5 percent leading to organic revenue declines of 6 percent to 8 percent.
This reflects more difficult comparables in the first quarter, as well as our assumptions around industrial demand globally, including semiconductors.
We also expect a roughly 2.5 percent headwind from FX leading to reported revenue of $1750 to $1785.
With that, I will now hand the call to Michael.
Thanks, Tom. As we conclude, I want to emphasize our conviction in our long-term financial algorithm.
We view the current headwinds and supply chain normalization as short-term dynamics that will subside in the second half of the year as supported by internal analysis, ongoing customer interactions and industry trends.
We are confident in our plan for 2023 and are well positioned to execute on our growth strategy.
I am encouraged by the strong fundamentals in our end markets.
the deep relationships we have with customers, and the positive returns we are generating from our investments in innovation and capacity expansions.
Our strong free cash flow enables rapid deleveraging and capital allocation flexibility as we continue to actively build our M&A pipeline.
Thank you for your interest in Avantor 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. If you would like to ask a question today, please press start followed by the number one on your telephone keypad now.
If you change your mind and would like to be removed from the queue, please press star and then 2.
To allow everyone an opportunity to ask a question, we will be limiting each question to one per person.
Our first question today comes from Patrick Donnelly with City. Please go ahead Patrick your line is open.
Hey guys, good morning. Thanks for taking the questions. Michael, maybe just on a couple of those, you know, variables as we enter 23 here, it seems like European industrial demand, you guys were pretty cautious last quarter going out some risks in the macro. Seems like you're feeling a little bit better about that. And then the second one, obviously some of that excess inventory.
get back to the kind of growth and a little bit more normal. Thank you.
Thanks for the question Patrick and good morning everyone. Yeah, I think that's a great place to start. We point out the dynamics that we saw in the fourth quarter on Europe certainly played out a bit better than we expected and were certainly pleased with more than 6% core organic revenue growth there in the quarter was really.
continues a strong year that we had there in the region. Entering the quarter, I think we were trying to reflect just some of the uncertainty associated with the energy situation in Europe , certainly the conflict in Ukraine as well as in the hairstyle that we see on the Equipment School.
you know, just overall recessionary concerns and it certainly played out a bit better than we had been anticipated. As we look ahead into the end of the year I think, you know, we're encouraged by the trends that we that we see there although we remain, you know, a little bit cautious.
From a de-stocking perspective, I think the quarter played out as we had anticipated, both in liquid handling consumables as well as in the single-use consumables within our bioprocessing offering and transitioning into 2023. I think the picture for us remains.
largely unchanged as we engage with our customers as we try and gillate a number of reports and analytics that we have. I think our view here is that it's probably something that will be with us throughout the first half of the year, which will lead to a dynamic here that Tom referenced with the second half of the year being stronger than the first half. So we'll...
Rachel Vanster with JP Morgan. Please go ahead Rachel.
Great, thanks guys. So my question is just around margins. You guys exited 4Q at roughly 19 and a half, even down margin. You're guiding to down 25 to up 25 basis points for the year. So can you just talk about some of the puts and takes very similar to Patrick's question.
Given some of these headlines in the start of the year, how should we think about that EBITDA margin, expansion or contraction on a quarterly basis? And then, is that mainly driven by price or volume or kind of how should we see that rolling through the PNL? Thank you.
Thanks for the question, Rachel. I think I'd start by just reiterating our confidence and our ability to continue to expand margins, and I would point to the fourth quarter as a good proof point of that. The environment that we saw in the fourth quarter is probably pretty similar to what we're anticipating as we move into the new year here.
and we're coming off a quarter here where we did expand 60 basis points. So certainly a strong record, a track record of being able to do that. When you look at our margin expansion algorithm, there's probably two or three variables that we really focus on, certainly starting with managing price versus COGS.
a big part of that process plays out in the fourth quarter and early days of the first quarter. We're pretty well through that and I think we're pretty confident that, you know, although pricing is going to be above our...
long-term algorithm and similar to what we delivered last year, we do think it's going to be sufficient to contribute at a level that we would historically see. You then get into things like mix and we've talked openly about
The roll off of the covert had wins that are pretty margin rich, we're working against this as we, as we move through the year, that's gonna be more pronounced in the 1st and 2nd quarter. Then it would be in the. In the 2nd, half of the year, and the last variable I mentioned is. You know, just around.
the productivity aspects of our program here. We've got a pretty full pipeline of opportunities that we're driving to help mitigate the impacts of inflation. So I would say largely the algorithm is intact.
We tried to reflect some of the headwinds associated with the mix as well as just the volume impact as the stocking and COVID come down and the impacts that that has on absorption. But I think we're cautiously optimistic here out of the gates as we look ahead to margins and look to build on our strong...
any kind of commentary there what you guys are seeing in the fourth quarter and any signs that this is trough and starting to get better from a de-stocking perspective and the various headwinds there and then secondly can you talk about I mean you guys have talked about the investments you made in the customers and you just came out with the master service agreement with or the others
As Tom mentioned in his remarks, we continue to be incredibly optimistic about that business, not only from a growth standpoint, but also a margin standpoint. It's one of the leading franchises in the single-use space and gives us one of the only end-to-end aseptic fluid management solutions in the industry.
It might have been a little bit stronger in Q4 than maybe what we had anticipated, but not far off of that. We'll expect to see that to be with us through the first half of the year, as I mentioned. I imagine as we work through the first quarter and such transition to the second quarter, we would anticipate things to start incrementally improve.
So, I think we certainly draw a confidence from the strong demand in positioning of that technology and the supply chain continues to improve. We still have certain components that we're struggling to get on time, but we're starting to see incremental improvements there.
As Tom mentioned, I think we get to the second half of the year, we're expecting double-digit core organic growth for that business.
Really appreciate your second question as well. We continue to have really great traction and momentum with our customers. This is an important part of our business model, the unparalleled customer access that we do enjoy. And when I look at 2022, the team did just a remarkable job in
where we became their primary supplier of a broad range of laboratory supplies and clinical and production materials and services that will significantly expand our current relationship with them. We also extended the duration of our lab supplies and lab services relationship with Johnson, pharmaceutical companies of Johnson & Johnson.
And that came with a pretty significant upfront investment, but we're really excited by the positioning we have with that business and the duration that we were able to achieve with that extension. So just another good example of the traction we have and momentum we have in...
give us significant returns as we enjoy the revenues of those relationships as we move forward. Thanks for the question.
The next question today comes from Vijay Kumar of Evercore ISI. Vijay, please go ahead.
Hey guys, thanks for taking my question and I had a cool part. Michael, maybe I'll start with you. The guidance here when I look at the midpoint core organic 3.5 for the year, that's 150 basis points below your LRP.
And when I look at Q1, I think that number is 750 basis points. So one, is all of this inventory destocking in a macro industrial slowdown, is that happening in Q1? Is that the bridge between your 5 to 3.5 for the annual, and I thought for some reason Q4.
Those headwinds were around 300 basis points, so why is it accelerating here in Q1? In one for Tom on Margin's here, Tom. At the time, you said pricing was positive. Can you clarify what the pricing assumption is for?
fiscal 23 and why shouldn't pricing aid your margin share in 23?
Yeah, good morning, VJ. Thanks for the questions. I'll take the first one. The midpoint of 2023 core, organic guide of three and a half, you know, percent contemplates roughly 250 basis points of macro impact. And that would include. Just keep.
Certainly the impacts of the stocking would include our view on kind of just the general macro environment and impacts on
our applied markets, perhaps most notably the semiconductor market as we mentioned in the prepared remarks. And so that gets you on that basis to the high end of our legal long-term guide of roughly 6%, so very much in line with what we've been doing over the last...
you know, several years. As you think about then the phasing within 2023, you know, I think that the headwinds that we've talked about are certainly most pronounced in Q1. You know, we'll have a...
you know, the de-stocking effects in Q1 are certainly most pronounced there, as well as, you know, just our view of...
the macro impacts on some of our applied markets. I'd also note in Q1, kind of relative to where we're at in Q4, Q1 is one of our most difficult comps of the year. I think we're running into a comp that's probably 300 basis points plus in Q1 compared to where we were at in Q4.
It's certainly going to be a situation here where the second half will be stronger than the first half as we work through some of these de-stocking events.
Thanks for your question on the margins and in particular on pricing. Just to reiterate what's behind our guidance, I think it's helpful to...
remind ourselves, you know, since the IPO, we've been tracking to the high end of our margin expansion, long range plan of 50 to 100 basis points, and nearly at 100 basis points or so when you look at each of those years. So the drivers are not much different than they've been in the past.
We like to think of it, as Michael said earlier, as three components. The first being the pricing and overall what we call commercial excellence. In other words, balancing pricing against inflationary pressures on COGS inputs and other inputs. I think that this has really proven to be a core capability of a bond.
starts in early November and really culminates right around now. And working with suppliers and customers, so we're well along, we have a high degree of confidence in our ability to drive price to offset inflationary pressures and be accretive to margins.
as Michael had said. So that's definitely a positive factor for us. When you're considering the range that we've given, I certainly think the COVID headwinds need to be taken into account.
When you see roughly 200 million of revenue coming out of the plan from 22 actuals to 23, that's pretty margin-rich content. And since it's mostly in the biopharma production, vaccines and other kinds of content that...
go into when the bioproduction vaccines work.
reflecting that in the guide as well. And then I think overall the third aspect in addition to.
mix is just productivity from our experience. We have plans in place, as we always do, that address material productivity. Number one, assuming the functionality of the hands on machine learning?
that address performance of our factories, performance of our distribution centers. And we'll continue to be pretty vigilant on costs and know that will contribute to some potential movement to the higher end of the guide.
I wouldn't look at our guide as reflecting anything materially different than what we talked about in Q3 and Q4 in our various meetings. I think we're setting up in a way that I think as we look ahead we feel that it's pretty prudent.
start for the year in terms of expansion margin. The next question comes from Michael Riskin with Bank of America. Please go ahead Michael.
Great, thanks for taking the question guys. I got a couple parts but it's just one question and I kind of want to touch on debt levels, interest expense and M&A. So could you just walk us through again the interest expense coming in higher year over year if the deal averaging remains a top priority? We thought it would kind of come down.
using available free cash to reduce debt. Today I think you had a comment about actively building pipeline of M&A opportunities. So definitely noticing a tone change there. Could you talk us through what's going on and is that something you're considering towards the end of the year? Is there a certain leverage target you want to hit before you're back to being on a hunt for more M&A? Just clarify the difference there.
Yeah, thanks, Mike. And I'll answer the first question, and I'll let Michael answer the second. In terms of our leverage and debt levels, things are playing out as we've kind of articulated in our planning. We started out the year at $50,000, $50,000, and then we started out the year at $50,000,
You know, 2022 didn't exactly hit the mark on free cash for us. We were pretty pleased with how the interest itself was managed. We had articulated at the beginning of the year roughly $260 million of interest expense. We came in roughly $266,000, and that's with over 400 basis points of increases in the various reference rates that impact our weighted average borrowing costs.
So when you look at how we manage that, we did a few things to basically convert variable rate debt to fixed. We also, right before all the interest rate increases had taken place, we had a good fortune of basically refinancing our entire portfolio. Over the course of.
In 2021, we had significantly lowered our overall weighted average cost of borrowing. And the combination of those two things, that is the re-pricing as well as some of the things we did in 2022 on the swapping variable to fix the...
variable in the Euro swap that we did. We ended up improving the mix of our variable versus fixed rate. We're about 30% of our debt is variable rate. Most of that is exposed to the Euro.
And as we look to, you know, 2023 interest expense, you've got, you know, two components there. Certainly, that 30 percent of the debt that's variable, we do have, you know, some impacts, as I've talked about and quantified in the past, certainly close to 50 or 60 million of interest expense.
pressure on interest expense from that, but the delivering impact largely offsets most of that.
And so if we deliver the midpoint of our guidance range, 7th.
700 to 800 in free cash flow, I think we'll be in pretty good shape. So we've called that at our interest expense roughly 270 to 290 in the guide. So it's relative to 266 in.
22 and considering the industry environment, pre-please with how that looks to come in. And the more cash we can generate, the better we'll do on interest expense.
Michael, I'll pick up the second part of your question there around M&A. Maybe make just a couple of comments. Firstly, we'll just reiterate that M&A has been and will continue to be an important part of our playbook. And we've been actively investing in enhancing our capabilities. You'll recall we announced a new head of...
for M&A in 2022 and where we're at here in the first half of the year. Certainly we're cognizant of our own leverage as well as the status of the debt markets and consequently have been and will continue to prioritize deleveraging in this environment. I think there's still some disconnects between buyer and seller.
by de-laveraging.
But I think it's prudent to continue to be active in building a pipeline, which we have been doing throughout 2022, and we'll certainly remain focused on that as we move here into 2023. Just to ensure that we're positioned as opportunities open up.
market start to normalize, perhaps later this year as we move into 2024. So I don't think our position has really changed here in terms of our view of the priority of M&A or just the...
the status of the current market conditions. But we'll continue to invest in this area and make sure that we are prepared if and when things open up again.
Our next question comes from Dan Brennan with Cohen. Please go ahead, Dan.
Great, thank you. Thanks for the questions, guys. Maybe just want to buy a production.
So 4Q, I think you said it grew high single digits. Just give us a little color, kind of maybe unpack that number a bit. It was a bit slower than the trend, but obviously there's a lot going on within that. So I'd love to get color and kind of how you actually did the year in bioproduction. And I know you talked about the 23 strong growth.
maybe a little color on, you know what you're assuming for 23 in terms of a growth rate and included in that, how does some of the new capacity that you're bringing online impact your growth outlook across that business? Thanks. Yeah, thanks for the questions, Dan. I think at a high level, probably important to reflect on just the strength of the overall, you know, wild production.
around, you know, a biosimilar approval, you know, in the, in the, in the humorous space. So there continues to be, I would say, a very favorable backdrop in the core, you know, monoclonal antibody space. There's six CAR-T therapies that are in the available in the US and Europe , and there's a...
and in track record of outgrowing the broader market by 200 to 300 basis points. We concluded 2022 with more than 20% by production core organic revenue growth, so another really, really terrific year. Q4 was certainly the lightest quarter of the year for us in that space.
process from upstream, downstream to fill and finish. We had pretty good performance across the space with the exception of these liquid handling consumables. We saw it both in Masterflex as well as in our legacy business.
I think the quarter played out largely as we had anticipated. I think Tom referenced we did have a pretty meaningful order in our RIMbio business of nearly $10 million that slipped from our plan in December into the early part of this year due to a supplier constraint.
Absent that, I think it was another double-digit quarter and a really strong finish to the year. As we think about 2023, again, we'll deal with these stocking events through the first half of the year. And overall, we expect another year of double-digit core organic revenue growth in bioproducts.
Either to ask your line is open please proceed with your question.
Hey guys, sorry about that, I was in mute. Just a few follow-up there, Michael, starting with bioproduction. Can you give us just what your open-order growth was in terms of your order book at your N22 versus your N21? And second, in terms of the guide itself.
Would you be willing to break out what you're assuming for Masterflex, Ritter, and RIM versus the 393 mill that you did in 22? And then finally, Tom, on your comments on free cash flow, could you elaborate a little bit on some of those working capital improvements that you referenced that you expect to provide an offset to the gross investments here in 23? Thank you.
Thanks Tejas for the questions. Appreciate you joining us today. On bioproduction, I think the setup for that space as I just mentioned is quite strong heading into the year. We have a really terrific order book that reflects.
I think the strong underlying market fundamentals, as well as I think the investments that we've made in capacity to improve service levels and bring down lead times. We were fortunate even in the fourth quarter to reduce the lead times on several hundred.
you know, GMP materials, which, you know, we'll support our customers growth as we, you know, move into the year. So, you know, great backdrop from an order book standpoint to start the year. Relative to our acquisitions in terms of how we think about those shaping up in, you know, 2023.
We expect mass reflex, you know, tubing headwinds side by mid year, and you know, would return to double-digit core organic growth in the back half of 23. Ritter business has certainly stabilized. You know, I think if you look at the outperformance relative to plan in the second half of the year.
of all the work that we're doing around and customer conversion through our channel, as well as, and importantly, the impacts of all of the NPI's that will be launched as part of our technology roadmap. We had some pretty meaningful launches in the fourth quarter.
And another four or so launches planned for the first half of the year that will put us in a position to continue to improve the trajectory of that business. And I would say in aggregate we do expect a full year basis growth for our business.
for these acquisitions. Yeah, Tadas, just answer the question on working cap. I mean, I think the...
The important backdrop here is that the business continues to generate a strong amount of cash and has since the IPO. We're a low cat-backs model in our conversion relative to our net income. That is generally pretty strong in relative to our peers.
2022 was a unique year in many ways, and I think our supply chain was probably the most impacted by the events that we've seen unfold over the course of the last couple of years. We've made a fair amount of investment in our inventories to return.
cushion and manage the availability of inventory and also to protect our customers, their supply chains. So, it's no secret when you look at our statement of cash flows that inventory has been an area of build for us in both 2021 and 2022.
Michael referenced lead times when he was talking about open orders. That certainly has an impact on inventory levels as well. And we are starting to see significant improvements as a result of the actions that our supply chain teams have taken on reducing lead times both from our supply levels and from our supply levels.
suppliers as well as within our own four walls of our distribution manufacturing. So we're encouraged by that. We think we can take a few days out of inventory over the course of.
The other aspect is that 22 was unique for the pricing environment that we were in as well. There were probably an unprecedented level of number of pricing changes. That makes it challenging to stay synchronized with your customers.
individual invoices and at times there can be confusion. We've worked through most of that. I think on the receivable side we're pretty confident that we'll be able to...
You're taking a couple days out of that as well over the course of the year. So please are looking up and I think the working capital investors we've made have paid off
But I think we do see some opportunity there and that's reflected in our pre-caspal grant. Thank you.
The next question comes from Dan Leonard of Credit Suisse. Please go ahead Dan.
Thank you. Tom, you mentioned that customer contract renewals pressured free cash flow in the quarter. Could you circle back to that? What types of investments are associated with a contract renewal? And was there anything abnormal in the fourth quarter or was this just normal course of business? Can one dollar be Kenn undermining the sales, trade salary, or eventually take the antiquities
Yeah, the business model with most of our customers is to drive volumes and to drive growth and you typically enter into the long-term agreements with the customers. Could be anywhere from three to seven years.
and they're often extended. So it's a natural part of the business that either you have a contract coming up that you extend or in the case of some of the ones that Michael's mentioned, we actually can expand the services in those.
but embedded in the business model are incentives to drive volume growth for the customers. And that's pretty formulaic in terms of the milestones that they achieve on growth, cumulative growth.
relative in particular product categories and whatnot. And so when you enter into new agreements or extend agreements, there typically is an upfront type of prebate as well that gets factored into the equation.
And we deal with those all the time. It's just that the size and magnitude of the customers we've talked about.
in the fourth quarter took more out of our free cash flow than is normal. But we're quite excited by the investments. We think they're going to drive, continue to drive. You know, really strong growth for us as we go forward and those customers. So that's the model.
The next question comes from Brandon with Jefferies. Please go ahead, Brandon.
Thanks. Good morning.
Mike, can you touch on the service and specialty segment, down low to single digits in the fourth quarter? Can you unpack that a bit? And Tom, are there any selling day variances to be aware of that you'd like to call out?
for this year. Thank you. Thanks for the question, Brandon. Overall, the service is in, you know, especially for human part of our, you know, offering is an important aspect of, you know, kind of the customer intimacy model that we do have and gives us a pretty privileged position with our...
with our customers. I would say a couple of factors that drove kind of the underperformance in that part of the offering in the fourth quarter. Certainly the especially procurement nature that reflects, I would say, just the overall macro environment and the level of activity in our customers labs.
as well as probably a more muted year-end budget flush. Part of the offering there is to support procurement of materials that aren't necessarily a core part of our portfolio. And we saw somewhat muted finish to the year.
particularly in the Americas. So I don't think anything particularly caught our attention there other than just a reflection of the environment. Activity levels here in the early days of the first quarter have been strong and we're certainly encouraged by
the trajectory that we've got here out of the out of the gates, but really just related to you know, I would say the overall uh, you know, macro environment and, uh, you know, these docking and, uh,
that we've got here out of the gates, but really just related to, you know, I would say the overall macro environment and, you know, be stocking and a more muted hearing budget flush.
Thanks Brandon. On the selling days, I assume you mean going forward and for 2023, overall for the full year, the number of selling days is the same as 2022 roughly. You'll have a little bit of favorability in the first quarter.
And we end up giving that back in the third quarter. I think the second or fourth quarter is the selling case. Roughly equal. You're over here.
And we end up giving that back in the third quarter. I think the second and fourth quarters for selling case are roughly equal year over year. Thank you.
Our next question comes from Josh Waldman of Cleveland Research. Please go ahead Josh.
A good morning. Thanks for taking my questions. A two-parter for you first. Would be helpful to hear your thoughts on just how prudent you view the flat up to organic guides to be. When you consider moving pieces like inventory, destocking price, and I guess underlying demand, do you think the 2% assumes a base case scenario for these variables?
Do you think the first quarter guide, for example, captures the base case?
Yeah, thanks for the question, Josh. What I would say about our guidance is it certainly does reflect the number of variables that we see and certainly is underpinned by our...
our view of really strong end market fundamentals, particularly in the life sciences space. The 250 basis points of macro headwinds that we've categorized certainly reflect our view today of destocking as well as
I would say a step down in our applied growth rates from 22 into 23. We ran well ahead of our long-term algorithm in 22. In that part of the market, most quarters were high single digit, low double digits in an end market that more classically for us grows.
you know, mid single digits. So within that 250 also, you know, reflects a normalization of of growth in that part of the business in a, you know, pretty meaningful step down in the semiconductor and market. For example, you know, on the other side, you know, we do see, you know, continued strong, you know, contribution from price.
for a portfolio like in biomaterials. We recognize there's a sequential ramp in growth rates throughout the year to achieve the guidance that we've put out there but we have certainly confidence in the shape of the plan given the demand signals.
that we see today, as well as a moderation and comparables in the back half of the year. So, you know, when we put all that together, I think we're confident in the plan. I think it's a prudent place to start.
Those are all the questions we have time for today so I'll now turn the call back to Michael for the conclusion remarks.
Yeah, thank you and thank you all for participating in our call today. Certainly appreciate your support and look forward to updating you when we meet next. Until then, take care and be well everyone. Thank you. Thank you for everyone for joining us today. This concludes our call and you may now disconnect your lines.