Q1 2023 Avantor Inc Earnings Call

Speaker 1: Good morning, my name is Emily and I will be your conference operator today. At this time I would like to welcome everyone to Avantor's first quarter 2023 Earnings Results Conference call. After the prepared remarks there will be the opportunity for any questions, which you could ask by pressing start followed by the number 1 on your screen.

Speaker 2: and Tom Slosik, 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.avantursciences.com. A replay of this webcast will also be made available on our website after the call.

Speaker 2: Following our prepared remarks, we will open the line for questions.

Speaker 2: During this call we will be making some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings.

Speaker 2: Actual results might differ materially from any forward-looking statement that we make today.

Speaker 2: These forward-looking statements speak only as of the date that they are made. We do not assume any obligation to update these forward-looking statements as a result of new information, future events, or other development. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures.

Speaker 2: can be found in the Supplemental Disclosures package on our IR website. With that, I will now turn the call over to Michael.

Speaker 3: Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on slide 3. Our first quarter operating results were in line with our expectations, with reported revenue of $1.78 billion and adjusted EPS of $0.29.

Speaker 3: Market dynamics played out as anticipated, including ongoing de-stocking of customer inventories and a downturn in semiconductor demand, resulting in a core organic revenue decline of 1.8%.

Speaker 3: We continue to leverage the Avantour business system to drive execution of our plan and enhance operational rigour and efficiency.

Speaker 3: Reflective of strong contributions from commercial excellence and productivity, adjusted EVDA margin was 19.4% at the high end of our expectations. Also, free cash flow increased approximately 50% compared to Q1 last year, and free cash flow conversion was approximately 100% in the quarter.

Speaker 3: reflecting our focus on improving working capital performance.

Speaker 3: We also continue to make progress on our long-term strategy and are seeing the positive impact of our investments in capacity expansion, new product introductions and digital infrastructure to support our growth.

Speaker 3: Some notable highlights for the quarter include expanding our hydration capabilities in Gliwice, Holland, and Aurora, Ohio to provide ready-to-use buffer solutions for our bioproduction customers.

Speaker 3: Successfully launching multiple new JT Baker product lines, produced at our Ritter facility in Germany.

Speaker 3: Rolling out our enhanced inventory manager, Digital Solution, which supports our customers' needs for real-time information about their critical lab products in a user-friendly interface.

Speaker 3: and winning the Asia Pacific Bial Processing Excellence Award, a testament to the power of our customer-centric model.

Speaker 3: We also continue to push forward on our Science for Goodness Sustainability platform, and look forward to publishing our annual sustainability report later this quarter. Looking ahead, there are indications from customers that inventory health is improving. However, current run rates suggest

Speaker 3: that there is a heightened risk that de-stocking will extend into the second half of the year.

Speaker 3: Therefore, we think it is appropriate to reflect the risk of a more gradual return to normalized growth and are updating our full year outlook accordingly.

Speaker 3: Tom will walk you through the details of our updated guidance in a moment.

Speaker 3: We do view the factors impacting the current operating environment as transitory and remain focused on executing our plan and taking actions to drive growth and profitability.

Speaker 3: Our long-term algorithm remains unchanged and we are confident in the resilience of our end markets and our proven business model.

Speaker 3: With that, let me turn it over to Tom to walk you through our financial results and updated guidance in more detail.

Speaker 4: Thank you, Michael, and good morning, everyone. Starting from the top of slide four, reported revenue was 1.78 billion for the quarter at the higher end of our Q1 revenue range.

Speaker 4: Revenue declined 1.8% on a core organic basis, reflecting inventory destocking, elab the consumables, and single-use solutions for bioprocessing, as well as software demand for formulated solutions from our semiconductor customers as expected.

Speaker 4: Corriganic revenue in our bio-production platform grew low single digits with sales of process ingredients and exhibits up high single digits. We also continue to see strong momentum in our medical grade silicone platform with first quarter revenue up more than 20%.

Speaker 4: Adjusted gross profit for the quarter was 35.1%. Favorable contribution from commercial excellence was offset by headwinds associated with inventory de-stocking and the roll-off of margin-rich COVID-19 revenues.

Speaker 4: Adjusted EBITDA was in line with our expectations at approximately 346 million, driven by our gross marcher results, offset by a sequential increase in S-GNA related to wage inflation and investments in our workforce to support our growth strategy.

Speaker 4: Adjusted earnings per share came in at $0.29 for the quarter, reflecting revenue and EBITDA results, as well as an increase in interest expense to about $74 million in the quarter, as compared to $65 million in Q1 2022.

Speaker 4: COVID-19 revenue declines, forward change, and interest expense in aggregate represented a six-cent headwind to adjusted the EPS.

Speaker 4: We generated free cash flow of $191.5 million, representing approximately 50% growth from Q1 last year, and approximately 100% conversion of adjusted net income.

Speaker 4: Our working capital performance improved from Q1 of 2022, and we're actively working a pipeline of initiatives to improve receivables and inventory balances.

Speaker 4: Our adjusted net leverage ended the quarter at 3.8 times adjusted EBITDA within our stated target leverage of 2-4 times adjusted EBITDA.

Speaker 4: We paid down over $200 million of debt this quarter and continued to prioritize free cash flow for further de-leveraging while remaining active in driving the commercial synergies of our 2021 acquisition and building our eliminator pipeline.

Speaker 4: Slide 5 outlines the components of our first quarter revenue growth.

Speaker 4: As previously indicated, core organic revenue declined 1.8% in the quarter.

Speaker 4: Customer destocking in liquid handling consumables and single-use solutions played out as expected, representing an approximate 500 basis point headwind in the corridor.

Speaker 4: COVID-related revenues represented a 4.8% headwind for the quarter, reflecting the roll-off of approximately $90 million of COVID-related sales from Q1-22, resulting in a 6.6% organic revenue decline.

Speaker 4: Foreign exchange translation represented 2.1% headwind driven primarily by the strength of the U.S. dollar versus the euro, resulting in a first quarter reported revenue decline of 8.7%.

Speaker 4: On to slide six.

Speaker 4: From a regional perspective, the America's decline 3.7% on a core organic basis, reflecting strong contributions from commercial excellence, process ingredients, biomaterials, and services offset by the impact of customer destocking and soft demand in semiconductors and biotech. Europe achieved 1% core organic revenue growth in the quarter.

Speaker 4: Bioproduction was up double digits on a core organic basis in the region and our applied technologies and advanced materials and market continues to perform well.

Speaker 4: Like the America's inventory destocking in Europe played out in line with our expectations.

Speaker 4: Emea also grew 1% on a core organic basis in the first quarter. With strong growth in our bio-production, processing, ingredients, and exhibits, partially offset by a high single-digit decline in sales of proprietary materials to advance technologies and applied materials customers, primarily in semiconductors.

Speaker 4: Slide 7 shows our core organic revenue growth for the quarter by NMarket and Product Group. Biopharma representing almost 55% of our annual revenue declined low single digits in the quarter, impacted by destocking of lab consumables and simply used solutions as anticipated.

Speaker 4: Biofarmer production was up low single digits on a core organic basis, including high single digit growth in process chemicals and ingredients, reflecting the strength of underlying end market demand.

Speaker 4: HealthCare, which represents approximately 10% of our annual revenue, declined mid-single digits on a core organic basis in the first quarter.

Speaker 4: Biometrials' performance was strong with double digit growth across all three regions, while diagnostic sales were negatively impacted by destocking of lab consumables. Education and government representing approximately 10% of our annual revenue grew mid-single digits on a core organic basis in the first quarter with growth.

Speaker 4: applied materials representing approximately 25% of our annual revenue. The client low single digits on a core organic basis in the first quarter with solid performance in Europe offset by decline from the Americas in Amea.

Speaker 4: Largely it's a softer demand from semiconductor customers and a broader macroeconomic pressure on industrial customers.

Speaker 4: By product group, proprietary materials and consumables offerings were flat in the quarter with strong biomaterials and bio-production process ingredient sales offset by destocking in single-use solutions and reduced demand for formulated solutions for semiconductor customers.

Speaker 4: Sales of third-party materials and consumables declined mid-single digits, impacted by a moderation in lab consumables demand related to destocking. Services and specialty procurement grew mid-single digits while equipment and instrumentation declined low single digits. Third-party materials and consumables declined mid-single digits.

Speaker 4: pronounced semiconductor headwinds and a modestly weaker macro environment.

Speaker 4: We continue to expect effects to be neutral for the full year, leading to reported revenue declines of 3% to 1%.

Speaker 4: Based on our updated top line view, as well as our commercial and productivity initiatives, we expected adjusted EBITDA margins to contract between 75 and 25 basis points.

Speaker 4: We continue to expect interest expense of 270 to 295 million and a tax rate of 21.5% leading to adjusted earnings per share of $1.28 to $1.36.

Speaker 4: We are updating our free cash flow range to 675 to 750 million.

Speaker 4: For the second quarter, we estimate organic revenue declines of 6% to 4% as compared with the first quarter decline of 6.6%.

Speaker 4: This includes a COVID-19 of 2.6% resulting in core organic decline of 3.4% to 1.4% as compared to the first quarter, core organic decline of 1.8%.

Speaker 4: This core organic decline reflects an aggregate headwind of approximately 700 basis points, reflecting customer inventory destocking at similar levels to Q1 and a modest further deceleration in sales to our semiconductor customers.

Speaker 4: We expect a roughly 0.5% negative impact from FX, leading to reported revenue of 1,785,000,000 to 1,825,000,000. We also expect adjusted EBITDA margin of 19% to 19.5% in the quarter.

Speaker 4: reflecting the ongoing volume and mixed dynamics, as well as our continued focus on commercial excellence. We expect interest expense to be approximately 2 million lower than Q1 driven by ongoing paydown of our floating rate debt, and expect free cash flow generation to be more modest in Q2 given the timing of cash tax payments. With that, I will now hand the call back to Michael.

Speaker 3: Thanks Tom, as we conclude, I want to emphasize our conviction in both the attractiveness and resilience of our end markets.

Speaker 3: and the relevance of our offering to serve our customers.

Speaker 3: Earlier this month, we hosted our America Sales Conference, which brought together hundreds of our suppliers and our entire North America Sales Organization.

Speaker 3: This important form strength and collaboration across of on-tour functions and with our suppliers to drive growth.

Speaker 3: This was our first in-person forum since early 2020 and the energy and feedback we received reinforced the opportunities ahead of us.

Speaker 3: We are looking forward to similar forums in Europe and Amia next month. We remain confident in our growth strategy and are investing in new capacity, launching new products, and expanding our geographic footprint and digital infrastructure to support our long-term financial algorithm.

Speaker 3: Continuous improvement is in our DNA and we are taking actions to strengthen our operational rigor, efficiency and commercial execution.

Speaker 3: Thank you for your interest in the Vontour and for your continued support. And thank you to the 14,500 associates around the world who are working to deliver for our customers and support our mission of setting science and motion.

Speaker 1: I will now turn it over to the operator to begin the question and answer portion of our call. Thank you. If you would like to ask a question, please do so now by pressing star followed by the number 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then 2.

Speaker 1: We would ask that you please limit yourself to one question and one follow-up. Our first question today comes from Vijay Kumar with Evercore ISI. Please go ahead Vijay. Hey guys, thanks for taking my question. I just want to make sure I had some of these numbers correct.

Speaker 4: Michael, this updated guidance here. So, destocking, I think for second quarter, I heard that's minus 700 basis points. Is there continued destocking impact? Like I think the prior destocking impact for the year was so.

Speaker 3: You know, something like 250 basis points. Was that change for the year? What was the change? And I think biopharma, there's been a lot of questions. What is your exposure to emerging biopharma? Early stage biotech and it has a bio production growth of double data change at all?

Speaker 3: Thanks, Vijay, for the questions. Let me unpack both of those areas for you. First, starting with de-stocking, as we indicated in our prepared remarks, the first quarter played out essentially in line with our expectations.

Speaker 3: with roughly 500 basis points of destocking headwinds. What we've modeled for the second quarter is a continuation at approximately that same level.

Speaker 3: And then similar to what we had in the first quarter, it's important to take into account. We also had roughly a hundred basis points of, you know, semi-conductor headwinds, and we see that accelerating modestly in the second quarter. So those are...

Speaker 3: probably the two key factors as we think about moving from the first quarter to the second quarter. But we see the quarters playing out pretty similarly, particularly around destocking.

Speaker 3: I think we continue to be quite encouraged by the underlying growth drivers for that space. There's been some pretty exciting approvals here around Alzheimer's and obesity and multiple myeloma recently the pipelines are quite robust and the underlying demand continues to be quite strong and the read through in our business.

Speaker 3: trends we are seeing on the stocking and the expectation that we had that those, you know, would, and we would have seen an inflection point on that by now. And the fact that we haven't, you know, we've reflected that risk of, you know, destocking continuing into the, into the second half of the year. So we've moderated in our full year guide. It would reflect more of a, you know, mid single digit growth in aggregate.

Speaker 3: science that they're developing. We have moderate exposure here. It's probably, you know, in the order of 2 to 3% of our overall revenues, it's, you know, concentrated in our research platform. And, you know, certainly we see, you know, the headwind in that space playing out, that space is probably off double digits in the first

Speaker 3: big guidance change. So the last call it three to four months and other guidance research share.

Speaker 3: When we look at these assumptions, can you talk about your visibility and how investors can take comfort in numbers? We said perhaps a second half, guide now being the arrest. What visibility does that I want to have? Yeah, happy to weigh in on that VJ.

Speaker 3: the destocking headwinds would subside by the middle of the year. And while we were encouraged by the ramp that we saw as we moved through the first quarter, we were also needing to see an additional step up in growth in those categories as we moved into the early days of the second quarter here. And frankly, we don't see that happening. So what we've tried to do today is to reflect.

Speaker 3: the risk that this be stocking persists through the balance of the year. So if I step back then and look at what's embedded in our guidance, if I look at the underlying core business, we're assuming that that continues to run for the balance of the year at levels that we saw in the first quarter. We assume that we'll continue to face the headwinds in the semiconductor market for the balance of the year.

Speaker 3: order destocking for both lab and and vial processing, you know, or similar to what we saw in Q1. We've extended those, you know, through the balance of the of the year. It has the effect of the second half of the year of

Speaker 3: of showing a modest improvement as you see in our growth rate, but of course that's somewhat mathematical and that you're running incremental headwinds on top of the destocking that was embedded in our numbers last year. So the impact on growth is a little bit more muted in the second half.

Speaker 3: given the dynamics last year. But we have pretty similar levels of destocking factored in here for the second half of the year. So from our perspective, we think it's a prudent change that reflects the current dynamics and doesn't really require much improvement in the business as we move through the balance of the...

Speaker 3: Michael, maybe a follow up on that one. You know, I think you talked about when you're talking about stocking. You're at least seeing some early signs of things, maybe bottoming out or turning a little bit. I guess what are you seeing in the channel there? Get to VJ's question just on the visibility. You know, what are you hearing from customers? Obviously, you know, that the headwind of 2Q and being similar is prudent. But it does sound like.

Speaker 3: you're maybe at least seeing some signs. We'd love you to just give us a little more color there on what you're seeing and any level of confidence that we are at a draw from sorts. Thanks, Patrick. I think probably helpful to maybe provide a little bit of context on just the operating model that we have here in the visibility we have into the different parts of the business.

Speaker 3: We're facing these docking headwinds as we've indicated previously in both our lab consumables category and in our liquid handling consumables in bioprocessing.

Speaker 3: Within those categories, those are products that our customers would generally expect us to have on the shelf and order times and lead times would tend to be rather muted, certainly measured in days and weeks as opposed to monster.

Speaker 3: or quarters. So that's one of the dynamics that you know, make predicting these things somewhat difficult. But you know, obviously have great access to our customers and spending a lot of time in closing them to understand the dynamics in the trends.

Speaker 3: And we continue to receive positive feedback from our customers that in fact, the help of inventories in these categories are indeed improving. We do see the inventory coming out, perhaps just not at the rate that we had originally anticipated. So...

Speaker 3: We saw improvements in their daily rate of sales in these categories as we moved through the first quarter of the exit run rate in March was essentially in line with what we had anticipated going into the year. But we had also expected to see an additional step up into the second quarter and while rates are modically improving.

Speaker 4: Okay, that's appreciated. And then on the margin side, might maybe one for Tom. I mean, when you think about, you guys reset the margin guidance here, you know, down 50 minutes for the midpoint now, year over year. Are you taking any cost actions or the view? This is transitory. We'll keep the P&L where it is. And then there's a level of confidence.

Speaker 4: that next year we get back to the algorithm that you guys have provided in terms of margin extension. You just talk about higher approaching this and how we should think about that construct. Still, first.

Speaker 4: Yeah, first of all Patrick the the view is that it is transitory and you know we do expect you know to be through these these headwinds by the end of the year but not with standing that our plan and even our you know our updated guidance reflects.

Speaker 4: There's a lot of Patrick, the view is that it is transitory. We do expect to be through these headwinds by the end of the year. But notwithstanding that our plan and even our updated guidance reflects the ongoing productivity initiatives that...

Speaker 4: We continue to take. So we called it the three margin drivers for us that we continue to talk about our, you know, few reflexes of all the

Speaker 4: pricing and commercial excellence as well as that proprietary mix growth that gives us a better margin mix. And then a third has always been productivity. And we built this year's plan with a significant productivity in it.

Speaker 4: We're using the ABS of Entrepreneur business systems to drive a number of discrete projects across the entire enterprise. We've got actions in America, in Europe , and in in in a May to drive, you know, continued.

Speaker 4: fixed cost reduction. The one thing that is not being impacted is the investments in the front end of the business. So in terms of commercial sales force, marketing and marketing teams and so forth. We continue to...

Speaker 4: invest there across the entire landscape to drive the better top line.

Speaker 4: Even as we head into the back half of the year, that continues to be true. While we do continue to look at additional opportunities on the cost side. It's front and center for us. Was it the beginning of the year and continues to be throughout this year?

Speaker 4: As we head into the back half of the year, that continues to be true. While we do continue to look at additional opportunities on the cost side. So it's front and center for us. Was it the beginning of the year and continues to be throughout the year? Appreciate it, guys.

Speaker 1: Next question comes from Michael Riskin with Bank of America. Please go ahead Michael. Great. Thanks. Let me throw in one big one to start and then I'll have to follow up. So first I'm just trying to.

Speaker 4: be convoluted the change to the guy to let it, but he provided a lot of commentary, but given all the moving pieces, any you can say in terms of, you know, has the man, has the macro deteriorated at all?

Speaker 4: You're talking about inventory levels as feels like being the biggest change, the guy, but then giving your comments on semiconductor and some of those in the accounts you had in the prepare remarks. I'm just trying to parse out the moving piece here, you know, the $200 million roughly cut to the top line.

Speaker 3: How much of that is from the inventory of these stock? How much is semiconductor versus just broader macro expectations going forward? What's built in? Michael, let me take a shot at that. If you look at the adjustment in the guide, it's roughly 300 basis points at the midpoint. And how is the way I'd have you think about that?

Speaker 3: Dr. N. Market, particularly in the second quarter, and moderately weaker macro environment overall. So it's probably those three factors, but clearly more weighted towards destocking.

Speaker 4: Okay, thanks. And then on the starting point, just...

Speaker 3: anything can stay in terms of how much inventory is actually left at these customers. I mean they can't keep destocking forever. There's a finite amount. So any clarity on, you know, where inventory levels, this is both for a lab and by the process, by the way, where were inventory levels pre-COVID, where were they sort of at the peak, where are they now, and you know, any sense of, could you be seeing incremental share losses that would account for some of those changes?

Speaker 3: Thanks. Yeah, so certainly the pulsing and the feedback that we get from our customers is indicated before would certainly support of you that inventory help across the network is improving.

Speaker 3: I think we've taken a prudent approach here in trying to de-risk the second half of the year, if you will, just given that you don't have precise data here to call it exactly. And so extending kind of similar levels of drawdown.

Speaker 3: through the balance of the year here, I think, certainly would cover our expectations for what theoretically could be being held at our customers. And, you know, hopefully, you know, it proves to...

Speaker 3: to be just that, to be a bit on the conservative side. But in fact, we don't have visibility that takes us all the way through the end of the year in order books and such. But certainly this would indicate that there was perhaps a year's worth of inventory in some of these categories, which that's probably on the outer end of...

Speaker 3: any data that we've seen or any input that we've received from our customers. So I think it's a prudent approach given the data that we do have. Mike, and I would just follow up some of the conversations you've had with us along the way here. It was pretty clear that our original guide had anticipated an earlier inflection point on.

Speaker 4: destocking and as we're here deep in April just haven't seen it yet. We are, we are, the feedback, as Michael said from customers is very clear that inventory levels are moderating, but it isn't isn't at a point yet where we're seeing that in order rates. And you know, so we felt that it was prudent to incorporate more of that through the balance of the year as we have. And Michael, the other thing I...

Speaker 3: with our customers. And if you look beyond just these categories that are destocking, I think there are some pretty healthy trends there that support our views if I look at sales of lab chemicals, for example, and the growth that we saw in the first quarter.

Speaker 3: which was rather healthy and certainly well above our group average here. Certainly A gives us some confidence in the health of the end markets, but certainly also revalidates the position we have with our customers. We've had some number of really high profile customer wins here of late. We talked a little bit about Catalan last question.

Speaker 3: relative to things like the change in their R&D spend, we continue to run well ahead of the trends of their own spend levels. So I think we continue to be quite encouraged by the traction momentum that we have with our customers. And if I broaden it beyond just like the lab.

Speaker 3: category in the research environment. Our bio production business continues to be a real source of strength for us. We continue to outgrow the broader market by several hundred basis points. And similar to Lab, if you move beyond the destocking categories, we see things like processing ingredients and acceptance, which we don't think are facing some of these headwinds, again, really strong.

Speaker 1: Please go ahead.

Speaker 5: Great. Thanks for taking the questions. So appreciate the comments of emerging biotax being 2 to 3% of total revenues. Can you walk us through your exposure to emerging biotax within bioprocessing? And then separately, there's been some concern about the cell and gene therapy market just with some of the comments from peers this week.

Speaker 5: So, what's your exposure to cell and gene, and then have you seen any shifts in demand where ordering patterns from customers within that market?

Speaker 3: Yeah, let me unpack those questions for you, Rachel, and maybe take them in reverse. So on the cell and gene therapy space, one of the things I really like about our platform is we're going to be relevant across all modalities, both at commercial scale as well as in the pipeline. So we're going to be relevant across all modalities, both at commercial scale as well as in the pipeline.

Speaker 3: while we're encouraged by the momentum overall in cell and gene therapy. And the help of the pipeline, clearly the commercial platforms are heavily slanted towards the Monoclin line about is driving the bulk of our revenue there, kind of in line with just the split of revenue.

Speaker 3: at an end market level there. So yes, we certainly have exposure to saline gene therapy within our bio-production platform, but it would be in the proportion of overall saline gene therapy end market revenue as a proportion of total biologics and market.

Speaker 3: an end market that I think long term favor growth in that space and we're not going to be over indexed to any particular product or customer. It's a rather diverse platform.

Speaker 3: long-term favor growth in that space and we're not going to be overindex to any particular product or customer. That's a rather diverse platform as. Is, ähm...

Speaker 3: as you know, and regarding order rates or things like that, have we seen a change in patterns, I'd say, you know.

Speaker 3: Given the diversity of the platform, certainly nothing that I would call out is driving the momentum one way or or another.

Speaker 3: We continue to have strong specifications across all these platforms. We are certainly seeing good growth across all of our modalities and our encouraged by the approvals that we see coming.

Speaker 3: coming through. On the biotech side, most of our exposure there is going to be on the research side, as I said earlier. And while we like that customer segment a lot, just given the number of molecules that they're developing, it is kind of those...

Speaker 3: look at the bio production side of our business, which we tend to think about only on commercialized platforms. Your exposure there would typically be through the CDMO lens where you have biotext that are scaling up to produce commercial quantities, probably don't have their own capabilities.

Speaker 3: output in their production levels. Similar to what we see in life sciences, there is a very, very significant inventory correction that's underway within the semiconductor space. And if you look at the earnings release from our customers, that space, they're off.

Speaker 3: 40 plus percent in their production schedules are probably off even more than that as they look to reset inventories. We typically get a little bit longer range forecasts from our semiconductor customers that are updated kind of on our rolling monthly basis. We do see a step down coming through in the second quarter, but...

Speaker 3: We are encouraged by the feedback we're getting from our customers that they see kind of arresting the inventory headwinds somewhere around the year here. And then the return to kind of recovery as we move through the back half of the year. So we've...

Speaker 3: We factored in pretty much headwinds all year, probably the steepest in the second quarter. And I think the view here is that the health of that end market improves heading into 2024.

Speaker 3: roughly at the lead, you know, maybe a little higher and keep you like that, but I'm not sure if the doubt that between the one Q and two Q is all semi. But are you now contemplating or is it included in the guidance now that 4% headwind persists in Q3Q4? So when we look at your guidance, we should be thinking about that to bake in to the implied organic growth at that much of a headwind direct through the full year now. Yeah, so maybe clarify a couple of points there Dan. On the...

Speaker 3: first half of the year in order to come in at the midpoint of our full year guidance. And really what you see reflecting there is the fact that the second half of last year also had meaningful destocking head ones in there. So while we're indeed carrying forward incremental destocking in the second half.

Speaker 3: in the second half as we see in the first half.

Speaker 3: And then you made a comment about semiconductors. Semiconductors are in fact worsening by roughly a full point in the second quarter relative to the first point, the first quarter. If we think about having roughly 600...

Speaker 3: basis points of headwinds in Q1, that was roughly 500 associated with de-stocking, another 100 basis points or so for semis. As you look at Q2, it steps up to roughly 700 basis points of headwinds, as Tom indicated in his prepared remarks. Similar levels, 500 basis points of de-stocking, roughly 200 basis points of semi-headwind in the second quarter.

Speaker 3: that we see moderating back to something closer to the 1% headwind for the balance of the year. Got it. Great. Thank you for that. And then maybe just one other, I know you highlighted beyond semi-division, you have some impact from border industrial. Just kind of remind us, I think, you know, maybe half of your advanced second-applied materials could be considered to more cyclical industries, but just kind of ex-semi-what else are you seeing in there?

Speaker 3: kind of quantify and give us some color about kind of what's big then and kind of how you arrived at that. Thank you. Yeah, so if you look at the performance of our advanced tech and applied materials and market.

Speaker 3: which would certainly have some end markets there within there that do exhibit more cyclical GP type dynamics. We were actually overall, I was relatively pleased with, given the macro environment we're operating and on how well that platform performed. It was kind of down, low single digits.

Speaker 3: which was somewhat encouraging given what we've been keeping an eye on in Europe . So whether it's Pet Cam, oil and gas, some of the other food and beverage, these are the aerospace defense, these are some of the other end markets that we would serve in there. I'd say,

Speaker 3: Generally, overall, that part of our business held up reasonably well. The most notable point to make here is probably just the heavy downturn in semiconductors. I think on this.

Speaker 3: what we supply into the manufacturing process itself, it's probably down 50% in Q1 and it's probably gonna move to down 70% in Q2 before bouncing back a bit. So it is really driving the numbers there, but with a lot of that exposure being in the Americas, enables...

Speaker 3: probably a better read-through in Europe where we don't have as much semi-exposure. You can see how the applied markets for us are playing out where we actually grew mid-single digits in the quarter.

Speaker 1: Great, thanks Michael. Our next question comes from Jack Meehan with Nefron Research. Please go ahead Jack.

Speaker 6: Thank you. Good morning. I want to ask about the margin cadence into the second half of the year. So just

Speaker 6: playing around with the numbers. I think it implies about a 200-bit step up in second half, EBITDA margins relative to the first half.

Speaker 6: Historically, I look like pre-COVID, it's been a little bit more muted than that. Can you just walk us through the framework on margins into your end?

Speaker 4: Yeah, thanks, Jack. The. So the so, you know, first quarter is, you know, as a reference point.

Speaker 4: It came in at, you know, it, it, it, it's 19 4, which, you know, was down significantly from, you know, the first quarter 20.

Speaker 4: to and you know the COVID impacts on the revenue side that were the most you know pronounced impact there. So we had roughly $90 million of COVID headwinds coming coming out in the first quarter. That's you know predominantly proprietary materials.

Speaker 4: which are very high margin content. So that contributed to the bulk of that reduction. The headwind that we've talked about as well, particularly by a farm production category, also have pretty good margins. So the combination of those two is what?

Speaker 4: to kind of drove us to the lower margins. As you progress through the year, we do see improvement in the second half. I do think that when you look at the second quarter and you model that out, it'll be very similar to the first half in terms of pure P&L numbers, probably.

20 million more of revenue or so at the midpoint, a couple of points of EPS. But the margin rate I think continues given that you have that same complexion of headwinds continuing. We do see the second half.

And improvement, we do see a step up in the margin rates as those revenues and the inflection points that we're anticipating come into play, particularly on the biopharma side. So, overall, full year, we do end up at the midpoint of what we've talked about.

would be a modest reduction from 2022 overall. Got it, okay. And then as a follow up, wanted to ask just the performance of Masterflex and Ritter in the quarter. I know, don't break out the M&A sales anymore, but just how was their progression to start the year kind of relative to?

and happy to report that all three of those platforms were either at or above our plans for the quarter with starting to see some momentum really across all three of those. I think in the press release, we referenced a couple of new product launches in our ridder category that we've been signaling and we've got

innovation and are quite encouraged by what that does for building out and really the only end-to-end ASIP, the management solution in the space and a lot of excitement from our customers. I would say one of the more notable things in mass reflex in the first quarter is just the improvement in the supply chain. We've been talking a lot about headwinds on access to chips and stuff and backlogs on the pump and the pump.

And while we continue to work through some of those challenges, I think we've been able to cut the lead times on our peristaltic pump offering by half. We've got a little bit more room to go yet before that ultimately normalizes, but certainly some good momentum there. And then on Rimbio, obviously, a more modest sized platform for us. But we're super excited by the progress that we're making in translating that technology, particularly the 2D and 3D bank.

anticipate these platforms growing in 2023 and certainly we're keeping pace with those plans in the first quarter.

Our next question comes from Dan Arias with Stevell. Please go ahead Dan.

Thanks for the questions. Michael or Tom on biofarm overall, low single digit decline in the quarter. What should growth be? Growth or decline be for the year there? And then what should bio process specifically be for the year of politics, if I missed that, in the moving part of the guide? And then as a follow up, you guys have talked about service penetration and just what that mean for you to use.

you know, headwinds that run into our biopharma numbers. You probably also have to think about it on both an organic as well as a core basis. You know, within the first quarter, biopharma overall was off, you know, high single digits. But you have, you know, in that particular end market, we had a bit over 500 basis points of COVID headwinds. And so you get to a core basis point.

given the comps in the second half of the year that do include de-stocking, although we've continued to model de-stocking persisting through the second half of the year, the impact that that has on growth is a bit more muted. So you move from kind of low single-digit decline in the first quarter to

you know, on a full year basis, you're probably looking at a load of mid-single digit growth for biopharma overall.

that would contemplate bioprocessing, which is the production component of that coming in and around a mid-single digit bubble dam.

Okay, helpful. If I could just maybe ask another and just sort of stay with the details around the inventory topic. When you look at the DV stocking activity that's taking place and you try to separate by a process from routine lab consumables, are you able to discern a difference when it just comes to the pace of the work down?

the potential risk into the second half of the year. We've got them moving at about the same pace. And the data coming back from our customers would certainly indicate that's not a bad way to think about that. And if I look at changes in daily rate of sales, as we move through the first quarter and into the early days here of the second quarter, I think that's another validation of our view that they seem to be winding down or moving at roughly the same.

at the same pace. So we've, you know, as we've extended the view into the second half, it does cover, you know, both of those both of those categories.

Okay, thanks very much guys.

Next question comes from John Sauerbeer with UBS. Please go ahead, John . Thanks for taking the question. I guess just continuing on the D-stocking here. Just any broader regional color and how you see this play in the second half by region. And then just second question, or I'll ask you to at the same time. On the industrial and applied market.

I guess how much conservatism do you think you have in the guidance for this in market? You know if we were to enter a deeper recession in the second half of the year I guess how much do you think that is baked in on the guidance there? Thanks

On de-stocking, that's going to kind of flow in line with just the revenue splits that we have between the region, which is just another way of saying we have probably more de-stocking headwinds in the Americas. That's probably more a function of our Americas business being roughly 2x what our European business is. We only see both in the lab.

as well as in bioprocessing headwinds in both regions. On the COVID side of things, as the COVID headwinds wind down, particularly on things like the vaccine, we had more pronounced headwinds in...

in the Americas, but I would say the on a percentage basis, you see some of the dynamics between both regions and a bit more muted exposure in Asia, of course. And then on your second question regarding...

being off 50%, we've contemplated that being off 70% in Q2. So I think we've got a pretty realistic view of baked in here.

that I think we're comfortable with at this point. Thank you everyone for your questions. Unfortunately, those are all the questions we have time for today. So I'll now turn the call back to Michael for closing remarks. Yeah, thank you Emily. And thank you to all of you for participating in our call today.

disconnect your lines.