Avantor, Inc. (AVTR) Earnings Call Transcript & Summary

[Audio Gap] And with that, let me turn it over to Michael.

Thank you, Tycho, and good afternoon, everyone. Thank you for your interest in our business. Really excited to kick off 2020 here at the JPMorgan Conference in San Francisco. Following our presentation here today, as Tycho mentioned, I'll be joined by our CFO, Tom Szlosek, and we'll be happy to take your questions. I guess the slides will catch up to us here in a minute. But as we get started, I wanted to remind you that what we share today reflects our beliefs based on information that's currently available to us. And certainly, we'll be providing forward-looking statements, which reflect our current views, but are not guarantees of future performance. Factors that could alter these views and assumptions include, but are not limited to, the factors described in the Risk Factors section of our IPO registration and our Form 10-Q for the quarter ended September 30, 2019. Also, I need to remind you that this presentation may contain certain financial measures, which are not prepared in accordance with U.S. GAAP, and a reconciliation of these non-GAAP measures to GAAP can be found at the back of the deck. Okay. Everything I share with you today is really tied to the mission that we've set for ourselves, which really is to do all that we can to help set science in motion to create a better world. Avantor is committed to being a leading trusted global provider of products and services to the life science and advanced technology space. And as I'm sure you would agree, there's never been a more exciting time to be part of this space. And I think you owe that to the potential to achieve life -- critical life-saving breakthroughs has never been greater. New therapies are emerging, saving and enhancing lives and treating some of the most challenging diseases that we face. From discovery to delivery, and I'll talk a little bit more about this concept as we get into our presentation, our mission is to contribute as much as we can to helping our customers achieve these breakthroughs, and we feel our business model is uniquely positioned for success. I want to start by sharing a few highlights about our business. You see some of our financial profile here based on the guidance that we provided at the end of the third quarter. We'll generate a bit over $6 billion in revenue this year, corresponding to about 5% to 6% organic growth. We will expand EBITDA margins north of 100 basis points this year, leading to adjusted EBITDA of more than $1 billion. EPS expanding more than 50%. And I'll talk to you about the unique algorithm that we had here that causes EPS to expand at a disproportionate rate to EBITDA. That is one of the more unique aspects of our financial model. And lastly, this business generates a tremendous amount of cash, and we have some really unique opportunities here within 2020 to even extend the cash flow power of this business even further. The business is extremely well positioned to service our global customer base. And our infrastructure is strategically located close to our customers, and that enables us to serve more than 240,000 customer locations around the world in more than 180 countries. We have 9 innovation centers that are core and central to our innovation-centric model and allows us to collaborate with our customers to develop customized applications. We have a world-class manufacturing footprint that's highlighted by the 13 GMP facilities that are in our network, and we execute our model across more than 100 sales and distribution locations. Importantly, within 2019, we achieved a very significant milestone for our business. As you would know, in May, we completed the largest health care IPO in U.S. history and listed our business on the New York Exchange. We have a very diversified product portfolio and revenue landscape that leads to a very resilient growth profile. And as you can see from the geographic split of our revenue, we're extremely well positioned to service the mature markets in Europe and the Americas. And we have a really unique opportunity for outsized growth in Asia. The legacy Avantor portfolio comprise roughly 25% of our revenue in Asia, and we have tremendous infrastructure in the region that we continue to expand. And as we connect then the entirety of our portfolio, we have an opportunity to realize upside growth potential in that region. I apologize for the technical difficulties here today. From a product perspective, our portfolio is highlighted by the custom proprietary materials portfolio that comprises roughly 1/3 of our revenue base. More than 50% of our revenue comes from our own branded capabilities. And more than 2/3 are -- more than 85% actually of our revenue is recurring in nature, which leads to a very resilient robust revenue profile across all economic cycles. Lastly, we service 4 specific end markets that all share common characteristics of high regulatory oversight and complex development processes. Roughly 50% of our revenue is derived from the high-growth, attractive biopharma space with a special emphasis on the large molecule space. We have a very unique offering into the health care space, driven from our medical-grade silicone platform, and we have significant exposure to the education market, with a special emphasis on the higher education space. Roughly 25% of what we do is in the applied markets across a really diverse set of end markets, including things like semiconductors, aerospace and similar industries. Our portfolio includes more than 6 million products and services, and we go to market using what we refer to as a workflow approach. And we're deeply embedded in the activities that the scientists and our customers execute on a daily basis, both in their R&D activities as well as the workflows that they conduct in their commercial platforms. And we deliver this portfolio through a really agile multi-tiered, high-touch sales model. And we've depicted that here on the slide. The quarterback at our accounts are the thousands of account managers that lead and coordinate all the activities that go on an account, and they really bring in all of the subject matter expertise that we have in the form of technical and application specialists that allow us to bring the novel scientific and material science and process and innovation expertise that's embedded in our business. One of the more unique aspects of our approach to our customers is the strategic partners group that we have that reports directly in to me and is responsible for coordinating the activities of our largest multinational accounts, particularly in the biopharma space, comprising roughly 25% of our revenue. We bring transactional efficiency to the customers that we serve through a world-class leading e-portal that continues to grow in contents and traffic and is an important enabler for the way our scientists interact with us. I mentioned in my introduction that we seek to add value to the work that our customers do, both in their early phase research and discovery work as well as on an integrated basis, positioning ourselves to service the activities that our customers conduct in their manufacturing and delivery activities, and we're uniquely positioned to do this. The way to think about our model here is we're really striving to position our proprietary materials with the scientists that are working on the next-generation drug developments while they're in the early phase discovery activities, customize a solution, earn a specification on those platforms and then support those activities as they scale through the clinical phases and ultimately achieve approval and enter the commercial markets. And that's what ultimately led to the combination of the legacy Avantor business and the VWR business that we brought together a couple of year ago, was to marry up the leading channel access into the laboratory environment to be able to position our proprietary solutions in a robust way in an environment that is fragmenting to a large degree, meaning more than 80% of the new molecules that are being developed today are being developed by pre-revenue startup labs in disparate locations around the world. I talked to you a little bit about how we're organized and how we think about the activities that our customers execute on a daily basis. And we orient our solutions and our approach to our customers on workflows. And I've got a couple of slides here that walk you through some very concrete examples that show how we think about a workflow, both in the research space, as well as in the production world. This particular example here that I have on the screen is an example of a cell biology workflow which is obviously taking on more prominence as the -- we have the emergence of new therapies, such as CAR-T. And you can see that in each step of that workflow, we have a significant offering, whether that be from our materials and consumables portfolio or our equipment and instrument capabilities or even, in many cases, our services capabilities where we may perform some of the activities at each one of these individual steps of the workflows on behalf of our customers. We align our capabilities and our portfolio to these individual steps. We'll position these solutions with our customers and bring scale and efficiency to our customers as they execute their work on a daily basis. On the other end of the spectrum, here's an example of a customer producing a specific monoclonal antibody. And I think this really highlights the breadth of the capabilities that we bring to the bioproduction space. A couple of things to note about this example. One, you'll see our products specified throughout the entirety of the workflow, from the upstream processes through the downstream purification and ultimately into the final formulation and fill and finish activities. This particular example, we have more than 30 different specifications that are on this platform, including 24 distinctive raw materials, 51 different packaging configurations, and touch this molecule in a more intimate way than probably anybody that's servicing the bioproduction space. The market for mAbs continues to expand as does the number of indications and disease types where they're being approved, and we're excited about our positioning in this space, and we'll continually look to add more content to our solution and chase more specifications. We have a unique growth algorithm that allows our platform to grow at mid-single-digit-plus levels. And I'm going to highlight a couple of these platforms that are critical to understanding why our platform today grows faster than it has historically. Starting with bioproduction, I just highlighted some of the capabilities that we would have there. This platform, as you can see by the graphic, grows at double-digit type levels. And that, I think, speaks to the comprehensive nature of our solution. We're going to be, as I showed in the previous example, supplying solutions and products into that workflow on an end-to-end basis. We have a very deep pipeline. We have more than 2,000 projects in our pipeline. We're well positioned to serve not only the largest of the large pharma companies that are involved in drug development and commercialization. But importantly, as I mentioned earlier, the channel access that we have and the ability to execute a supply chain into a very fragmented market where these activities are now occurring on a pre-revenue type basis and the ability to service both small and large customers alike has us uniquely positioned here to continue to realize outsized growth as we move forward. As I mentioned earlier, our technologies are not specific to any particular modality. As you can see here on the slide, we're positioned to support breakthroughs across the entirety of the biologic spectrum, whether that be in the traditional monoclonal antibody modalities and vaccines, recombinant proteins, but importantly, our solutions are well positioned to support the emerging cell and gene therapy area. And you would have seen some of our recent investments in expanding our innovation footprint in our Bridgewater, New Jersey facility as well as in Shanghai, China, specifically dedicated to support our customers' development in the cell and gene therapy area. And we're going to be positioned here to help drive increases in cell culture yield, drive enhancements in purification and drive stability in the final protein formulation. A lot of the solutions that we have help shrink our customers' footprint and take cost out of their system. Innovation is the lifeline of our business. And just highlighting here for you 2 or 3 of the more recent innovations that we've launched to our biologic customers, starting from left to right here. We have a strong foothold into the chromatography space, and we're enhancing that with the launch of a new protein, a product line that we think has performance capabilities that would rival or exceed the best-of-breed solutions that are out there. We have significant developments in the cell and gene therapy space, particularly around being able to deliver very small amounts of product on an individual patient basis that would be free of contamination and delivered at the highest purity levels possible, and we have a pretty robust direct dispense offering that we've extended into our hydration platform that takes out significant time, processing time and dispensing time for our customers and shrinks their overall footprint. So we'll continue to focus on bringing efficiencies and new solutions to our customers through our innovation model. Another platform that's rather unique to Avantor and is responsible for driving high single-digit, low double-digit growth to our business is our medical-grade silicones platform that we refer to as our biomaterials platform. We are certainly the leader in this technology, and we're situated over many decades of experience here as the leader in this space. It's a rather large and growing space. And you would find our custom silicone formulations on nearly every implantable device that's going to be in the body for more than 30 days. And really leveraging the many years of experience that we have in providing these materials into the body in an inert way. Device designers love this material, owing to the number of -- the degrees of freedom that they have in really customizing these products. And this business is characterized by nearly 100% customization at a product, customer, application level. And you can see here in the graphic the number of places that you would find our device in the body. One of the last platforms I wanted to highlight here that really drives outsized growth for us is our services platform. It's roughly 12% to 15% of our total revenue and is rooted in 4 or 5 critical pillars and capabilities that we bring to the market. We provide more than 1,400 or probably getting close to 1,500 on-site associates by now that wear our uniform but show up and execute workflows on behalf of our customers every day. We have a unique equipment maintenance and calibration platform. And we provide some customized procurement services for our customers to get them access to their critical materials that they might not be able to find in our catalog. And lastly, over the last number of years through acquisition, we've built a really unique offering to provide services to the clinical services part of our customers' business that's highlighted by our leading biorepository franchise. The whole aim of this platform, obviously, is to return time to the scientists and allow them to spend the majority of their time focused on experiment design and data interpretation. Here's our framework for creating long-term values. You'll see that it's rooted in 5 core pillars. One, we have an attractive organic growth story that is characterized by a mid-single-digit-plus potential. We have many levers for enhancing our margins and driving expansion north of 100 bps. One of the more unique aspects of our story that I encourage you to understand in more detail are the kind of self-help mechanisms that drive outsized expansion on a below-the-line EPS basis. Business generates a tremendous amount of cash, which allows us to delever rapidly. And as we improve our balance sheet, this platform is well positioned to drive inorganic growth through the M&A lever. As I mentioned earlier, there's never been a more attractive time to service the -- and be part of the life science space. R&D activities are proliferating at an exponential rate. We're working on problems that we've never been able to tackle before, and the Avantor model is uniquely situated to take advantage of some of these trends. As I mentioned before, roughly half of our revenue is tied to biopharma. I just walked you through multiple platforms that all have high single-digit, low double-digit growth characteristics. And owing to our under-penetrated positioning in the Asia region, we have an outsized growth opportunity there as we deploy the breadth of our model. And perhaps most importantly, this is a very resilient, highly recurring model that performs well across economic cycles. And you add all that up, and you've got a really robust organic growth story. I mentioned the many multiple levers for driving margin expansion. Over the last couple of years, we've driven more than 300 bps of improvement, really leveraging the fixed cost or the installed fixed cost base that we have in the business, recognizing the advantages of our proprietary products growing faster than our third-party branded products, some pretty acute pricing acumen and discipline, and then, ultimately, realizing the $300 million of synergies that we've committed to as part of the VWR acquisition. I referenced some attractive EPS growth from below-the-line enhancements. You see here on the chart on the left, a pretty significant step down in interest costs since the time of the merger with VWR in late 2017. Certainly, part of this is driven from the IPO that we executed a year ago, but we've also been successful along the way, repricing some of the instruments that we have in our capital stack. And importantly, as we look towards the back half of this year, we have a unique opportunity to take another look at our capital structure. We have roughly $2 billion of unsecured bonds that are priced at 9% that we'll be able to address when the make-whole provision goes away in October. And similarly, we'll have an opportunity to address the 6% bonds on roughly $1.5 billion that will also be able to be addressed in that same time period. We launched a repricing of our term loans last Friday, and that will be kind of an ongoing activity. But you'll see significant opportunities here as we move forward to address the interest cost in this business, which will obviously free up significant cash to accelerate deleveraging as well as to open up the inorganic opportunities. We have a lot of fun with our tax rate. And as we started the journey a couple of years ago, we were at a shockingly high level of 32%, which really speaks to just some inefficiencies in the way we're financing some of our foreign operations. And as we've been able to optimize some of that structure, we're looking at being able to go into 2020 with something in the 25% to 27% range. With the strong top line growth and a capital-light model, we see significant conversion of our EBITDA into free cash. And you see the metrics here on where we expect to end 2019, and we'll continue to see that unlevered free cash flow continue to expand at double-digit levels. There is a nice deleveraging story here. We started back in 2017 with a leverage ratio of more than 9x. We ended 2018 at roughly 7x. And as we end 2019, we expect to be in and around 4.5x. The business is deleveraging organically at roughly a turn a year, and we're obviously accelerating that through the application of the IPO proceeds. All of that will allow us to unlock the full potential of our model with being able to start to extend our capabilities and footprint through M&A. And this is a model that has had considerable success historically in growing through acquisitions. And we have a team that's got a tremendous track record of executing both small and large deals alike and recognizing and executing the synergies associated with those. We're pleased to announce that we recently added a head of M&A to our team with a rich background in the life science space, and we're excited about formalizing our approach here and really making this a meaningful part of our story going forward. Not unlike other leading life science companies, we have a very specific way in which we execute our model. Internally, we refer to that as our Avantor business system. This ultimately is what defines our culture and outlines the way we work and the way we run our business. It's grounded in our values and ultimately leads to a culture of continuous improvement and a kaizen mentality, if you will, where our associates show up every day to make today a bit better tomorrow and you just repeat that cycle every day. It also provides a very formal structure for solving problems. And as challenges and opportunities arise in our business, we have a very formal approach to how we attack those problems in a very data-driven way. The Avantor business system underpins the Avantor culture and defines how we work. Just wanted to remind you of our 2019 full year guidance. We're obviously in the process of closing our books on the fourth quarter and certainly look forward to updating you on our results in early February. But you see the numbers here. We expect to end the year with organic growth of between 5% and 6%, and EBITDA in the range of $1.25 billion and $1.35 billion, which translates into an EPS of between $0.55 and $0.58 a share. As I mentioned, we're looking forward to sharing our results with you as well as providing our guidance to you early in February. And just in closing, we just summarized the elements that we have in place for the long-term value creation. We serve really attractive growth-oriented industries that are investing and growing across the globe. We are deeply embedded. This is a really high-touch intimate model, and we're deeply embedded in the activities that our customers execute, both in the lab as well as in the manufacturing of their drug therapies. Innovation is core and central to what we do, and we have a great track record of execution, generating cash and growing this business. With that, we thank you for your support of our business and look forward to taking your questions in the Olympic room across the hall. Thank you.