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

Good morning, everyone. I'm Derik De Bruin, the senior life science and diagnostics tools analyst from Bank of America. Thank you for joining us today for the kickoff of life sciences tools sections for our 2021 Virtual Vegas Health Care Conference. To kick it off this morning, with us today is my colleague, Mike Ryskin, also from Bank of America. You can tell by the blue banners that we're the Bank of America crowd. And we're excited to have Michael Stubblefield, President and CEO of Avantor, here with us this morning to kick off the proceedings. Michael, thank you for being here. Always a pleasure.

Yes. Thank you, Derik. Glad to be here, and I appreciate everybody joining us today. And hopefully, maybe next year, we can all gather in person in Vegas. But happy to be here with you.

Yes. I'm hopeful with that as well. So just remember that you can hit us with a chat question via the Veracast website or ping Mike Ryskin or somebody that's online to ask as well if they're -- I may not see you on Bloomberg. But Michael, thanks for being here.

So I guess, let's just get started. It's been about 1.5 years since Avantor's IPO. It certainly feels longer than that given the market. I guess a lot of clients are certainly were -- are familiar with the business, at viewing this, but I still am doing a ton of teachings on the company. I guess could you talk a little bit just about the legacy Avantor business, in particular, that I think still comes up with questions? Could you just give us a brief overview of the business? Why is this combination stronger? Just sort of set the stage for the rest of the conversation.

Yes. I think it's a great place to start, Derik. And it has been pretty exciting in the last couple of years. I think next week will mark the 2-year anniversary of our IPO. And as you know, the integration of the 2 businesses certainly has created a unique combination that it's a classic case of 1 and 1 being well more than 2 in this case. At the time of the acquisition, the legacy Avantor business had a rich history of manufacturing high-performance chemicals and specialty materials to really exacting specifications. That was always the calling card of that business. And we supplied these high-performance solutions across a number of highly regulated applications and industries. And then when you then look at the VWR business, they had a broad portfolio of products and a highly regulated business model as well, a great e-commerce channel and certainly unparalleled customer access with global infrastructure that enabled us to then serve the scientists worldwide. By bringing these 2 businesses together, we created a global leader in the life science industry with the portfolio and scale to capitalize on the opportunities that we see in this space. Today, as we now look on the back end of this integration, you see that we are deeply embedded in virtually every stage of the most potent research and scale-up in production activities in the various industries that we serve. And our model is clearly grounded in supporting our customers' early phase discovery activities, and that was really the driver of the acquisition was being able to better position the rich technology platform that legacy Avantor brought through the customer access that we married up with VWR for to be able to earn specifications in that early phase discovery work so that we could support our customers throughout their journey and then ultimately, on a highly recurring basis on the production platforms that we were commercializing. And in that way, we serve as a one-stop shop in providing scientists all that they need to conduct their research. We have a unique customer-centric innovation model that allows us to provide custom solutions for some of the most demanding applications. And as I mentioned, we leverage our access to early-stage work and that collaboration, that access to scientists that are doing the early phase discovery work to seek content and solutions that ultimately become specified into our customers' production platforms. And when you combine kind of the technology, the broad portfolio and the services that we provide on this now fully integrated basis, we're now able to support our customers every step of the way. We've talked a lot about the relevance of our offering and our positioning with our customers. I think the pandemic certainly has enabled us to accentuate that and to highlight that. And certainly, the business has proven its resilience and its relevance through the pandemic. And we've seen strong double-digit organic growth of late. We've driven significant margin expansions. The profitability of the business has improved substantially. And certainly, we've been able to rapidly deleverage the balance sheet and now find ourselves in a position where we're supplementing a pretty rich organic growth story now with being able to deploy capital productively for M&A. And the Ritter acquisition that we recently announced is a great example of that. So we're pleased, Derik, with the progress we've made, not only in integrating VWR, but certainly, the progress we've made since being a public company. But to your point, we recognize that the story is still a bit new for a lot of people, and I would maybe just make a plug for the Investor Day that we've announced and we'll conduct in the early days of September. I believe it's September 9, for those that would like to participate. We'll continue to tell the story and help people understand what we're trying to build here.

Great. That's a great introduction, Mike. Appreciate it. So what -- there's a number of questions I want to jump off on there, but I think what's been surprising to me is that the core of the business of the company has done really well. You have some tailwinds from COVID, but they're not crazy tailwinds. I think 4% last year, maybe 2% this year. Yet I still think there seems to be this general fear across the life science space, the companies that had these big COVID tailwinds are not going to be able to grow in 2022. I mean can you sort of -- I mean I know it's a little bit early, you can't give guidance. Can you just sort of like give us your broader thoughts on like how you see your COVID contribution playing out? And I said -- I mean, I don't -- I mean looking at my model, I don't see any impediment to your business being able to grow next year, particularly given your exposure to the mRNA vaccine and the other things about it.

Derik, it's a great question. I appreciate the opportunity to weigh in on that. I think we do share your conviction that this model will continue to enable us to deliver both top line as well as EPS expansion going forward. To your point, we have relatively modest exposures to COVID. It's less than 5% of our revenues today. And when you look at the composition of those tailwinds that we do enjoy today, I think we're fortunate in that those tailwinds for the most part, I think we're going to be quite durable. In the end, as we exit the year, we would anticipate well more than 50% of our tailwinds coming from the vaccine. And certainly, our experience this year would indicate that we have a relevant solution to offer here. We're well represented across the various modalities. At the end of the day, we're still only partly through vaccinating the world. Together, I think with the prevailing view that those of us that have been vaccinated are likely in for some type of an annual booster starting as early as this fall. And so we would view certainly the vaccine portion of our exposure here to be pretty durable. And I think we're even more excited in that this experience that we've all had, particularly with things like mRNA, has probably expanded the addressable market by now bringing into play bioengineered vaccines as a category that is going to be relevant. You can see many of our customers now exploring, extending the technology into things like the flu vaccine, for example, that will likely be filed this fall as well as in other therapeutic areas. And so we're certainly well positioned here from a vaccine standpoint. I don't see that coming to an end certainly anytime soon. And then the other part of our exposure is going to be through PPE and testing. Certainly, the PPE component is going to be relatively durable. I think as some of these protocols have given -- we're supplying this content into labs and production floors, we see as -- although it may moderate a bit here this year, I think there's probably an underlying level there that persistent. And then on the testing standpoint, there's 2 dynamics. One, there's going to be kind of a return to life level of testing that's going to be necessary, whether that need to support kids in school or all of us to return to our places of work or just to support payment venues or travel that will certainly drive an underlying level of COVID testing going forward. And I think we'll also benefit from a pretty significant increase in the installed base. So the automated high-throughput testing equipment that requires a lot of the sample prep content that we would provide that for us, we would be agnostic to what the diagnostic platform was. And so I think there's probably some expansion to the broader diagnostic play here that will benefit from long term. But you put all that together and specifically, what does that mean for our business next year? Look, we've guided 6% to 9% to 2021. And to your point, maybe a couple of points of that is going to be COVID tailwind-driven in the end, which means that there's plenty of room for this business to grow next year. And I think we're encouraged. When you look at the performance of our core business, we printed 7% in the first quarter, if you would have adjusted for the number of business days in the quarter where the core business actually grew close to 9%. So we've got strong momentum in the core business. Biopharma, both in the R&D environment as well as the non-COVID-related production environment, continues to grow rapidly. We're encouraged by the trends in the academic markets, with revenues that would suggest that we're back to normal. I don't think we quite see necessarily lab utilization that would support us being back to normal. There's certainly some pent-up demand that we're satisfying there. But certainly, the trajectory for academia is in the right direction. We talked in the first quarter about our elective procedure platform within our health care end market being back to pre-pandemic levels. And similar to our bioproduction order book, the order book for our NuSil medical-grade silicone platform would sit at kind of record levels at the moment as well. You then get into like our applied exposure, that's been hovering around low single digits to kind of flat. In the early days of the second quarter here, it's probably trending more in the low single-digit level. The production parts of that platform, whether it be in semiconductors or some of our space-grade applications that we would support strong order books similar to the other proprietary platforms we have. And then some of the GDP exposure that we have certainly is heading into an easier comp window here. And I think when you just look at GDP expectations around the world, our PMI numbers are good. The backdrop for our core business would show a lot of momentum, Derik.

So that's actually a great segue way because it sort of goes back to the first question I asked about growth. I mean look, the markets are really good in the life sciences space and your applied markets as well. Things are good there. You've got momentum from the COVID, which vaccines and such which is not going to disappear. You're now adding Ritter on top of that. I want to go -- I want to talk a little bit about that in more detail. But when you look at the growth algorithm, as it stands, when you were on the IPO, the company was talking about a 5% to 8% range. That was a little bit more moderated when you gave guidance last year. But it looks like that, that upper end is not actually crazy as you start looking together in terms of where the business is and what's there. I know you're not -- I'm not going to put you on the spot to back that right now. But I mean, the growth feels like it definitely has accelerated to the overall business versus 1.5 years ago from when we were on the [indiscernible] were on the road.

Yes. What I would say there, Derik, is if you look at what we've said about the kind of the core business with the tailwinds aside, we've been very confident about this business growing sustainably at 5-plus percent. And if you look at the experience of the core business over the last 3 years, we've printed right around 6% during that period. So certainly at the upper end of the levels that we've been talking about. And when you look at the backdrop that we're operating in, and the investments we've been able to make over the last year or so to even enhance our positioning, some of the innovations and stuff that we've launched, we're leaving the pandemic better positioned than we went into it, which is to say that in a strong funding environment like we see the momentum in the biopharma space, broadly speaking, we're well positioned to continue to grow. And then you start to add on top of that then M&A, which in our algorithm will allow us to bring in platforms that will enhance both top line growth rates as well as help us expand margins, enhance our solution and better position going forward and being able to do it at scale. We deployed, in the case of Ritter, a little over $1 billion. And excitingly for us, we still have $1 billion plus of capacity that we could deploy this year if we had the right asset. And so the model will continue to build on itself and really now start to pick up momentum as you'll supplement a pretty rich organic story with now the opportunity to further enhance that as we can deploy capital for M&A.

Well, Mike, so -- go ahead, Mike.

Sorry. Let me just jump in there real quick. On the M&A pipeline, I think the Ritter view, one of the things that caught us a little bit offguard was the valuation. It certainly was a little bit more reasonable than what we've seen elsewhere in the market, at least as far as a lot of public comps. So given the current environment, it feels like a lot of the names that are out there, a lot of the usual suspects, valuation in the tool space has certainly gotten a little bit more extended, obviously, over the past year with COVID. Could you talk a little bit about what else is out there in terms of the pipeline of candidates, how you think about valuation, if that changes your approach, either in terms of particular nature, market or technology or the public/private dynamic?

Yes. I think the strategy that we had set out on, I think, is still intact, and we're, I think, on the same course today as we were when we got started on this journey. And that is to say then that we have multiple areas, multiple levers that will -- multiple end markets that we'll look to grow in via M&A. And I think that's helpful in an environment like this where a lot of balance sheets in our space are pretty robust. Valuations are maybe at the higher end on some of these assets compared to where they've been. So having optionality in terms of where you can productively deploy capital is certainly helpful. And I think this Ritter acquisition is a great example of that. But yes, we have to put capital to work in bioproduction. Being able to move beyond that and buy assets in the life science workflows within the lab environment at multiples that will allow us to do something really accretive here as well as enhanced growth, enhanced margins is helpful. And I would add a third layer to that in that the services area for us is another area that we have a pretty rich pipeline in. If there were assets that we could pick up that will enhance our offering for clinical trial services, we'd love to do that. So there's multiple areas that we're focused on. We have a very disciplined approach here. I think we have a very clear line of sight to the algorithm, both financially as well as strategically that a deal would need to satisfy. And I think we've got a pretty full pipeline that at least, as we see it, would satisfy those criteria.

How does this sort of like then translate to market expansion? One of the -- as I said, going back and thinking about the IPO and thinking about sort of margin targets, how should we think about the mix shift that were going on, the growth in business? What does it look like to the margin expansion business?

We've obviously had great success really over the last 3 years since we combined with VWR even pre-IPO in dramatically shifting the margin profile of this business. We probably averaged 150-plus basis points of expansion in more recent times. And we've talked about our long-term algorithm here that would have us expanding organically margins 50 to 100 basis points on a sustainable basis. And that then comes from probably a few key levers starting with the really disciplined approach to managing the price versus COGS relationship. We get great operational leverage in our P&L as we drive organic growth, and we have a great culture of productivity here that drives long-term value into the business. And we also have kind of a natural hedge on the mix of the business. Given the proprietary content that we have on the portfolio and the fact that almost all of our production-oriented solutions are based on our proprietary content, we get the benefit of the exposure to the high-growth production platforms, growing faster than workflows in the lab, for example. And so given the market associated with our proprietary content, we benefit organically from kind of the disparate growth rates that we realized in the proprietary part of our portfolio relative to the third-party portfolio. So organically, we're set up very well to sustainably grow, call it, 50 to 100 bps a year. You'll then extend that and enhance that further and probably really drive the step change over time via M&A. This Ritter deal is another great example of that. We'll be bringing in $300-plus million of proprietary content if margins that would print at the -- certainly the upper half of our proprietary margin profiles today. And that would be kind of what you should expect us to do on future deployments of capital. So you'll get, I would say, kind of incremental expansions organically, and we'll move the needle even faster when we deploy capital.

We did a conference call back in October just as the vaccines were starting to roll out that people are starting manufacturing. You talked about the bioproduction business. What did you learn since we did that call in October? I mean what -- I mean when you go back and you look at what you thought how the vaccine market, the bioprocess market has been unfold. Where were we been? Where are we today? Can you just sort of like update us on what sort of like your experience today, better, worse, super better?

Yes. No, I mean obviously, remember the teach-in well there. And we did a lot of work leading into that to try to quantify and dimensionalize the opportunity here for raw material in single-use provider like ourselves for the vaccine opportunity. And obviously, at that time, we had no idea what the mix of modalities, how that was going to play out, what vaccines would prevail. And obviously, we're a lot smarter on that today than we were then. One of the things I think we've been encouraged by is not only that mRNA vaccines kind of get out of the gate first, the efficacy that they've demonstrated has been quite impressive. The public confidence that, that has generated certainly has that modality position, I think, well throughout the -- for the pandemic and existing moves into more of an endemic situation, mRNA vaccines, in our view, will be relevant. I think it's also set that modality up well for vaccines beyond COVID, just given the experience that we've all had here and how fast that has been able to scale. I think that's been somewhat surprising to us, just how collectively the value chain has moved towards producing the number of doses we're talking about here from an mRNA perspective. And that's good for our business. Obviously, that modality, as we talked about it, that teach-in has the most raw material and single-use requirements of any of the other modalities. But I think if you take a step back even beyond the technology, it's just this past year has certainly demonstrated the potential for our space to enable breakthroughs in life sciences beyond what have been achieved before. And you've got new therapies that are emerging, new treatments that are emerging that will engender funding in the near to the longer term to continue to support our space and just the opportunity to have impact like never before has sort of been on display here. I think as you look at the role that the various governments around the world have played during this process, I think that will probably support the funding at least in the short to midterm. I think the experience has certainly taught us a lot about our supply chains, highlighted pinch points, opportunities for investment that we've worked through. And we're definitely coming out of this experience with a much stronger footprint and better positioned not just for COVID, but to support our -- the core business as well. And the opportunities that we've had to invest in manufacturing capacity will certainly serve us well, like I said, well beyond the vaccine opportunity, but it will expand into cell and gene therapy for sure, and certainly into our core monoclonal antibody franchise as well.

I'm going to ask all the companies presenting some - a standard question, which is -- and you sort of addressed it here, but the long-term implications of COVID on the market in our industry and your company in particular. I don't know if you care to expand -- if you have any thoughts about the broader market and just in terms of how you react to your customers, how things are changing. But I just want to sort of like big picture thoughts on -- I mean, how does COVID change you in the industry?

Yes. I think there's 2 or 3 things that come from this. One, I think it's going to support continued strength in funding, which is important for our industry. I think long term, there'll be a structural shift on the funding available in our spaces, given the reliance on this value chain is one thing. I think the acceleration of technology is evident in not just mRNA but public vectors as well has been accelerated to this. And there was a rich pipeline already building for mRNA technologies that, I would say, has been accelerated by multiple years. The expansion into other non-COVID-related vaccines has expanded the addressable market for the biologics space significantly. Our supply chains have been strengthened through this experience. Certainly, the value of a listed supply chain has been on display and some of the global customer connections we've been able to make as a result of this experience will serve us well going forward. And so obviously, we're proud of the role that we played in helping combat this horrible disease and virus. But it is really, in the end, strength of our business, and we created a backdrop for us to operate in going forward there.

So I guess just got a question here from a client, just wanting to you having opine on your tax rate and potential changes going on in Washington? What do you think happens? I mean your rate is not as low as some of your peers, which is just sort of general directions on where you think the tax rate can go over time?

Yes. We've made obviously considerable progress even going back to the IPO to put VWR and Avantor together. We actually had tax rates in the 30s, and Tom and his team have done a great job over the last couple of years, taking out some of the natural inefficiencies in the way the business is structured. And we did, I think, in Q1 kind of 22%, 23% range. I think we're expecting something 24% or lower on a full year basis this year. So we indeed have made considerable progress. I would hate to speculate. We don't have any inside information the same thing that everybody else has in that's been talked about in Washington in terms of what a U.S. tax rate could be. But of course, the devil is in the details in terms of what all implications that would have. And so it's difficult to try to do something proactively given just the lack of experience in levels comes from that. But we have a line of sight to some additional changes in investments that we'll make to continually push our tax rate lower. Certainly, M&A will give us an opportunity to probably address that over time as well. And so we're focused on the things that we can control and continuing to optimize that part of our business.

So as we're coming to the top of the hour, my standard closing question, which is what's The Street not appreciate about Avantor?

Look, I think the -- we've worked hard to try to articulate what Avantor does, its relevance, the broad offerings that we have. Hopefully, The Street understands the growth algorithm here, which I think is quite unique. And this opportunity that we have to drive outsized EPS growth given deleveraging that we've been driving, the ongoing margin expansion and certainly, a pretty rich organic story. But hopefully, we'll start to get credit for being a consolidator in this space, given our customer access and the strength of our balance sheet. But I think it's important for The Street to recognize COVID strengthened our business, allowed us to strengthen our business. At the end of the day, it's only a modest portion of our revenues, less than 5%. And given the unique exposure that we have through the vaccines, we think that's going to be durable, and we're poised to exit this pandemic a lot stronger than we came into it there.

And right on time. Thank you, Michael. Always a pleasure to being here. Thank you, investors...

Thanks for the opportunity, too.

Yes.

Thank you.