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

Good morning. My name is Wayne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Avantor to Acquire Masterflex Bioprocessing Conference Call. [Operator Instructions] I will now turn the call over to Mr. Michael Stubblefield, President and Chief Executive Officer. Mr. Stubblefield, you may begin your conference.

Thank you, and good morning, everyone. I'm excited to be here today to discuss our acquisition of Masterflex. Tom Szlosek, our CFO, is joining me on the call today. Following our prepared remarks, we'll be happy to take your questions. Starting on Slide 2. I need to remind you that we will be making some forward-looking statements, which reflect our current views and are not guarantees of future performance. This call will also include a discussion of non-GAAP measures. A reconciliation of non-GAAP measures can be found in the appendix of the presentation. You are encouraged to read the rest of our standard disclaimers as shown here. I'm now on Slide 3. This morning, we announced the acquisition of Masterflex, a leading global manufacturer of peristaltic pumps and aseptic single-use fluid transfer technologies for $2.9 billion or $2.7 billion net of anticipated tax benefits. This acquisition is an exciting opportunity to further strengthen our single-use offering for the high-growth biopharma end market. Masterflex is a business segment of Antylia Scientific, a privately held portfolio company of investment firms GTCR and Golden Gate Capital. For over 50 years, Masterflex has been providing industry-leading fluid transfer technologies that play a central role in clinical biopharma research and production workflows. Masterflex's technologies are relevant across all established and emerging biopharma platforms, including monoclonal antibodies, cell and gene therapy and mRNA, and support both vaccine and therapy manufacturing, including COVID-19. Over 80% of Masterflex's revenue is concentrated in biopharma, giving us access to a $5 billion addressable market that is growing high double digits. Masterflex gives us a fully integrated solution for managing aseptic fluid transfer throughout the bioproduction workflow. Its offerings span 3 product categories. First, Masterflex manufacturers peristaltic pumps and instruments that transfer critical materials at precise flow rates without coming into direct contact with sensitive materials. Masterflex continues to invest in product enhancements, including multi-modality wireless access and stainless steel componentry. Masterflex has a significant installed base of pumps in academia and biopharma research as well as in biopharma manufacturing. They also manufacture engineered single-use tubing, which is designed and optimized to work with Masterflex pumps to achieve precise performance attributes. This tubing is specified into customers' processes and drives highly recurring revenues. The final product category is single-use components for fluid transfer assemblies to complete the end-to-end solution. As you know, the single-use fluid transfer space has been an area of significant growth for Avantor, supported by expansions of our facilities and our previously announced acquisition of RIM Bio. Our single-use platform has delivered double-digit growth in 2021, and we see this acquisition as a further accelerator of this growth. Moving on to Slide 4. There are several elements of Masterflex's strategic positioning that attracted us to this opportunity. Masterflex's industry-leading pumps act as an anchor technology for the bioproduction workflow. As customers design their production processes, they decide on pumping technology early in the process. This will enhance Avantor's advanced insight into customers' production needs, enabling us to position the right pumps and associated fluid transfer solutions and to position other Avantor products and services. Additionally, fluid transfer solutions are mission-critical to the execution of bioproduction workflows. Masterflex's products enable biopharma customers to transfer materials throughout the upstream, downstream and fill and finish workflows at very precise flow rates in an aseptic environment. And Masterflex pumps and tubing are engineered to work together to ensure precise performance attributes. The entire solution is specified into customers' processes driving a significant pull-through of recurring consumable sales, including tubing and other single-use components. Masterflex's fluid transfer solutions complement Avantor's existing single-use platform where we design and configure custom single-use assemblies. Our assembly capabilities will enhance Masterflex's current offering and enable us to deliver a fully integrated fluid transfer solution with proprietary Masterflex components. Turning to Slide 5. I'd like to highlight the close strategic alignment between our businesses. Masterflex shares several core business attributes with Avantor, including its premium brand position, stringent quality standards, strong culture of innovation and specification-driven model. The early access I just described as well as the complementary capabilities of Masterflex and our single-use platform will drive significant cross-selling opportunities. The business also strengthens Avantor's offering across all bioproduction platforms, further enhancing our relevance in this high-growth end market. Additionally, Masterflex's considerable installed pump base in both research and production drive significant demand for single-use consumables and components, consistent with Avantor's highly recurring revenue profile. Finally, Avantor will leverage its differentiated channel and deep biopharma customer relationships to enhance growth opportunities in both research and production environments. With that, let me turn it over to Tom.

Thank you, Michael, and good morning, everyone. Slide 6 outlines Masterflex's financial profile and key parameters of the transaction. Starting with some of the financial highlights. In 2022, Masterflex is expected to generate approximately $300 million in revenue and is expected to grow at rates similar to that of our biopharma production business, which, as you know, has consistently been above 15%. Approximately 90% of Masterflex's content is proprietary with margins comparable to those of Avantor's proprietary products. Similar to Avantor, the Masterflex business has a strong customer reorder profile. Approximately 70% of its business is recurring. The carve-out acquisition will be an all-cash transaction for $2.9 billion, subject to final adjustments at closing. As Michael mentioned, there are approximately $150 million of income tax benefits mostly created by the transaction that reduce the net purchase price to $2.7 billion. We expect the transaction to be accretive to adjusted EPS in year 1 and deliver a high single-digit return on invested capital by year 5. In terms of financing, we've fully secured 100% debt financing for the transaction. Through the expected close in the fourth quarter, we'll have the flexibility to consider an equity-based component on the transaction. Masterflex has similarly strong cash-generating profile to Avantor, and we fully expect our leverage to be within our targeted 2x to 4x adjusted EBITDA by the end of 2022. Let me move to Slide 7. This transaction hits the bull's eye on both our qualitative and quantitative acquisition criteria. It's a proprietary technology serving highly attractive growth spaces and generates high margin and recurring revenue. Its double-digit growth rate and proprietary gross margins will be accretive to the Avantor enterprise. We also expect modest accretion to our 2022 adjusted earnings per share and a high single-digit return in year 5 post acquisition. And we remain committed to a strong balance sheet, including the targeted 2 to 4x leverage range by the end of 2022. This concludes our prepared remarks. At this point, Michael and I will be happy to take your questions.

[Operator Instructions] Your first question comes from Tycho Peterson from JPMorgan.

Wondering if you could talk a little bit more about revenue mix. How much is monoclonal antibodies versus cell and gene versus mRNA and what's the COVID exposure? And then how are you thinking about revenue synergies on this one going forward? To what degree were they already being kind of spec-ed in to your workflows? And then if I could ask a follow-up for Tom. I had a few questions about the equity comments in the press release. I know you said you have 100% debt financing, but can you just talk about your views of a potential equity offering and how soon you might do that?

Thanks, Tycho. One of the things we're excited about in regards to the transaction is the additional exposure it gives us to the biopharma space. And similar to our existing technologies, the Masterflex lineup of products is relevant across all of the modalities, including those that you mentioned. The mix of the business looks very similar to our own, which is to say that the majority of the revenue is coming from monoclonal antibodies, but they're also very exposed to the recent approvals in cell and gene therapy. And certainly, there is COVID exposure here, particularly through the mRNA modality that I would probably characterize in and around 10% to 15% of the current year revenue. From a synergy standpoint, clearly, this is a commercially driven deal. There's limited cost synergies that we would be going after here. And as I reflected in my remarks, there are considerable cross-selling opportunities. We'll certainly be able to leverage our channel, particularly in the academia environment, to accelerate growth in the research environment. And obviously, we'll be able to leverage our deep biopharma access and relationships around the world. So it is a specification-driven profile of the revenue as we mentioned. So there'll be a bit of a lag here as we start to see these new opportunities with our commercial teams, but we would certainly anticipate delivering on revenue synergies as we move forward. For the sake of clarity, the financials that Tom walked you through there on Slide 6 in the deck exclude any potential synergies that we would get from the transaction.

Yes, Tycho. On the financing comment, first of all, we've secured 100% committed financing. We talked about our lending partners there and fully expect to have a constructive debt financing that's consistent cost-wise and catalyze with our existing portfolio. With that said, there's no requirement for us to do equity in this transaction. We've had some preliminary discussions with ratings agencies and we'll have some more. But I think from that perspective, there's been support for what we've articulated. But we do have a desire to preserve flexibility going forward to be able to have capital to put to work as opportunities arise. We've also always been committed to 2 to 4x leverage. It's important for us that we have a clear pathway to get to that in a pretty reasonable period of time. As we said, with the equity component, this deal will be just slightly above 4x and quickly delever over the course of 2022. In terms of timing, there's really no hurry. We've got a lot going on this week between this event. We've got our Investor Day on Thursday. So we'll be monitoring the market over the next short-term period of time and decide what, if any, anything we decide to do and when we do it in due course based on the market.

Your next question comes from Derik De Bruin from Bank of America.

Just a couple of ones. So what's your overall proprietary product mix today following this deal and Ritter? And I guess, can you just sort of, and I realize you're going to probably go through some of this on the margins at the Analyst Day coming up, but what do you sort of think about is the longer-term margin profile of the company now that you sort of have been switching the mix?

Yes, Derik, thanks for the reference to our Investor Day on Thursday. I hope everybody is able to join us there. We will be spending some more time talking about our views on margins and proprietary content going forward. Clearly, the 2 acquisitions that you mentioned, Ritter that is closed and this Masterflex deal once we get it closed, similar top line profile, roughly $300 million each. And also both have similarly high proprietary content will undoubtedly help move things forward here today. With the businesses that we have prior to closing those 2 acquisitions, we were about 50% of our revenue as we've talked about before as proprietary. And so you can kind of add in the 2 acquisitions on top of that, that will certainly start to move things forward in a more meaningful way on top of just the natural enhancements we're getting to the profile through organic growth that we have. But we'll be prepared to kind of give you some more insights on this when we speak on Thursday, Derik.

Your next question comes from Vijay Kumar from Evercore ISI.

Congratulations on the transaction. Michael, maybe one on the deal financing side. Maybe from a slightly different perspective, I think the deal close of late Q4, I mean, that seems fairly quick. One, are there regulatory concerns after having the close in place, not? And given the deal close timing or uncertainty around regulatory process, how should we think about the equity offering? I think by my math, it seems like $1 billion-plus is on the offering here.

Vijay, one of the, I think, attractive elements of us as a buyer certainly is our ability and certainty to close transactions quickly. We're relatively unencumbered from a regulatory perspective. And that certainly was one of the differentiating factors in us securing this deal today. We do not anticipate significant or material regulatory concerns here. We will obviously be advised to file here in the U.S. and then maybe one other minor foreign jurisdiction that we would need to file in for antitrust approval. But as you note, we are anticipating a relatively short time line to getting the deal closed just based on the time lines associated with regulatory reviews in those jurisdictions and our conviction that there shouldn't be any meaningful concerns on that front. Relevant to the financing structure, I think the key message I'd like you to take away from the call today is just a couple of things. One, we're committed to maintaining our leverage within the 2 to 4x range. Clearly, if we were to do this with all debt, it would take us between 4.5, 4.7, somewhere in that range at the time of the close. And if we opted that, we do have the advantage that the business does delever rather quickly. And in the worst case, you would certainly exit 2022 below 4x levered, but we would like to continue to preserve flexibility. As we've shown with our M&A activities this year, we've been able to significantly enhance our capabilities, our offering for our customers and bring forward a pretty compelling enhancement to our financials. So given that, we'll certainly take a look and monitor the markets here in the coming weeks and also make a decision on whether we go with a full debt offering here or whether we supplement it with equity.

And just one quick follow-up, if I may. Was this a competitive process?

Yes. I think that was disclosed in the press release. The sellers were being advised by JPMorgan. And it certainly was launched as a competitive process a number of months back. And it's our view that it was competitive throughout, even up until the recent days here. So short answer would be, yes, it was a competitive process. Secondly, I think we've been able to, as we talked about before, just differentiate ourselves as a buyer and not simply just based on economics. In this case, I think the other non-economic factors actually had us positioned pretty strongly here, including the lack of regulatory concerns, our ability to close quickly and just the strength of our single-use and bioproduction offering makes us a natural home for these assets. We would now have the only end-to-end fully integrated fluid management solution for the bioproduction space. So I know that the sellers are excited and anxious to become part of our platform.

Your next question comes from Jack Meehan from Nephron Research.

Wanted to ask about bandwidth on M&A. You're now managing 2 big integrations at once. What's the appetite to do more? And how does that factor into your thinking of leveraging an equity component when it comes to the financing?

Jack, that's a good observation. I think we talked when we closed the Ritter acquisition around this topic around just bandwidth, particularly given what's going on from a synergy standpoint as well as just managing a pretty frothy growth environment of the core business. One of the things that we considered in this particular transaction is that the internal resources that are focused on driving the Ritter acquisition are pretty distinct and separate from the resources that we're going to be relying on to drive this particular acquisition. In both cases, we're aided by the fact that there are limited cost synergies that we're trying to drive here, which can add another element of complexity in an integration. So they're in primarily different end markets and primarily different resources that we're able to carve out here to drive the integrations, which certainly gives us confidence that we're well positioned. And we've got a well-established playbook for this in terms of how we stand up our integration office, the cadence, the engagement of our executive management team. We've done dozens of these deals in recent years. And I think we're obviously very comfortable that we've got the bandwidth to do this. In terms of going forward, we've said all along that M&A will be an important element of our growth story. And certainly, will be important for us to accelerate the top line growth of our company as well as to bring additional proprietary content into the business, which will expand our margins. And we continue, so we would expect to continue to do that. Clearly, with the size of this acquisition and just where we sit, wouldn't anticipate doing any more certainly in 2021. And depending on what capital structure we ultimately land on here and how much flexibility we give ourselves, we would hope to be continuing to work our pipeline and look for opportunities in 2022.

Your next question comes from Patrick Donnelly from Citi.

Michael, maybe one for you just on the revenue synergies to follow up along the earlier questions. I mean, how much did that play into this? When you think about the customer overlap, whether it's leveraging your reach and kind of bringing their products into some of the relationships you have that maybe they didn't have access to and then vice versa, can you just talk about maybe the overlap between the 2 and then, again, the opportunity to leverage each reach and kind of drive more penetration for the products here?

It's a really insightful question actually. And when we looked at the business, I think our first observation was that it's a great business on a stand-alone basis. They've got a great track record. And on their own, they have been growing very impressively through their investments in innovation, bringing their technology capabilities along. They've had a long-standing leadership position in the research space and the lab space with their offering and have done a really nice job of pivoting here over the last few years into the production environment. So there certainly is a strong overlap. We did observe though as we got into the diligence that our presence, just given our differences in scale, is going to be a bit more pervasive. And so we see certainly an opportunity to leverage our access and our positioning to drive accelerated growth of the Masterflex business. We also see the opportunity to leverage our channel, as I referenced in my prepared remarks, particularly in academia, where there's a strong use of these types of products. The other thing that is going to be critical here is, given the early access that this gives us to production, as I mentioned fluid transfer becomes one of the primary design concerns or focus areas for our customers' engineering teams and process development teams, it will just further enhance our visibility into the production needs of this customer base, which will give us an opportunity then to not only seed our pretty comprehensive single-use offering, but it's obviously going to give us an early seat at the table to position our other process ingredients, excipients, chromatography resins and the rest of our portfolio. And so that's an important element of this. We like the business on a stand-alone basis. With the synergies that we see coming from this, we like it even more.

Your next question comes from Luke Sergott from Barclays.

Can you just give us a sense of the geographic mix according to how you're going to be reporting, see where the accretion is going to come from on your different segments? And then I have a follow-up for the normalized growth rate.

Yes. Region-wise, the mix is not much different from what we have for Avantor. And yes, they're a little bit bigger in EMEA. And I think the growth perspective, there really isn't anything that distinguishes any of the regions from a differential in growth at this point.

All right. Great. And then on the normalized growth rate, you gave high double digits for long term. Can you give us a sense of how the business performed during the last couple of years of the COVID tailwinds and really trying to get at the rise of single-use and where this kind of puts your business from that perspective as a single-use versus a large installed base portfolio mix?

Yes. Thanks, Luke. As Michael was explaining, the model certainly is to get the anchor pump technology into an installed base, whether that's in a lab or in a production environment. Masterflex has been very successful with that, and that has served to enable them to spec in with a lot of the other componentry, especially the tubing and then create a nice business that has strong flow of consumables and aftermarket-type products. When you look at it from a COVID perspective, just like most other companies in our space, yes, there's been tailwinds. We've been pretty thoughtful about how to assess those and certainly have done that as we build our plan going forward. We've said that this is going to be a double-digit grower. And if you read the fine print, I think it actually says double-digit, high double digits, which means they're greater than 15%, and we're confident in that. Historically, the growth has been much higher. And so we think we've been conservative on that. And we think we've also given the proper assessment on some of the potentially nonrecurring-type tailwinds they may have enjoyed.

We have one last question from Josh Waldman from Cleveland Research.

Wondering if you could comment on how much of the $300 million expected 2022 revenue is currently going through the VWR channel. And then a follow-up on Derik's question. Wondered how much of the, I guess, with the Masterflex business, how much of the proprietary business is self-manufactured.

Look, to your first point there about the split on the $300 million versus how much of that will be incremental to our existing book of business, I think for modeling purposes you could consider almost all of it to be incremental. There's probably low single-digit millions that we're running through our channel today. And so we'll certainly be able to accelerate that in our hands. Your second point about the split on the proprietary content. I think on the Slide 6 there, we show that more than 90% of this should be considered as proprietary. There's some third-party componentry that becomes part of some of the assembly solutions that, in some cases, we're carrying forward our partners' brands on that. But more than 90% of our revenue here should be considered as proprietary branded offerings. And the margins associated with that would be in line with the margins of the rest of our proprietary portfolio across our business.

I would now like to turn the call over to Mr. Michael Stubblefield for closing remarks.

Yes. Thank you. And thank you all for joining us today, especially coming out of a holiday weekend on short notice. Acquiring this Masterflex business is another example of our M&A strategy in action and a great opportunity to create value for our customers as well as for our shareholders. As we referenced in a few points in our remarks today, we do look forward to engaging with you at our upcoming Investor Day this Thursday, September 9 at 9:00 Eastern Daylight Time. Until then, thanks for joining us today and have a great day, everyone.

This concludes today's conference call. Thank you all for joining. You may now disconnect.