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

I guess we're good to go. Thank you, everybody. It's great to be in person again. Welcome to Barclays Conference. It's my pleasure to speak with Avantor and CFO, Thomas Szlosek. With that, I guess we can dig right into it.

So Tom, plenty of macro, we got to kind of go over that first. So let's go in. I know you have small Ukraine, Russia exposure, but you guys have a pretty sizable European business. So are you starting to see any cracks there? Just give us an idea of how the demand environment played out versus your expectations throughout the quarter.

Yes. Yes. Thanks. Thanks, Luke, and good morning, everybody. Just to set things at the outset. From a guidance perspective, for 2022, Avantor had set out with 4% to 6% organic growth, roughly 125 basis points of margin expansion in, call it, mid-teens. EPS growth, call it $1.48 to $1.53. Important to remember that the 4% to 6% included some tailwind -- or sorry, some headwinds from COVID. We'll get into that in a second, but roughly 200 basis points. So really, you can consider the 4% to 6% to be something closer to 6% to 8%. In terms of what we're seeing so far, we're comfortable with the guide. Certainly, when you look at first half, second half, as we've talked about, we were -- we grew 13% in the first quarter of last year and 20% in the second quarter of last year on the heels of some of the recovery trade. So our first half definitely has a bit of a tougher comparison. The other element of the growth I mentioned, it's effectively 6% to 8%. That's a bit higher than what we've delivered in the last 3 years ex COVID. And certainly, the pricing environment is a bit different, more robust from a pricing perspective to capture impacts of inflation, which we're seeing. And so again, when you talk about first half, second half, the -- our pricing performance typically phases in over time because you enter every year with a backlog that's priced at older prices. So it's -- the pricing impacts definitely have a second quarter, third quarter, fourth quarter kind of tail to them, as is typical. With that said, specific to Russia and Ukraine, our exposure there is very limited. We sell mostly into Russia, about $5 million a year through our distribution in Austria. We don't have any manufacturing presence there, really limited people on the ground. And when you think about the sourcing that we do, there's little content from those areas. I will say though that, probably like a lot of the other companies you cover, the inflationary impacts that we've already been experiencing have been magnified by -- particularly on the fuel base side by the oil pricing. There are also other residual impacts that we deal with, including container availability and other things. I mean the good news, it's mostly, for us, supply-related concerns. And we manage that as we normally do. I mean it's -- during this whole pandemic, I mean, we're 2-plus years into it, we've been dealing with a number of rolling many crisis on a product category or something in the supply chain that broke down because the factory closed because of an uptick in COVID and so forth. So we've become accustomed to kind of managing through each and every one of these things. I think this -- the price/COGS dynamic experience that we've had in the past will serve us well in this time frame. So we fully recognize the environment and trying to operate like we know how to do.

All right. I guess we'll touch on the -- let's touch on the inflationary portion right now before we get into the COVID piece. So you've talked about in the tool space, in general, is really pretty resilient and able to pass on a lot of that pricing. You guys have talked about that as well. Are there any segments or product lines or regions that you're unable to pass on as much pricing? It's not going to be clear across the board.

Right. Right. Yes, and if I could just take a step back and talk about how we drive that margin expansion. I talked about 125 basis points of margin expansion. Generally, we're at -- our long-term guide is 50 to 100 basis points of margin expansion. We called 125 this year on the heels of some nice benefits from the acquisitions. I mean we have roughly $500 million of new revenue coming in this year at gross margin rates that are 1.5 to 2x the, let's call it, legacy gross margin rates for Avantor. So that 125 -- and our normal margin expansion comes from 3 or 4 different factors, the first being productivity and we have a fairly low, fixed cost base and low CapEx spending. So as you can get more volume through that, you get productivity. The second element certainly is mix. As we sell more of our higher-margin proprietary content, including the content from the acquisitions, you get a nice mix impact as well. And the third big one for us is acquisitions. I talked about the deals we've done this year. And then fourth is the commercial part of it, managing the price over COGS. And we've gotten questions about how flexible are your commercial arrangements with your customers and do you have pricing caps and so forth. And certainly, there is some protection in there for customers to protect from unreasonable-type activities, gouging, if you will. But in this environment -- I should also say that those pricing caps typically are confined to a small basket of products. And outside of that, the pricing is more flexible. In addition, we have the ability to pass on direct inflation, like in the form of fuel surcharges, as an example. That's certainly something that's on the table. And in addition, protect our supply. Most of our customers are wanting to ensure that they have a steady flow and that there's no disruptions. I mean it's -- like I said, there's -- supply chain is tight and pricing can help in that situation as well. So it's not a walk in the park. There's a lot of heavy lift that you have to do. But like I said, we've been down this road plenty of times. And we're confident in our ability to drive those, the overall margins even in this inflationary environment.

Okay. And here we touched -- you're talking about the supply chain right now and how it's had fits and starts. Where are you seeing some of the constraints currently? And kind of how do you think about -- how do you plan for the next one? Really, how are you -- where are you looking at there?

Yes. No, it's funny, I was talking about COVID before. And it seemed like in right around 2 years ago, March 2020, there was an onslaught of need for masks, like facial masks and you couldn't get that and the pricing went crazy. And then it kind of rolled through a number of PP&E-type categories. And then we started to feel the impact on testing, like the content that we provide into testing, whether it's PCR tests or the antigen kits. The content that we need to produce, those became a bit tight and constrained and we worked through that. And then just on the material side for the various proprietary offerings that we have, whether it's our chemical ingredients, single-use offerings. Resins are tough to -- it's a tough market right now and with petroleum prices the way they are, it gets a little bit more constrained. So we worked through that. But we have a sizable single-use business that -- where we have resins, and the same thing with our robotic fuel handling tips in Ritter. So it's -- they keep coming at us and we continue to deal with them. I wish I had a crystal ball to say what's -- what are going to be the next one. So I think we have a pretty robust, resilient supply chain and a lot of experience that helps us to manage through these things.

Okay. And kind of tying into the supply chain and the bioprocessing, but as you're looking at the COVID vaccine and the testing environment, you guys are guiding to relatively similar levels ahead of '21. Just give us an update there on what you're seeing and how you're thinking about it throughout the rest of the year. Is there a change there, follow-up?

Yes. So I mentioned earlier the headwinds that we have from COVID in 2022 of 2%. So the 4% to 6% includes 2% COVID headwinds. Our COVID numbers, in aggregate, are pretty small relative to our $8 billion portfolio. I think in 2021, we had about $400 million of revenue. And that would be in 3 categories: personal protective equipment, mostly masks and gloves; diagnostic testing, whether they are the kits themselves that we might distribute or the content that we put into like a PCR-type kits would be a second category; and then the third category was -- is the content that we have into the vaccines. The first 2 categories were about half of our revenues in 2021. And the vaccines were a couple of hundred million as well. And 2022 guide, we only really assume that we would have a continuation of the vaccine revenues for the most part. A little bit on the other 2 categories. But we basically said our revenues would be halved from $400 million to $200 million. That 2%, that's in the guide that we talked about. So far, 2 months in, no reason to really change those assumptions and we're comfortable with them. And again, a big takeaway for us is that it's not a material part of the business. And if there were to be variability, for example, in vaccinations, we feel pretty good about our ability to redeploy our capacity pretty quickly. We've got sizable amount of open orders in our biopharma production business. It's fairly pliable and the capacity can be redeployed fairly quickly for those things. It's mostly ingredients, chemicals and single-use type offering.

Okay. And so on that -- on the vaccine and the bioprocessing side, are you guys playing -- I guess you're playing across the API and the fill finish. But where is the majority of your exposure there?

It's pretty ubiquitous. I mean we are a participant in the entire biopharma production mAbs workflow, starting with the cell culture and a number of process ingredients that we bring into that process, so upstream. The downstream, including chromatography resins. Fill and finish, I mean the excipients. Single-use offering covers the entire gamut. So I'd say we're probably half -- you can think about half of it as single-use and probably half as ingredients, chemicals, excipients, those type of things.

Okay. And then so you talked about a pretty open order book. Give us an idea of, there's debate on how quickly the COVID revenues roll off if the industry can fill those lines quickly enough and if there's any risk of overcapacity. Just give us a sense of how you're looking at it.

Yes. Right now, we're not really seeing that. We've certainly prioritized the vaccines in our biopharma production business with [ DPAS ] and operational work speed and so forth. So the -- our open orders really is a fairly small component for COVID and for vaccine related. It's probably an order of 20% of the total biopharma production, open order book. And so it's -- even if there were modifications in that, we feel comfortable we'd be well positioned to sustain the revenue growth that we've talked about.

But on the -- outside of COVID, just in general, from the -- from your order book in just -- in biopharma and processing, give us a sense of where you're seeing most of the demand coming from right now.

Yes. No. I mean certainly, mAbs continues to be a workhorse. And the importance of high-purity material offerings in GMP is our sweet spot. And that plays very well. It's -- we're going to be continuing to be fueled by that. But we're also bullish on other modalities. mRNA, the personalized medicines we've talked about, those also depend highly on sterile fluid management and transfer GMP processes. So it's -- those are also areas fertile for our material deployment.

Okay. And so let's -- I mean, just keep following on that bioprocessing. Let's talk some Masterflex. How is the integration there going? It seems to be going quite well for you guys. How does that continue to expand your portfolio? And where can you take that in addition to the scale story?

Yes. So all 3 acquisitions that we did in 2021, the integrations are going very well. We're furthest along the line. RIM Bio, China, a single-use manufacturer as well as on Ritter, both of those were a little bit simpler, self-contained type of business. We did those in June of 2021. And so pretty far along. In terms of Masterflex, that was a little bit later in the year, it was in November. A bit more complex. The seller had Masterflex embedded in its other life science businesses. So when I say embedded, I mean even the master files, the customer master files, the product master files, all the ERP setup, distribution facilities, commercial teams, very integrated. And so we're slowly pulling that apart and operating under a transition services agreement until we can get that done. We'll be cutting over outside of the U.S. for Masterflex right around Memorial Day. And we'll cut over in the U.S. right around Labor Day. And so for both of those businesses, we should be positioned by the end of the year to be completely off of transition services agreements. As for the synergies on all 3 of those deals, most of the synergies are commercial synergies. And the idea really is leveraging our commercial footprint. As you know, we have a channel that has 3,500 sales associates, customer-facing people, a pretty sophisticated e-commerce platform, physical distribution with the latest technology that really helps us to excel well in serving our customers on time, high quality. And it really haven't had offerings like robotic fuel handling tips in those channels. We really haven't had fluid management solutions like the pumps that come with Masterflex and the single-use type offerings that come with Masterflex. So we're excited to move those through our channel. You basically are moving from a stand-alone company that was able to only access a finite number of customers. Like, for example, in the case of Ritter, you're -- it was basically an OEM set of customers that Ritter will serve, probably less than 20 customers and probably that many salespeople. And you take that into a channel like we have, it's very powerful. And we're excited every month to see the synergies that are materializing in that business, in the same [ half ] of Masterflex.

And digging a little deeper on Ritter, you just talked about, I guess, 20 salespeople on 20 customers. Those are primarily diagnostics OEMs. So talk about where you're seeing additional demand for that business. And is -- are we starting to see it from biopharma or just expanding the scope of Ritter supply?

I think it's everywhere. I mean we've -- the trick is really figuring out where the product content is utilized. And our channel gives us that information pretty readily. You map out where the PCR testing equipment and fuel handling, robotic instruments are, and it's in biopharma, it's in health care. In some cases, it's even in our advanced technologies and applied materials-type customer sets. So it's something that takes a bit of time. You need to get your customer to sample our offerings, to run them through their quality control and testing and documentation. But once you do that, it can be pretty powerful. We can compete very readily with any offering that's on the market. And our product has all the most contemporary features that are required to be successful. So we're very excited about how we are progressing here.

And so the whole story here is the roll-up strategy, you guys kind of layer on these accretive businesses, get immediate top line accretion just from the scale of the channel here. And as you look at your LRP, you guys are doing, like you said, 6% to 8% this year ex COVID, you're maintaining that 4% to 6%. Kind of how are you guys thinking about the long-term growth? And why are you basically sticking to that?

Yes, fair question. Fair question, especially when you look at the last -- the year since the IPO. I mean we've clearly been on the higher end of that 4% to 6%. And this year, I think we're looking at is 6% to 8% is a bit of an aberration with the pricing power that we have. But on the other hand, we are bullish about our ability to continue to drive to the higher end of that. And it's probably a question of when and not if we change that guidance. We're in a little bit of a market environment where you kind of want to be confident of everything around we've talked about product availability. Like I said, our challenges are more on the supply side than they are on the demand side given all the open orders we've talked about and so forth. And so I think when we see -- when we get clarity and some confidence that we're in normal run rates and maybe COVID settles. So maybe you read about Hong Kong and the water testing in our sewers today, and you're not sure yet that you're in a stable environment. So we want to see the white of the eyes of stability a bit before we go there. But like I said, I think it's pretty imminent that we do that.

Yes, that makes sense. And as you build out into more and more biopharma focused and really kind of continue to transform the portfolio focused on that environment and you're seeing the biotech funding weakness on the IPO side, give us a sense of what you're seeing on the private side. And what's your exposure to the early-stage biotech industry?

Yes. That's a great question. We seem to be getting that a lot today. I mean I don't have like a definitive here's the dollar amount. But the way I think of it is biopharma is a little bit over 50% of our business. And that's split between, I'd say, 60-40, 60 is research, 40 is on the production side. And I'd say of that 60 research, more than 80% of that is large pharma, large existing customers. So you go through all that math, you'd probably get to a fairly small piece of the overall $8 billion revenues is strictly linked to the emerging biopharma-type customer base. But with that said, it does drive growth. A lot of the customers that we have, that would fall in that category, are we believe in further stages of research where their funding has already been committed. It's already been available. They're already kind of moving ahead on things. So maybe there's a lag effect. Maybe we'll see some impact somewhere down the road, but we're not seeing it right now. And we're pretty confident.

And RFPs from that segment are still out there?

Yes. Yes.

Okay. All right. Well, thank you again.

Okay. Great. All right.

In a second, I have to get another one in but thanks again.

All right. Thanks for the time, Luke.

Yes. Of course.

Okay. Thank you.