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

Okay. Thanks, everyone, for joining us this afternoon. A pleasure to have with us Avantor. We have the CEO, Michael Stubblefield, with us this afternoon.

Michael, when I look at life sciences 3Q, it's been a lot of moving parts there have been, whether it was some stocking dynamics in bioprocessing or macro, et cetera, and different companies have said different things, right? And I think for you guys specifically, you had a guidance change on the core. Maybe let's start with like a big picture question, right? I think if I just keep it very simple, other tools companies did not take their core down, Avantor took the core down. Is the share lost for Avantor? And how would you respond to that?

Yes. Firstly, Vijay, thanks for hosting us today. Really happy to be with you. I certainly hope everyone had a good holiday. I think that's a great place to start. When you look at how our business has performed this year, particularly looking at the core, our full year guide is 6%, 6.5%, which if you compare that to our long-term growth algorithm of roughly 4% to 6%, it will be another year of above target performance for our core. So the core of our business continues to be quite healthy, really led by our exposure to biopharma and notably the growth that we're seeing in bioproduction. As you think about how the year has developed, obviously, we've signaled that the core will be a little bit lighter in Q4 relative to the rest of the year. And I think there was a few factors that we signaled as part of that, probably most notably just the impact of some of the stocking that we've seen in some of the liquid handling consumables that were overstocked as part of the testing workflows during the pandemic. But outside of that and some modest headwinds in maybe the industrial sector in Europe, the core business continues to perform at a really high level. Specific to your question around share gains or share loss, I'd probably look at the business in a couple of different buckets. If you look at our research business, certainly, everything that we see would point to continued momentum in that area. And certainly, we don't see any signs of share loss in that part of the business. And to validate that, we look at a lot of different data points, Vijay, including things like the competitive win/loss rates on bids that we're participating in. We look at renewals on existing contracts. We look at things like web traffic, and we can directly compare that to traffic at our competitors' sites. And I think we compare favorably across all those dimensions. And perhaps most importantly, we haven't seen any customer losses. So I think we're continuing to be very well positioned there. And we've had another great year of contract renewals, and we've got a great pipeline moving into 2023. When I look at our production side of the business, particularly the bioproduction part of our offering, going back over the last 8 or 9 years, at least that I've been involved in the platform, I think traditionally, we would outgrow the broader market by a couple 200, 300 basis points. And I think when you look at our numbers again this year, we're running again probably in that similar range. So extending our track record of continuing to leverage our global footprint and our broad offering to continue to grow share in that part of the business.

That's extremely helpful perspective, Michael. I think looking at those win/loss ratios, et cetera, those should be additional data points to support the core here. But when I look at Q4, right, when I look at the Q4, I think the implied core is maybe flat or up low singles, right? And that probably is at the low end of life science tools. Now you did bring up stocking and perhaps EU softening. Can we quantify how much of this Q4 impact of stocking versus perhaps macro?

Yes, it's probably helpful to provide a little bit of context to how we see the quarter playing out. On our third quarter call, we provided an updated outlook for the full year for the core of 6% to 6.5%. And that implies, for the fourth quarter, underlying core organic growth of approximately 2% to 4%. So you take 3% at the midpoint, clearly, that does reflect a deceleration in the quarter compared to the roughly 7% that we've seen through the first 3 quarters. And of course, we even do better than that in the third quarter around 7 -- just under 8%, 7.8%, I believe. So if you look at kind of the dynamic going from Q3 to Q4, you're looking for roughly 400 to 500 basis points. On a sequential basis, you do have to take into account the difference in the number of days in a particular quarter. And we do have a selling day headwind in the fourth quarter that's just under 200 basis points. So that gets your fourth quarter from roughly 3 on a comparable basis, up to something closer to 5. So you're then looking to understand maybe the balance of roughly 300 basis points. And I split that between kind of the European impact as well as the consumables impact, roughly equally or thereabouts. And this dynamic we see in Europe is somewhat cautionary in that we're certainly aware of some of the geopolitical issues in the region and the impact that's having on energy prices and kind of the recessionary environment that is looming over the region. Despite that, Europe for us has continued to perform well. In the third quarter, we grew mid-single digits, which is very much in line with our long-term algorithm. And we see continued strength, momentum in biopharma, and we had another great quarter in bioproduction in the region. Probably the area that we see some of the slowdown would be in more of the industrial applications, things associated with construction or the do-it-yourself market, paints and coatings, these kinds of things, where our offering to support the QC workflow as part of the production in those end markets is seeing a bit of headwind, but I think roughly in line with how we were expecting it to perform in the quarter. And then the stocking effect that we've talked about, it is really limited to the liquid handling consumables that were in really high demand during the peak of COVID and associated with the testing workflows, and that really plays out across all of our end markets where customers have been able to protect their supply chains by putting in place perhaps nontraditional sources of product. And we're probably talking about a category for us which is on the order of $200 million to $300 million of revenue and a certain subsegment of our customer base there as we've quantified it as probably stocking in excess of their normal levels of anywhere from 3 to 9 months. So that's probably going to be a dynamic that's with us certainly in the quarter that we're in now, and we'll probably see that working its way out through the first half of next year.

That's extremely helpful, Michael. And just maybe before we get into the macro and the stocking, how it plays out for next year, maybe -- and this might be a simple way of looking at it, one, a selling day headwind that's like 100 basis points. I mean it depends on how you do the math. Why -- is there some dynamic in Q4 why it's 200 basis points headwind, maybe it's a budget flush or something that's impacting?

No, just sheer number of shipping days in a quarter. In a run rate business like we run, it's more relevant to look at our business not on a monthly basis but on a daily rate of sales basis. And in the quarter, when you look at it sequentially, moving from Q3 to Q4, you take that into account. On the full year, we take it into account. And obviously, in the guidance that we've been sharing all year on a full year basis, we've been accounting for that. So that's not new information. But when you start to look at sequential walks is where it needs to come into play. But it's just a sheer difference just in the year-over-year change in the number of shipping days.

Understood. Understood. And then you did mention, when I look at the sequential chain 3Q versus 4Q, maybe 300 basis points was macro and stocking. So roughly, if I think like half of that was stocking is the right way to think about for our first half of next year. The core, I think on the third quarter call, you said it's mid-singles, call it like 5%, and you have like 3 points of headwind between stocking and macro. Should we be thinking about core being like low singles in first half and then accelerates as comps get easier for back half of next year?

Yes. We're probably a little bit ahead of our process here around trying to get too granular on our outlook for 2023. Our current plan, Vijay, would be to provide our full guidance for next year on our fourth quarter call. There at the end of January, early February is when we would traditionally do that. So we'll plan on doing that again this time. But what I can say is when you look at the year ahead, as with every year, we would start with our long-term guide as a starting point, which is that mid-single-digit level that you referenced and you start to kind of take into account the puts and takes from there. Pricing I think next year is going to be a little bit stronger than what we would traditionally contemplate as part of our long-term algorithm. Not sure it will contribute quite at the same level as what we saw this year, but certainly, we're anticipating it to be above where we have seen it historically. We're going to need to take into account kind of the flushing out of all of our COVID tailwinds. I think our plan for next year would be to take into the year 0 contribution from COVID and kind of help us transition out of that dynamic. And of course, FX is very likely to be a pretty meaningful headwind for us next year. Of course, that's been pretty dynamic, and we'll see where the rates settle in at, but we would anticipate that being a bit of a dynamic that plays against us next year. And then as you suggest, there's -- we're going to need to work through the stocking in the -- at least in the first half of the year that I would imagine that being with us. So we'll take all that into account. And when we get through the year-end close and get through January and into our fourth quarter call, we'll provide some full granularity on how we see next year playing out.

Understood. And then if I want to dive into some of the segments, biopharma, that's your largest end market, 55% of revenues. It's been a very consistent high single-digit grower rate. And I think bioproduction is about maybe 15% to 20% in my head of total company revenues. But some of your peers have spoken about perhaps that stocking dynamic on bioprocessing, which it seems like it's different. The stocking that you're talking about is different from what the bioprocessing guys are talking about. So maybe you just talk about what does Avantor do within bioproduction? What is differentiated? And how should we think about your bioproduction business into '23?

Yes. So maybe big picture, you're right. Biopharma for us is our largest end market. It's about 55-or-so percent of our overall enterprise revenues, and that's really split into 2 offerings. One, about 60% of our biopharma revenue is going to come from our offerings into the research and laboratory environment, including what we do to support our customers' clinical trials. And then roughly 40% of our revenues are going to come from our offering into the bioproduction space. As part of our long-term growth algorithm, we would typically think about the research part of that offering growing mid-single digits. I think certainly, over the last several years, that piece has been probably going -- been growing a little bit faster than that given some of the funding that's been available in that environment. Over the long term, though, I think mid-single digits is probably the right way to think about that. And then I think our algorithm would then contemplate roughly mid-teens, mid-teens plus kind of growth in the production part of that offering. And of course, we've been running well ahead of that over the last several years. And consistent with what I said earlier, I think given our global footprint, the very broad offering that we have and kind of our leading position in the materials offerings into those workflows, we continue to grow well above the market in that space. I think it's probably fair to break that workflow, the bioproduction workflow, Vijay, down into maybe 3 distinct steps. You have kind of the upstream component of the workflow, which would include all the cell growth, cell expansion and protein expression activities. You have a protein purification that occurs in the downstream portion of that workflow, then you have the fill-finish portion. And probably more intimately than probably anybody that plays this space, Avantor is going to touch that process on an end-to-end basis with literally thousands of materials we would have specked into our customers' commercialized platforms. Our offering in the upstream category is characterized by essentially all of the functional materials that go into a cell culture media that would help promote and enable the growth of cells and expression of protein. So these are things like carbohydrates and minerals and essentially anything that a cell would need to sustain life would be the components that we would supply on a customized-specified basis. In the downstream offering, we have a complete line of chromatography resins as well as a leading position in offering things like buffer solutions as well as high-purity chemicals that are used in the viral deactivation step of that process. And then finally, we have the broadest and deepest offering of excipients that are used in the formulation of the final product that's injected into the patient. And importantly, we would connect all of those unit operations with probably the only end-to-end fluid management solution in the industry starting with peristaltic pump technology that we acquired as part of our Masterflex acquisition and all of the tubing and assemblies, connectors, manifolds that go into providing aseptic fluid management on a single-use basis. So that's the offering. Now when you step back and you look at your question around stocking, I think it is important. Whether you're talking about what's going on in the research environment or what's going on in production, the details do matter. And I think the -- understanding the portfolio is important to reflect the different impacts each of the platforms are seeing or not seeing. In our case, we don't see much of any stocking of the offerings that we provide into the bioproduction workflow. And there's probably a number of reasons for that. One, very few of our materials are used across the customers' multiple platforms, which would make it difficult to stock. Their shelf-life considerations associated with our products. And there's -- the storage requirements for our products are pretty significant and don't lend themselves to a lot of excess stocking. In the categories where we would probably see a modest level of stocking could be some of the single-use tubing and components that could be broadly used across various therapeutic platforms, perhaps some of the buffer solutions. But many of the categories that we would potentially think about in our portfolio is being open to maybe some excess stocking. We're actually on backlog in many of those cases where we don't have sufficient raw materials or capacity to meet the demand that's out there. So really haven't been able to support the inventory aspirations that our customers have had. So I think when we reflect on the strength of our order book, the fact that we have a backlog that's 2 to 3x our normal levels, I think our focus is on continuing to strengthen our supply chain to be able to improve service and lead times to our customers. And different than our research environment, stocking isn't something that we're seeing at any meaningful level in our business.

That's helpful perspective in context, Michael. I think you touched upon backlog, your backlog for some of these products. And I think historically, you've cited order being -- order book being 3x higher than historical levels, right? But we don't have a sense of what that base is, and it's hard to quantify these numbers. Is there a better way of characterizing what the backlog and the order book means? How much visibility does it have? Or is fiscal '23 a transition year within bioproduction as COVID perhaps comes off or maybe comps are a bit tougher?

Yes. So in our business where you're providing customized materials on pretty much a make-to-order basis, meaning you're not stocking the products and you don't start production until you get firm orders from your customers, your order book tends to be driven by the lead times that you're quoting for your offering. And business as complex as ours with as many products as we have, you can imagine there's a pretty wide distribution of lead times in our business from some things that we may have in stock that we could ship off the shelf to things that may take historically 6 or 9 months to produce, particularly some of the chromatography offerings that we have. But I would say, historically, pre-COVID, our lead times were probably centered around, call it, plus or minus 3 months of -- or thereabouts. And so you would have good visibility out to that level traditionally. And so when we talk about an order book that's 3x historical levels, you're looking at moving off of that kind of 3- to 4-month visibility to something that's out there 9 to 12 months in terms of order levels. And that's what we do see. Now we use a couple of different terminologies. It's probably important to clarify. So when we talk about order book at Avantor, that would include all the orders that we have in hand that are not yet fulfilled. And we talk about backlog or back orders, and those would be a subset of our order book and would capture the portion of the order book with delivery dates that are now past due for various reasons. Normally, that would be something associated with raw material, supply constraints or capacity constraints on our side. So as the investments that we're making in our supply chain play out, as demand normalizes, as our suppliers' supply chains normalize a bit, we would anticipate lead times moving back from kind of 9 to 12 months that they've been during COVID back to normal levels of, call it, 3 to 4 months. And the order book will presumably at some point sell in at those levels. I imagine that transition will occur throughout next year. The backlog is also unfortunately kind of 3x what it is historically. And in the near term, we're looking to normalize that in every store the customary high levels of service that our customers have come to expect from our supply chain. So I think then the impact on demand, look, I think the fundamentals are, again, really strong in support of another strong year ahead for our bioproduction offering with an order book that gives us that visibility and we can say that with confidence. And when you look at the -- just the underlying growth of the therapeutics, the expansion of the number of modalities, the strength of the pipeline that's coming through here, I think we continue to be quite bullish about the long-term prospects for bioproduction. We'll take a bit of a headwind next year as we eliminate the vaccine revenues, at least from our plan. I imagine there'll be some modest level of support for vaccination next year. We'll go into the year assuming that, that will be 0. And to the extent that there is some, and it doesn't require constrained capacity from our core, it could be somewhat incremental. But we'll be looking at roughly $100 million headwind to our bioproduction business next year just from the step-down in vaccine demand. And as we've proven throughout the pandemic, our capacity is fungible, and we'll be able to deploy that incremental capacity towards working down our backlog and servicing the robust order book that we do have. It may not be one for one, but I think we're set up for another strong year ahead.

Understood. Understood. And I think related to bioproduction, just given Masterflex that plays into sort of that area, it was impacted by electronic component shortage. Do we know what the magnitude of the impact was in fiscal '22 because of these component shortages for Masterflex?

So we're -- continue to be excited about our Masterflex acquisition that we closed a little over a year ago now, and that is now an integral part of our end-to-end food management solution for our customers. And certainly, we're encouraged by the traction we have with our customers and the excitement that they've expressed in now being able to source that integrated solution from a single supplier like us that they already know well. We came into this year expecting roughly $300 million of revenue from that platform. And our most recent outlook for the platform had it probably in a range of $240 million to $260 million. So you're talking roughly a $50 million headwind to what we had contemplated coming into the year. FX is a certain component of that. Obviously, FX has moved against us this year, and given the global exposure of that platform, certainly haven't been immune from that. The COVID trail-off has been a piece of that, kind of similar to our legacy bioproduction offering. The COVID step-down in Masterflex has been probably about -- we'll do about half the revenue this year that -- in COVID to support the vaccine production than we did in 2021. And then the third piece of that headwind is going to be the kind of the stocking dynamic that we faced in some of the tubing offering associated with that component of the offering that goes with the pumps and connects those pumps to the process. And facing kind of a similar stocking dynamic there is what we saw in our research business where the products went really short during the early days of the pandemic. And I think our customers across the board mobilized to try to shore up their supply chains, and that's an area where -- as we've talked about in previous forums, where there's probably a couple of quarters headwind here where at least a portion of our customers are sitting on excess inventory there. But I would say probably over half of the headwind here would come from this tubing stocking effect and then perhaps the other half split somewhat equally between COVID and the supply chain constraints around circuit boards.

I see. That's extremely helpful, Michael. And off of this new revenue base of, let's call it, $250 million, given that you mentioned Avantor remains excited about Masterflex, is that $250 million growing high teens? Or should we see an accelerated growth because the base is lower and we can get back to $300 million?

I think the -- when I look at our bioproduction offering in total, which is about -- as I said before, about 40% of our total biopharma revenues, you're going to have a split there in our portfolio where now about 40% of our bioproduction revenues are going to be in that single-use area, and the balance is going to be with our legacy chemicals offering. The single-use portion of the offering has been growing north of 20% on a core basis. I don't necessarily expect it to hold up at those levels over the long term. But certainly, that's been the faster growing part of the portfolio over the last several years. And all the data that we have and certainly the lived experience that we've had over the last year since we've owned the business is that the core Masterflex business will grow roughly the same as our legacy single-use offering, which means it should support a mid-teens plus type growth over the long term. And similar to the stocking that we've seen in the Masterflex tubing, we certainly faced some of those headwinds in our own single-use offering as well as the step-down in COVID. So I think the core of the legacy offering and the core of the Masterflex offering, I think, are fully intact and tend to grow at similar levels. And we would expect that for next year as well.

Understood. Understood. That's a helpful perspective. I guess switching gears to, I guess, on the macro side. You did mention advanced tech, applied, which also I'm assuming that's where your industrial exposure is. How should we think about the market given the segment has grown double digits year-to-date? And it's a tougher comp, macro is a little bit tricky. Any variables or qualitative comments on how to think about advanced tech and applied materials?

So that end market is roughly 25% of our enterprise revenues, and that comprises a whole host of industries and application areas with no single area representing more than a few percentage of our total sales. So it's quite a diversified platform. And within that, about half of it, I would say, would exhibit kind of classical, industrial dynamics, which will be linked to indicators like GDP and PMI, for example. We're facing a period here of distressed macro conditions that are going to definitely be impacted by those fundamentals. And we see that if you look at things like petrochemicals, for example, as one of those end markets, we see the impact of slowing production in that environment. And again, we're providing content that goes to support the QC workflows associated with our customers' production activities in that case. And so we're going to ebb and flow with their output. But what I would say is given the other half of the platform is quite resilient, quite defensive, growth-oriented in things like semiconductors and food and beverage and particularly the defense portion of our aerospace and defense offering, we have quite a nice balance there. And similar to the rest of our portfolio, it certainly makes for a rather resilient platform. And I think the fact that even in the kind of the choppiness of the macro environment where we've operated in, in 2022, the fact that, that end market has grown for us at the levels that it has, I think, is a good proof point of that. Now to be clear, we don't expect that platform to deliver double-digit growth over the longer term. As part of our long-term mid-single-digit growth algorithm, we would count on this end market to give us mid-single digits growth on average. So we're running a bit stronger than that this year. And I would say, certainly, a piece of that would be the strength that we're seeing in the semiconductor offering. Despite maybe some of the news that we all read about in terms of chip demand declining and some of the headwinds our customers are facing, you do benefit from some of the platform-specific exposures that you have in some of the unique ways that we play that space that has given us strength there that has probably moved acyclical to the rest of that end market. But as we look ahead, there's typically some puts and takes there in that end market, and we're pretty happy if we can get that business to grow -- or that part of the business to grow mid-single digits.

And on the semi piece, Michael, is that exposed to R&D side or up on the production side for semiconductors?

It's -- similar to our exposure in life sciences and our business model in life science, that end market or that application area works exactly the same in that we're going to engage with our customers in early phase research and development. And then as those platforms start to scale and they start to work towards commercialization, that's when our more meaningful revenues start to kick in. So the bulk of our exposure there is going to be on the production environment and providing bulk custom-formulated solutions that are used in the manufacturing of the semiconductor wafers themselves, and then we provide all kinds of materials that go into maintaining the clean room environment that these products are produced in. So predominantly, the revenues come from the production environment. But it is noteworthy that -- to understand that we're going to engage with our customers in a very, very early phase research. And maybe just to put a finer point on that. If you think about the chips that would be driving our -- all the smartphones that we all use today, the technology that's in most of those phones is probably going to be like a 7-nanometer chip. We've been working on 5-nanometer and 3-nanometer platforms, which are multiple generations ahead of what's in the market today, probably for the last 5 years. So we're deeply embedded in the development cycles of our customers in that business. And similar to our life science offering, we earn those custom specifications, and then we enjoy the recurring nature of the revenues once these platforms go commercial.

That's helpful. And then switching gears to diagnostics health care, 10% of revenues. How should we think about '23 for this segment? I think on the headwind side, obviously, utilization and COVID spikes, I think, is something to consider. But I also suspect in a normalized environment, that could be a source of upside. So give us the puts and takes for DX Health Care.

Yes. So DX Health Care for us is roughly 10% of enterprise revenues, and it's probably not a bad assumption to model it, maybe 60-40, 60% in traditional diagnostic workflows and maybe 40% in providing custom medical-grade silicone formulations into the medical implant world. Within those diagnostic applications, we're going to be providing a full suite of solutions that really help our customers with the sample preparation associated with the diagnostics that they're doing. So chemicals and reagents and consumables and certain equipment and instruments to support that workflow. Obviously, that workflow has been disrupted a bit over the last couple of years and certainly been a bit choppy as all the lion's share and the focus was on COVID diagnostics, which we benefit from at some level, but it also kind of crowded out some of the traditional testing and diagnostics as capacity in hospitals and other clinics was disproportionately allocated to COVID treatments. And so as we've worked through 2022, we've seen most of that legacy or traditional diagnostic activity return. And aside from the liquid handling stocking dynamic that we've talked about, the core of that business, I think, is in pretty good shape. And those -- that workflow, over the long term, should grow mid- to high single digits, and we're well positioned as we move out of some of these -- the stocking that we talked about. On the 40% of the revenues there that are associated with our biomaterials offering, we're having a really terrific year, if not a record year, as procedures have returned to kind of normal levels. And our innovation engine there continues to deliver some significant growth for us. So that's a platform that we would anticipate continuing to grow kind of high single digits for us. And given the proprietary nature of our offering there, it also has a nice contribution to our overall margins and earnings.

Understood. And then just a couple on the business mix here. I think one on Ritter. Off the restated revenue base, Michael, I know the deal model had this as growing high singles. Can this now grow high singles off of the restated numbers? I think the new guide is for [ 1 30 to 1 50 ].

Yes. So if you look at Ritter and the workflows and the end market application areas that, that business is supporting, it's squarely positioned to support kind of high throughput liquid handling activities within life science research and to support those same kind of liquid handling activities within the diagnostics space. And so as we've said earlier here, some of your other questions, life science research and some of the non-COVID diagnostic activities, classically growing, call it, mid-single digits to high single digits. And there's no reason to believe that our core business there won't be growing at those levels. And in fact, we've seen that happening this year when you kind of look at the non-COVID portion of that business. And so we're well positioned, I think, off of the base that we've established here to be able to move forward with that type of growth off of the core. And we've got a great opportunity here. We've talked a lot about the transformation of that business from being just an OEM business, now leveraging our unparalleled customer access to the end customers and positioning this offering alongside the rest of the content that we provide into that workflow. And I think we can provide a pretty compelling value proposition to our customers. The key issue, of course, we've been facing since we've bought the business is just the rapid downturn in COVID testing and the impact that, that's had on inventory levels of some of the products in that channel. But as that works its way out and as we bring on the investments that we've made to broaden that portfolio, I think we're excited about some of the traction that we're getting there. And certainly, I think we've got a full effort and a full set of resources and expertise in place to help us accelerate the growth of that platform. But long term, I think we would anticipate kind of a mid- to high single-digit contribution from that portfolio.

Understood. And then one in China, Michael, here. Avantor is under-indexed to China, but there has been some rising geopolitical tensions. I know there's been some headline news about lockdowns. How should we think about China here? Any lockdown impacts in the near term and longer term, the geopolitical risk?

Yes. So as you mentioned, we are under-indexed to China relative to our peers. It's low single-digit percentage of our enterprise revenues, but a growth vector that we do think long term will be important for our business. We're certainly aware of the current geopolitical situation and the direction of travel there. And I think in terms of our strategy, it just probably strengthens our conviction around the importance of localizing your supply chain and having an infrastructure and a strategy there that's rooted in kind of a China-for-China strategy. So as we have, over the last several years, tried to execute on that playbook of putting capabilities in region to support the growth of the region, starting with supply chain infrastructure to technology capabilities, just part of the pandemic, we opened up an innovation center in Shanghai and certainly building out our local capabilities there. The RIM Bio acquisition that we did last year was -- had kind of 2 parts. One, there was some interesting technology there that we wanted to acquire and exploit globally, but it was also an eye towards giving us local manufacturing capabilities to support the growth there. So we'll continue to execute on our strategy there. It's early days. There's not a lot of commercialized platforms there. So a lot of it is around making sure you've got the right capabilities, that you're starting to access the right partners and starting to support their pipeline developments. But long term, we think that's going to be an important region, and we'll continue, at least as long as the environment is conducive, to put capabilities there in the region to support what we think is going to be a long-term growth story for us.

Got you. Then maybe a last question here, Michael, before you can finish off with some closing remarks. And a lot of debate on that, the acquisitions, et cetera. What has Avantor learned from these 2 deals, right? Like if you had to go back and do something differently, would it have been communication with the Street? Or was it some execution capability that you thought was -- that Avantor now learned and should do better going forward?

Yes. I mean no different than any deal you do. There is certainly a lot to learn, and perhaps these 2 deals have given us maybe more to learn than normal. I think you referenced communication and managing expectations. We didn't give ourselves much room on that front and obviously underestimated the amount of -- in both cases, the amount of inventory in the value chain and the impact of COVID that we've had in those businesses, more so Ritter than Masterflex. I think we had it about right in Masterflex. And so when you look at the integration activities, I mean we've done a full kind of deep dive into how all those activities have gone. As we brought on our new head of M&A and corporate development, she spent a lot of time kind of looking with kind of a cold eyes' perspective on the lessons that can be learned and translated, and certainly, we'll build on those learnings as we do our next transaction, whenever that happens to be. But it is important, I think, to reflect that this is an organization and a platform and a team that's done a lot of M&A. These are not the only deals we've ever done. And fortunately, most of them have gone significantly better than this. But you learn from all these activities. And certainly, there's a lot of rich learnings in there from these 2 deals. And consistent with the strategy that we set out on a few years ago and to continue to build the capabilities that are going to be necessary for us to credibly deploy capital over the long term, we're certainly starting with the lessons learned from these deals, but we're also broadening the capability sets, building out more permanent capabilities to have more kind of repeat associates that are moving from deal to deal. Certainly, we'd be looking for opportunities maybe in less volatile conditions. Buying a business in COVID certainly didn't prove to be challenging, trying to parse out the core underlying growth from the -- maybe some of the volatility that the business had benefited from building separate teams to conduct commercial diligence that gives you kind of independent perspectives from the business perhaps. We'll continue to develop the capabilities in advance of what we do here. But there's a lot to learn, and we're committed to this as an important growth vector for our business. And I'm certain the next deals will go better than these. But the last chapter is not written on these deals. I think we have high conviction on both businesses that as we work through some of the headwinds that we faced this year, they're both well -- very well positioned to make good on the long-term growth prospects that we identified when we bought the business. They're both great assets.

Fantastic. Any closing remarks, Michael, before we close out?

I think, firstly, I would just thank you for hosting us. A great opportunity to talk about the business and reinforce, I think, the strength of the core of our business and our conviction on the long-term growth algorithm. This is a business that's well positioned for ongoing mid-single-digit core growth. It's a strong playbook here for driving ongoing margin expansion of 50 to 100 basis points. And it's a business that delevers rather quickly. We've made good on that again this year. And presumably with more muted investments in working capital next year, we'll return to a platform here that delivers 90-plus percent conversion of your free cash flow. So I think we're -- we'll finish the year here in line with the guidance that we've provided, and we'll transition into another strong year ahead. But I appreciate the opportunity to highlight the business, Vijay, and look forward to connecting with you all again soon.

Fantastic. No, I couldn't help but notice the free cash conversion. You guys stand out, Michael. Even in life science tools, you guys stand out. So fantastic. I think we're out of time. Thank you for the time this afternoon.

Great. Thank you, Vijay.