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

Great. Thanks for joining us. We'll kick things off. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. And joining us for our next session, I'm excited to host Michael Stubblefield, Chief Executive Officer of Avantor. Michael, thanks so much for being here.

Yes. Thank you. Happy to be here again. Good to see you all.

Great. Usual format as always. We'll run through with the fireside chat. Just to kick things off, I mean, you reported 1Q just a couple of weeks ago. A solid start to the year. Any quick comments you want to make, any opening remarks on how the quarter played out?

Yes. I think as you suggest, it was a good start to the year. I think we're pleased with how fast we're out of the gates here. See, the top line came in line with expectations. And it was really good to see what I would consider to be the Avantor model at work, which is to say that you start to see consumables momentum, particularly in bioprocessing pickup, flowing through to margin expansion, really excited about getting our new operating model up and running. We're out of the gate strong there. And then as you saw from the margin outperformance, really good traction with our cost transformation initiative, where we were able to pull forward some of the savings into Q1 and deliver some nice expansion on that front. So a good start to the year, and I think we're encouraged by the setup.

Great. I'll take it from there. One of the components was you reiterated the fiscal year '24 guide, which is organic sales decline of negative 2% to a growth of plus 1%. Can you talk a little bit about what you're assuming for underlying market conditions? What's built into that outlook?

So we did reaffirm our full year outlook at the ranges that you described and really based on a continuation of the trends and run rates that we exited 2023 with. And as we got into Q1, the quarter played out largely as we had anticipated, consumables a little bit stronger, equipment and instrument, a little bit weaker, but net-net, run rate is similar. So I think the assumptions that we had coming into the year on [indiscernible] sales and run rates is still the assumption that we're carrying through the full year and that resulted in kind of 49% first half of the year and 51% second half of the year, which is right in line with kind of pre-pandemic splits in the business.

Okay. And I have to ask at least 1 short-term question, and I'm going to get yelled at. So you went through April. We're a couple of weeks into May. You guided for 2Q for LSS to be down low single digits, BPS to be down LSD to MSD. Can you talk about orders, customer activities, just sort of like what you've seen in the first couple of weeks of the quarter and how that's framed your view?

Yes. So on the call we had a couple of weeks ago, we talked about the quarter -- the second quarter being minus 3.5 to down minus 1.5, really reflecting a continuation of the trends that we saw in Q1, which, in that case, would be continued momentum in consumables and a little bit of headwinds here in the equipment and instruments. And we made those comments, we obviously had the benefit of seeing what April was looking like or at least the first month of the quarter, and we've kind of reflected that through the balance of the quarter.

Okay. All right. Next, I want to run through a couple of specific end markets or customer groups. First, we have to start with bioprocessing. Can we just dive a little bit deeper into your customer product exposure here, instruments versus consumables? How that's faired to start the year maybe versus your expectations?

So we have a really attractive bioprocessing platform. And I would say we're the leading supplier of ultra-high purity materials, end-to-end across the workflow and across modalities. From a customer standpoint, we're going to be lined up behind virtually every commercialized molecule that's in the marketplace, which means then we're serving large pharma. Certainly, we're well positioned with the CDMOs as directed by our OEM partners. And although the biotech revenues for us gets sorted out in our lab business, certainly, that exposure, as those programs move through the pipeline and ultimately get commercialized, really gives us access across the board. From a product standpoint, I mentioned our ubiquitous position in materials, a lot of process ingredients, buffers, high-purity chemicals, leading supplier of excipients and the only player in the space with an end-to-end aseptic fluid management solution, which, given the growth of single-use platforms and their use, and particularly as we move towards more personalized medicine solutions, really has us positioned nicely.

Okay. That's actually the next part I was going to go to was just sort of a deep dive into your bioprocessing exposure. And I guess where I'm going with this is how does it compare to others in the space? It's a relatively concentrated market. It's yourselves, Thermo, Danaher, Merck KGaA, Sartorius, Repligen, so there's really a handful of players that dominate that market. And we're all really focused on taking read-throughs from what 1 company says to another. So sometimes that works, sometimes that tends to not work. So what's the discrepancy there? And why are some companies seeing something different than others?

Well, I'd say a couple of things. One, all of our portfolios are unique. There isn't really an apples-to-apples comparison that could be had in our space. We each are attaching ourselves to the macro play here in a bit different way. And of course, we're all being driven by what happens to be a really terrific end market with pipelines that are as full as they've ever been, a regulatory environment that has been conducive to the support of record levels of drug approvals, and then the promise of all these new modalities that are in this space. And so one of the things I like about our business is we're not tied to a particular modality. We're agnostic from that standpoint. Yes, monoclonals is the core driver of revenues today, but we're very well positioned in cell and gene therapy, mRNA, the GLP-1s. And so I like our positioning across all of the different technologies that our customers are working on. And we're going to be relevant throughout the workflow, really intimate relationship with our customers in the upstream, cell culture processes where we're providing all the ingredients that functionalize the media. We have a terrific downstream platform with a full complement of chromatography resins, certainly all the buffer solutions, high-purity chemicals that drive the viral clearance activities and then the leading platform for excipients in the space, as I said earlier. So there's probably not a company out there that touches the molecule itself more intimately than we would, and we would literally have dozens -- multiple dozens of specifications on any given molecule throughout their workflow.

Okay. And given the breadth of that portfolio, there's been -- different parts of it have been exposed to or susceptible to inventory stocking at different levels. And that's been the key debate in the space and for you over the past year. You've given some indications that inventory destocking is coming close to the end. Can you talk about your visibility there? What gives you confidence to sort of make those comments? And just how do you see that inventory situation playing out in the next couple of quarters?

So in our portfolio, particularly within bioprocessing, the part of the portfolio that was probably most exposed to excess stocking at our customers were our single-use solutions. And we've been working over the last a year plus, 18 months plus through the build down of those inventories. And as we've seen in our order book, particularly in the fourth quarter and again in the first quarter, we now have 2 straight quarters of kind of sequential improvement in the rate of order intake, including in our single-use platform, which, to me, together with the surveying data that we extract from our customers, is a great proof point of we're very, very close, if not at the end of the rope there on this destocking. Now there is another layer of inventory in the system that's still creating some friction for all of us that are playing in this space. One of the other ways our customers were able to derisk their supply chains was, of course, to hold excess drug substance inventory. And so when you start doing that, we benefited obviously from the demand when they made it, but that also then impacts some of our chemicals demand as well. And you see, at least on the companies that are public, you can look at their balance sheets, you see those inventories starting to normalize as well. And when we talked about the leading indicators and the encouragement we get from looking at our order book, the step-up in orders that we saw again in the first quarter was across the portfolio, both in the ingredients, excipients, as well as in single use. So it does feel like the engine is starting to rev up again.

Okay. And as you and others have indicated over the past year, there have been a couple head fakes, a couple of false starts when it comes to predicting customer inventory levels and sort of a return to that normal growth. Any other data points you can point to that gives you a little bit more confidence that this is for real and this is the final sort of restart?

Well, we continue to be a bit cautious in our outlook for the reasons that you mentioned. We were encouraged by the modest step-up in Q4 and another acceleration into Q1. And we are starting to see it reflected in our sales rates. We were guiding to maybe mid-teens decline in bioprocessing in Q1, and we did a bit better than that, which matches with the order book dynamics that we've talked about. But until we see this order book translate into more meaningful step up in sales, and we see it sustained for a meaningful period of time, we're going to continue to manage our guidance on the basis of the current run rates that we do see to try to avoid the false start that you're talking about. But probably the thing that I focus the most on here in this particular end market is just the health of the end market itself that we're serving. Patient demand is strong in our business. Number of new approvals is an important source of growth for us, certainly all the pipeline activity that we're participating in. And so even throughout this contraction here, we've been working off excess inventories and stuff, the end markets itself have been really, really strong, and they continue to be. And so at the end of the day, I think we're all encouraged by the ongoing strength of that end market. These supply chain dynamics will play out, and we're starting to see that happen. And to the extent that we see a more meaningful recovery as we move through the year, that would be upside to our outlook.

Okay. All right. That's helpful. Pivoting away from bioprocess for a minute. The other area that's gotten a lot of focus over the last couple of weeks has been instrumentation. It's a relatively small part of Avantor's portfolio. It's not something we think about, but still, there was some incremental weakness there, and it's consistent with what almost everyone else has called out. Your instrument portfolio is a little bit different than most others. It's not mass specs and LCs. It's freezers, fridges, centrifuges, plate shakers. Why is that necessarily seeing weakness? And could you just characterize like what are the customers? And if you're seeing any discrepancy there between various pockets of spend?

So for us, instrument and equipment represents about 15% of our enterprise revenue. We have a small portion of that in our Biosciences segment. Majority of it is actually in our Lab Solutions segment. It's about 20% of the revenue in that segment. I would say the -- probably the top price point on a piece of equipment or instrument in our portfolio would probably be $50,000. So ASP in that space is going to be significantly lower than that. You're talking benchtop equipment and basic equipment that -- and instruments that would be used in a lab. Key drivers of demand for us would be new lab buildouts. And so when you think about what's been going on around biotech funding over the last 12, 18 months and the reprioritization and closure of labs throughout last year, there's been certainly a slowdown in the number of new lab buildouts. We're encouraged by return of funding and those things typically take 1 quarter or 2 to work themselves into orders. But -- and then just the replacement cycle. And although we did see weakness generally across each of our end markets, biopharma was probably the one that was the most pronounced. And there still is this kind of cautionary spending patterns within biopharma that's impacting all of us in this space. And when we talk to our customers, lot of activity. Our sales reps continue to be encouraged by the number of opportunities, the size of the funnels, but projects are getting pushed, taking longer to get orders released and approved. Our customers signal that they'd anticipate the second half of the year budgets being a bit more loose than in the first half, but again, similar to my commentary on bioprocessing, we've not baked that in. And so we're anticipating, at least in the outlook, that the current friction in the system here continues as we move forward.

Okay. And when you think about new lab built out, and you think about some of that equipment that you talked through, I mean, that's pretty indispensable. That's not something that when those labs do come back, you're not going to forego a freezer or a fridge, and you can't really exist without it, right? So it's pretty, pretty locked in.

Yes. I mean just consistent with the rest of our portfolio, these are the necessities of a lab for scientists to do their work. And if you're outfitting a new lab, and you're worried about spend, these are items you can't do without. And so it's great positioning. It is, I think, a headwind that we see across the industry. And it was a bit more pronounced in Q1 than what we had seen last year. It stepped down both year-over-year as well as sequentially double digits, low double digits. So even though it was only 15% of the portfolio, it did have an impact in the quarter. Fortunately, back to my opening comments, this is a consumables play here at Avantor. Already 85% of our revenues are recurring. And so to start to see the momentum building on key consumables categories, lab chemicals categories, that's really the strength of our platform. The equipment and instrument demand will come back. That's not a category I need to see a lot of growth out of. If we're growing that low single digits, our algorithm works just fine. So just need that to not be a headwind and then the strength of the consumables will really start to show through.

Okay. And just 1 last 1 on that. Again, it's not your usual instrument comps and tools that you think of. It's not like you're competing with Waters or Agilent there. It's more like the MedWares, the Sartorius, maybe a small part of Thermo in the LPS segment, not the AI segment. But those are the right comp to think about?