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

All right. Good morning. Let's go ahead and get started. My name Eve Burstein, and I cover U.S. life science tools and diagnostics. And I'm really pleased to be joined by Michael Stubblefield, the CEO of Avantor. A little bit of background. So he's been at the helm of the ship since 2014 and before that, was at Celanese and spent some time also at McKinsey as a senior expert in their Chemicals Practice. So thanks also to all you guys for joining us today. Quick reminder, you can submit questions through the Pigeonhole app. So I've got a lot that I'm excited to ask but really want to take your questions as well, and I'll be checking throughout the discussion, so send them in. All right. Let's jump in. Michael, I think you wanted to start with some comments.

Yes. Thank you, Eve. And good morning, everyone. Thank you for joining us today. Super happy to be here today. I thought it might be helpful just to kick things off and share a bit of an overview of the business, for those of you that are new to the story. We have our standard disclaimer here around forward-looking statements and non-GAAP financial measures. The presentation is posted on our website. So I'll leave for you to read all of the standard details there. But Avantor is a leader in the life science tools space with a really terrific business model where we are providing -- a leading provider of materials and consumables to the laboratory environment and the production environment for customers around the world. And we're really deeply embedded in supporting their workflows in early-stage research and discovery. We'll support them through their scale up and clinical activities and ultimately, would provide critical input materials to their production platforms. We tried to denote some of the more interesting attributes of our business model on the righthand side of the slide here. Significant exposure to biopharma; more than 60% of our revenues are derived from biopharma and health care with the overwhelming majority of that coming biopharma. Give the consumables nature of our portfolio, a highly recurring revenue model; more than 85% of our revenues would, in fact, be recurring, and it's a really sticky business model. We're operating in a highly regulated marketplace with very stringent requirements. In production platforms, nearly 90% or -- more than 90% of our products would actually be spec-ed in and covered by the regulatory filings of our customers. So not only is it recurring, but highly sticky as well. And then we have, just given the business model that we run, really deep enduring relationships with our customers. Back in December, we actually announced a transformation of our operating model, where we moved away from a 3-region structure to a 2-business unit structure that we think better aligns our business with the needs of our customers, specifically in the lab as well as in the production environment. And you can see here, it's about a $7 billion platform. Roughly 2/3 of the revenue is going to be derived from our laboratory customers and roughly 1/3 of our revenues will come from our production segment that we refer to as our Bioscience Production segment. Importantly, in that segment, about 45% of our profitability comes from that part of the business as well. Just a quick double-click on each of the 2 segments, give you a little flavor for what we do here. Our Laboratory Solutions business is deeply embedded in serving the workflows of our customers in labs across the world. Certainly, in the research environment as well as in diagnostic labs, as well as in the QA/QC labs of many of our customers that are producing products across various end markets. And we do this through a really comprehensive offering that we've tried to cover in these 3 pillars: a really robust and deep proprietary products platform that would include self-manufactured chemicals, reagents, equipment instruments, high-precision consumables, most of which would be marketed under our flagship J.T.Baker brand, which has been around for about 120 years now. We extend our product offering by embedding ourselves through our services offering more deeply with our customers. We have about 2,000 associates that wear Avantor uniforms that work at our customers' facilities on a whole host of activities, whether that be simple inventory management or stockroom management to reactor setup, cell culture, media production and literally everything in between. It gives us a really privileged position and insights into what our customers are working on. We also have a whole suite of digital capabilities that we deploy to our customers to drive efficiency and productivity. And then we round out our offering to really build complete end-to-end workflow solutions through the partnerships that we have with our critical third-party suppliers, of which we have more than 5,000. To grow this business, we're focused on high-growth workflows. We're focused on innovation, and we're an important source of bringing innovation and innovative solutions to our customers in the lab, and bringing efficiency and productivity to them through the digital tools that we deploy. At the heart of the model is really our customer access. We have unparalleled customer access through our lab offerings and we serve more than 300,000 customer locations around the world. And here's just a little bit of a cartoonish depiction of what a typical customer's campus might look like and how pervasive we would be across that campus in serving all aspects of their workflow. And its through this access that we're able to not only serve their laboratory workflow requirements, but it's also where we seed and introduce them to our proprietary production content that ultimately gets spec-ed into the production process. And so you can see this particular campus where they'll be doing research and QA/QC workflows that we would service through our lab offering, but this particular campus also has a production facility that we would be introducing our critical raw materials into. So let me touch on the Bioscience Production segment here just briefly. As you'll recall from my earlier slide, it's about 1/3 of our revenue, but nearly 1/2 of our overall profitability and we're going to be serving 3 principle end markets here. This is where our bioprocessing platform is housed. We also have a really unique custom silicone formulation business that serves the medical implant space in a unique way. And then we also have a custom formulations business that serves aerospace and defense as well as the semiconductor as part of our advanced technology offering. The business model across all these 3 end markets, which on the surface might look a little bit different, but they actually all operate roughly the same way, which is to say that we would engage with our customers across all 3 of these areas in their early phase discovery and development activities. We would customize a solution for them, manipulating a whole host of properties associated with our formulations to customize the solution to meet their specific application needs. We would then earn a specification on our platform. We would support them through their regulatory and approval filings and we would ultimately provide that content to them throughout the lifecycle of their product. Very stringent purity requirements and quality requirements in this space. That's an important part of the business model. And a lot of regulatory expertise that's required. For example, in the health care space, our customers in the medical implant space would rely on the nearly 800 master access files that we maintain to support their regulatory filings. Just going to do just a quick double-click for you on bioprocessing. This is an area we get a lot of questions on, and certainly, there's a lot of interest in just given the growth and importance of this area. So I wanted to just give you a bit more detail on what we do to serve bioprocessing. We are a leading provider, as the slide suggests, of critical materials to service the biologic manufacturing workflows. Of course, in the biologic manufacturing process, you're taking a living cell to excrete a certain protein or complex molecule that has some therapeutic value. And we would be the #1 or #2 player across the supply of materials into this space. And as you see on the slide there, we're going to be relevant across all modalities. Most of you might be familiar with the monoclonal antibody therapies, which are the traditional space here. Certainly, the majority of the industry's revenues come from monoclonals, and we're deeply embedded in that space as well. And what's exciting to me there is even though that's historically where a lot of the revenues have been derived, there's still a lot of momentum there. There's a lot of innovation, a lot of new therapies coming out there, a lot of technical advancements, antibody drug conjugates, for example, that still, in our mind, create a lot of runway for growth. But you also see exposure to GLP-1s, both the chemical as well as the fermentation route. Cell and gene therapy is particularly important to us. And we're really excited about that space as we're starting to move from treatment to cure. It's a new frontier. There's a lot of solutions that have yet to be developed there, that gives us an opportunity to grow, share and establish a really strong foothold. And then you have the other modalities, including mRNA that are important to us. We're going to serve this space with a pretty comprehensive offering of materials and products. You would think of us as providing process ingredients, excipients, buffers and a whole host of fluid management and single-use solutions. So I wanted to make it a little bit more granular for you. This is kind of a standard workflow depiction that you can think about using for really any of the modalities. This one happens to be for monoclonal antibody production. But where we've segregated the platform into kind of an upstream process, a downstream process and ultimately, a fill/finish process and just trying to show you all the different places that we touch this process. In the upstream process, of course, they're concerned about growing and cultivating cells that will actually excrete the target protein. And in that part of the process, we are going to be providing all of the ingredients that would functionalize the media that enable the ecosystem around that cell to promote the growth and expression of the protein. And so this would be vitamins, minerals, nutrients, basically, anything that you could think of that would be necessary to sustain cell life and growth. In the downstream part of the process, we're talking here about, obviously, eliminating any of the unwanted content that comes out of the upstream process, purifying and isolating the target protein, and we're going to be providing buffers and other materials that are necessary to move the target protein through that purification process and provide the conditions necessary to drive the separation. We also provide specific materials that are used for inactivating any of the viruses that might have made their way into the process as well as a whole host of chromatography solutions. Before you get down into the final formulation and fill/finish step, where we would have the broadest portfolio of excipients that are used to prepare that protein to be injected into a patient and to stabilize the protein so that it can still be functional as it's used. We do have some hardware that's scattered about through this process, but our primary focus is helping liquid biologic materials move through this process. And when we look at the other part of our offering here, which is on the next slide, you can see our focus on fluid handling and single-use solutions. So same process flow, but connecting every unit operation in this facility, you would also see our line of peristaltic Masterflex pumps that would be used to move materials from point A to point B or operation A to operation B, to bring input materials into the process, to take waste materials out of the process. And we do this in an aseptic end-to-end fluid management solution. And we're the only company that are able to do this. And so you see everything from the pumping technology to manifolds, assemblies, single-use components that are all used to facilitate the movement of that liquid biologic material through the process. One thing I would note here is just how intimately we touch the protein material on an end-to-end basis. There's probably not another platform out there that would be touching this process as intimately or as closely as we do or with as many specifications. It's not uncommon for us to have literally dozens of materials spec-ed into a biologic platform. Innovation, as you would anticipate, is really critical to our business model and a key source of growth for our business, and we continue to ramp our investments in this area to bring innovative new solutions to solve the most contemporary problems that our customers are working on, particularly on some of the newer modalities. We have now 13 global innovation centers around the world, more than 200 scientists that are driving the collaborations with our customers. And I've denoted just a few of the more recent examples of innovations that are typical of the kinds of things that we work on that are coming out of our centers. The first one is a monoclonal antibody example, where there's a real market need to move away from the existing detergents that are used to provide the vial and activation solutions in the process. And so our teams have collaborated with our customers to develop new solutions that have better characteristics and certainly meet the regulatory and sustainability requirements of the customers. The cell and gene therapy example in the middle is an interesting example where our customers there have needs to basically penetrate the membrane in the cells that you can release the genetic material that's embodied in that cell. And you need specific materials that can interact with the membrane to make that happen. So we've launched a whole set of GMP cell lysis solutions that enable that to work effectively with performance characteristics that are superior to anything else that's on the market. And the last example is just kind of an interesting capability that we have, given the material expertise that we have together with some of the single-use capabilities that we have in bringing together integrated systems. So this is an example of a magnetic mixer that integrates our single-use bags together with our assemblies and manifolds and our mixing technology in a way that is a lot more gentle for the protein. We have some exciting developments in innovation space. This summer, we'll be cutting the ribbon on our new state-of-the-art innovation center in New Jersey. That will double the capabilities that we have in this region, and we're excited about that. So just quickly before we take the questions, a couple of takeaways for the presentation here. We'd want you to understand we have a leading position in both the lab as well as production. We provide mission-critical process materials and ingredients into the high-growth bioprocessing end market. And hopefully, you get a sense for the importance of innovation to our model. So with that, let's take some questions.

All right. Thank you so much. Let's start with your segments. So when you were introducing the company, you said you've reoriented from what you used to have, which were 3 different geographic segments to now 2 segments that are based on customer needs or settings or environments. Why strategically did you do that? What were you hoping it would provide for you in the future?

Yes. It was an important transition for the company. And in my perspective, having run the platform, as you introduced me, for 10 years, to me, it was really a natural evolution of how we've built out the model. And I think it recognizes the strength and positioning that we have within the laboratory environment as well as within our production capabilities. And it's a better alignment of our capabilities with our customers' needs and it brings, I think, better focus and accountability for us in that regard. So we're super excited to make the move. And not only is it, I think, better aligned with how our customers think about our capabilities and how we can better serve them, but in a unique way, it also unlocks significant operating efficiencies. We've talked about this move unlocking roughly $300 million of gross cost synergies that will accrue to the business over the next 3 years. So exiting 2026, we'll have roughly $300 million of savings that'll come into the business, and we're off to a fast start. We've already been able to recognize some of those into the first quarter.

Great. Are there any early proof points either on execution against cost savings or perhaps on the strategic growth and better serving customer needs side that you can point to?

Certainly, there are. One of the things that we were particularly excited about as part of this transformation is getting our business better aligned with our customers to enhance their experience. So shortly after standing up the 2 segments, we've launched a global enterprise-wide customer transformation, where we're focused on providing better service to our customers on an end-to-end basis, and there's a lot of momentum building from that and excited by the capabilities that we'll have and ultimately, what that means to our customers. It's also a much simpler model to operate. When you think about the diversity of our business, when you think about it at a regional level, it's hard to interrogate. It's hard to analyze it. It's hard to understand it, quite honestly. I think thinking about it from a customer need perspective is a lot more straightforward. So it's made a lot of our operating cadences and rhythms in the company a lot more straightforward. We probably have now cut our operating reviews probably in half just given how much more streamlined the operation of the company has come. So we've certainly benefited from that in the early days. And then I touched on the operating efficiencies that accrue to us, moving from 3 units to 2. There's a simplification of a lot of the back-office functions that come from that. There's -- and we've got the full transformation program that's in flight that will save us the $300 million. We hadn't necessarily anticipated savings in the first quarter from that, but as you saw from our first quarter results, we were able to bring some of that forward as we're moving quickly to put things in place here. So starting to already realize benefits from that for sure.

Right. I think it was really helpful for you to go into depth on your bioprocessing portfolio. And you talked about how many parts of the process you touch. But can you just really help orient us where you fit in the competitive landscape? How is the portfolio that you have different from the other players out there like a Danaher, MilliporeSigma, et cetera?

Yes. I mean it's obviously a very attractive space to be in with a lot of growth and a lot of innovation. And so there's continued opportunities for you to bring new products into the market, reinforce your positioning. But when I think about the landscape, we're going to be the leader in providing process ingredients and materials and single-use solutions into the space. I think the challenge, just as an industry, is everyone's portfolios are rather unique. There's limited overlap between the companies and the list of names that you mentioned there. We don't traditionally think of them as competitors in what we do because largely, they don't have the type of materials that we would have. And I mentioned in cell and gene therapy, for example, it's kind of a new frontier. There's a lot of white space here, a lot of new materials that are necessary for those processes to work. And so we're deeply focused. As I mentioned, the new innovation center, a big part of that will be focused on cell and gene therapy innovation and bringing new materials into the workflow that are necessary to meet the needs of these customers. So it's definitely a complex ecosystem. A lot of those names you mentioned, we would actually view as partners or complementary to what we do. It's a very fragmented space. We literally provide thousands of materials into this space and have developed the capabilities over decades. You mentioned my heritage back in the chemicals and petrochemicals space. Coming into this space and understanding the quality requirements and the capabilities that it takes to meet our customers' requirements are extreme. Our manufacturing processes take a certain amount of time, but our quality processes probably taking an equal amount of focus and the regulatory expertise that you have to be able to do what we do is quite significant. So we think we have a differentiated platform that, at least over the 10 years that I've been here, has outgrown the broader market by 300 to 400 basis points consistently.

Maybe -- so let's stick on that growth point actually. So given your portfolio, what do you expect for growth in your bioprocessing offering versus bioprocessing in general? So for example, the trend towards single-use is probably really, really good for you. But I could also argue that as we move toward more and more novel modalities that are focused on rare disease in small populations, you're not growing as many cells as you might from labs. And so maybe that's bad for some of your process ingredients. So where do you see growth of bioprocessing writ large? And then what do you think your growth is?

So if you go back to one of the slides that I showed in my presentation that depicted each of modalities, there was a bubble there at the top of the chart that showed kind of greater than 10% growth is kind of how we view the market for this space. And you can take monoclonals as kind of the anchoring part of that and whether that's high single digits or low double digits, it probably wants to be somewhere in there from a market standpoint. And when I look at not only what's been commercialized, but the robust pipeline that's there, the therapeutics that are coming through there, whether it's for Alzheimer's or a whole host of other indications, we're still excited about monoclonals. And particularly when you think about some of the technical advancements towards things like antibody drug conjugates, we think continues to propel this space forward. There's a lot of innovation and we stress internally, let's not forget about the core here. At the end of the day, probably for the foreseeable future, most of our revenues and most of the industry's revenues will come from that space. The other modalities are interesting from a growth standpoint. You can -- we can debate, is it 20% or 30% for cell and gene therapy? Regardless, it's a big number off of a relatively small base. We're seeing that in our business. We're encouraged by the number of approvals that are coming through. Last year was a big year. I think last year, there was more approvals than the 5 years prior to that combined. We already have, I think, we're up to 4 approvals out of the gates this year, and the pipelines are bulging. There's some really exciting science. Now the scale-up is problematic and challenging. These are sophisticated workflows, to your point there. The manufacturing process itself is at an individual customer level or patient level, if you will, which is creating a lot of scale-up and manufacturing challenges that the ecosystem is working through. And one of the things we're encouraged by in that is any time there's friction or challenges that the partners need to lean in and help provide solutions and that's where we excel, it's probably not too different than where monoclonals were at a couple of decades ago, and I'm sure that the maturity curve will get scaled here, and we even see that on the platforms that are out there. So we think there's a bright future for these other modalities that's anchored in the monoclonals. And we think that given the promise of the science that's out there, these emerging technologies that are already starting to take hold, that we consider kind of at least a 10% growth rate for this space to be pretty certain.

And so if it's at least a 10% growth for the space, I think you said you've grown about 300 bps above average. So is that right?

Yes, 300 or 400 basis points on average. When we think about our long-term algorithm, and I think as we talked about at our Investor Day back in December, and I think pretty consistently, I would look at this is a 14%, 15%, somewhere in there, 13%, 15%, pretty frothy growth, obviously.

Right. So you talked about how you don't necessarily see some of the other big names in bioprocessing as competitors. Everyone has a really different portfolio. What does that mean for the time line of consumables destocking for you versus some of the other names out there? So I can imagine, for example, that -- or I could guess, excipients tend to have a longer shelf life than the average. So maybe those inventories could be held for longer and are going to take longer to come down. Where does it put you based on your portfolio in the shelf life that your offerings have? And what do you anticipate for timing of that destocking to play out first year?

Yes. So this has been obviously an important topic over the last several years. Just given some of the challenges, I think we have as a value chain of visibility into inventories and the breadth of the portfolios has made it challenging to really understand where our customers are at from an inventory standpoint. And so it's been pretty painful over the last couple of years to kind of chase down where those inventories are at. And we've tried to triangulate through surveys and customer interactions and obviously, a whole host of data analytics. The proof point ultimately comes into what's your order book doing. And in my bioprocessing business, our average lead time on an order is probably 2 to 3 months. And so it doesn't give us a real long runway into what our customers are thinking or what they're expecting to do here. But when I look at the data that we have available to us from just customer inputs, whether that be formal surveys or VOC or just discussions I'm having with our customers, the inventory health has been improving steadily actually for a while now. And it would -- that would indicate that we are in the last innings across most of our materials from a destocking standpoint. The proof point of that in my mind is what we're seeing in our order book. We talked about, in Q4, seeing a modest uptick in the rate of order intake, and we saw another sequential step up of that in the first quarter. Not at a level that I think we would ring the bell and saying, hey, we're fully back, or that we would characterize as an inflection point because it's not just our materials that are overstocked or were overstocked at our customers, they actually did try to manage some of the shelf life issues by also -- by proceeding through manufacturing and getting to the drug substance level, where you can kind of store it in bulk, cryogenically preserve it before it gets converted to a drug product. And so our customers are also working through drug substance inventories are high. And you can look at the balance sheets of our customers that are public that disclose inventories. You can also see where their inventories are at and how those are trending. So I think we're probably further through the destocking of our raw materials, and I see that as my order book starts to step up, we're still not at an inflection point. And I think one of the reasons why we're not at an inflection point yet is our customers still have drug substance inventories that they're needing to completely work through before campaign cycles and batch production gets back to what we would consider to be normal. But we like the trajectory and there's certainly some momentum building there.

All right. I'm going to do a quick rapid fire for the questions on the quarter, and then I want to move to some longer-term or more strategic questions. On the quarter. So first, for your education and government end market. In the last year, you've had really impressive strength there; 4 consecutive quarters of growth, which you attributed in part to increased commercial intensity during that time. But that market was down low singles this quarter. So can you help us understand how things laid out there for you? Was it just a factor of very tough comps because you've been so successful? Was it increased weakness? Or is it potentially share gain going back to where it came from?

Yes. So this has been a really strategic area of focus for us over the last 12 to 18 months. The end market itself, we would anticipate over long term growing at kind of low single digits. And I think you're referencing our outsized growth last year. We were driving higher education growth, high single-digit, low double-digit type levels. We've got -- probably we're a bit underpenetrated there. So there's arguably more headroom for us than others there to grow. But we did lean in specifically to enhance commercial intensity, more feet on the street, a lot of digital tools and content deployed, really scaled our digital marketing capabilities to drive personalized campaigns to be able to reach those scientists in the academic labs around the world. And the proof point was, obviously, in the growth that we drove. In the first quarter, our higher education demand is captured under our academia and government end market as a whole. And in the first quarter, even though academia and government for us declined low single digits, we did have another, I think it's the fifth straight quarter now of growth in the higher ed space. So we are continuing the momentum that we've seen there. Headwinds in K-12 and headwinds in government did kind of bring that end market down for us, but still, we see good growth and the continued momentum of new contract wins and extensions in the higher ed space, which ultimately is probably the key focus for us in that area.

What about the biopharma end market? So one question that we get quite a lot and probably from some of you in this room is, is VWR losing share to Fisher in the channel? And if I had to make that argument, right, like if I had to offer evidence to support that, I would say for you guys, you had started to see destocking in this biopharma end market earlier than Thermo and some other peers. So you had an easier comp, but you were still down high singles in that segment, with Thermo down only low singles. They also talked about stronger-than-expected performance in the channel, which is where they're competing most closely with you. So there's a ton of noise here, and I hate to do this, but we get this question a lot. So on behalf of all of you that might have wanted to ask it, how would you respond to that?