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

All right. Great. Welcome, everybody. Thank you for joining us today. My name is Casey Woodring from the Life Science Tools and Diagnostics team here at JPMorgan. Welcome to the conference. Pleased to be joined by the Avantor management team. We have CEO Emmanuel Ligner; CFO, Brent Jones. They're going to go through the corporate presentation here, then we'll get into Q&A. So with that, Emmanuel, all yours.

Thank you, Casey. Very good morning. Thank you for having us at JPMorgan conference. I've been coming here for a bit more than 10 years maybe now, but that's my first time to present. So it's a very exciting time to talk to you about this great company, Avantor. As Casey said, I'm joined with Brent Jones our CFO, will be answering some questions after 15 to 20 minutes presentation about the company, but I'm also joined with Hedi Hosak, who is representing our IR team. As you know, I spend my entire career in the life science industry, GE Healthcare, GE Life Sciences, Cytiva and of course, Cerba Healthcare, my former employer. And today, I'm super excited to talk to you about Avantor. Before we start, a quick disclaimer that I'm sure you know very, very well. We will be presenting in my presentation and in my -- in the Q&A, some forward-looking statements, which reflect our current views, but not guaranteeing future performance. Also in the presentation, it includes non-GAAP measures. A reconciliation of the non-GAAP measures is included in the appendix. Today, my goal is to introduce you Avantor in a simple way, to share with you the passion that I have for life science, but in particular, for Avantor. I've been working as a customer, as a supplier with Avantor, VWR and all the other brands for more than 20 years since October 1, 2004, actually. This company has solid foundation and a great and rich heritage. It's a global business that support thousands of scientists around the world through their day-to-day work, which is about research, development, and manufacturing. Our product and services are embedded in every stage of our customers' activities. I worked in GE for more than 10 years, and Jack Welch had a famous say. If you're not #1, if you're not #2, don't bother. Let me tell you about those brands. VWR, which is our distribution brand is #1 in Europe, #2 in the U.S. Masterflex is #1 in high tubing quality and pump systems for research and industrial fluid transfer. J.T. Baker is #1 in bioprocessing chemicals. And NuSil is #1 for human implant, high-purity silicone. And the solid heritage and an incredible brand, incredible product. We're serving them, and we have such an incredible reach. We reach and serve 300,000 customer locations in more than 180 countries. We supply all the top 20 pharmaceutical companies. By nature, our products are very sticky, product and services are very sticky, and which means that it has an incredible high percentage of recurring business. Consumables are used every day. Our high-quality products are designing in our customers' processes and stay there for a long time. And finally, this is a business which has an incredible cash flow. Over the last 3 years, we have 100% free cash flow conversion. Now when I say that, I'm sure that our entire audience today will agree with me that while we have solid foundation, there is room for meaningful improvement. I'm sure you will all agree with me that our current share price doesn't reflect the long-term value of Avantor platform. As you know, I joined in August last year of 4 months. And in October, when we shared our Q3 results, I also introduced you and introduced the launch of the Revival program. The Revival program now is 10 weeks. And today, in addition to tell you a bit more about the company, I also want to tell you what we are doing with Revival, what is going on and what is our commitment. So quickly a reminder of Revival, which we launched in October. It's about enhancing the go-to-market strategy. It's about improving manufacturing and supply chain organization. It's refocusing our portfolio. It's driving cost out and saving by simplification of processes, by empowering the team and it's strengthening the talent of the organization. So over the last 10 weeks, we're acting quickly. We have created a Revival management office with project management team. And actually, every single pillar that you see on the slide today is led by one of my team's executives. It is just the beginning. It is a lot of work, but there's a lot of opportunity ahead. And we are really excited about the impact that Revival can have on the organization. I will give you some further details of the steps that we have already made and what we're doing and what we're expecting for the rest of the year. I like this picture. I like this picture because it's a simple picture that show who we are. On one side, we have distributed lab consumables and equipment to laboratory around the world. On the other, we're manufacturing proprietary products used in life science and medical technology application. On one side, you have the channel, which is product agnostic. On the other, you have product, which is channel agnostic. Our goal in the go-to-market pillar for Revival, which, by the way, I am leading personally, it's really adjusting our market approach to ensure that each business, each product, its services is sold the most effectively. It's reaching the customers the right way. And we are focusing on 5 key areas: customer service, commercial effectiveness, marketing, sales and talent. Now I want to go a bit more in detail about VWR and a bit more in detail on product and again, give you an example of what we've done and what we are doing on Revival for those 2 pillars of the company. So as I shared with you at the beginning, VWR is an incredible leading distributor around the world, #1 in Europe, #2 in the U.S. It has been founded in 1852. It's a great heritage, a great brand name, great recognition of high-quality service and speed of delivery of product. And we achieved that using 400 distribution centers around the world, equipped with specialized infrastructure, and it is really renowned for the quality of service that we have provided. It has 3 pillars. First, a private label with more than 5,000 suppliers providing us product with VWR label. And this offer alternative to our customers. Of course, we're supplying millions of SKUs from top and most renowned supplier in the world. You have only a few names here, but it's also a service that we are providing to those incredible suppliers is to give them access to the reach that VWR have. And finally, we have really an added value services. We have more than 2,000 of our associates, which works at the customer's bench alongside the scientists and make sure that the scientists are focusing on what they do best, science. And the goal of these services is really to return time to scientists. So Revival, what does revival do? And what are we doing for the go-to-market for VWR? Well, first of all, over the past 2 days, I've met many suppliers, many customers. And of course, over the last 4 months, a lot of our associates, everybody refer to this channel as VWR. So the first thing that we're doing is we are relaunching VWR as a distribution channel of Avantor. We are doing that next week, our sales conference of the Americas, and we will continue to do that along the year. Really, this brand is very iconic, very well recognized, and we need to capitalize on it. We have also, in December, and I don't know if you remember in the Q3 earnings, we talked about our e-commerce platform, which had not performed the way that we wanted. Well, in December, we already launched a first update of our e-commerce channel. It is the beginning. There's many more to come. And we've committed between $10 million to $15 million in 2026 to really get back to an e-commerce platform, which is really top of the customers' mind, which is really the perfect interface for the customers. Our marketing team is also working with supplier to recreate marketing tools as a workflow. The benefit of a distributor for customers is that we are capable of offering a complete workflow for the application of the customers, bundling many different supplier products. Finally, the team is working on offering both strategic supplier and strategic customers great visibility and analytics about all those consumables and equipment reaching those 300,000 customers location around the world. So it is about a better customer service. It's about a better customer experience, and it's really about bringing the customers at the center of VWR to turn around the performance of this great product brand. Let's talk now about our product. In addition to the VWR distribution, of course, we are offering manufacturing specialty product, high-quality product. J.T. Baker, high-purity chemicals, a company dated 1904 with an incredible reputation. It's about predictability batch to batch, consistency for our customers. Masterflex, fluid handling company, as I said, incredible positioning, #1 in pump research, in fluid management. And I will explain to you how those 2 brands and 2 product lines are really helping our bioprocessing business. And finally, NuSil, high-purity silicon for human implant. Revival for those products is about leveraging our scientists. We add value to the customers when we lean in, when we work at the bench with the customers to solve their challenges to bring them solution to enhance their processes and make their processes better. So it is about customer intimacy. It is about commercial effectiveness. It is about marketing, leveraging those very powerful brand. But it's also about relying on a strong supply chain. It's about increasing on-time delivery. It's about reducing lead times, ultimately to better serve our customers. As you know, I spend a lot of time in the bioprocessing world at the helm of Cytiva and GE Life Sciences. And I truly believe that Avantor has a differentiated portfolio. That differentiation comes really around our chemical portfolio. As you can see, it's a busy slide, but our chemical portfolio really are used by our customers and offer really high-quality purity chemistry from the very beginning to the very end alongside the entire processing. However, since the last 4 months in my onboarding, I was a bit surprised that we get compared with Cytiva, with Thermo, with Repligen, with Sartorius because we have a differentiated portfolio. We do not have cell culture media. We do not have a cell line. We do not have filtration. We do not have bioreactors. We do not have large skid and chromatographic columns. And we have a differentiating offer. It's those chemicals, which combined with Masterflex fluid management offer a unique differentiator. As you know, when customers make buffer, they receive usually chemistry in big drums and large drums. And they have associated with a spoon, a big scoop one place to another into the mixers. Well, our team in our innovation center in Bridgewater, New Jersey have created a combining the Masterflex fleet management and the chemistry from J.T. Baker, a unique differentiated ready-to process, ready-to-dispense bag. It is a unique product. It is differentiated and it shows you the strength of the chemistry on the one side and the fleet management on the other. It's about really enhancing process integration. It's about reducing contamination risk, safety for the associate and the employee of our customers, it drive efficiency. So again, remember about differentiation, it's a consumable business, which is not exposed to capital cycle, and it's a product line which are embedded in our customers' process. So I just wanted to make sure that I share that with you as this is an area that I know very, very well. Right. Let's go back to Revival. There's 4 other pillars in Revival, all led by different people, executives. I will just start basically with talent, led by our Chief Human Resource leader, Brittany. We've moved very fast. You've seen that we've hired Mary Blenn, from former employee of GE Healthcare and Cytiva. She has an incredible experience, global experience of leading very large manufacturing operation, and she is already in action. She has been only 10 weeks in the organization, but she has already identified the need of investing about $20 million of some equipment to make sure that we enhance our reliability. But with her team, she's already in action to work a long-term manufacturing road map, which will give us opportunity to actually simplify our supply chain, leverage the places that we have today and take cost out. So this is for the manufacturing strategy on the top left. Sorry, I started to talk about Brittany on our HRM, but that's Mary, and we are super happy to have her. So if we go back to the talent, we are also on the final stage of recruiting a CIO, a Chief Digital Officer. We have a new IR leader, which is going to join us on February 1. We have also recruited many talents in both segments, Lab Services segment and the bioprocessing segments with a new leaders for chemistry business in the VWR channel, of course, someone as well, which is going to lead our supplier relationship, which is so important. So a lot of things already done in talent on the last 10 weeks, a lot of things going on in manufacturing with that $20 million needed and the entire plant being developed. Brent is leading our optimization of our portfolio. A lot of analysis have been done, a lot of decision has been made and a lot of things are already in progress. As you can imagine, I'm not going to share many details about this, but more to come soon. And then finally, Corey Walker, our leaders of our Lab Services Solutions segment, VWR is leading the simplification work. It's about driving cost out. It's about optimization. And they're really focusing right now on the process of order to cash. So the team is in place. The value stream mapping is being done, and we are going to work on this optimization of order to cash for both channel segments and the product segments. A lot to be done, still a lot to come, but we strongly believe that the Revival plan will be really helpful to revamp the performance of Avantor overall. A couple of more slides. I think a slide which is always very, very important in JPMorgan, it's the capital allocation priorities. This is just reinforcing the message that we gave in our Q3 earnings. Look, we have a commitment to continue to reduce our debt and reduce our leverage. At the end of Q3, we were at 3.1. We will continue to target to have a sustainability below 3. It's a full commitment for us. At the same time, and it's back to my comment at the beginning around the share price, which we believe don't really how do I say, don't really just reflect the value of Avantor portfolio and solid product line. So the Board of Directors has authorized Brent and myself to go after 500 million share buyback. But this is something that we are going to do on an opportunistic way without increasing our leverage. I think that Revival is going to give us the opportunity in the near future to go back to M&A. But as you can imagine, I think we need to have the house in order. We need to be simpler. We need to have better talent. We need to have better go-to-market and stronger supply chain to be able to go back to M&A to welcome any new technologies that we think will fit our portfolio. Finally, a quick summary. I cannot be more excited to be first back to the life science industry to be here with you today, but also to lead this incredible business. Incredible heritage, strong brand, strong product. The customers that I've met, the suppliers that I've met all want us to do better, want us to work with us. They want to give us more, and I'm really excited about the future. There's a lot of work to do, but the opportunity is there. Revival is in action. The team is committed to it, and it has already started to show some improvement of our performance, and I'm super excited about this program because the team has really embraced it. And not only my leadership team, but also the rest of the organization. We are acting with urgency to become more competitive and to serve our customers better and come back to growth. Finally, I just want to remind everybody, and this is a good reminder before the Q&A session that we will be sharing our Q4 performance and our guidance for 2026 on February 11, and I'm looking forward to talk to you then. Thank you very much. Let's go back to Q&A session now. Thank you.

Great. Thank you, Emmanuel. Maybe to start, just can you talk about how you view the Avantor business in the marketplace as it stands today and your strategic vision moving forward? Obviously, coming from Cytiva, you must have a good understanding of Avantor's legacy bioproduction portfolio. But would just be curious to hear what attracted you to Avantor as a whole? And what are the key initiatives over your first 12 to 18 months on the job?

Yes, sure. Look, as I said, I joined Whatman in October 2004, and VWR was a very important distributor of Whatman. And those 2 brands are incredible legacy and strength. I don't know if you know, but Whatman date 1773 and Avantor and VWR 1852. I mean it's -- you need to be very, very humble when you lead a company like this because they have such a great legacy and you are a custodian of those brands. So I was always having a great relationship with the VWR team with former CEO, Manuel Brocke-Benz and a couple of other people. And so when John pick up the phone and called me about it, I was very exciting because I knew VWR because I knew what VWR can do for a supplier. And guess what, GE Healthcare was also buying all the consumables through VWR. So I knew as well what a VWR can do and what a distributor can do for a customer side. So that was the first really excitement. It's great brand, great services and something which is really great. On the other side, when I was leading Cytiva, we purchased a lot of chemicals from J.T. Baker, some amino acids, some glucose, some salt for the buffer business from the cell culture media business of Cytiva. So I knew as well the reputation. I knew as well the quality of the product. And I think what is exciting when you are a leader is, look, it's great to manage great business, great product in great times. I think there's always a challenge to manage businesses that need to be turned around, and this company needed to be turned around. So I had a great discussion with John Peacock. We thought that it will be great that I bring my experience of supplier, customers and partner of Avantor in the bioprocessing into this business. And so I said yes. And he said, yes as well. So lucky me. But no, it's a great business and I'm super exciting about it. It's a great industry as well.

You gave a lot of detail on revival here today. I guess, which specific elements of the program are being prioritized for immediate execution and which are expected to drive longer-term transformation? Maybe if you could just walk us through the expected time lines for each of those 5 pillars that you talked about today.

Sure. Well, I think the first thing that we need to realize is it's going to be an evolving project, right? I think it's going to be step by step. We will focus on first things and then we find some other things. So I think there's a beginning, it's very difficult to tell you when there is an end. We are leading those 5 pillars at the same time, right? And that's why we have those 5 executives leading them, right? So we're recruiting talent. We are working through the portfolio. Mary is working on the supply chain. I'm working on the go-to-market. Corey is working on the simplification and cost out and empowerment of the team. So I think we're really working all those 5 things at the same time because they are all very, very important. And they're all kind of coordinated as well. When you look at the go-to-market, if you redeployed your commercial team in certain area and redeployed commercial effectiveness tools, you need to make sure which portfolio you have. So you need to have the portfolio, I would say, cleanup done at the same time in parallel because if they're done after, you have to redo it again. So I think it's very important that we lead all those things at the same time. And look, just by refocusing the organization on the customers, we can already see, I would say, a funnel of opportunity, which is good. And that's why excited us. So we are going to push hard on this.

What specific financial and operational KPIs are you going to use to measure the progress of Revival? And can you just share your short, medium and long-term targets for those metrics, if you can share any today? And where would you see as the greatest execution risk as you implement some of these changes with Revival?

So let me first talk about the last part of your question, which is about the risk. Organization change is always risky. It's always hard. It's very often come from the top. What I am excited about is usually your most resistant layer of your organization to change are your middle layer. Those -- in an organization like us, we are 13,500 people, it's about a group of between 300 and 500 leaders. This is usually the hardest bit to change, and they are the most important people to change. What I'm exciting here is actually they are the team which actually really won't change. And they are the one that when I met with them, are excited about the change. So I think it will be faster than other change that I may have done in the past. In terms of KPI, I mean, I think Brent can help us here. But what Brent and I are doing, I mean, we both come from Danaher, Brent from Pall and me from Cytiva, and we all worked a lot with bowlers and a lot of KPIs. And so we're working on building those bowlers. So every single team has their own bowler, so there's multiple facets of it. But it's about measuring the customer satisfaction. It's about measuring on-time delivery. Of course, it's about measuring the funnel, the funnel conversion, the funnel growth. And ultimately, it should be measuring a leading indicator about where we're going and what's going to be the performance of the business. So Brent, I don't know if you want to add anything?

No, I would just say there, as Emmanuel noted, 10 weeks into Revival, still getting the work streams going. As you see the effects, as we have '26 guidance, we'll start giving more on what KPIs you should measure us against there.

Maybe we can move on to the Lab Solutions business. So you've highlighted that the impact of prior share losses could create a drag to the business in future quarters. What's your strategy for accelerating the transition and ramp-up of new contract wins? And how should we think about those wins offsetting the drag from prior losses here moving forward?

So you have the contract win, which is very important. And within this win, you have, of course, making sure that the share of wallet gain is coming. So the team is organizing those strategic accounts. There's a lot of engagement from Corey on that side. But we should not forget as well that there is a very important hands of customers, which we do not deal with contract, okay? But we deal with the e-commerce platform. And those customers are very important because they are smaller customers, sometimes customers which are around the 10,000 or 50,000 purchasing a year, but you have to serve them very well. And the way to engage with them is really through the e-commerce platform. So the revamping of the e-commerce platform is very important for us. I shared that we had our first version, which has been deployed in December. There's many more to come. We have a commitment of $10 million to $15 million investment this year to make sure that we launch a much more powerful tool. Our customers are not looking at a product. They're looking for a solution. They are looking for a workflow. And so the other initiative that we have with the marketing team to really work with our supplier and our scientists to make sure that we offer a complete workflow to the customers because it simplifies their life. They may be looking for centrifuge. They may be looking for a small centrifuge. But in fact, behind that demand, they are doing Western blotting. They are doing genomics, they're doing proteomics analysis. And therefore, they need the whole full offering. And by revamping our web page to have an easy search to have a complete workflow offering and revamping our marketing workflow, we will be able to really regain our market share and regain our, I would say, trust in our customers. I think the rest in terms of the logistics, in terms of the on-time delivery and in terms of service level is impeccable. It's really, really good. I think it's more than connection with the customers and interaction with the customers that we really need to revamp in particular, for that sale of small customers, which are very, very important.

And how should investors think about the time line for margin recovery in Lab Solutions? And what framework are you using to balance share growth against margin protection in a competitive environment that is seeing more of your customers bundling and cutting prices?

I'm going to start and then Brent, you can jump in after. Look, we have the right to win, okay? And it's always a difficult balance between price, but it's also a very important volume game here, okay? You have an infrastructure. I spoke about those 40 different incredible distribution centers that we have around the world. So the balance between making sure that you have the right price to win the volume and getting that volume is very important for the recovery of margin. Do you want to add something?

Yes. I mean, look, ultimately, you want to compound earnings and driving volume is the most critical part to absorb there. And look, we have to have volumes the system. Typically when you have those pressures when you have new contracts, you have lower price and they rise over time as you get mix volume otherwise, we're just seeing a lot of intensity of that right now. And again, you'll see that when we talk about the '26 expectations.

Okay. That's helpful. Maybe moving on to Bioscience production. So other bioprocessing players had indicated that the market is going to grow high single digits in '26, primarily driven by consumables growth. How should we think about bioprocessing growth within Biosciences production relative to overall end market growth for Avantor here? And how should we factor in competitive pressures and then the commercial execution headwinds experienced in 2025 in controlled environment consumables and process chemicals?

Look, I think we're pretty happy with where the commercial effectiveness is and with the team winning business, okay? I think in Q3, I shared that our order book and our order intake in bioprocessing and in chemicals, in particular, was high single digit, okay? And so I think it's a good signal that the customer trust us that our commercial team has a winning business. And we have really good share, good positioning. And as I said, in bioprocessing chemicals, we're the #1 company. I think the combination of the chemicals and Masterflex and the buffer really give us a lot of opportunity. What we have to do is we need to have better supply chain. It's about supply chain. It's all good to have an order, but if you cannot deliver the product, it's on time when the customers want it, it's not helping. So it's a combination of this commercial effort and supply chain effort. And so for us, really on priority on the bioprocessing and on the chemicals is very important that we invest quickly those $20 million of equipment and different assets that we have looked at doing because it's going to help us the ability to be much more reliable to have much more capacity in some of niche products, and this is very important. So Mary Blenn is full speed ahead on this, and it is very important for us that we do it quickly so that we serve our customers. But the good news is even if we had had a bit of a hiccup on the supply chain side, we didn't let down any customers and the customers want to continue to do business with us. They want to give us more. So I'm pretty confident that fixing supply chain will really help us to go back to the high single-digit growth that we see at the end of Q3 in our order book. Do you want to add something?

No, just in your comment there was on process chemicals.

That was on process chemicals, sorry.

Yes. Yes, that was.

Yes. Okay. And how should investors think about the reshoring opportunity for Avantor? Your portfolio is very consumables heavy. How should we view the potential benefit here relative to other bioprocessing players maybe with more equipment-heavy portfolios? Just curious on Avantor's single-use heavy portfolio. Could that be a competitive differentiator? Maybe walk us through how you're thinking about reshoring.

Well, I think there's very similar opportunities. I think the equipment is always -- give you some lumpiness, and there's always cycle around equipment, which we are lucky that we don't have. So I think it's about compounding. It's about making sure that you're designing your chemicals and your fleet management tools into customers' process and helping them to succeed. And so it's a compounding effect really in that sense. So I think the opportunity is pretty similar.

Okay. And Brent, maybe one for you just on the model here. Can you walk through the moving parts of the adjusted operating margin line for 2026 and whether 4Q could be a good jump-off point? And then maybe if you can help quantify some of the puts and takes on the gross margin line, like incentive comp inflation? Just any color on that.

I would say we'll look forward to giving you all that color on Feb 11.

I did give you a hint about the answer at the end of my presentation.

Okay. Fair enough. We'll wait to hear about that. Maybe one shifting back to the lab business. Given the heightened competitive pressure in LS within the distribution channel, do you see Avantor's portfolio as more competitive or differentiated for certain types of biopharma and biotech customers, whether that be different size or development stage?

That is a very good question. I don't know if you noticed in my very simple way of the business of looking at the business with channel on one side, product on the other. I talk about something which I think is very important in terms of differentiation. It's called channel, which is product agnostic. I think our major competitor is not necessarily product agnostic, and that's the feedback that we got from our customers. So I think this is where the VWR channel can be really differentiated is by really concentrating on what does the customers want, and that's what we want to do.

Interesting point. And then maybe on the academic and government side, can you just walk through the K-12 customer headwinds you've experienced? That business was down, I think, double digits in the third quarter. NIH funding is not a direct correlation here, but obviously, the overall market uncertainty is seemingly impacting your academic and government exposure. So can you just maybe talk about how you expect that market to perform in 2026?

Yes. I think there -- I mean, look, I'm not the one decided of what government will fund in academy. So there's always a bit of a worry there. Science and education is definitely suffering in that side. I think funding, we've seen some good funding at the end of Q4, actually, some leftover budget is always good. Look, I think the government understands that academy is very, very important and innovation is very, very important. So I think that the good science will always be funded. The good project has always been funded, maybe not at the level in the past, but I think it's going to continue to be there, and we are a strong supplier in there. But it's not the only segment that we are supplying. I think this is a beauty about a business like VWR is we're serving the mining industry, we're serving the oil and gas industry. We are serving the food and beverage industry. Of course, we're serving the health care, the private and the academy and the fundamental research that are done there. So I think it's for us to make sure that we navigate those different segments and put our efforts where the funding and where the money is.

Got you. Coming up here at time. Maybe just in closing, what are you most excited for in 2026? It seems like you guys have a lot on the horizon, but if you can kind of narrow it down, what are you most excited for?

Yes. I mean very exciting about Revival because I think it is really the right program. The team is very embraced about this. And look, I think maybe something for you guys. I think I'm also very exciting because we will have an opportunity probably in the second half, end of Q3, end of Q4 to have an Investor Day and to welcome us to our place and spend a lot of time with you to share you more about the Revival because we will have had more time behind. Remember, it's only 10 weeks now and then really be able to talk about the future because I think the future is bright for Avantor.

All right. We'll look forward to that. And we'll close that. Thank you very much.

Thank you.

Thank you.

Thank you, Emmanuel and Brent. Thank you everybody for joining us. Enjoy the rest of the conference.