Avantor, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Advantor Third Quarter Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Helen O'Donnell. Thank you. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us on today's call. Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom Slosek, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our investor website at ir.avantursciences.com. A replay of this webcast will also be available on our website following this call. Following our prepared remarks, we will open the line up for questions. I would like to note that we will be making some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made. And we do not assume any obligation to update these forward-looking statements, whether as a result of new information, future events and developments, or otherwise. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the appendix to the presentation. With that, I will now turn the call over to Michael.

Thank you, Helen, and good morning, everyone. We appreciate you joining our third quarter earnings call. Let's get right into the performance for the quarter. I'm on slide three. Organic revenue growth was 2.4% for the period, which reflected a couple of factors. First, our strong growth in the biopharma end market continued in the quarter. We were up 7% on an organic basis and are up 10% for the year. You may recall that biopharma represents approximately 50% of our annual revenues. and continued momentum in this end market is a critical element of our model. This growth was partially offset by a low single-digit decline in education and government, which had significant growth in 2018 driven by the initiation of a new customer contract. Tom will share more details later, but this contract affected the year-over-year comparison by more than 200 basis points. Turning to adjusted EBITDA, we continue to make excellent progress on managing product pricing relative to product cost inflation, and delivering the synergies from the VWR acquisition. However, the positive impact of these factors was offset by foreign currency headwinds and adverse product mix, which together diluted margins by approximately 100 basis points in the quarter. The one-off issue in education and government that I mentioned previously also contributed to the margin performance. We will provide more details in a few minutes, but we are confident that our long-term growth and margin expansion model is intact. Q3 was an excellent quarter for earnings growth, as our adjusted earnings per share increased 49%, driven by our operating performance and the ongoing benefits on interest expense from our deleveraging. We remain on track to deliver adjusted earnings in the range of 55 to 58 cents per share for the full year. It was also an outstanding quarter for cash flow generation and continued deleveraging. Our unlevered free cash flow in the quarter was 206 million. representing 127% of adjusted net income. Working capital was the main contributor to the free cash flow improvement. Net leverage declined to 4.8 times in the quarter, down from five times at the end of the second quarter and from seven times at the beginning of the year. In addition to the impact from the IPO earlier this year, we are on track to reduce leverage through operational performance by almost a full turn this year. While we are pleased with the progress we made in the quarter, there were some notable headwinds worth mentioning. The quarter started off somewhat slow, and we saw a modest tightening in capital expenditures, particularly in Europe. Industrial end markets, which represent approximately 25% of our revenue, also continue to be soft around the world. Despite these challenges, and excluding the one-time impact we encountered in our education and government end market, we were able to deliver mid-single-digit growth in our core business. Also, we were encouraged by the momentum of our business in September that has carried forward into the fourth quarter. Our exposure to biopharma, including the high-growth bioproduction space, our global presence, broad customer access, and a highly recurring revenue profile make for a resilient model that performs well across economic cycles. I am moving to slide four, where on the left you can see highlighted the sales growth, synergy execution, adjusted EPS growth, and continued balance sheet deleveraging that I previously discussed. I would like to take a minute to cover some non-financial highlights. We were pleased to expand our share of wallet with several existing BioPharma customers. One notable example is an existing account which we previously only served in Europe. After understanding the value our integrated offering brought to its European business, this global BioPharma customer decided to expand the contract on a worldwide basis. We also won multi-year contract extensions with several top-tier biopharma accounts and successfully onboarded several new customer accounts, including some important wins in CRO and education space. During the quarter, we began work to expand our innovation center in Bridgewater, New Jersey. By nearly doubling our footprint, we will be adding capabilities to support our customers in the areas of downstream processing and cell and gene therapy. We also began work to increase production capacity for high-purity, low endotoxin sugars used in both the upstream and downstream workflows of the biologics manufacturing process. We anticipate that this new capacity will be online by the end of 2020. Our digital offering remains a key driver for our business model, and continually enhancing user experience is a priority. We implemented additional improvements throughout the third quarter and see additional online traffic leading to revenue growth across our platform. In September, we announced that Bjorn Hoffman, the leader of our manufacturing and procurement teams, plans to step down from Avantor later this year to join New Mountain Capital, our private equity sponsor who continues to own approximately 20% of the company. Bjorn has been a valuable member of our executive team for the past five years, and we appreciate his contributions to our growth and execution. The good news is that Bjorn will be with us for as long as we need him and will be available to us even after his official transition. With Bjorn's departure, we are pleased to welcome Tanya Fox, who recently joined as Executive Vice President, Global Operations and Supply Chain. Tanya brings a wealth of experience in supply chain management from her prior roles at Johnson & Johnson, as well as at Avon, Walmart, and Ford. Her leadership and experience will be critical in helping us build a fully integrated end-to-end supply chain that will further strengthen our overall value proposition to our customers around the world. With that, let me turn it over to Tom.

Thank you, Michael. I'm on slide five where you can see the 2.4 percent organic growth and the breakdown by region. The quarter was a bit lumpy with low single-digit growth in July and low single-digit contraction in August. However, we were pleased to see this trend reverse in September when growth returned to the mid-single-digit levels. And it is important to note the challenging comparisons we had in the quarter, considering the 9 percent organic growth we had in the third quarter of 2018. The 1% growth in the Americas stands out as this is where the effect of the 2018 one-off that Michael mentioned materialized. For this single account in the education and government space, we had more than $40 million of sales in the third quarter of 2018, reflecting the ramp up at the start of this new contract. In 2019, a large portion of the revenue for this contract was recognized in the second quarter. Additionally, not all the Q3 2018 volume repeated, as some portion of the ramp-up was to establish a threshold level of inventory to service the business. Absent this factor, the Americas growth would have exceeded 4% in the quarter, and the growth for the entire company would have approximated 5%. Europe was strong at 4.5% with growth across all of our end markets, including high single-digit growth in biopharma. EMEA at 8% grew a bit more modestly than we have seen recently. although BioPharma reported low double-digit growth, and we had a very strong month in September, growing well into the double digits. Let me move to slide six for a very quick look at sales by end market and product group. As you can see, BioPharma grew in the high single digits while healthcare and advanced technologies and applied materials were flat. Education and government, as previously noted, had a low single-digit decline. By product group, proprietary materials and consumables declined low single digits. which in large part reflected the America's education and government one-off we've been describing. I will talk more about this product group when covering our adjusted EBITDA performance. Third-party materials and consumables grew mid-single digits. The services and specialty procurement group grew by low double digits, and the equipment and instrumentation group grew low single digits, where we saw customers moderate capital expenditures. Slide 7 is a summary of our adjusted EBITDA free cash flow and adjusted EPS performance. As Michael indicated, we did well on product pricing versus product cost inflation and on synergy realization, but had about 100 basis points of dilution from adverse foreign exchange and mix. I'll cover this in more detail on the next slide. Cash flow in the quarter was strong. Unlevered free cash flow was $206 million, up 48 percent, and is up 34 percent for the year to date. Our leverage position continues to improve as we ended the quarter at 4.8, down from approximately five times at the end of the second quarter. We expect to see further progress in the fourth quarter. Last, the 49% increase in our adjusted earnings per share reflects the operational performance and the ongoing benefits on interest expense from our deleveraging. Slide eight shows the adjusted EBITDA bridge from the third quarter of 2018. to the third quarter of 2019. Starting with the $13.7 million price volume factor, we had flat volume in the quarter, reflecting the netting of some very strong growth in biopharma against the negative impact of the one-off in our America's education and government business. Single-use and serum volumes in the Americas were particularly strong. Product pricing relative to product cost inflation performance was also strong, particularly in the Americas. This was offset by timing of supplier and customer rebates. The productivity factor reflects our continued realization of the SG&A synergies from the VWR acquisition, around $9 million in the quarter, largely offset by non-COGS inflation and approximately $5 million in strategic investments. These investments are mostly targeted to customer-facing sales and marketing functions and to new supply chain facilities to support growth in the EMEA region. Sales mix had an adverse impact in the quarter, but it's something we view as temporary in nature. Part of our margin enhancement strategy is to drive the sales of our proprietary products, which are accretive to margins. We have been very successful in doing this, and in fact, for the six quarters preceding this quarter, the sales growth rate for proprietary products had exceeded the sales growth rate for third-party products. But in the case of this third quarter, sales of our proprietary products were down, as I mentioned earlier. The one-off sales decline in the America's education and government business was the main factor here. This customer volume is largely comprised of proprietary products. Similarly in the Americas, we experienced a normalization in sales of proprietary materials to the healthcare space compared to the third quarter of 2018, when sales of these materials grew 25%. Foreign currency is the last bridge item I want to cover. We've been experiencing foreign currency headwinds all year. The impact was the most intense in the first quarter when, for example, we were comparing the 2018 Euro exchange rate of 123 to 2019 at 114, a nine cents gap at that time. For the third quarter, this difference was down to five cents, so 116 versus 111, but it still created a $6 million year-over-year headwind for us. We expect this impact to narrow further in the fourth quarter. Combining the $6 million FX impact and the $9 million mix impact, we realized an approximate 100 basis point contraction in margins from 2018. This is not something we expect to continue. Slide 9 has our segment results. As I indicated earlier, the 1% organic revenue growth rate in the Americas exceeded 4% absent the one-off revenue decline in education and government business. We also exited the quarter with mid-single-digit growth for the month of September. We enjoyed another solid quarter for the biopharma business, our largest customer group, with sales up mid-single digits reflecting new customers and strong volume growth from customer spending on research and development. The bioproduction business also remained strong with low double-digit growth. This strength was partially offset by a mid-single-digit contraction in healthcare, which reflected the normalization I mentioned earlier in sales of proprietary materials to the healthcare space. Absent the normalization from this customer, Q3 sales for America's healthcare would have been up 3%. We experienced mid-single-digit contraction in education and government. Apart from the one-off item, we actually experienced improved performance in the remainder of this end market, especially in higher education, where we had some recent customer wins. The advanced technologies and applied materials end market was down low single digits, driven by high single-digit decreases in from food and beverage, agriculture, semiconductor, and chemical customers, reflecting softness in the industrial sector. This was partially offset by growth in our aerospace and defense platforms. Despite the more challenging revenue comparison, the Americas region reported an improvement in the management EBITDA margin rate, which reflected strong product pricing relative to product cost inflation and SG&A savings driven by the BWR synergies and lower incentive compensation accruals. These were partially offset by the adverse mixed factors and timing of customer rebates that I referenced in the overall adjusted EBITDA margin bridge. In Europe, net sales increased approximately 4.5% on an organic basis with roughly equal contributions from improved pricing and volume growth. Sales to the biopharma end market increased high single digits from broad-based strength across strategic customer accounts and new customer wins. The healthcare segment experienced mid-single-digit growth largely due to strong sales of proprietary materials, partially offset by declines in third-party consumables and equipment and instrumentation products. Sales to education and government consumers grew in the low single digits. We were successful in winning new government projects, but these gains were partially offset by contraction in equipment and instrumentation sales. Advanced technologies and applied materials recorded low single-digit growth driven by higher sales of third-party materials and consumables, and relatively flat sales in electronic materials. Europe had a modest improvement in the management EBITDA margin rate. We had strong product pricing relative to product cost inflation performance, modest volume leverage, a favorable mix of sales, and SG&A savings driven by the VWR synergies and lower incentive compensation accruals. Offsetting these were the unfavorable transactional foreign currency headwinds and the timing of supplier rebates. The EMEA region reported organic sales up 8.2% due to growth in biopharma and advanced technologies and applied materials, our two largest end markets. We exited the quarter with over 30% growth for the month of September. The biopharma business experienced low double-digit growth driven by increased volume in lab products, primarily through sales of third-party materials and consumables. These were partially offset by a decline in sales to biopharma production customers, driven by challenging prior-year comparisons and the timing of customer production campaigns, offset by stronger sales of single-use offerings. Advanced technologies and applied materials experienced mid-single-digit growth, driven by sales of third-party materials and consumables. Sales of electronic materials were flat year over year. EMEA had a decline in the management EBITDA margin rate from 24% in 2018 to 20% in 2019. We had modest volume leverage offset by a slightly dilutive mix of product sales and investments in customer-facing sales and in marketing functions and new supply chain facilities to support future growth. Turning to slide 10, I want to share some more detail on cash performance for the quarter. For grounding, the green bars on the left show free cash flow, which grew from $99 million in the third quarter of 2018 to $185 million in the third quarter of 2019. Networking capital contributed approximately $80 million of this $86 million improvement, as you can see in the table on the right. We are clearly getting some traction from the leadership attention this area is receiving. However, we still have an opportunity for significant further improvement. You will also note that the improvement in free cash flows from lower interest costs driven by our deleveraging was largely offset by higher payments for income taxes as our net operating loss deductions begin to expire. Excluding cash interest, which is shown in the blue bars, the unlevered free cash flow grew from $139 million in 2018 to $206 million in 2019. This cash generation enabled approximately $157 million of cash deleveraging in the quarter. Speaking of deleveraging, slide 11 gives a quick update on leverage at the end of the quarter. We started the year at seven times and reduced it to five times by the end of June and further reduced it in the third quarter to 4.8 times. We expect our leverage ratio to approximate four and a half times by year end and continue targeting a long-term leverage ratio in the range of two times to four times. Looking ahead, there are some opportunities with our debt structure to further reduce the interest burden. In particular, our $2 billion in senior unsecured debt with a 9% coupon and our $1.5 billion in senior secured debt with a 6% coupon offer attractive opportunities for refinancing in the second half of 2020. We will share more detail as we get closer to that date. Our full year revenue and earnings guidance is on slide 12. We are adjusting our full-year outlook to reflect the third quarter performance and foreign currency differences between our original guidance and the current environment. We now expect full-year revenues to be in the range of 6.02 to 6.08 billion, with organic growth of 5% to 6%, and adjusted EBITDA in the range of 1.025 to 1.035 billion, or an increase of 8.4% to 9.4%. At the midpoint, the new guidance reflects a 1% reduction in revenues and a reduction in adjusted EBITDA of approximately 2%. Our guidance for adjusted earnings in the range of $0.55 to $0.58 per share or an increase of 52% to 60% remains unchanged. With the updated guidance, we expect a very strong fourth quarter. with inferred sales growth of 5% to 6%, EBITDA margin expansion in excess of 100 basis points, and adjusted EPS growth of 57% to 87%. I will now turn it over to the operator to begin the question and answer section.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile a Q&A roster. And our first question comes from the line of Tycho Peterson from JP Morgan. Your line is open.

Hey, thanks. Tom, I want to kind of go back to kind of how the quarter played out. If we go back to September, you know, you had made some comments about Europe being soft and, you know, that ended up being fine. And conversely, it was the Americas that came in a little bit light against, you know, a tough comp that you kind of knew about. So can you just talk a little bit about where you're feeling better or worse geographically coming out of the quarter? Were you surprised at the reversal in Europe? And are you able to talk at all about October trends? I know you said September was really strong.

Yeah, so happy to take that. Thank you, Tycho. Just starting with Q3, when we look at the growth by month, it's kind of interesting. We were, and I think I tried to say in the comments, we were kind of in that 3%-ish range in the month of July, and we actually went negative in August, and It was in part in Europe where we were seeing that. And the month of August is tough always to kind of base a full year projection on given schedules and vacations, particularly in Europe. But we definitely were sounding a cautionary tone after seeing that. But I'd say that September was very strong for us across the board. I mean, the Americas was mid-single digits. Europe was high single digits, and Asia, as I said, was well into the double digits. So a very strong month of September. In terms of October, we're not closed yet, but we are trending in line with the guidance that we provided for the full year, as well as what that implies for the fourth quarter. So I think off to a reasonably good start for the quarter, and it's going to be a It's going to be a pretty strong quarter relative to Q3.

And on Asia, I was a little surprised that EMEA didn't do a little bit better given that the comp slowed. I know you called out some timing issues on bioproduction. How much of this was just kind of pacing, timing of manufacturing campaigns versus, you know, a broader slowdown? You're obviously off a small base there.

Yeah, Tycho, this is Michael. I'll take that question. I think a couple things to keep in mind for EMEA, firstly, just the relative magnitude of EMEA for us is roughly 5%. And the way our portfolio has been built out there, it's skewed more towards the production environment than the other two regions that we participate in. So we do see a little bit more volatility in Asia. owing to just the batch and campaign cycles that our customers bring us into. If you look at the third quarter specifically in bioproduction, in 2018 that was in fact the high watermark for us in the region. There were a number of really, really significant campaigns that we participated in that just based on the timing this year, several of those have actually slid into the Q4. Nothing structural, you know, still very well, you know, positioned there. Growth continues to be solid. And as we look into the fourth quarter in our order book, particularly around bioproduction, you know, you'll see, I think, a return to kind of levels of growth that you would expect in that region.

Okay. And then lastly, just hopefully a quick one, but how much of the EBITDA being lowered is FX versus accelerated growth spending versus the lower organic growth? I know you flagged accelerated growth spending.

Yeah, I mean, if you look at it, if you look at it at the midpoint, Tycho, you know, we were at a 1050 midpoint in the prior guidance. We're at 1030 now, so call it 20 million. You know, of that 20 million, 15 is really, you know, the Q3 results that we just took you through. And the remainder is mostly FX for Q4. Otherwise, we're pretty in line with what we've talked about before on Q4.

Okay, thank you.

And our next question comes from the line of Derek DeBruin from Bank of America. Your line is open.

Hi, good morning. Hey, I just wanted to follow up on Taika's question on EBITDA. I mean, this is the – I realize that there's a lot of FX and mix associated with it, but the question I sort of want to focus on is, It's been a little bit more volatile than even we had thought, given our experiences with TWR, and certainly relative to where the IPO model was. I'm just curious, you know, what can you do to sort of help smooth out the EBITDA, you know, expansion? Is there anything you can do? And it also goes to the question, as you look to 2020, are you still comfortable with at least 100 basis points to do the Dow March expansion next year, given the current trends?

Yeah, thanks, Derek. I was having a little bit of difficulty hearing the first part of your question. But if I talk about, you know, the trends going forward, and you can start with the fourth quarter, if you look at our guidance for EBITDA, it does continue in line with, you know, the model that we've talked about. And just to remind you, you know, during the three-year integration period of volunteer and VWR, And we have a high degree of confidence of being able to grow the margins in part because of conversion on organic growth, but also in part because of the synergies in that 100 to 150 basis point range. We did that for the first two quarters of this year. We'll do it for the fourth quarter. Third quarter was for the reasons we've talked about, a little bit of an aberration. As you head into 2020, that's the third year of our three-year integration. And while we haven't finished our planning yet for 2020, you know, I would expect that, you know, we'll adjust the overall baseline to reflect 2019 actuals. But, you know, the growth algorithms, you know, on organic growth as well as margin expansion, de-levering and so forth still remain intact. Can you help me? Can you take me back to the first part of the question?

No, that basically covers it. You got what I asked in the first part on it. I guess another question I just wanted to bring up was you're seeing some good pricing gains, and I'm just wondering how sustainable those are. I mean, you're seeing a little bit better price than even I would have thought you had. Can you talk about what you're doing to sort of maintain that?

I think, Derek, as you look at the impact of pricing relative to volume, I think the third quarter played out plus or minus what we've seen in previous quarters, which is to say that we strive to modestly offset the COGS inflation that we do see in the more transactional part of our portfolio. And then on more of our proprietary products, you know, which tend to have more of a value-based pricing approach to those, nothing really new to report there. So I think as we look at the contribution of pricing in the quarter, you know, we call it out only to indicate that, you know, we continue to execute our model that we've had in place for quite some time here. I don't think anything unusual to note there, Derek.

Great. And just one other quick one. If you look at – if you back up the one-timer in proprietary products, what did that grow in the quarter?

Yeah, if you – yeah, we were looking at the math on that this morning, but if you take, you know, the impact of the science and education piece out of it, you know, we would have been strong mid-single digits, like 5% to 6% is, you know, what you would have seen, which, you know, certainly is – you know, a tad better than what we would have had on third-party. So we think the algorithm of proprietary growth relative to third-party growth, you know, still, you know, remains intact. And, you know, that is a, you know, a tenet of our baseline expansion.

I think, Derek, it's important to point out when we look at the proprietary materials part of our portfolio, you In large part, you're talking about our exposure to bioproduction, where most of our solution is manufactured from our own technologies. And then our exposure into the healthcare space with our medical grade silicone platform is also an important part of that. you know, algorithm that Tom mentioned. And, you know, to Tom's point, those end markets for us continue to be very robust. We continue to see, you know, strong double-digit growth in our bioproduction platform led by, you know, more than 20% growth in our single-use platform. So I would say, you know, it's important to recognize that The proprietary materials part of our portfolio does influence margins to a large extent as we've laid out today, and the core part of that business continues to run at a very high level and save the one-off here in the science education business we've talked about another really strong quarter. Thanks for the clarity.

Our next question comes from the line of Jack Meehan from Barclays. Your line is open.

Thank you. Good morning. Actually, I wanted to follow up. Good morning. I wanted to follow up on that last point. Just as we look at the fourth quarter guidance, you know, it looks like around 5.5% organic. You know, what are you expecting proprietary to bounce back? And Michael, can you just build off that point related to maybe some of the proprietary products across JT Baker and New Seal? Just, you know, Could you maybe, how did they perform in the quarter and, you know, how are you feeling about that going into your end?

Right. I think that's a good place to focus, Jack. When we look at the, you know, the inferred, you know, Q4 performance, obviously you see, you know, strong top line, you know, our return to kind of the normal margin expansion in line with our long-range targets. And then underneath all that, in order for that to happen, you're seeing a bounce back in proprietary materials probably right to think about that in the high single-digit growth levels for Q4. That is a part of our business. We talk a lot about the limited visibility we have overall for our order book. That proprietary materials part is, particularly in our production space, an area that does have a little bit longer lead times associated with it. you know, in the first week of November, we do have fairly good line of sight to, you know, orders that we would have through the end of the year and, you know, are comfortable in kind of the guidance that we've put out for that aspect of the model. When I look into Q3 specifically, Around bioproduction, I referenced the strength of our J.P. Baker brand in our bioproduction chemicals platform. The single-use platform continues to grow well into the double digits and well beyond, I think, any kind of normalized market growth rate for this space, which I think speaks to our global presence and the success that we're having in growing that part of our business. You mentioned the new cell business. In Tom's remarks, he did reference a bit of a pullback in that part of our portfolio as it relates to our healthcare business. And that's another production-oriented platform that from quarter to quarter can have a little bit of volatility to it just given the production cycles and inventory balancing that our customers need. you know, would go through. And in that particular platform, Q3 a year ago was the high-water mark. I think we grew that platform, you know, 25 percent a year ago. So, you see a bit of a more normalized environment in the third quarter this year. The comp, you know, loosens up a bit, and, you know, we see structurally, you know, a return to normal growth in that end market as well.

Great. Thanks for all the talk. In the slide deck, I really like the EBITDA bridge on slide eight, but the one thing I guess that stood out to me was that net productivity was only half a million in terms of the year-over-year contributions. So now you're at 247 million of one rate synergies. You can annualize some of these as you go into the numbers, but how much you know, as we exit 2019 and go into 2020, can you give us a sense for, you know, how much is left in terms of the potential to expand margins based off synergies?

Right. So I think I'll provide a little bit of high-level cover for your question there, and then Tom will give you a specific walk on that net productivity element of the bridge. You know, we're still very confident in delivering the $300 million of synergies that we had outlined at the beginning of the integration with BWR. You know, we're run rating nearly $250 million at the end of the quarter here. And as we look forward into next year and the individual programs that are in line to get us, you know, to the 300, you know, I would say we're very, very confident about that. One important point to note... you know, that program is comprised of literally hundreds of individual projects, you know, some of which are driving, you know, top line, you know, revenue, some that are driving, you know, reduction in COGS, some that are more SG&A driven. So you're going to see the impact of that $300 million, you know, scattered throughout the P&L. And, you know, as we look into you know, the balance of this year and moving into next year, you'll continue to see a step up in the contribution from that program. Now, what we're reflecting here in the bridge, and Tom will walk you through it, is just kind of the netting of on the, you know, the fixed cost side of things, how that productivity plays out in the quarter.

Yeah. So, Jack, just to get right to the productivity number that you saw in there, I mean, it does look a little measly in the walk, but it really is a reflection of some very strong performance on the value capture. This has the SG&A synergies and productivity that we delivered in the quarter. It was approaching $10 million is what I'd say. There's additional synergies and productivity that's embedded the value capture and synergies that are in the operating piece of the business. But just from an SG&A perspective, in this net productivity, you've got $10 million offset by some big investments. We made investments in Asia in particular as we're continuing to invest in feet on the street and in laboratory capabilities. We've also got... some additional investments elsewhere in the enterprise, just growth-oriented R&D kind of investments. And you had a little bit of inflation in there as well from a year-over-year perspective. So I expect that bar to get bigger as we head into the fourth quarter and into 2020. Thank you, Bev.

Our next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question. So maybe I'll start with this Q4, 5 to 6. Just given Q3 was a little bit like maybe talk about some of the drivers here. I know the comp is easy for Q4, but X the comp, anything that we should be aware of, the confidence that you have in 5 to 6% for Q4?

Yeah, BJ, thanks for the question. Good morning. I think when you, it's important to kind of ground in Q3. I think, you know, you're looking at a quarter here that really did want to be, you know, 5% on its own, you know, absent this one-time issue with, you know, the scientific education, you know, customer that does repeat going into the quarter. So you're looking at, you know, a normalized, you know, maybe single-digit, you know, growth as a launching point from Q3 going into Q4. You know, the comp does pull back a couple hundred basis points. But, you know, we've had, you know, a number of, you know, recent contract wins. You know, we've got, obviously, visibility that I referenced earlier into the campaign schedules of many of our large, you know, bioproduction customers, especially in Asia, which we'll, you know, print into the quarter here. So as we look at, you know, kind of an inferred Q4 here in that five to six quarter, you know, range. It also has the embedded or implied kind of normal year-end budget flush that we would see in our consumables business. And so, you know, I think we're comfortable with the trends that we've seen exiting September. Early read on October would be, you know, supportive of the guidance that we have in line here and then, you know, round it out with a pretty robust order book for our bioproduction business.

That's helpful. And then maybe one on free cash flow, Tom. I think the presentation had you guys delivering to sub-4 turns end of fiscal 20. You're at 4.8 right now. I mean, basically, with $550 million of free cash guidance for the year, this is implying your free cash flows should run north of 40% to pay down an incremental billion of debt between now and now. end of fiscal 20. Does that math make sense? Your free cash, 550 for 19, that should be catering at 40% or growing 40% for next year?

You have to factor in the EBITDA growth that we'll get as well on the delivering. So I haven't done the math on that, but it is a combination of the growth in the EBITDA as well as the continued servicing on the debt that we'll get.

That's an impressive free cash flow growth number, guys. Thanks.

Our next question comes from the line of Brandon Coulard from Jefferies. Your line is open.

Hey, thanks. Good morning. Hey, good morning, Brandon. Mike, if you look at the industrial markets globally in the third quarter, could you just kind of unpack the various subsegments globally, particularly on the more cyclical, say, chemical and industrial side and what you're embedding for? you know, that market in 4Q?

Right, so just maybe to provide a little bit of context here, roughly 25% of our revenue would have exposure into this industrial end market, but in a very fragmented way. You know, we're going to serve lots of different applications, whether that be aerospace and defense, semiconductor space, food and beverage, oil and gas, with no end market. representing more than, you know, kind of low single-digit percentage of our overall revenue. And, you know, as we have been signaling for most of the year, this part of our business has been relatively soft to negative and certainly haven't really seen a significant change in that trajectory in the third quarter, and nor are we anticipating or relying on any significant pickup in that of those end markets in the fourth quarter. There are a couple of pockets of bright spot for us. Our exposure to the aerospace and defense end market is rather unique in that we're specced in much the same way you would expect us to be specced into a biologic drug with a very specific specification on a long-term platform that is growing and certainly grew in the third quarter and will continue to grow going into the fourth quarter. The semiconductor space is another important end market for us. We've seen the business in Asia slide for most of the year, starting to moderate a bit in the third quarter, I would say. you know, we feel like we've probably bottomed out in Asia in that end market and see, you know, the signs of a little bit of an uptick, nothing, you know, that will drive the results in a significant way, but certainly a glimmer of hope that things have likely bottomed out there. Europe, you know, when you look at an impressive print there on the quarter of 4.5%, it is still, you know, one or 200 basis points below where we had been running earlier in the year, and I would say if there was one change I would point out, we did see kind of the industrial end markets in Europe, you know, start to slow down a bit in the third quarter, and I think when you look at, you know, a 4.5% print that obviously, you know, demonstrates the exposure we have to biopharma in Europe, but it also does reflect a little bit of a weakening environment in Europe across that industrial sector, particularly as it relates to capital expenditures. And if you recall, roughly 15% of our portfolio in the equipment and instrument part of what we offer is going to be subject to our customers' capital expenditure programs. And certainly saw a tightening of that in Europe. We were off in the quarter low single digits on that platform. And see that kind of moderating here through the fourth quarter. I would say continued weakness with maybe a couple areas of bright spot, and I would say Europe had a few more headwinds in the third quarter than what we had seen up to that point in the year.

Thanks. Appreciate that, Cutler. And then, Tom, just in terms of the guy trimming EBITDA a little bit for the year, just curious, but holding EPS, just curious if there are any changes below the line in terms of net interest and other or tax for the year?

Not really. I mean, when we put together the original guide, we had some assumed levels of interest expense. We've done a little bit better on that as we've progressed through the year. I mean, we had repricing in the middle of the year that's helped a little bit. We've also – the IPO was a little bit bigger than we had modeled. So between those two, we're getting some favorability on the – on the interest line. Taxes will be pretty much in line with what we modeled out in that 30% range. As I've talked about, as we look forward to tax, that's certainly an area of opportunity for us. We're making good progress on some of the things we need to do to bring that rate down to the levels I've talked about before. Overall, it's not a significant you know, change other than the fact, as I mentioned, of the repricing and the IPO sizing. Super. Thank you.

Our next question comes from the line of Doug Schenkel from Cowen. Your line is open.

Hey, good morning, guys. Maybe to start with a, I guess, sort of a high-level question. As you noted in your prepared remarks and as we've covered a bunch of times already over the course of this call, You had some one-timers, and generally speaking, a tough comparison relative to the norm in the quarter that depressed organic revenue growth relative to recent trends. That said, it does seem like something surprised you in the quarter, given that you cut full-year guidance. I know that's basic, but I just want to make sure that's fair. And building off of that, probably more importantly... Even if something changed relative to your internal model for the second half of this year, is it fair to say that your 5% to 8% long-term revenue growth guidance is very much intact at this point?

Yeah, let me take that question. I think your observations on some of the one-time nature of the results that we saw here were somewhat to be expected. Certainly, the tough comp was known. Certainly, kind of the shifting of revenue from Q3 to Q2 from this science education customer was known. What was not known on that part of the business was the relative level of inventory that they were carrying and the volume that didn't repeat in the quarter. So we knew that there was a pull forward of some of the volume, but there was some lack of transparency on just how much inventory that they were carrying, and as a consequence, volume that wouldn't repeat in a quarter. The other dynamic that we didn't anticipate going into the quarter, and this is actually relatively normal for that end market. The healthcare space, relatively limited visibility into inventory through the supply chain. You do have relatively volatile production schedules. And coming off a quarter where we had 25% revenue a year ago, knowing at some point that there would be likely some inventory taken out of the value chain. the timing of which is very difficult to predict. And unfortunately, it looked like more of it came out in Q3 than what we would have anticipated. So those are probably the two things that I would point to that surprised us a bit on the quarter. Relative to our longer-term guide, absent those two factors, we had a great quarter. Our consumables business holding up in the mid-single-digit levels, our bioproduction business holding up in the low double-digit range. This model that's really built to deliver over the long term, you know, on a sustainable basis, mid-single-digit growth, you know, with the embedded, you know, power, you know, on various quarters, as we've demonstrated, you know, to go, you know, even into the high single-digit frames is very much intact. And you see that, you know, in the optimism we have here around our fourth quarter.

Okay. That's all super helpful. And maybe if I could just slip in one quick follow-up. On tax rate, you came in well below expectations in the quarter. How much of this was a function of timing or something else? And I guess as we look ahead, do you still expect 2020 adjusted tax rate to be in the 26% to 27% range, or are you seeing something, as we sit here today, that could drive that even lower? Thank you.

Yeah. Yeah, I think when you're talking about, Doug, just for everybody's references, the We're still sticking to that. The quarter was a little bit lighter in terms of the rate, and it came in around 27%. That's about $2.5 million of net income, less than a penny. So not terribly material, and there's really nothing to point to structurally or from a longer-term perspective. But I would say that and repeat what I said earlier, that we are on track relative to the things that we need to do to get the tax rate lined up for 2020, particularly around the way we're financing our international operations, doing that in a much more tax-efficient manner.

Okay. That's great. Super helpful. Thank you.

Our next question comes from the line of Dan Brennan from UBS. Your line is open.

Great. Thank you. Thanks for taking the questions. I joined a little late. The first question was just on AMEA. I know it's a smaller portion of your business, but I know it's an important growth opportunity for you, and the growth this quarter was below what we were expecting. So could you just kind of give us some sense of kind of what the trend was in the quarter, and also as we look out, what's the right kind of growth rate to expect for that geography for you?

Yeah, we did cover that question early in the call here, but just to reiterate the key points from the answer we gave there. Obviously, it's a relatively small or modest revenue base for us in Asia, roughly 5% of our overall revenues. And unlike the other two regions that we serve, it's disproportionately oriented towards our production customers and then naturally the exposure to their campaign cycles. So we've had a number of really important wins in the region this year. It just so happens that last year was probably the high water mark for our bioproduction business in the region a year ago, so very difficult comps. And a number of those campaigns actually slid into the fourth quarter this year. So nothing particularly structural. The business continued to perform well. while it was certainly muted by, you know, downside in our electronic materials platform that continues to be negative. But long-term, you know, we would expect that part of our business to grow, you know, at least in the low double-digit range for the foreseeable future.

And then, Michael, thank you for that. And then just within biopharma, there's been, you know, kind of varying degrees of kind of growth this quarter from your peers across the different subsegments within biopharma. But just You know, I know the growth this quarter was still, you know, positive, a little bit lower than what it had been. Just can you kind of remind us of kind of your split within biopharma, you know, between the bioproduction, which is obviously robust in other areas, and how we think about the trajectory of biopharma in Q4 and beyond? Thank you.

So BioPharma for us is roughly 50% of our revenue, so obviously it's a critical end market for us, and we're excited about the momentum that we have in the business. We highlighted a number of customer wins that we had in the quarter, you know, which would be a follow-on from a number of specifications and wins that we've had throughout the year. So really great momentum there. We're going to serve BioPharma across the workflows, you know, starting in the research and discovery phase all the way through to the production environment. As a rule of thumb, you probably wouldn't be too far off to assume roughly two-thirds of that revenue is going to fall into the laboratory and research and discovery phase and somewhere in the range of a third of the revenue falling into the production environment. Clearly, the growth in the production piece of that is going to be a bit more robust. I think if you look at and triangulate most of the market data points about production growing high single digits, low double digits, Just given our portfolio, our exposure globally, we would expect to do at least in line with that, if not slightly better than that.

Great. Thank you.

Our next question comes from the line of Aaron Wright from Credit Suisse. Your line is open.

Great, thanks. Can you speak to some of the nature of those contract wins in the quarter? I guess what drove those? Was it the integrated offering that contributed to the wins across CROs as well as in biopharma and the extensions there? If you could speak a little bit more to those, that would be great.

Yeah, no, we're always excited to speak about some of the success that we're having. We won't get into any specific customer detail for obvious reasons here, but when I look at the success that we've had in defending our accounts as well as winning new accounts across biopharma and across education especially, it's been a really successful year. When I speak to our customers on the back end of these discussions, two or three things seem to emanate with them. One, the power of our integrated offering is certainly unique for them, and as these two platforms have come together, we're able to offer them a much more significant solution today than we ever have before, and you see that in the share of wallets that we're able to gain with some of these accounts. Our global exposure is important. We referenced in our remarks an example of a customer that we had historically only served in in Europe, but as we have built out our capabilities, especially in Asia, but also building our presence in the Americas, they stepped up and awarded that business to us globally. The CRO space continues to be an important driver of growth for us. We had a number of important contract wins in a quarter in that space. And then playing on a theme that we've been running now for multiple quarters, we continue to build momentum in our higher education portion of our business in the Americas. We have, as we've discussed in other forums, an exclusive relationship with a consortium organization that a lot of the universities in this part of the world would buy across. And given that position as well as just the focused efforts that we've been driving, we've seen a number of important contract wins in the higher education space this year.

Okay, great. Thanks. And then digging a little bit deeper into the VWR synergies, I guess, can you give us a geographic update on sort of the productivity and other initiatives there, specifically in Asia. I know that was an area that you highlighted with the IPO as far as the opportunity with BWR synergies as well. Is that all still intact in terms of the prospects there?

That is. When we look at synergies, kind of two-thirds cost, roughly one-third commercial synergies, A good bit of those commercial synergies actually play out in Asia, as you're describing, as we integrate the BWR portfolio across, in that case, what happens to have been the legacy of On4 infrastructure. And we continue to invest, and you see that in some of our SG&A numbers and other operating expenses, whether that be in sales reps or marketing resources or, you know, we're commercializing a new application center that will open here in a few weeks in Shanghai. So we'll continue to build out, you know, a supply chain to service that and then to be able to capture those synergies. But they definitely, you know, as we see out over the long term, you know, a region that will be growing double digits in part due to these synergies.

Thank you. I would now like to turn the call back over to Michael Stubblefield for closing remarks.

Thank you, everyone, for participating in our call today. We certainly appreciate your support of Avantor. As we've talked here, we had a bit of noise in the course from some prior year one-offs and mix and foreign currency headwinds, but we're pleased with the underlying growth that we did generate, the strong cash generation, and excited about the optionality that the leveraging trend that we have will provide for our business going forward. BioPharma are certainly our most important end market, continues to grow strong, and overall we exited September with great momentum that has carried forward into the fourth quarter. As we talked here on the call today, we did see significant customer wins in the quarter, and we're strengthening our overall value proposition by continuing to make strategic investments to better serve our customers. Certainly, our operating performance benefited from continued progress and the operational efficiencies and synergies from our integration program with EWR. And overall, we remain on track to deliver the margin expansion and cash flow that's in line with our long-term objectives. As we look at this platform, our business is certainly well positioned to further enable the innovation and breakthroughs that help our life science customers dramatically improve patient outcomes. Again, appreciate you joining our call today. We look forward to our next update after the new year and to seeing some of you in person in the coming weeks. Have a great day, everyone. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.