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spk08: Good afternoon, my name is Grace and I will be your conference operator today. At this time, I would like to welcome everyone to a Venture Support Quarter and Full Year 2020 Earnings Results 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 then the number one on your telephone. If you require any further assistance, please press star zero. I will now turn the call over to Tommy Thomas, Vice President of Investor Relations. Mr. Thomas, can you begin the conference?
spk00: Thank you, operator, and good afternoon, everyone. Thank you for joining us on today's call. Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom Slozek, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our investor website at ir.avantoursciences.com. A replay of this webcast will also be made available on our website following this call. Following our prepared remarks, we will open up the line 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 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. Michael?
spk07: Thanks, Tommy, and good afternoon, everyone. I appreciate you joining us today and hope the new year is off to a good start for you. I also hope that you and your families are staying healthy. Reflecting on 2020, the value of the significant transformation we have undergone since acquiring BWR in 2017 is clear. Organic growth has doubled. Margins in overall business profitability have increased substantially. and our leverage has now reached our target range of two to four times EBITDA. This transformation has positioned Avantor as a global life sciences leader, and there has never been a more exciting time to serve this space. As shown here on slide three, Avantor is deeply embedded in virtually every stage of the most important research, scale-up, and production activities in the industries we serve. Our model is grounded in supporting our customers' early phase discovery activities, And we serve as a one-stop shop in providing scientists all that they need to conduct their research. Our customer-centric innovation model enables us to provide solutions for some of the most demanding applications. And we leverage our access to the early-stage work to feed content and solutions that ultimately become specified into our customers' approved production platforms. Our fully integrated business model enables us to support our customers' journey every step of the way. Resiliency is an element of Montreux's business model that was demonstrated throughout 2020. Slide four provides an overview of our revenue across several dimensions. Our resiliency stems from the consumables-driven nature of our portfolio and our highly recurring revenue base. Approximately half of our revenue comes from proprietary branded products and services. These proprietary products are supplemented by innovative third-party offerings from our critical supplier partners. enabling us to provide comprehensive, workflow-driven solutions to our customers. We serve four end markets that feature similar characteristics, including high regulatory oversight and complex development processes. Approximately 70% of our revenue is in attractive life science end markets, including more than $1 billion in the bioproduction space. We have leading positions in the Americas and Europe and have a growing presence in the EMEA region, driven by our ongoing investments in core biopharma hubs like Singapore, Korea, and China. Moving to slide five, I want to share some highlights from the fourth quarter. As pre-announced last month, we ended 2020 with a Q4 organic growth rate of 14.9%, our strongest growth quarter of the year. Combined with solid margin expansion and strong cash flow generation, our results underscore the relevance and value of our business model and our team's ability to execute in a challenging environment. In addition to generating strong financial results, we also remain focused on driving innovation and growth across our core business. We enhanced our bioproduction offering through several technology launches in the quarter. Our Avantor top mixer single-use mixing system with integrated formulation programming enables consistency and reproducibility during media and buffer mixing processes. Our new sterile-end single-use high-pressure fluid handling system sustains pressure up to 150 psi, making it suitable for applications where temperatures are elevated and pressures exceed normal biopharma process conditions. Both technologies are compatible with our full line of single-use solutions, complementing and extending the range of our customer offering. During the quarter, our biomaterials business commercialized a controlled-release drug delivery technology for an HIV prevention application that has received a positive opinion from the European Medicines Agency. The technology leverages our flexible, high-purity silicone to continuously release an anti-HIV drug. We are proud of our role in expanding the HIV prevention options available to women, particularly those in geographies most affected by the HIV epidemic. We also completed the transformation of our capital structure by refinancing the remaining high-cost portions of our debt. Over the last couple of years, we have cut our weighted average cost of debt by nearly 50% and reduced our interest expense by over $300 million. This will give us significant financial flexibility going forward and positions us to pursue M&A opportunities that will accelerate growth and enhance our portfolio of proprietary offerings. Avantra remains an important partner in the fight against the COVID-19 pandemic. In addition to the PPE and testing solutions we offer, we are relevant in all vaccine modalities, including the mRNA and viral vector modalities that have already received emergency use authorization in several countries around the world. We continue to make appropriate investments to increase our critical file production clean room and manufacturing capacity to meet the growing production needs. The first clean room expansion in our North Carolina facility came online in the fourth quarter, and we expect additional capacity to be ready at our Massachusetts site by the summer. We're also working to increase our raw material manufacturing capacity with plans to bring additional capacity online for key products throughout the year. Additionally, our innovation team recently commercialized a silicone elastomer to support fluid transfer at extremely low temperatures, a critical requirement in the production of some of the COVID-19 vaccines. This is a good example of our integrated business model and highlights the value of leveraging the breadth of our portfolio to solve customer challenges. Turning to slide six of the presentation, I'd like to summarize our Q4 financial results. Organic revenues increased 14.9%, reflecting approximately 800 to 900 basis points of COVID-19 related tailwinds. Improvements in all our end markets, and importantly, mid to high single digit growth in our base business. Performance continues to be driven by BioPharma, where organic revenue growth exceeded 20%. BioPharma's broad-based strength in the quarter is indicative of the value we offer through our ability to collaborate directly with customers to characterize and scale up their formulations. In healthcare, we once again experienced double-digit growth driven by strong hospital and clinical reference lab activity that offset ongoing elective procedure weakness. It was an outstanding quarter in our government and markets, growth exceeded 50% as we were favorably impacted by COVID-related purchases. Adjusted EBITDA on the quarter was up approximately 21%, leading to adjusted earnings per share growth of approximately 57% to 29 cents. Our EBITDA margin rate growth continues to reflect the impact of volume leverage, favorable mix from our proprietary offerings, commercial excellence, and productivity. Tom will provide more details on adjusted EBITDA and EPS growth in just a few minutes. Our strong free cash flow generation drove 152% conversion of adjusted net income. For the full year, we generated $868 million in free cash flow, about 75% higher than the high end of our initial 2020 guidance, aided by strong EBITDA growth and lower interest and taxes. This full year performance enabled net leverage to reach our target range of two to four times EBITDA down from 4.6 times at the beginning of the year. Our results reflect our attractive end market exposure, highly recurring revenue base, trusted and collaborative customer relationships, and a strong culture of execution enabled by the Avantour business system, which underpins everything we do. With that, let me turn it over to Tom.
spk04: Thank you, Michael, and good afternoon, everyone. Slide 7 shows our organic revenue growth by end market and product group for the quarter. Biopharma, representing approximately 50% of our revenue, experienced organic revenue growth of over 20% in the quarter and double-digit growth for the full year. Strengthening trends in R&D workflows drove growth in our lab products business. In addition, our bioproduction platform experienced very strong growth in production materials and single-use assemblies to support both our base business and COVID-related areas. Healthcare, which represents approximately 10% of our revenue, also increased revenues over 20% organically in the fourth quarter and attained mid-single-digit growth for the full year. Strength was once again driven by continued COVID testing momentum, offset by ongoing elective procedure weakness, which adversely impacted our medical implants business. Education and government, representing approximately 15% of our revenue, experienced double-digit organic revenue growth in the fourth quarter and declined mid-single digits in the full year. Fourth quarter growth was driven by government customer purchases offset by ongoing education declines centered in the Americas. Advanced Technologies and Applied Materials, representing approximately 25% of our revenue, experienced low single-digit organic revenue growth in the fourth quarter and declined low single digits for the full year. The core industrials portion of this end market, including oil and gas, petrochemicals, and mining, has driven the sequential improvement. By product group, proprietary materials and consumables experience approximately 20% revenue growth, with strong growth in the Americas. Third-party materials and consumables also experience very strong high-teens organic growth. Services and specialty procurement increased high single digits driven by ongoing clinical services strength and continuing equipment services as sites continued to reopen. Equipment and instrumentation experienced a sequential recovery to low single-digit growth, reflecting a modest improvement in CapEx investment. Let me move to slide eight. Looking at growth from a regional perspective, Americas, which represents approximately 60% of global sales, reported 16.2% organic revenue growth and strong sequential improvement from Q3 growth of 4%. Full year growth was 4.6%. Most end markets experienced sequential growth improvement in the quarter. Highlights were growth of 20% in biopharma, including strong double-digit growth in biopharma production, and greater than 20% growth in healthcare driven by hospital and clinical reference lab customers offsetting ongoing elective procedure weakness, which continues to impact our medical implants business. The declines in education moderated, although lab and school closures are still creating a headwind. Our government business was very strong, essentially doubling, driven by COVID-related purchasing. Europe, which represents approximately 35% of global sales, reported 14.7% organic revenue growth and strong sequential improvement from Q3. Full year growth was 7.1%. All end markets experienced sequential improvement, with growth highlighted by ongoing biopharma strength and strong government sales, as both grew by double digits. Similar to the Americas, Q4 strength in research materials and consumables and continuing biopharma production sales drove the biopharma growth. Governments continued their broad-based purchases, largely centered around COVID-related personal protective equipment, and diagnostic testing offerings. Healthcare experience double-digit growth and education grew by mid-single digits. The first growth quarter in 2020 aided by ongoing lab reopening. Advanced technologies grew by low single digits. EMEA, representing approximately 5% of global sales, reported 5.2% organic revenue growth. despite a challenging comparable in the prior year when growth in our biopharma production and market drove overall EMEA growth over 20%. Slide 9 has our segment results. America has reported 20.6% in adjusted EBITDA margin rate, approximately 240 basis points higher as compared to the prior period. Key drivers include strong volume growth favorable mix driven by strong growth in proprietary materials and consumables content, and commercial excellence, offset by additional costs to support the growth. 2020 full-year adjusted EBITDA margin expanded approximately 190 basis points in the Americas. Europe reported an 18.1% adjusted EBITDA margin rate, approximately 60 basis points lower as compared to the prior period. We continue to experience favorable margin impacts from strong volume growth and commercial excellence. In this quarter, however, some additional investments to support the growth, along with some non-recurring items, created the margin rate decline. 2020 full-year adjusted EBITDA margin has expanded approximately 50 basis points in Europe. EMEA reported a 21.4% adjusted EBITDA margin rate, approximately 900 basis points lower as compared to the prior period. As you will recall, we had an exceptionally strong adjusted EBITDA margin rate in Q4 2019 in EMEA, driven by this very strong growth in our biopharma production and market. 2020 full-year adjusted EBITDA margin declined approximately 170 basis points, in EMEA due to the same factor. Turning to slide 10, let me start with our fourth quarter adjusted EBITDA. We achieved approximately 21% growth in reported adjusted EBITDA and 60 basis points of reported margin expansion. Key drivers of the performance were volume growth, favorable mix including strong growth in biopharma production and proprietary offerings, commercial excellence, and continued discretionary cost containment. offset by increased compensation costs driven by our strong performance. For the full year, adjusted EBITDA margin expanded approximately 80 basis points. We achieved approximately 57% growth in our adjusted earnings per share for the quarter and approximately 54% growth in adjusted earnings per share for the full year. Primary drivers were the strong operating performance, the ongoing reduction in interest expense from RTE leveraging and refinancing, and the improvement in our income tax rate. As Michael mentioned, we had a strong quarter of free cash flow generation with $286 million in the fourth quarter. The full year of free cash flow generation was $868 million, almost $400 million higher than the high end of our previously withdrawn guidance. The growth was driven by higher EBITDA, outstanding leverage of working capital, and lower tax and interest payments. During the slide 11, You may recall that we withdrew our 2020 earnings guidance due to the extraordinary uncertainties and volatility created by the global pandemic. Although a path to resolving the pandemic is starting to take shape, significant uncertainty remains with lab utilization, diagnostic testing volumes, and vaccine production distribution and adoption. In addition, the path to full recovery for our education, medical implants, and industrial businesses is still unclear. These uncertainties make it extremely challenging to construct an operating plan for 2021. Nevertheless, we do provide some preliminary perspectives for revenues, profits, and free cash flow. We will update you on the full year guidance during each quarter's earning call. Excluding the impact of the COVID tailwinds, our core business grew approximately 100 to 200 basis points in 2020. We consider a mid-single-digit run rate a reasonable baseline for core revenue growth as we start the new year, and it should be even higher as we move into the second quarter, where the year-over-year comparison becomes significantly easier. However, as we head into the second half of the year, and particularly into the fourth quarter, the comparable prior year periods will become more challenging. Based on this outlook for our core business, together with the potential COVID-19 tailwinds, of $250 million to $350 million plus. We are currently planning a 4% to 7% organic growth rate range for 2021, including growth of mid to high single digit for the first half of the year. Reported growth will reflect the weaker U.S. dollar and will approximate 6% to 10% for the year. Our preliminary result for January suggests that we are off to a strong start to 2021. We expect adjusted EBITDA margin to improve by about 50 basis points. This improvement reflects our ongoing expectation of strong growth in our proprietary offerings, operating leverage on our fixed cost base, continued focus on managing inflation, and productivity. There will likely be a return of certain operating costs like travel and entertainment and employee health care as the impacts of the pandemic subsides over the latter half of the year. We anticipate adjusted earnings per share growth of approximately 30 percent. This reflects continued strong operational improvement, lower interest expense from deleveraging and completed repricing and refinancing actions, and an effective tax rate of 24 percent. We also maintain a flat share count for guidance purposes. Free cash flow is expected to be approximately $800 million versus $868 million in 2020, also reflecting the strong operational performance, lower interest payments from deleveraging and already completed repricing and refinancing actions. We do expect higher CapEx and working capital investments during the year to support our continued organic growth and for certain non-recurring 2020 benefits mainly related to income taxes to subside in 2021. This concludes my prepared remarks. I will now hand the call back over to Michael.
spk07: Reflecting on 2020, we executed extremely well in a challenging environment and our top line performance, strong EBITDA and adjusted earnings per share and outstanding cash generation reflect the resiliency of our business model. The value of our highly recurring revenue base broad mission-critical product portfolio and exposure to attractive end markets, like biopharma, position us well for continued growth as we head into 2021. While the uncertainty associated with the current pandemic continues, our business remains strong, and we have embraced our critical role in providing solutions and services to support COVID-19 testing workflows, head-to-toe personal protective equipment, and customized materials needed to produce vaccines and therapies. Reflecting our relevance in this critical endeavor, our bioproduction order book continues to experience strong growth, and we are actively investing to capture this opportunity. There has never been a more exciting time to serve the life sciences space. The COVID-19 pandemic has underscored the importance of science to our society, and Avantor has the scale and resources to capitalize on the opportunities in this thriving industry. We remain steadfast in our focus on executing our long-term growth strategy, and are optimistic about our future. I want to thank you for your interest and investment in Avantour and for your ongoing support. I will now turn it over to the operator to begin the question and answer portion of our call.
spk08: Thank you. As a reminder to ask a question, you will need to press start then the number one on your telephone keypad. To withdraw your question, please press the county. Please note that you will only have one question, one follow up per person. The first question comes from the line of Tycho Peterson from JP Morgan. Your line is open.
spk06: Hey, thanks. Michael, when you laid out the guidance for the year, you noted a number of variables, base lab utilization, COVID vaccine trends, and non-COVID healthcare demand. I'm wondering if you think about the 4% to 7% organic outlook. You know, if you could just talk to where you see conservatism in the numbers, you know, would it be around additional vaccine approvals or maybe more durability of COVID, you know, tailwinds? I'm just curious, you know, what could get you to the high end or maybe above?
spk07: Yeah, thanks, Tycho. Thanks for doing the call. Appreciate the question. You know, as we look at how we have kind of constructed the guidance, there's obviously two key components here. our perspective on how the base business will perform, and then obviously trying to take a view on how the COVID-19-related revenues will flow throughout the year. So let me try to unpack each of those for you in some detail here. For the base business, as Tom mentioned in his remarks, we grew in 2020 roughly 1% to 2%. And we're estimating somewhere in the mid single digit levels for full year 2021. So we're definitely assuming some sequential improvement year over year. And if we look at where we finished Q4, obviously, we've seen continued momentum in all of our key end markets. But we still do have some headwinds that we're facing. Our education business is still flattish to modestly down. Our medical implants business still has some headwinds to it. And our industrial business is still somewhat below pre-COVID levels. And for most of those end markets, I think we're going to need to see the effects of the pandemic subside before we would anticipate those things growing. So that's, I think, one important assumption. Obviously, continued strong momentum in our biopharma platform, particularly in the R&D environment, is going to be key here. And then from a vaccine perspective, we obviously generated significant tailwinds in 2020, and we're out of the gates here, anticipating somewhere around the same level, although the mix would be different. with more focus or more weight on the vaccine opportunities compared to 2020, now that we have a number of candidates that are in full-scale production. We do have an assumption baked in here that testing, while strong here in the first quarter and likely into the second quarter, that we would anticipate that trailing off somewhat in the second half of the year under the assumption that as the vaccine becomes more prevalent in the marketplace and transmission rates decline, that the demand for testing will start to fall off somewhat in the second half of the year. I think that's the key assumption. that could push the numbers one way or another. If testing obviously were to hang up at the levels that we're at at the moment, that could provide some momentum to push us to the high side of the range. And then the vaccine, as we've talked in your conference and in other forums, We're obviously very relevant here across all the modalities and our order book is ramping and the revenues we're recognizing from the supplies that we're providing there are providing some nice momentum here. There's some assumptions here obviously around how many vaccines get produced, how many doses get produced, which modalities get commercialized or get approved. And then, of course, we have our order book. And I would say at the moment, our outlook is probably more based on our order book than some of the other variables that we could try to take a read on. And if the order book were to continue to grow over time, you could theoretically see some upside coming from that. But obviously, a lot of variables at play there. And so I think we take an approach here of trying to be prudent with line of sight to, you know, the business in hand at the moment.
spk06: Thanks. And then a follow-up for Tom. If I think about the margins, the 50 basis points, I think you had said 50 to 100 at our conference in January. So can you just clarify, you know, why the outlook is a little bit more muted than what you talked about at the beginning of the year? And then secondly, there was a $38 million non-cash charge, you know, in the cash flow statement for inventory. Was that PPE or something else? Thanks.
spk04: Okay, just on the 50 to 100, long-term guidance, that's what we're quite confident in. You know, like going into 2020, you know, we guided, I think, 45 to 75 in and up at 80 basis points. I think you can consider the 50 to, you know, be somewhat of a minimum. We didn't range, you know, the top end given the variables that Michael talked about because they can have, you know, quite an impact on performance. the margin rate. In terms of non-cash items, we continue to have ongoing strength in cash flows, and you picked that up in our cash flow statement. But you will as you're integrating our acquisitions with BWR and Avantor continuing to you know, complete that. You'll see some, you know, non-operating items come through. But, you know, provisioning for, you know, bad debts, provisioning for inventories is a normal course of business, you know, kind of thing overall. And, you know, we do see some improvement opportunities, but, you know, overall not that big of a factor for us. Okay.
spk06: Thank you.
spk08: Thank you. And your next question comes from the line of Derek DeGraw from Bank of America.
spk03: Your line is open. Hey, good afternoon. Just a couple of questions. I think on the first one, can you, I mean, you sort of alluded to it, but can you talk a little bit more about the mix between PPE diagnosis and bioprocess? And I'm also particularly, I'm particularly interested in, you know, specifically as the mRNA vaccines roll out, just You know, what essentially, you know, how's a good way to sort of think about your revenue contribution specifically from the different vaccine types? I know you've laid out some stuff in the past, but I'm just wondering if you have a little bit more granularity on how we should sort of think about the mix on this and the margin profile on this incremental growth.
spk07: Thanks for the question. To look at kind of where each of the categories that we participate in related to the COVID pandemic, The relative proportions of contribution remain somewhat steady throughout the year, meaning that roughly half of the tail ends came from diagnostics and then in kind of equal parts, then PPE and vaccines made up the balance. One dynamic we did see obviously in the fourth quarter is, as anticipated given the order book, a meaningful step up in the absolute contribution from vaccines. But you also then saw COVID tailwinds accelerate from 300, 400 basis points in the third quarter to 800, 900 basis points in the fourth quarter. in addition to the strong contribution from vaccines, diagnostic testing obviously played a meaningful role in the quarter, given the number of tests that were being, you know, run. So the proportions didn't actually change that much in the fourth quarter, despite, you know, vaccines stepping up as much as they did. Going forward, you know, on a full year basis, we would anticipate that, you know the 250 to 350 million of plus of revenue coming in 2021 uh you know roughly half of that we would anticipate coming from vaccines And then, you know, diagnostics and, you know, kind of being the one that, you know, declines and PPE probably being, you know, similar in 2021 relative to 2020 is how we would see that, you know, playing out. We intentionally kind of put, you know, the range at 250, 350 plus to indicate there are obviously scenarios here that could evolve here that would cause us to move the range up. I mentioned earlier in response to Tycho's question that we made an assumption that diagnostic testing falls off in the second half of the year. You know, we'll see how that develops. And then, you know, depending on how the vaccine rolls out, you could theoretically see some upside there from additional approvals and, you know, more aggressive ramp of production throughout the year. As we've said in a lot of different forums, Derek, We're relevant in all these modalities. You mentioned mRNA, and we're certainly well positioned there with the candidates that are in production at the moment. I think it's also important to point out that the viral vector vaccine, the J&J vaccine, the AstraZeneca vaccine, for example, also has pretty significant requirements for our raw materials and excipients and single-use systems actually not that far behind what we would supply to mRNA. And so we're excited about the potential of getting those vaccines approved and in the market as well. I don't think, you know, our view probably hasn't changed in terms of the amount of content that is required for each of these, you know, various modalities. And, you know, just reiterate how well represented we are throughout the pipeline here.
spk03: I mean, just once again, I think that the question I'm getting is, like, is in general the bioprocess contribution higher margin in 20, you know, basically is it a higher margin than the diagnostic contribution? I think that's sort of the question I'm getting.
spk07: Yeah, so if you look at the three areas, you know, Derek, if I was to stack it up for you in terms of margin contribution, nearly everything that we're going to be supplying to those vaccines is going to be proprietary content and carried correspondingly then. you know, the highest margins of the solutions. The diagnostic piece would probably be, you know, second in line there with a mix of kind of third-party content, but we do have quite some proprietary content there as well, whether it be, some of the reagents, some of the other consumables, or even some of the equipment, thermal cyclers, for example. And then PPE would probably lag that a bit with quite a lot of that, or the majority of that being third party in nature.
spk03: Great. You hit me on one, Bob, on that one. You mentioned the lab equipment. I mean, that sort of, that grew in the quarter. Could you just sort of characterize sort of that pickup? I mean, just given, you know, is it, It's been sort of like pent up and people sort of like waiting for it as a new lab is being built out. I'm just wondering, just given your equipment mix is a little bit different than some of your peers, you have more sense of like where the laboratory builds are and things are going on. I'm just sort of curious in terms of what you're seeing in terms of placements of instrumentation equipment.
spk07: We definitely did see some acceleration in the quarter, but even with the sequential improvement that we saw moving from third quarter to fourth quarter, still somewhat muted. I think equipment and instrument growth for us in the quarter was low single digits, so it was nice to see the category return to growth. And certainly, you know, the budget flush topic that we encounter this time of year kind of played out, I would say, probably at historical levels, which is to say that nothing particularly unusual. But, you know, across the biopharma space, for example, you know, we did see You know, probably the strongest acceleration of the equipment and instrument purchases, you know, in the quarter and, you know, to support, you know, a lot of the new projects and things that are going on here. But still, even with the growth we didn't see, still somewhat muted relative to historical levels there. Great. Thank you very much.
spk08: Thank you. And your next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open.
spk01: Hey, guys. Congratulations on a good print share. Michael, if I may start on one on the guidance, the top line here. I guess if you look at the Q4 number, 130 million of COVID-19, a sequential step-up of 70. I'm assuming most of that was vaccines. You annualize that number. I mean, we're getting close to 300-ish. If I heard you correctly, I think you said 150 to 175 vaccine revenues in fiscal 21. So I'm curious what would cause the vaccine to drop off? Is that a mixed change? And I think on the base, you know, X incremental tailwinds, the guide is assuming 3% to 6% on the base. Offer for 1% comp. So perhaps talk about the base business as well in the context of easy comps.
spk07: Yeah, happy to address both of those elements, Vijay. Firstly, on kind of the Q4 split and contribution, Yes, vaccine contribution definitely stepped up, but we also saw a meaningful step up in the quarter for our diagnostic platform as well. Testing in the quarter was obviously at its highest point at any point in the year, and we participated in that in a meaningful level. So that's probably important for you to account for a meaningful step up on the testing side of things as well as you're extrapolating out. you know, where things could land in 2021. I do think, you know, with the order book that we have in place at the moment and the ability we have, you know, kind of the guidance that we've given around, you know, 250, 350 plus with half of that coming from vaccines, still a pretty reasonable estimate. And, you know, perhaps as more vaccines get approved and more orders come in, we'll see a way to increase that. But not a bad jumping off point. Welcome to the base business. You know, if you kind of bookend 2020 with the Q1 growth of, you know, core growth a little over 4% and the Q4 growth of, you know, 6% to 7%, you know, we're going to have relatively modest comps to address in the second and third quarter, but, you know, pretty good comps in the other two quarters. And we do have still some headwinds in important parts of our business. Our education business is still down, improving, but nevertheless still behind pre-COVID levels. Our biomaterials platform, and particularly our medical implants business, is still off high single digits. And our industrial complex is still lagging pre-COVID levels as well. And if you remember, last Q1, for example, was a pretty normal quarter, mostly free from COVID impact. So we don't anticipate any of those end markets that I just described as having headwinds as completely recovering until later in the year. Okay. So I think that's maybe some of the differences you're seeing there. But recovering from 1% to 2% growth into that mid-single-digit level would reflect, I think, kind of the momentum that we've got exiting the year, but does take into account some of the comp dynamics.
spk01: That's helpful comments, Michael. And maybe one for Tom. My favorite question on free cash flows, impressive fiscal 20. It looks like there was some timing element guiding to free cash of 800 step down for fiscal 21. I guess if that's a normalized level, what should free cash flows grow off of that 800 normalized level? And it looks like you're guiding to tax rates stepping up. Any comments on why tax rates can step up?
spk04: Yeah, a couple things, Vijay. On the pre-cash flow, first of all, we did $868 million in 2020, which was up significantly from the $300 million we did in 2019. So more than 2x, almost 3x. We were signaling throughout the year that there were some – You know, extraordinary items coming through around CARES Act. Just to refresh you, we had some deferrals of employee taxes or employer taxes on payroll. We also had some interest deductibility issues. improvements or enhancements from the Act. And there were a couple of other things in the tax area. We settled some open audits and got some refunds there. So when you look at the tax area, in particular in cash taxes, the 2020 number was extraordinarily low. I mean, we had roughly $40 million or so in taxes. you know, to return to a normalized level, that will be, you know, north of, you know, $120 million, given those, you know, the one-timers that I talked about. I think we're signaling, you know, these items throughout most of the year. If I look at You know, what our entitlement is, you know, on net income, you know, on adjusted net income, we should be around 110%, 115%. And because of, you know, some of these factors, we ended up converting at around 150% in 2020. Okay. One other element that's, you know, when you look at 2021, are some investments that we're going to need to make. We have some opportunities. We talked about the need to add capacity in some of the biofarmer production areas. As an example, we've got some projects underway that we think are going to create some exciting additional growth. And then, you know, also in working capital. I mean, to support, you know, an ongoing growth, there could be, you know, some additional working, you know, capital investments there. So between, you know, just the one-time, you know, out-of-the-ordinary sort of benefits that, you know, we've signaled throughout the course of the year, as well as, you know, some modest investments, you know, into 2021, you know, we're starting with an $800 million investment you know, estimate for, you know, free cash flow for 2020, or sorry, 2021 relative to the 868 in 2020. Hopefully we'll drive it higher, but we think that's a, you know, a proven starting point at this early point in the year. You had a second question, if you could remind me of that.
spk01: The tax rate step up, is that in any one-timers in the 24% and should that step up? No.
spk04: Yeah, again, you know, on tax rate, if you just kind of recall from where we came from, like if you started in 2019, you would have seen us north of 30%. For 2020, we guided to an improvement, but we didn't guide it to improvement down to the 22.9% that we got to. There certainly was a positive impact from the initiatives that we've talked about in terms of removing some of the inefficiencies. in terms of how we're funding our international operations. We also had some one-time benefits in 2020 around just the excess benefit around employee stock option exercises. And some other, you know, minor things. Those probably gave us 50 to 100 basis points of improvement on tax rate. You know, I do expect those to, you know, continue on a normal run rate basis. Having factored those into the return, or sorry, into the estimate, I do expect us, as we've said, to continue to drive our tax rate down on a long-term basis to the lower 20s. So I wouldn't read into the, you know, the starting guide to 2021 is any, you know, significant change in how we're approaching tax or our confidence in, you know, being able to drive continued improvement.
spk01: Thank you.
spk08: And your next question comes from the line of Doug Schenkel from Collin. Your line is open.
spk04: Hey, good afternoon, everybody. Thank you for taking my questions. I'm going to just ask the two questions I have and then get back in the queue just because I know I'm heading into a bad reception area. So my first question is really on M&A capacity. You know, you guys have always been a cash flow generating machine, and that was never more evident than it was in 2020. Given where the balance sheet sits today, I'm just wondering if you could provide a little more detail on the parameters that we should be thinking of as we think about the types of deals that you would pursue and what, you know, I guess if you want to give us some parameters mathematically to assess your capacity, that would be appreciated as well. So that's the first thing. The second on COVID, I'm just curious, you know, as you think about, you know, the doing well there by doing good, you know, is that also opening opportunities with new accounts that you would expect to essentially be more durable over time? So I guess put differently, you know, the new account openings because of what you're doing in helping with COVID, Are they opening the door for you that you expect to be durable even after the pandemic ends? Thank you. Okay. Thanks for the question. I'll take the M&A piece, and Michael will address your second question around COVID. In terms of overall capital deployment, you're right around the cash generation, and it has had a direct impact. on improving our balance sheet, our leverage has gone from seven times at the beginning of 19 to the four times that you see at the end of 2020. We think that with the continued cash generation, if you didn't do anything around, you'd continue to drive that down between 0.75 and a full point term. by the end of 2021, you could be approaching three times. Our targeted leverage range is two to four. So we're inside that corridor now. That in itself is one of the governance here. But to get to capacity, we can stay within that corridor and spend all the cash flow that we generate. If you were going to argue about it, you could say that we could take leverage off of it as well, but if you just started with the $800 million of free cash flow that we projected for 2021, that would be capacity that would be available plus whatever incremental leverage you'd be comfortable taking on, as well as the cash that we have on the balance sheet. So there's well over a billion of capacity right now to do something. And our approach has been, first of all, to improve that flexibility, and that is materializing. We're active, but we're certainly not desperate in terms of developing an M&A pipeline. We've got all the businesses engaged. We've been actively pursuing individual deals, but we're going to be disciplined. That's not to say we're not willing to pay a fair price, but we want to engage with businesses opportunities that can bring good growth and enhance our overall growth rate, but also bring cash and be accretive to our margin rates as well. We're typically looking for deals that involve proprietary content and that would be in biopharma production space. some of the lab, the research spaces that we've talked about in the past that we find to be interesting, including genomics and other things in that lab area. It's okay for us. We've got plenty of things to do on the balance sheet if we're not scoring on M&A every single month or every single quarter because we have plenty of capacity to continue to deleverage essentially at no cost. So that flexibility is serving us well, has served us well, and we'll continue to be disciplined on that front.
spk07: Picking up the 2nd question project, the opportunity to expand the question a bit to think about. You know, or maybe our longer term perspective on what we're what we've learned, or what this experience of covert has. You know, maybe changing our thinking here. Firstly, I think my personal view here that's evolving is that the cover vaccine world is probably going to be. more durable than not. And I think given what we're seeing unfold here with the variants and mutations that are emerging and the work that's going on by even some of the existing vaccine manufacturers, it's likely going to be necessary to even have some kind of a booster market perhaps in the latter part of the year heading into the winter flu season again. And, you know, I think that the data is starting to indicate that this is, you know, perhaps heading towards being something more endemic in nature, meaning, you know, we could be facing kind of an annual, you know, COVID vaccine. So, you know, it's obviously not definitive at this stage, but certainly the durability of COVID, you know, seems to be increasing significantly. The second piece, which maybe is more responsive to your question, we see a great opportunity here emerging beyond COVID, you know, leveraging the technologies that have been accelerated here. You know, bioengineered vaccines is a category I think is going to take on a whole new level of importance for us. You know, COVID, you know, presumably becomes endemic, will be a part of that. But you already see many of these companies, you know, initiating research activities to apply the technology to other areas that would maybe more common vaccine technologies that we're used to that could be potentially replaced by this, which would bring in a biologic player like ourselves into that realm. And that could be exciting. And then I think just the acceleration of a modality like mRNA, there was obviously a nice pipeline building for the technology outside the vaccine space that presumably will have been accelerated through this experience. We've all learned a lot in scaling the technology, and certainly the benefits of the technology are clear. So we see some nice... tailwinds emerging from this that go even beyond COVID that give us a lot of excitement. We were bullish on the biologic space pre-COVID, and certainly, as we sit here today, we're even more bullish on that as an end market. And then, relative to new account openings, as we've said all along, our technology is very relevant across all these modalities. You know, many of the names that have emerged as leading candidates are well-known names that we've had as customers for a long time. But there's obviously a really deep pipeline of activities that includes a number of companies that we probably hadn't done a lot of work with before. And, you know, that could be another element of this that produces some value to us over the long term. That's great. Thank you, guys.
spk08: I think your next question comes from the line of Jack Meehan from NASA Research. Your line is open.
spk02: Thanks. Good afternoon. I wanted to dig in a little bit more around the assumption behind the guidance for COVID testing. It just seems like an important assumption around the back half. And to frame that, I was wondering if you could provide some color on the fourth quarter step-up. Did you have any notable wins on the PCR side? And how much did antigen contribute to the step-up?
spk07: Yeah, all fair questions, Jack. Thanks for calling in tonight. Diagnostics in the fourth quarter was close to half of the... You know, the tailwinds that we saw in the quarter. And that was really, you know, some nice pickup on the PCR side of things where we've been well positioned throughout the pandemic with and, you know, kind of tracking just the daily testing right there in terms of the volumes that we've been supplying. But we also saw a nice contribution in the quarter from the antigen-based testing workflow that obviously started to take on prominence late in the third quarter, and we kind of got a full quarter's benefit from that. And we did have a number of pretty significant wins. If you dig into the numbers there, you'll see our government business grew at over 50% in the quarter. A lot of that actually is diagnostic-driven and both PCR, but definitely we had a number of pretty significant wins on the antigen side, particularly here in the Americas with some of the state governments and other municipalities that we were able to penetrate into. in the quarter. So that was, you know, we'd anticipated that. I think we even signaled that on our last call that we anticipated seeing some pickup from that particular workflow. And it certainly did materialize in the quarter.
spk02: Great. That's helpful color. And then looking at the 2021, just wondering if you could give some color on the interplay between proprietary and third-party products. It sounds like from all the commentary, that should remain favorable, but can you just weigh in and maybe confirm that?
spk07: That's an important question, Jack, because as you know, that's a strong... you know, driver for margin expansion. And historically, our proprietary product category has outgrown our third-party category by, you know, anywhere from 2 to 3x, and in large part driven by just the dynamics of how our production platform grows relative to maybe R&D space. That trend didn't exactly hold up exactly like that in 2020. And you take a look at the fourth quarter, we had phenomenal proprietary growth, 20% or so in the quarter. But we also had very, very strong third-party growth as well. It only lagged by a few percent. And that really is a reflection of some of the uptick that we saw in the diagnostic space and particularly on the antigen side where a lot of that comes from our third-party partners that we work with. Obviously, we feel comfortable showing at least 50 basis points of expansion moving into the new year, and it is our expectation that this proprietary product category will outgrow the third-party category. The question is by how much, and I think that gets into some of our reluctance to kind of put a specific range on the guidance for the year, given how important MIX is to us. And, you know, depending on how, you know, testing workflows hold up for the year, you know, will be one of the stronger determinants of MIX for the year. But there's also a couple of other areas that, you know, probably were lagging a bit in 2020, mainly our third-party procurement platform as well as the equipment and instruments platform. category that lagged for most of the year. How far back those come to normal will also be an influencer on next in margin for the year, Jack.
spk02: Great. Thank you.
spk08: Thank you. Your next question comes from the line of Dan Brennan from UBS. Your line is open.
spk05: Great. Thanks for taking the questions. Michael, you mentioned a few times earlier on in the discussion about, you know, the start to the year I think was good in January. You also talked about the vaccine order book being solid. Could you just give us some visibility or color about the order book itself, any details about it, and kind of how far out the deliveries run through for the order book?
spk07: Yeah, absolutely. And maybe to just use the same kind of context as we've quoted in previous quarters, our bar production order book ending the year was up approximately three times the level that it was at heading into last year. And that compares to being up roughly two times at the end of the third quarter to give you a flavor for how fast the book is accelerating. And I don't have a specific number to share with you for January, but needless to say, it has continued to accelerate into the early weeks here of the new year. And so we're a fair bit of momentum there that we're excited about. That order book in the fourth quarter obviously stepped up in a meaningful way. A lot of that came from the vaccines, but I would highlight the base business continues to be very robust. And similar to the third quarter where I think we said you know, roughly three quarters, if not a bit more was from our core business and the balance coming from, you know, the vaccine space, you know, the order book for the core business continues to be strong. The mix is shifting, no doubt. uh, you know, towards vaccines and, uh, you know, the proportion of vaccine in that order book, uh, you know, probably moved up another, you know, uh, you know, 10, 15, 20%, something in that range in the, in the fourth quarter. And, you know, it continues to evolve here in the, in the early weeks of the new year here. So, uh, very strong order book, uh, and it's a mix of, uh, you know, very, you know, good momentum in the base and obviously a growing vaccine order book is, as we, uh, you know, support these production orders. I would say we've got, you know, stronger visibility than we've had, you know, historically. The core, we probably have some visibility for orders that go out even into the middle of the year. And, you know, the vaccine is probably similar, you know, early summer kind of visibility on at least the platforms that are approved for now.
spk05: Got it. And then as a follow-up, I wanted to ask, just kind of within bioproduction, obviously you've given a lot of information over the last... three to six months about the areas you play in. But could you highlight within, you know, media and resins and buffers, excipients and, you know, single use, and you've gotten more listed on some of the charts you've laid out. Where would you characterize your real strength? Like what are the two or three products maybe that you're really dialed in that are critical across whether, you know, the vaccines that are rolling out or just more blowing in bioproduction? Just wondering how you would highlight, you know, the real strength for Avantor's offering in that space. Thank you.
spk07: Yeah, relative to the vaccines, clearly very, very strong growth and pull from our single-use portfolio. And that's going to be across all the relevant modalities here. Very, very strong demand for those technologies. For the mRNA vaccines, while the full breadth of our portfolio is going to be applicable there, probably the piece there that's unique is going to be some of the cholesterols and lipids that are used in the delivery technology of that platform. Some of the buffers and other processing ingredients are key there as well, but that's probably something that's a bit unique to mRNA that you might not see in other platforms.
spk05: Great. Thank you.
spk08: Thank you. That is all the questions that we have today. I will turn the call over back to Mr. Michael Chappellfield for any closing remarks.
spk07: Great. Thank you, Operator. And thank you all for participating in our call today. As we close, I would be remiss if I didn't express my sincere gratitude for the tireless efforts of our global associates around the world who are, you know, living our values every day and, you know, working to fulfill our mission of studying science in order to create a better world. you know, as they are, you know, giving everything they've got to support our customers during this unprecedented time. And, you know, I'm certainly inspired by their passion and dedication to our mission that, in fact, has certainly never mattered more. As I mentioned earlier, I'm super excited about what lies ahead for our business and for Avantor and look forward to updating you when we meet again soon. Until then, take care and be well, everyone.
spk08: Ladies and gentlemen, this concludes today's conference call. Thank you all for joining.
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