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spk01: Good afternoon, my name is Annie and I will be your conference operator today. At this time, I would like to welcome everyone to Avantor's first quarter 2021 Earnings Results Conference Call. At this time, all participants line are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I will now turn the call over to Mr. Tommy Thomas, Vice President of Investor Relations. Mr. Thomas, you may begin the conference.
spk07: 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 Selozic, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our investor website at ir.avantourscientist.com. A replay of this webcast will also be made available on our website after the call. Following our prepared remarks, we will open up the line for questions. During this call, 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 day that they are made, 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?
spk05: Thanks, Tommy, and good afternoon, everyone. I appreciate you joining us today. I'm starting on slide three. Avantour's first quarter results provide a terrific start to the year and underscore the value of our fully integrated business model and the relevance of our diversified portfolio. Driven by the Avantour business system, we delivered strong results across all core financial metrics. We achieved 13.5% organic revenue growth, and our core growth rate, excluding COVID tailwinds, improved for the third consecutive quarter. We continue to play a critical role in providing solutions and services to support the global response to the COVID-19 pandemic, and these COVID tailwinds accounted for approximately 700 basis points of growth in the quarter. We realized substantial EBITDA growth, expanded margins more than 300 basis points, and more than doubled adjusted EPS. Additionally, our leverage position continues to rapidly improve, and we received upgrades from all three rating agencies in the quarter. On April 12th, we announced the definitive agreement to acquire Ritter GmbH and its affiliates, a technology leader in high-precision consumables, expanding our proprietary offering for diagnostic and drug discovery workflows. I will share more details about the transaction in a moment. We continue to actively invest in biopharma production capacity, supporting our core business as well as COVID-19 vaccine production. This quarter, we advanced several important expansion initiatives. including projects at our Morrisville, North Carolina and Devons, Massachusetts facilities. We're also adding a second European single-use facility in the Netherlands. In total, we will increase our single-use manufacturing footprint by 30% and double our cleanroom space in the United States and Europe. We remain focused on driving innovation and growth across our core businesses and recently enhanced our bioproduction offering with the launch of JT Baker, Baker Bond chromatography columns to support downstream protein purification. These new columns have unique selectivity and enable higher purification performance across a wide range of platforms. Consistent with our integrated discovery to delivery model, Avonto bond resins are available to support scientists from early phase discovery through full-scale production and will drive long-term recurring revenues across multiple biopharma therapies. In our advanced technology platform, we created a unique space-grade silicone formulation that was used on the Lockheed Martin aeroshell, which helped protect NASA's latest rover, Perseverance, during the descent into the Martian atmosphere earlier this year. Our silicone materials performed a critical role in protecting Perseverance from extreme heat and particulate contamination, a great example of our proven ability to customize solutions for the most stringent and demanding applications. Looking forward, we expect our end markets to steadily improve throughout the year. Growth in April has kept pace with the first quarter, and the order book in our longer cycle businesses, including biopharma production, continues to grow. Based on these favorable market dynamics and our strong first quarter performance, we are raising our full year revenue, EBITDA, and EPS guidance. We will share details on this in a few minutes. Moving on to slide four, I'd like to reiterate some of the highlights from the announcement of our definitive agreement to acquire Ritter GmbH and its affiliates. Ritter is a fast-growing technology leader in high-precision consumables for automated liquid handling in clinical and research applications. We've noted in prior presentations that M&A offers opportunities to accelerate growth, enhance our portfolio of proprietary offerings, and ultimately provide more comprehensive, workflow-driven solutions for our customers. In that context, Ritter's platform is an excellent strategic fit with Avantor, as it addresses all these dimensions and applications and end markets that we know well. Additionally, our combined businesses share similar characteristics, including a highly recurring specification-driven revenue profile. One important element of this acquisition is the attractive end market dynamics and the addition of approximately $7 billion in total addressable market in application areas such as clinical diagnostics, drug development, and clinical trials. We're excited to bring together Ritter's proprietary offerings and manufacturing capabilities with Avantor's broad reach and deep customer relationships to generate incremental growth and margin expansion. The transaction is expected to close in the third quarter, and we anticipate that it will be immediately accretive to adjusted earnings per share. For further information about the acquisition, please see the recorded presentation on the investor section of our website. Turning to slide five of the presentation, I'd like to summarize our first quarter financial results. Organic revenues increased 13.5%. All regions and all product groups experienced double-digit organic growth. Overall performance continues to be driven by our biopharma end market, where organic revenue growth once again exceeded 20%. We are encouraged to see several leading indicators that point to the ongoing recovery of our end markets, particularly in the United States, including the resumption of clinical trial activities, the return of scientists and researchers to R&D labs, and the rebound in elective surgical procedures. Importantly, our elective procedure-related revenues returned to pre-pandemic levels in the quarter, COVID-19 related tailwinds contributed approximately 700 basis points of revenue growth. We play a 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. There was continued demand for our testing and PPE solutions during the quarter, and we realized a significant step up in the contribution from our support of vaccine production. We are proud to play a role in the global COVID-19 response, and we see opportunities to participate in future mRNA and viral vector-based vaccines and therapies for other applications. Adjusted EBITDA in the quarter was up 38%, leading to adjusted earnings per share growth of 101% to 35 cents. Our EBITDA margin growth continues to reflect the impact of volume growth, productivity, and the favorable mix from our proprietary offerings. Tom will provide more details on adjusted EBITDA and EPS growth in just a few minutes. We generated $112 million in free cash flow in the quarter and are reiterating our full year free cash flow guidance of over $800 million. Our cash performance and earnings momentum enabled a reduction to our adjusted net leverage from four times EBITDA at the end of last year to three and a half times EBITDA at the end of the first quarter. We now expect our leverage to remain under four times throughout the year, even after we close on Ritter. You will recall that our long-term target is two to four times EBITDA. In summary, our results reflect our resilient portfolio, relevant market position, and unwavering focus on execution. As always, we remain committed to building trusted and collaborative relationships with our customers and driving a culture of continuous improvement and execution through the Avantour business system. With that, let me turn it over to Tom.
spk04: Thank you, Michael, and good afternoon, everyone. Slide 6 shows our organic revenue growth by end market and product group for the quarter. BioPharma, representing approximately 50% of our revenue, experienced double-digit growth in the first quarter. Our BioPharma production business grew over 30% in Q1, driven by strong contributions from both chemicals and single-use technologies. Our lab products business also experienced strong growth in chemicals, consumables, and equipment driven by positive trends in R&D activity. Healthcare, which represents approximately 10% of our revenue, also experienced double-digit organic revenue growth. Strength was driven by continued COVID testing momentum and a strong rebound of elective procedures. As Michael mentioned, we saw our medical implants business for elective procedures return to pre-pandemic levels in Q1. Education and government, representing approximately 15% of our revenue, experienced mid-teens organic revenue growth in the first quarter. Growth was driven by strength in government COVID-related sales and an incremental improvement in education as more university research activities resumed. Advanced technologies and applied materials, representing approximately 25% of our revenue, declined by about 1% in the first quarter. This business continues to show modest signs of improvement, and we are encouraged by macroeconomic signals pointing us to a broader industrial recovery. We saw strong contributions in the quarter from both our EMEA industrial sector and our microelectronics business, offset by weakness in other sectors, including food and beverage. By product group, all our product categories experienced double-digit revenue growth, including our proprietary materials and consumables, driven by strong demand for our biopharma production platform. Notably, equipment and instrumentation experienced a significant recovery to double-digit growth, consistent with industry trends and reflecting an increase in capex investments as lab activities resumed. Let's move to slide seven. Looking at growth from a regional perspective, Americas, which represents approximately 60% of global sales, reported 14.6% organic revenue growth and sequential improvement in daily rate of sales from the fourth quarter. Highlights were double-digit growth in biopharma, including approximately 40% growth in biopharma production. and greater than 20% growth in healthcare, driven by hospital and clinical reference lab customers, as well as the rebound in medical implants used in elective procedures. Education in government grew double digits, driven by COVID-related government purchases and education growth from COVID diagnostic demand. Europe, which represents approximately 35% of global sales, reported 10.1% organic revenue growth. Growth was driven by biopharma, with biopharma production growing double digits. We also experienced continued COVID diagnostic tailwinds, given ongoing COVID challenges in the European region. Healthcare and education and government both experienced double-digit growth, supported by recovery and elective procedures and strong consumable sales. EMEA, representing approximately 5% of global sales, reported 27.2% organic revenue growth driven by biopharma, as well as a moderate comparable given the early impact of COVID in the region in 2020. Our biopharma production business in EMEA grew nearly 70% in the quarter, and our order book has grown significantly, reflecting strong demand for both chemicals and single-use products. On the right-hand side of the slide, you can see the expansion of our core growth rate, meaning organic growth less the estimated COVID tailwinds, versus Q1 last year, rising from approximately 4% to approximately 7% this quarter. As Michael noted, this represents the third consecutive quarter of acceleration. This trend reflects positive and market trends, as well as the resilience of our business model and relevance of our market positions. Slide 8 has our segment results. America's reported 24.3% in adjusted margin rate, approximately 320 basis points higher as compared to the prior period. Key drivers include strong volume and productivity, ongoing favorable mix driven by growth in proprietary materials and consumables, and commercial excellence. Europe reported a 20.2% adjusted EBITDA margin rate, approximately 330 basis points higher as compared to the prior period. We continue to experience favorable margin impacts from strong volume, productivity, and commercial excellence. EMEA reported a 22.7% adjusted EBITDA margin rate, approximately 500 basis points higher as compared to the prior period, driven by strong volume growth in proprietary biopharma materials and productivity. Turning to slide nine, let me start with our first quarter adjusted EBITDA. We achieved approximately 34% growth in adjusted 300 basis points of margin expansion. As I indicated on the prior slide, all three regions achieved strong margin expansion, reflecting volume growth, productivity, commercial excellence, discretionary cost containment, and modest mixed tailwinds. These mixed tailwinds are tied to strong growth in biopharma production and proprietary consumables, as well as return to growth in our biomaterials offering, partially offset by strong equivalent and instrument growth. Regarding earnings per share, we achieved approximately 101% growth in our adjusted EPS for the quarter. Primary drivers were strong operating performance, ongoing reduction in interest expense from our deleveraging and refinancing, and improvement in our income tax rate to 22.4%. We continue to forecast a 24% tax rate for the full year. Turning to free cash flow, as Michael mentioned, we generated $112 million of free cash flow in the first quarter compared to $240 million in the first quarter of 2020. The year-over-year difference primarily relates to the timing of interest payments, investments in working capital, and CapEx to support our growth strategy, and higher incentive compensation payments related to our strong 2020 performance. We are reiterating our full-year free cash flow guidance of over $800 million. Moving to slide 10, as Michael indicated, we are raising our guidance for the full year to reflect strong Q1 performance, improving end markets, and COVID-19 dynamics. Based on the outlook for our core business together with COVID-19 tailwinds of approximately $350 million to $450 million, we are now guiding to 6% to 9% organic growth for 2021 as compared to the original 4% to 7% guidance. Reported growth guidance is approximately 8% to 11% for the year. Growth in April has kept pace with the first quarter, but we do expect moderation in growth rates in the second half of 2021, given the extraordinarily strong comparables in the second half of 2020. We're also increasing our adjusted EBITDA margin expansion expectations to be approximately 75 basis points versus the original 50 basis points. This improvement reflects our strong first quarter results, continuation of higher growth in our proprietary offerings, productivity, and commercial excellence. Also, as global economies begin to open up, we are including in our outlook a return of certain operating costs, such as travel and entertainment, in the second half of 2021 that were previously put on hold due to the global pandemic. We now anticipate adjusted earnings per share growth of approximately 40%, up from our previous guidance of approximately 30%. This guidance reflects our strong first quarter results, continued operational improvement, lower interest expense from deleveraging and refinancing, and an effective full-year tax rate of 24%. We also maintain a flat share count for guidance purposes. As stated before, we are reiterating our full-year free cash flow guidance of over $800 million. Our full year outlook is based on ongoing EBITDA growth and lower interest payments with some modest offsets from increased working capital needs to support our growth. I mentioned the leverage ratio improvement we achieved in Q1 to 3.5 times EBITDA and an expectation that we will remain under four times EBITDA even after funding the Ritter acquisition. On debt pricing, we are pursuing opportunities to further reduce the cost of our term loans enabled in part by our credit rating improvements and leverage reduction. We expect to share more details about these repricing actions as well as about the Ritter acquisition financing in the coming weeks. Please note that we have not reflected the impact from the Ritter acquisition in this guidance commentary. This concludes my prepared remarks. I will now hand the call back over to Michael.
spk05: Reflecting on our first quarter, we are encouraged by the strong financial results and the continued improved core growth rate. We continue to execute well as evidenced by our significant margin expansion, EPS growth, and deleveraging. We remain steadfast in our focus on executing our long-term growth strategy, and our definitive agreement to acquire Ritter marks an important milestone in our transformation. on our exposure to the attractive biopharma end market by making additional investments to expand our manufacturing capacity. These investments will support vaccine and therapies to combat the COVID-19 pandemic and support our growing core business. Our biopharma order book continues to expand, further underscoring the relevance of our integrated discovery to delivery business model. As we look ahead, we are well positioned for continued growth and expect to deliver strong results for the full year. Avantor's mission of setting science in motion to create a better world has never mattered more. I want to thank you for your interest and investment in Avantor and for your ongoing support. I will now turn it over to the operator to begin the question and answer portion of our call.
spk01: Thank you, sir. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound key. We only allow one initial question and one follow up. Please stand by while we compile the Q&A roster. We have a question from the line of Tycho Peterson from JP Morgan. Your line is open. You may ask your question.
spk06: um i'll try to squeeze two in first on the covid tailwinds obviously you're bumping the guidance here um you know testing tailwinds obviously fading pretty quickly so can you just talk a little bit about you know how you're thinking about the relative mix and and you know what's really kind of prompting the increase and then bioprocess you know great great numbers just curious you know was there any element of stockpiling and then also how are you thinking about potential kind of mrna and viral vector uh therapeutics beyond covid uh given your current capacity thanks
spk05: Michael, appreciate the question. I'm taking your first question here around the COVID tailwind. As you noted, we've increased our outlook for the full year by, at the center point, roughly $100 million. The mix continues to reflect kind of our original assumptions around the vaccine being 40 to 50% of the total tailwind for the year. Obviously, we've seen that ramp aggressively. Q4 last year, certainly saw it ramping again in Q1, and we anticipate based on the order books and the approved vaccines that are out there for that mix to hold throughout the year. Testing for us was certainly strong in Q1, and as we're into the early days of the second quarter, we see it strong, that strength continuing. And in this, embedded in our kind of 350 to 450 guide on tailwind for the full year, we would anticipate the diagnostic solutions that we offer in that 40 to 50% of total contribution level. Embedded in that at kind of the midpoint, of course, would still be, as you suggest, an expectation that we would see a decline in the second half of the year, which, you know, we've been pretty consistent about that view, you know, even in our initial guidance. How that plays out, obviously, is a little bit of an unknown. With infection rates the way they're at around the world, you know, we're still seeing continued dose-triangulate diagnostics workflow. From a bioprocessing perspective, the business continues to run at a very high level. As I mentioned in my prepared remarks, order book has continued to advance at a pretty impressive clip. And it's both vaccine-driven as well as continued strength in our core business. The growth in monoclonal antibody production is continuing at a mid-to-upper teens level around the world, and we're certainly getting our share of that. So we're positioned for a fantastic year, and as I mentioned in my remarks, we're We're focused on significant investments in capacity to continue to keep pace with the growth that we're seeing. We're excited about the expansion to both our chemicals as well as our clean room capacity for single use. And innovation continues to be an important theme. You mentioned mRNA and viral vectors beyond COVID. And I think when you look at the application, particularly of mRNA to other non-COVID vaccines, we see that as a real opportunity longer term for the business. will add to an already pretty important addressable market for us. So we're encouraged by not only the momentum in the current business, but we're excited by continued strength of funding as well as the application of some of these technologies to some new indications going forward.
spk07: Great. Thank you.
spk01: Thank you, sir. We have another question from the line of Derek DeBruin from Bank of America. Your line is open.
spk07: Hi, good afternoon. Thank you for the question. Basically, it's a little bit more common when the tiger gets out. So when we sort of think about pacing for COVID for the rest of the year, I mean, can we look at
spk05: current level i mean it's more of an even it would say it drops off and it's more steady rather than a sharp drop off in the back half of the years of how to get into bioprocessing that's fair to say yeah when you look at you know at the midpoint um you know derek at roughly 400 million dollars of total tailwinds for the year and if you look at you know what we did in q1 Your point about it being relatively consistent throughout the year I think is fair. The mix made it look a little bit different, particularly as we get into the back half of the year. I think, as I mentioned Tycho, Our expectation would be that the diagnostic testing workflow could be a little bit weaker in the second half of the year than in the first half of the year. And we anticipate continued strength of vaccines. And I think the PPE contribution should be relatively stable throughout the year. Got it. That sort of leads to the question, I mean, should we think about the margin expansion?
spk04: I mean, you're obviously going to be up year over year. Is the bioprocessing should be higher margin than the diagnostics? Is that sort of the major driver?
spk05: If you look at our proprietary materials and consumables solutions, of which most of our production solution will fall into that category, that obviously is the highest margin part of our business. So strength there is certainly an important driver of margins. It goes beyond our production, though. We talked a bit about our new steel platform. If it wasn't lost in my prepared remarks there, that... We saw that business return to kind of pre-pandemic levels in the first quarter, which is going to be an important platform for us going forward. But I think workflows, we do have a fair bit of content on those, both from a chemical standpoint as well as a consumable standpoint. So the margins in that part of our workflow would come in above the group average, Derek.
spk04: But even, Derek, when you get to the margin expansion point, there are other factors besides the COVID mix that are driving that for the full year. We've got a really strong open order book beyond COVID, particularly in biopharma production. And those margins are superior to the overall weighted average of our portfolio. So you're right, it's a mixed factor, but it's beyond COVID given the growth dynamics in the portfolio.
spk01: Thank you, sir. Our next question comes from the line from Cohen. Your line is open. You may ask your question.
spk04: Good afternoon, and thank you for taking my questions. First on M&A. Ritter deal. One, what's your capability given you're going to be well within your target leverage range for the year? Two, beyond financial constraints, how would you characterize the organizational readiness for more? And three, how would you describe the deal pipeline at this point? So that's the first topic on M&A. And then on guidance, I was hoping that you'd be able to share more on your assumptions by end market in terms of what's incorporated into revenue guidance for the year. It would be great to get those assumptions for all end markets. That said, in particular, I think it would be interesting to hear more about biopharma and also advanced technologies in applied markets, given there are some signs of cyclical improvement. Thank you. Okay. Thanks, Doug and Tom. Thanks for the question. Yeah, so the winter deal, when it closes, call it early, hopefully early to mid-July, that'll be just north of a billion US dollars. It's a Eurodollar deal. But we think we have the capacity to, you know, for the rest of the year to have, you know, aggregate spending or spending on an individual deal, you know, roughly that same number. So there's somewhere between a billion and a billion and a half, you know, capacity for this year. And that, you know, when you get into 2022, that continues to grow depending on what we've done. In terms of the organizational readiness, I would say that this is, you know, the first, you know, deal that we've done since the large, you know, Avantour VWR deal. But we had a program management office in place that, you know, has winded down because we've, you know, completed the, the capacity, you know, from an integration perspective that we've demonstrated to be able to integrate, you know, deals that are three times the size of Ritter. And, you know, we've been able to, you know, sustain the ongoing businesses while generating $300 million of, you know, synergies on VW. track record. And when you go back further, we've kind of sustained that over the years. So I would say there's a fairly high degree of confidence. You know, doing simultaneous multiple integrations, I mean, there does come a, you know, a stretching point. But I don't think we're there. And, you know, I think we, you know, consider the capacity discussion in dollars. You know, I think we have the capacity. you know, to integrate something, you know, of that size. In terms of the deal pipeline, as you know, we're focused and concentrating on areas where, you know, we have, you know, superior growth rates relative to the Ivanka portfolio, and I think, you know, Ritter demonstrates that, you know, very nicely. And, you know, also... better overall margin rates, both gross margin and even the margin. That points us to proprietary offerings. And in both the lab space type, some of the diagnostic opportunities as well as in biopharma production would be areas that are of most interest to us. And We're looking for deals that have existing profitability and existing cash flow that will help us to speed that up quickly. So we're excited about the continuing flow. All the businesses are engaged. We have a regular pipeline review. We have capacity in that place. In terms of the guidance, market. So just to remind you, you know, overall we're, you know, guiding to six to nine, you know, percent for the year. And, you know, for, you know, biopharma in total, that's probably close to, you know, high single digits to low double digit, you know, kind of growth from a healthcare perspective. You know, it would be similar. an education and government perspective, that is the area where we're seeing the most improvement year over year given the decline in education last year. So that would be clearly in the double digits. In terms of advanced technology and applied materials, we're not forecasting a breakout. We're not including a massive return to growth just yet. And so you can consider growth expectations.
spk01: Thank you, sir. We do have another question from the lineup. From Evercore, your line is open. You may ask your question.
spk02: Hey, guys. Thanks for taking my question. One on guidance here. Michael, it looks like the base X COVID, it's about three and a half to six and a half. Is my math correct on the base assumptions? And the low end, is that just in a conservatism? Because I think most of your peers are looking at mid to high. I'm curious what would cause us to get to the low end?
spk05: Definitely to get to the question, I think it's important to recognize, firstly, you know, we're out of the gate strong on Q1, three straight quarters now of, you know, sequential improvements in the core business. We were, you know, down a business day in Q1. If you adjust for that, you know, our core growth rate in Q1 was, you know, probably 8% to 9% in the quarter, so really strong improvement. performance in the base business. And for a period here, obviously, where the comps on the base business are going to get a little bit easier here, at least for the next couple of quarters before you run into a tough comp beginning in the fourth quarter here. So when we break down the six to nine uh percent uh you know vj at uh you know the midpoint on our coveted tailwinds you're talking you know a couple points of of growth so that probably points you to you know kind of four or seven percent or so uh on uh on the base business that's helpful my feeling and maybe one one uh for you tom uh margin performance in the quarter was extremely strong
spk02: um it looks like proprietary products were you know came in strong at this mixture but why shouldn't that mix affect a computer in the back half i'm curious that you know on the free capital side a guidance wasn't chained but uh i mean that q1 free cash was very impressive uh 240 million that's almost 30 percent of the annual guide so was there any timing impact on our free cash
spk04: Yeah, so just on the margin performance, yeah, first quarter was outstanding, 300 basis points improvement on EBITDA. I'd say about half of that came from gross margins, and the rest was just really good performance. controls around SG&A spending and the volume leverage on those fixed costs. But between mix and productivity, as well as good commercial attention to pricing relative to inflation, you had about 130 face points or so on gross margin. You had the rest of the growth on SG&A. I would say that relative to the rest of the year, you have to consider the significance of that . When we printed 15% or so growth in the fourth quarter of 2020, we created a tough baseline for ourselves. real strong margin performance as well. I think in the second half of the year, we won't have quite the volume leverage, at least as we see it right now. If we're on the upper end of the guide, which knock on wood, hopefully we will be, then I would expect us to be closer to the margin expansion that we got in the first quarter and for what you would reasonably expect for the second quarter. On free cash flow, BJ, the number for the first quarter of 2021 was $112 million. We were at 240 in 2020, so we did have a bit of a decline. I would say it's two factors. One is just the growth in the business that necessitated investments in working capital. You know, we probably added in the quarter roughly $15 million of inventory, as you can see. But when you look at the inventory, you know, the days, the number of days that we have in inventory, day sales, it's roughly the same, you know, as what we had and what we've been carrying throughout 2020. So we're in good shape on that. And on receivables, there was a sizable investment, but the March sales relative to last year were up about $100 million. And so, you know, you would have, growth in receivables. So between receivables and inventory, you did have, you know, a a bit of dilution on, you know, free cash flow. But we think that's going to support, you know, the future growth. We also have a couple of other elements. I mentioned the incentive comp payments. I mean, the payouts this year were twice what they were in the first quarter last year. So, you know, all in, the number that we – The number we mentioned also includes investment. Our CapEx continues to be an area of focus. We mentioned several of the single-use investments that may support the growth in that business. All in, this is The performance is pretty much what we expected. We didn't give guidance by quarter, but if we had showed you our plan, you would say that the performance for Q1 was pretty much dead on what we would have expected, and that's in line with the 800 for the full year. Could that be better? I hope so, but we want to kind of get another quarter or so behind us before we're working on this. One other point that I mentioned, BJ, I should mention is You'll recall all the refinancings we did last year. As part of those, we ended up moving the interest payment dates from the second quarter and the fourth quarter, quarter and the third quarter. So we pulled in about 50 or 60 million. of interest payments into the first quarter that were, you know, were paid last year. So we'll get that back in the second quarter. It should be a real strong quarter from a free cash flow perspective. And looking forward to, you know, making you happy once again on cash with $800 million.
spk02: Thanks for clarifying on the free cash flow items. Thanks, guys.
spk01: Thank you, Cyril. We have another question from the lineup. Your line is open. You may ask your question.
spk05: Great. Yeah, and thank you. Good afternoon. Just wondering if you could start by just giving a little bit more granularity on proprietary versus third-party sales in the quarter, both double-digit, just any additional color there. And as you look at 2Q, I think you have some pretty easy third-party comps. Is that right? What's that going to mean for margin 2Q? Thanks, Jack. Good to hear from you. On your first question here regarding the strength of both proprietary as well as our third-party offerings in the corner, both well into the double digits, obviously, I think it reflects one, when you look at the proprietary piece, really towards our bio production offering. We're tracking strength in both our business there as well as in our vaccine production. But as a note, we're also, you know, for the first time in a year, seeing growth in some of our other important proprietary offerings, including our biomaterials offering, for example. On the third-party side of things, obviously strength there being driven by a lot of the diagnostic testing workflows. And these are, you know, chemicals and consumables where, you know, we have, you know, some structurally strong agreements there that also yield, you know, well above group average margins for us. So the growth, you know, being driven by, you know, kind of return to the lab and just general strength across biopharma and academia and healthcare, but also from a margin standpoint, certainly contributing to the 130 basis point of gross margin expansion that Tom referenced. So both trends in the quarter were pretty favorable for us.
spk07: Great. And as one follow-up on COVID testing, it seems like
spk05: you're expecting a little bit more durability here than some of your peers. Is there any color you can give around what the international mix you guys have there is? Is that one reason why you're expecting more kind of relative steadiness? That's a good question, Jack. If you look at where our strength in testing has been, we've probably been a bit stronger throughout the pandemic. in Europe than we have in the U.S., and clearly there's a different level of infection rate in Europe that's been persisting there, which we do see continuing. I think we've been pretty consistent in suggesting, maybe even contrary to what a lot of the data points that were out there, in that we would anticipate a bit of a fall off in the second half of the year. And that still continues to be modeled into our outlook here. But Q1 probably held up a bit stronger than what we had anticipated. And we're a month into the second quarter, and we see continued strength. We do see durability to testing, you know, that probably occurs beyond this year. If you look at just the U.S. and the funding that's going to be available to, you know, support, you know, testing for, you know, K-12 schools and, you know, employers, testing plans and getting associates back to work. Just to name a couple of examples, we do think testing is going to be you know, sustainable for, you know, for a stable future, albeit perhaps a more modest level than what we've seen here at the height of the pandemic. Thank you, Michael.
spk01: Thank you, sir. We have another question from the line of Patrick Donnelly from CDB. Your line is open.
spk05: Thanks for taking the question, guys. Michael, maybe one for you just on the advanced technology piece. Down low single this quarter, I think it had grown at 4Q. I think Tom is expecting low single-digit growth for the year. Can you just talk through, you know, it sounds like you guys are encouraged by the macro signals, obviously pointing to a broader recovery. Can you just talk about the outlook there? How conservative is that low single, and what should we be looking for in terms of kind of the macro piece to really suggest things are inflecting higher there? Yeah, thanks for the question, Patrick. And first, it's important to kind of maybe put that part of our business in context. It's about a quarter of our overall revenues, with about half of that being in what I would consider to be defensive growth-oriented platforms. semiconductor exposure, and that piece of the business continues to be pretty resilient. Both our proprietary offerings and both our third-party offerings into semiconductor manufacturing continues to be a strength for us. We then have maybe 10 or so percent of the business that's linked to more cyclical end markets like pet cam oil and gas, food and beverage. Net-net, we were down just a tad below flat in absolute terms. I think it was less than 1% off in the quarter. So a modest year-over-year decline, certainly not contributing to the results significantly here. You know, plus or minus, the business is on track from, you know, where it's been performing. Even in pre-COVID times, you're expecting that part of the business to print kind of low single digits. So, you know, PMI is holding up where they're at in outlooks around the world. You know, we would anticipate that business kind of, you know, sequentially improving throughout the year and, you know, certainly before the end of the year getting to kind of a low single-digit level. Okay. That's helpful. And then maybe just on the bioproduction expansion, you know, was that always in the plan? Can you guys just pull it forward a couple years due to, you know, the strength of COVID on the cash flow side as well as the demand? And then secondarily, you know, I think it's following up on maybe Tycho's question earlier, how robust is the demand there in terms of your confidence level that this expansion, you know, will get filled relatively quickly in terms of the capacity you're building out there? Thank you. Great questions. So this part of our business, the single-use part of the portfolio, we've been describing for a couple of years now as growing north of 20%. And certainly, you know, that's accelerated as we've worked through the pandemic. The base business itself, you know, continues to be strong. And then you add to that, you know, the demand coming from COVID. Our single-use offerings are very prevalent across these, you know, various production vaccine modalities. So we had an investment plan in place that we definitely had to accelerate to account for the tailwinds that we're seeing. And our order book, which we continue to reference as growing significantly faster, A significant part of that is what growth is in our single-use business. It really is necessary to keep up with the growth as well as to establish more normal lead times for our base business and for our offerings. to put the capacity in place. So the capacity will be utilized pretty much instantaneously. We're hiring ahead of the construction being completed so that when we turn the lights on, we're ready to go with full teams and full shifts. that can meet the demand that we do have in place. I referenced in my remarks to help to help keep up with the demand. Not only are we expanding existing facilities, but we were excited this week to announce the addition of a second site there in Europe that we've taken possession of that will take us two or three months to get the facility ready to run. But by July, we'll be producing single-use assemblies out of that facility. The team's doing a great job keeping up with the growth and making sure we've got capacity to sustain it. That's very helpful. Thanks, Michael.
spk01: Thank you, sir. We have another question from the line. This is from . Your line is open. You may ask your question.
spk03: Thanks. Just to follow up on Patrick's question on the capacity expansion, can you give us an idea of how big your single-use business is now and then what we should expect from an incremental sales perspective over the next couple of years as that business comes online and that capacity starts filling out?
spk05: I think that part of our business is in probably 20 to 30% of our total production platform and has been growing pre-pandemic north of 20%. Obviously, we're seeing tailwinds on top of that this year, but no reason why that type of growth rate won't persist for at least through the midterm here.
spk03: Okay, that's helpful. And then lastly, on Ritter, I know it has strong diagnostic exposure, precision manufacturing. That seems, you know, right down the middle for biopharma. Give us a sense of your early strategy here in expanding this customer base and, again, like the incremental opportunity as you guys see it over those first couple years post-close.
spk05: We're really excited, honestly, about the opportunity to bring these manufacturing capabilities into our portfolio. It really fits in the sweet spot here of our consumables offering to our automated lab workflows across a number of end markets. You mentioned Biopharma. These products are used extensively in the clinical trial workflows as well as in drug discovery. When you look at our customer set there, we're excited about the ability to expand the offering that Ritter has beyond their core OEM focus that they've had historically. When you look at the clinical diagnostic exposure that the business has, another area where we've got great customer overlap and great customer exposure here. We're selling significant content onto these workflows already. The products coming off of Ritter are going to be a straight drop-in to our channel. Our sales associates are excited to be able to add it along with the rest of the content that they provide. And certainly our customers, since the announcement, have expressed their excitement for us having this as part of our offering going forward. This is an area that's, you know, structurally been constrained, certainly throughout the pandemic, but probably even before that. And, you know, having... not only the scale and the reach that we'll bring to it, but the ability to accelerate the investments, to expand the business over time is going to be an attractive part of the target here.
spk03: Great. Thank you.
spk01: Thank you, Steve. Next, we have Dan Leonard from Wells Fargo. Your line is open. You may ask your question.
spk05: Thank you. A couple of one written objects question.
spk06: Could you characterize your COVID diagnostics exposure in terms of, you know, how much is lab based testing versus how much is the point of care testing you distribute? Just as I think all of us are trying to understand the divergent COVID views out there.
spk05: Yeah, Dan, thanks for the question. So as we've mentioned before, we're going to have offerings that are going to span kind of the three major categories of the testing workflow, with PCR testing certainly being the most important for us. But we do have significant content on the antigen-based tests that are out there, even at the point of care, as you mentioned, both in providing content to OEMs in their production of these tests and these kits, as well as in distributing the test kits and the tests themselves. And then, as we've said from the beginning, we also have, I think, an offering for serological testing, which to date hasn't had much traction as a workflow. How that plays out longer term is yet to be determined. But today, the preponderance of our exposure would be on PCR and antigen-based testing Thank you.
spk07: And then my follow-up, can you offer more color on your outlook for the APAC region, your strongest region in the quarter, or if you foresee any issues with the COVID outbreak in India or anything else worth flagging?
spk05: Thank you. No, it's a good question. We're obviously following, you know, the developments in the region pretty closely. And, you know, obviously that's, you know, from a human perspective, it's obviously tragic to see what's unfolding in India, for example, with the infection rate that we do see there. You know, we see most of the, you know, concerns are being centered on India. You know, China continues to be strong. Southeast Asia around Singapore and Korea continue to be pretty strong, particularly from a bio production standpoint. We have a significant order book to support all three of those regions and we anticipate continued momentum there. India, for us, has been a percent of the overall you know, business today for us. So it's a pretty modest impact. And I can imagine, you know, the return to a kind of pre-pandemic level for some of the end markets that we serve that are being, you know, stumped a bit here, you know, given the outbreak that they're experiencing. At the same time, though, we're seeing, obviously, very, very strong demand for things like PPE and diagnostic testing solutions, which obviously we're well prepared to provide. So the mix of the business probably unfolds a little bit differently than what we had imagined. You know, but the business continues to run well. But, you know, we're following it quite closely. So we anticipate, you know, continued momentum in the region.
spk04: Yeah, just to add a little more color to that, Dan, the, you know, 27% in Q1, I wouldn't take that here. As Michael said, it's going to be strong. But, you know, we've kind of got dialed into our numbers, you know, just right around double-digit numbers. type increase for the year for the region. We had a really strong Q2 last year, driven in part by some of the COVID testing that Michael mentioned. And so there are some comp things that we have to, that are actually counter cyclical to our overall comp for Q2. So I would expect a really strong overall number for the year, but I would just want to temper your enthusiasm based on the Q1, the outstanding Q1 results.
spk07: Okay. Thanks both for the color.
spk01: Thank you, sir. We do have another question from the line of Desire 7 from Morgan Stanley. Your line is open.
spk00: Thanks for squeezing me in here. Just one sort of follow-up, Michael, for you on the vaccine front. I mean, there's growing chatter around the need for boosters and so on. Does the vaccine portion of your COVID forecast... still essentially only account for the current order books and any sort of future forecasting. And then second, on a related note, last quarter, you had noted that the timing of the vaccine ramp, you know, is important. And if it ramps sooner than your capacity does, you may not be able to capture all that sort of upside that you think you're eligible for. So in light of this, you know, recent capacity expansion, etc., can you just give us an update on that situation?
spk05: Great questions, Tejas. Appreciate you joining the call tonight. From an outlook standpoint, you know, built into the 350 to 450 guide there, at this stage, you know, certainly reflects the approvals that are in place as well as the order book that we do have. which is pretty significant. It continued to build aggressively in the quarter, and not only do we have strong orders that extend throughout 2021, but we're also starting to now get orders that are destined for delivery in 2022. So I think on that part of the business, we certainly have a good line of sight, but I think it's becoming almost the prevailing wisdom that you know, there will be a need for a booster shot this fall, you know, to address the various, you know, variants and mutations that are out there. And I think you start to see that, you know, built into the planning. One of the implications, as you noted, of a strong vaccine ramp is whether or not you have instantaneously enough capacity to support that as well as a really robust base business order book. And certainly one of the things that us as well as our peers in the space have been challenged with as we move through the quarter is the you know, the so-called rated order status that comes with the vaccine orders that, you know, based on the Department of Defense, you know, prioritization protocols, you know, require you to place those orders at the front of the line. And so there are certainly instances here where some of the, you know, the core businesses, you know, the delivery dates have had to, you know, to get pushed out or adjusted to reflect that. We've had a series of expansions coming online to date, and we have a number of more that are plans throughout the year that will certainly provide relief to some of the balances. But the supply chains across the industry are going to be strained, I suspect, well into next year.
spk00: Got it. Super helpful, Michael. And one separate follow-up on your remarks earlier on advanced technologies and materials. How are you thinking about the impact of this semiconductor market supply-demand disruption that's underway here and expected to stay with us through 2022? Could that potentially be a tailwind for you guys for what you do there with the move to the lower nanometer nodes and so on?
spk05: Yeah, we like that platform an awful lot, and historically it's been, you know, quite resilient and, you know, pretty frosty from a growth perspective. It's, you know, quite reasonable for that platform to grow, you know, high single digits, you know, double digit type levels, and it's not off on us, the strength of that space. And, you know, we see that, you know, in our numbers. The business continues to run it up. We have great technology and a footprint that allows us to serve the growth from the fabs in Asia as well as in the U.S. here. So certainly one of the strengths of the advanced technology part of our business.
spk00: Got it. Super helpful. Thanks so much, guys. Thank you.
spk01: Thank you, sir. There are no further questions at this time. I would like to turn back the call to Mr. Michael Stableville for the closing remarks.
spk05: Thank you again for participating in our call today. I wanted to take the opportunity to make you all aware of our intent to host an Analyst and Investor Day on Thursday, September 9th. We'll be sharing more details, including registration information on that in the coming weeks. But as we close here this evening, I just want to express my continued gratitude for all of the efforts that our associates are putting in around the world who are living our values every day and helping us live our mission of studying science and nursing to create a better world. This team and the resolve and steadfast support of our customers is super critical to our mission and our success. We're excited about what lies ahead for our business and for Avantor and look forward to updating you when we meet next. Until then, take care and be well, everyone. Thank you.
spk01: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating.
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