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spk09: Good morning. My name is Ruwal, and I will be your conference operator today. At this time, I would like to welcome everyone to Avantor's third quarter 2021 earnings results conference call. At this time, all attendees are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. And to ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Thank you. I will now turn the call over to Tommy Thomas, Vice President, Investors Relations. Mr. Thomas, you may begin the conference.
spk10: Mr. Good morning. Thank you for joining us today. 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 Relations 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 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 date that they are made. We do not assume any obligation to update these forward-looking statements, whether as a result of new information, future events, and developments or otherwise. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the appendix to the presentation. With that, I will now turn the call over to Michael. Michael?
spk07: Thanks, Tommy, and good morning, everyone. I appreciate you joining us today. I'm starting on slide three. By now, you've seen our press release highlighting Avantor's third quarter results, which reflect strong business momentum across our end markets and our team's continued track record of execution. We achieved 10.2% organic revenue growth in the quarter, including a core growth rate of 8.5%, and COVID tailwinds of approximately 1.7%. The COVID tailwinds were principally driven by our vaccine-related offerings. In addition to delivering double-digit organic top-line results, we grew adjusted EBITDA nearly 26%, resulting in EBITDA margin expansion of approximately 180 basis points. Adjusted EPS grew 48% to 35 cents per share. In September, we announced a definitive agreement to acquire MasterFlex, a leading global manufacturer of peristaltic pumps and aseptic single-use fluid transfer technologies, expanding our proprietary single-use offering for bioproduction. We have since received all required regulatory clearances, have secured the necessary financing, and intend to close the transaction in short order. I will share more details about the transaction in a moment. We are committed to our role as a leader in life-changing science and remain focused on driving innovation and growth with investments in capabilities and capacity. This quarter, we advanced several expansion initiatives, including our production capabilities for key chemicals used in upstream and downstream applications in the bioproduction workflow. We also advanced our hydration expansion strategy and recently opened our new European single-use facility in the Netherlands. Additionally, demonstrating our commitment to helping scientists realize the potential of breakthroughs through innovation, we announced a commercial agreement with Oxford Nanopore Technologies, a market-leading manufacturer of next-generation sequencing instruments, kits, and consumables. The agreement combines the breadth and depth of Avantor's global laboratory customer relationships across all of our end markets with the sequencing technology from Oxford Nanopore. It will provide scientists broader access to Oxford Nanopore's portable, real-time Nanopore sequencing device, along with associated consumables and reagents through Avantor's channel. Looking ahead, we believe our role in the innovation ecosystem positions us for continued business momentum. We expect our core business to remain strong in the fourth quarter and are once again raising our guidance for the full year. Tom will share details on this in a few minutes. During our recent investor day, we described how our distinctive capabilities set us apart from our competitors and position us for long-term sustainable growth. Our third quarter results prove the strength of our business and how our products and services enable scientific breakthroughs. We are in the process of finalizing our 2022 operating plan and anticipate delivering another outstanding year in line with our long-term targets. We will share more details with you as part of our fourth quarter earnings call early next year. Moving on to slide four, I'd like to reiterate some of the highlights from our recent announcement about our pending acquisition of MasterFlex. MasterFlex will further strengthen our single use offering for the high growth biopharma end market. For more than 50 years, MasterFlex has been providing industry leading fluid transfer technologies that play a central role in biopharma research and production workflows. MasterFlex's technologies are relevant across all established and emerging biopharma platforms, including monoclonal antibodies, cell and gene therapy, and mRNA, and support both vaccine and therapy manufacturing, including COVID-19. More than 80% of MasterFlex's revenue is concentrated in biopharma, giving us access to a $5 billion addressable market that is growing high double digits and provides us a fully integrated solution for managing aseptic fluid transfer throughout the bioproduction workflow. The single-use fluid transfer space is an area of significant growth for Avantor, supported by the expansions of our facilities and our previously announced acquisition of RIMbio. Our single-use platform has been a key organic revenue driver of bioproduction sales to date, and we see this acquisition as a further accelerator of our overall organic revenue growth rate. This transaction meets both our qualitative and quantitative acquisition criteria and is a great example of our M&A strategy in action. Our customers will benefit from our fully integrated aseptic fluid transfer solution throughout the bioproduction workflow, and our financial profile will be enhanced by MasterFlex's double-digit revenue growth and proprietary gross margins. As I mentioned, we expect to close this transaction in short order and are looking forward to welcoming the MasterFlex team to the Avantor family. Turning to slide five, I'd like to summarize our third quarter financial results. Revenues increased 10.2% on an organic basis and 14.3% on a reported basis, including the impacts of foreign currency exchange tailwinds and the Ritter and RIMBio acquisitions. All regions and all product groups experienced strong organic growth. Overall performance was driven by our biopharma end market growing high teens with nearly 26% growth in bioproduction. We also experienced high single-digit growth in the advanced technologies and applied materials end market for the second consecutive quarter. COVID tailwinds contributed about 1.7% to our organic growth with the largest driver being proprietary materials and consumable sales to support the production of COVID-19 vaccines. As expected, aggregate COVID tailwind contributions declined sequentially, reflecting a decline in revenues from diagnostic testing. We continue to expect COVID-19 tailwinds of around $400 million for the full year, compared to approximately $250 to $300 million in 2020. Adjusted EBITDA in the quarter was up 26%, reflecting strong top-line growth, favorable mix, including nearly 20% growth in sales of proprietary materials and consumables, and outstanding execution enabled by the Avantor business system. Despite ongoing inflation in excess of historical trends across a number of cost categories, including raw materials, third-party products, transportation, and wages, we leveraged our ABS toolkit to expand EBITDA margin by approximately 180 basis points. Adjusted earnings per share grew more than 48%, reflecting the strong EBITDA growth along with lower interest expense and a lower income tax rate. we generated $229.3 million in free cash flow in the quarter, more than 100% of adjusted net income, while at the same time doubling our capex investment over the prior year to support our growth initiatives. Our adjusted net leverage ended at 3.5 times adjusted EBITDA, down 0.3 times from the second quarter, reflecting our strong cash flow and sustained traction in deleveraging. The funding of the master flex transaction will obviously increase leverage in the fourth quarter, but we fully expect that our strong cashflow profile will have us within our targeted leverage range of two times to four times adjusted EBITDA by the end of 2022. In summary, our third quarter financial results reflect the strength and relevance of our portfolio, our integrated offering and exposure to the biopharma space and our unwavering focus on execution supported by the Avantour business system. I am proud of our team for delivering another strong quarter and confident in our outlook for the fourth quarter and beyond. With that, let me turn it over to Tom to walk you through our results in more detail.
spk04: Thank you, Michael, and good morning, everyone. I'm starting on slide six. As Michael noted, organic growth was 10.2% this quarter, leading to year-to-date organic growth of approximately 15%. Our core organic growth rate meaning organic growth less the estimated COVID tailwind, was nearly 9% and improved nicely from the approximate 2% core organic growth rate in the third quarter of 2020. Proprietary materials and consumables grew nearly three times the rate of third-party materials and consumables, which, as you know, drives a favorable margin mix for the enterprise. From a regional perspective, Americas, which represents approximately 60% of annual global sales, achieved 9.1% organic revenue growth, driven by double-digit sales growth in biopharma production offerings, lab consumables, biomaterials, and procurement services. Biopharma production sales grew about 30% in the Americas, driven by sales of chemicals and single-use consumables, including those used to support COVID-19 vaccines. We also achieved record sales of proprietary silicone formulations for our biomaterials platform as demand for elective procedures fully recovered in the quarter. Europe, which represents approximately 35% of annual global sales, achieved 10.9% organic revenue growth driven by double-digit growth in lab consumables, biopharma production offerings, and biomaterials. Growth in COVID vaccine-related revenues were offset by anticipated declines in revenue from diagnostic testing, resulting in limited net COVID tailwinds in the quarter. EMEA, representing approximately 5% of annual global sales, achieved 16.4% organic revenue growth, which included a modest offset from COVID headwinds. Growth was driven by especially strong demand for our proprietary offerings in bioproduction and semiconductor manufacturing. Let's move to slide seven, which shows our organic revenue growth by end market and product group for the quarter. BioPharma, representing approximately 50% of our annual revenue, experienced high teens organic growth in the third quarter, including roughly 26% organic growth in bioproduction, driven by exceptional growth in single-use consumables, as well as double-digit growth in production chemicals. Demand patterns continue to be impressive, and open orders in biopharma production are now 65% higher than the beginning of the year. On the research side, the biopharma end market grew in the mid-teens, driven by lab consumables and supported by customer reopening. Healthcare, which represents approximately 10% of our annual revenue, experienced mid-single-digit organic revenue growth. driven by record demand for our medical-grade silicone offering in the elective surgical market, offset by lower COVID diagnostics testing sales. Education and government, representing approximately 15% of our annual revenue, experienced low single-digit organic revenue declines in the third quarter. Our education market experienced a low single-digit growth driven by ongoing recovery in university research labs and K-12 activities. Government sales declined double digits on lower sales of COVID-related test kits and personal protective equipment. Advanced technologies and applied materials representing approximately 25% of our annual revenue achieved high single-digit organic revenue growth, driven by broad-based growth in lab products sold for research and QAQC, especially in Europe and EMEA, and in proprietary chemical formulations for semiconductor manufacturing. By product group, as I mentioned earlier, our proprietary materials and consumables offerings achieved high-teens organic revenue growth, driven by strong demand for our biopharma production materials and single-use consumables, as well as by our biomaterials and electronic chemicals platforms. We also achieved double-digit growth in our equipment and instrumentation portfolio, with good growth in both Americas and Europe against the favorable prior year comparisons. Services had a mid-single-digit growth quarter driven by strong global lab and production services. Let me turn to slide eight for key financial performance metrics. We achieved approximately 26 percent growth in adjusted EBITDA and 180 basis points of margin expansion to 19.6 percent from 17.8 percent in comparable prior period. The margin rate expansion was driven almost entirely by gross margins which expanded to 33.6%. We continue to generate strong productivity, sound inflation management, and a favorable mix as our higher margin proprietary materials and consumables once again achieved superior growth rates relative to those of our third-party materials and consumables. Adjusted earnings per share were $0.35, up 48%, reflecting ongoing operating performance and reduction in interest expense from our deleveraging and debt refinancing and repricing activities. Although our income tax expense was higher than the prior year, we did have an effective tax rate of approximately 19% in the quarter, reflecting a catch-up to the now-expected 22% rate for the full year, driven by the impact of higher-than-expected deductions as well as U.S. tax credit planning. Our tax rate for the full year was previously expected to be 23%. Free cash flow, a non-GAAP financial measure, which we define as cash from operations, excluding one-time acquisition costs, less capital expenditures, was $229 million compared to $266 million in the comparable prior period. The decline was driven by higher cash taxes reflecting higher income and the expiry of CARES Act provisions. Working capital investments to support our growth and more than $30 million in capital expenditures in the quarter, mostly related to growth-driven initiatives, more than double the 2020 CapEx. We continue to forecast $850 million of free cash flow for the full year. Moving to slide nine, as Michael indicated, we are raising our guidance for the year to reflect strong year-to-date performance, stable core and markets, and confidence in the fourth quarter outlook. This represents our third raise to the annual guidance this year. We now expect organic sales growth of approximately 10% to 11% for 2021, which includes approximately 2% from COVID-19 tailwinds. We continue to expect roughly $400 million in COVID-related revenue for the full year, which includes modest COVID-19 organic revenue headwinds in the fourth quarter, which are expected to continue into 2022. The evolution over the course of the year to a higher proportion of vaccine-related tailwinds and a lower proportion of diagnostic testing tailwinds has also played out as expected. Layering in projected impacts from M&A of approximately 2.5% and from FX of approximately 2%, we are estimating total reported growth of approximately 14.5% to 15.5% for the full year. we're increasing our full-year adjusted EBITDA margin expansion guidance from 150 basis points to more than 170 basis points, reflecting our strong year-to-date results, continued core business momentum, and a modest benefit from MasterFlex. The margin accretion from Ritter was already reflected in prior guidance. We now anticipated adjusted earnings per share growth of approximately 55%, up from our previous guidance of approximately 50%. This new EPS growth estimate incorporates the impact from M&A, including MasterFlex, and an incrementally lower income tax rate offset by higher interest expense and a slightly stronger U.S. dollar, adversely impacting foreign currency translation. We are maintaining our full-year free cash flow guidance of approximately $850 million, which we raised at the end of the second quarter by $50 million. We expect the EBITDA upside reflected in our earnings and free cash flow guidance to be offset by higher investments in working capital and capital expenditures to support our growth initiatives. One final comment regarding leverage. As noted earlier in the presentation, we ended the third quarter at 3.5 times adjusted EBITDA, an improvement from 3.8 times at the end of the second quarter. The net debt in the 3.5 times adjusted EBITDA calculation conservatively excludes the $967 million in net proceeds we received from the MasterFlex-related equity issuance in September. Upon the close of the MasterFlex transaction, we expect leverage to be approximately 4.7 times adjusted EBITDA. We are confident in the attractive cash generation capability of our business model and are committed to be within our targeted two to four times adjusted EBITDA leverage range in 2022. This concludes my prepared remarks. I'll now hand the call back over to Michael.
spk07: Thanks, Tom. I'm now on slide 10. The relevance of Vontour's business model and the importance of our mission of setting science in motion to create a better world is evident in our strong year-to-date performance and the overall momentum in our core business. We continue to execute well as evidenced by our margin expansion, EPS growth, and free cash flow results. We remain committed to our growth strategy, including the ongoing integration of Ritter and RIMBio, and soon MasterFlex. We will continue to focus on biopharma as a key growth driver for our company and will support our customers and ongoing investments in manufacturing capacity. We're also committed to advancing our sustainability initiatives through our science for goodness platform. As we look ahead, we are well positioned for continued growth across each of our end markets and expect to deliver another solid year in 2022. The role of Avantours products and services in enabling scientific breakthroughs has never been more important. I want to thank you for your interest 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.
spk09: Thank you. And as a reminder, if you wish to ask a question, simply press star then the number one on your telephone keypad. Your first question is from the line of Tycho Peterson from JP Morgan. Your line is now open.
spk03: Hey, good morning. Tom, I'd like to start with the EBITDA margin expansion, which was certainly impressive. You know, you talked about inflation management. Can you maybe just talk on, you know, how much of that gross margin expansion, which drove most of it, was from pricing, you know, versus mix and maybe some of the productivity initiatives?
spk04: Yeah, thank you. Thanks for the question. And I think you're referring to the growth in the EBITDA margins, as we said, about 180 basis points, most of which as we said, came from gross margin expansion. It was an equal mix. We had a very, and mix, sorry to use the pun there, it was a combination of three different items. The favorable proprietary mix continues to be a nice driver for us. As we said, the growth in our proprietary products was almost three times the growth in third-party products. And that's not to say the growth in third-party products was shabby. It was mid-single digits as well. So it was overall mixing favorably on the sales mix. Secondly was you had a strong commercial impact of managing price over COGS. That did contribute to the margin creation. So, of course, COGS... And the inflationary impacts did have a modest impact, but commercially and through other means, we were able to offset that. The third thing was just our ongoing productivity initiatives, which includes the leverage that we get from the additional value. I'd say those three factors were equally weighted in the margin accretion on gross margin.
spk03: Okay. Are you able to quantify what the pricing contribution was? I mean, I guess obviously with all the, you know, input costs going up, resident costs, et cetera, you know, are you able to kind of pass – how much of that are you able to pass on to customers? And have you gotten more aggressive on pricing is kind of the spirit of the question.
spk04: Yeah, I think the – if you look at, you know, our history over the years, we've both – in the proprietary business as well as the third-party business, a strong acumen in doing and managing – the balance between the inflation we experience in our products or our costs against the commercial pricing that we have. And this quarter was no different. I mean, in fact, you talk about inflation. Since the start of COVID, we've been experiencing inflation and for that matter, some supply chain challenges. So it's not as if it's suddenly you know, emerged on the scene for us in the last, you know, quarter or so. And so I'd say the cadence that we have has continued to work, even with, you know, modest uptick here in this quarter. And I wouldn't say that the, you know, the overall impact was, you know, of pricing over COGS inflation was materially different than it's been in, you know, any quarter in the past in terms of its contribution to gross margins.
spk03: Okay. And then for Michael, I'm just curious if you could comment on Ritter and RIM performance. I know M&A was, you know, 3.2% or so for the quarter, but, you know, how has the integration gone in those two? And then separately on O&T, you noted launching a handheld scanner, a sequencer. I'm just curious, you know, to hear a little bit more about the strategy around that. Thanks.
spk07: Yeah, thanks, Tycho. Obviously early days for both the RIM and Ritter acquisitions, integrations on both fronts are going – As expected, I think we've got a pretty well-oiled playbook by now for driving integrations of these acquisitions and certainly excited by the momentum we have in integrating the new capabilities into our channel and presenting those offerings to our customers. In the quarter, I think both expected roughly in line with our expectations with perhaps a similar trend in the you know, COVID exposure, uh, which is somewhat modest for, for Ritter as, uh, as in our own business, um, you know, as, um, we saw, you know, somewhat of a sequential decline in, uh, in revenues, uh, into COVID related applications for, for Ritter, but, you know, generally business performing ahead of plan. We're, um, we're excited about the momentum we have in positioning those products in our channel. Similar to our other proprietary offerings, these are specification-driven products which require our customers to qualify these products into their processes and applications. And our teams are busy in sampling and qualifying these opportunities, and we have a pretty full pipeline that we're working on. So pretty excited about where we're at with both those acquisitions. Your second question. I think it's just another great reflection of the power of our channel and the opportunity it gives our third-party partners to see their innovations through our channel. Obviously, there's a lot of excitement around the technology and being able to do sequencing on the desktop, which represents a remarkable step forward from an innovation and technology standpoint. And given the access that we have to labs around the world, once again, showing the power of our model and the interest of our partners in leveraging our access to seed their content through our channel alongside the rest of our capabilities. And we've had tremendous uptick in the early days of that launch through our channel. And we highlight it really just as another you know, example of, you know, our focus on innovation and whether it's our own internal R&D or, you know, innovation that we bring to the market from our partners, just the important role that we play in, you know, the innovation ecosystem and bringing relevant technologies to our customers. Understood. Thank you.
spk09: Your next question is from the line of Derek Lebrun from Bank of America. Your line is now open. Good morning.
spk06: Hey. So, hey, if you could, I know you're not getting specific 22 guidance, but could you just clarify something? When you mentioned that your 22 planning is underway, you expect it to be in line with long-term objectives. When you think about that 4% to 6% target put out there, is that, as we're looking at 22, is that going to be inclusive of COVID? Or is that just the base business? Because we're expecting COVID to be down in 2022. Your COVID contribution will be down in 2022 versus 2021. So I'd love some clarification on that.
spk07: Good morning, Derek. Good place to start. I think the way you're thinking about it is spot on. As we talked about it in Investor Day, we expect next year to be in line with our long-term targets of mid-single digits. And that would be inclusive of the COVID headwinds that we would expect next year. You know, we'll get more specific when we do the guide in January, but I think, you know, probably not a bad way to model it, you know, roughly 2% headwind for COVID in our business next year, and that would be reflective of, you know, ongoing durability of the vaccine revenues that we enjoyed today and, you know, consequential downturn, decline in contributions from PPE and diagnostics. And, you know, In our single-digit outlook, we feel confident that we can absorb the headwinds that this would reflect and deliver against our long-term targets for next year. But we'll get a little bit more specific for you.
spk06: Great. That's pretty bullish. Along those lines, I mean, having any issues with supply chains or just your customers, your suppliers having issues delivering and like that, is there any shortages or weaknesses in the channel?
spk07: Derek, I'd say that there are, but I wouldn't necessarily say that there are any different or more acute than we've seen throughout the year. And, you know, it seems to move from different categories. We're certainly seeing some improvements in Things like PPE availability and some of the plastic wear that has been short for the better part of 18 months. We're starting to see some improvements in availability of supply in some of those categories. Some of the other categories, like some of the resins, for example, that go into some of the single-use offerings, which have been persistently growing. you know, well into the high double-digit levels, you know, continue to be constrained. So it's a bit of a balance, but I wouldn't say it's much different than you've experienced throughout the year. And, you know, the teams are doing a great job, you know, managing through that, leveraging the ABS toolkit to, you know, to problem-solve on a real-time basis and keep things moving. But certainly, you know, there are constraints in whether they're you know, product availability or, you know, certainly some of the labor constraints that everyone is facing in the U.S. Those are certainly in our business today, but not at any different levels than we've seen from previous quarters.
spk06: Great. And then this one housekeeping question for Tom. What are your expectations on share count for Q4 full year, just given the equity rates?
spk04: Yeah, as you know, from the equity raise that we did in mid-September related to the MasterFlex transaction, which raised roughly a billion dollars at the $42 share price, the shares that came with that, including exercise of the green shoe, because we were oversubscribed by about five times on the offering, but came in about 23, 24 million shares on that. So as we reset 2022, Derek, what we're going to do is reset this adjusted share count. As you know, we've conservatively maintained a standard number for the adjusted share count that includes the presumed conversion of our mandatory convertible preferred stock. So Even though the share count has averaged around 580, 590, we've, for reporting purposes to all of you in our discussions, have assumed the conversion of that mandatory convertible. So that is what's behind the 642 that we've used. But we'll adjust the 642 to reflect the issuance of the shares from MasterFlex as well as other minor changes in share account that have happened. Of course, you can always see the base outstanding shares, the diluted outstanding shares from the gap basis in our 10-key.
spk06: Thank you.
spk09: Your next question is from the line of Vijay Kumar from Evercore ISI. Your line is now open.
spk11: hey guys congrats on the print and uh thanks for taking my question michael just to clarify on the prior question from derek the the fiscal 22 commentary was inclusive of um two points of uh headwind from covid so the assumption is your base business for next year excluding code is uh is uh tracking or i shouldn't say tracking perhaps the expectation is uh high single digits
spk07: Yeah, happy to provide some clarification there, BJ. You know, the mid-single-digit guide or target that we have outlined there at our Investor Day, as we said then and reiterate again today, certainly is inclusive of how we see COVID playing out next year, which would include roughly two points of headwind for us. And I think consistent with how the business has been running over the last year you know, two or three years. I think the growth that you're talking about there for the core business is in line with, you know, what we've been, you know, delivering each of the last several years, including this year. So not a bad way to think about it.
spk11: Not sure. So inclusive of COVID headwinds, we're probably at five, so excluding headwinds somewhere around seven-ish for the base. One on that, the COVID tailwinds itself, can you remind us, you know, I know the prior range was 350 to 450 a year. And now we're fine tuning into 400. What percentage is vaccine and what percentage is diagnostics and others for fiscal 21? And should vaccine tailwinds be higher in fiscal 22, similar to your peers?
spk07: So if you look at the mix that we've been talking about, I think it's playing out in line with what we've described. Roughly 40% to 50% of our tailwinds are vaccine. Roughly 40% to 50% are diagnostic testing. And then the balance is PPE. And that is kind of the aggregate view across the year here. Obviously, as we move throughout the year, the contribution from vaccines becomes the majority of the benefits that we're getting here. And as we've said before, we expect that to be durable and continuing to increase as we move into next year, both as production internally here ramps as we bring on some of our capacity expansions, as well as just more capacity for vaccine production being available globally as we move forward. And in line with our expectations, you know, diagnostic testing and PPE, we would expect to continue to decline over time.
spk11: Okay. And then, Tom, just on the share count, just to be clear, what you're saying is base of 640 plus, plus another 23. So that's around mid-60s, 665, something like that. Is that what you're pointing to on share count?
spk04: Yeah. As you know, Vijay, we've used 642 since the IPO. And since the IPO, there have been other equity transactions, minor ones like option exercises and restricted stock units that we haven't continued to update the 642. We've kept it flat just for simplicity purposes. But we'll re-baseline the 642 to reflect the master flex as well as to reflect any other transactions that have happened. I mean, I expect it to be something we'll cover in the earnings guidance call in late January or February.
spk11: Thanks, guys.
spk09: Your next question is from the line of Dan Brennan from Collin. Your line is now open.
spk05: Thanks for taking the questions. Just wanted to start off on biopharma, particularly for bioproduction. So, obviously, solid growth, revenues, and orders. Can you just give us a flavor for, like, ex-COVID, what that number looks like, both on the revenue and order side, and just give us some color on what you're seeing in that business?
spk07: Yeah, you're correct in that we continue to see great momentum in, you know, biopharma, you know, and market, both at the, you know, R&D, you know, portion of our business as well as at production. And just to, you know, remind you, Wild Farm was roughly 50% of our overall revenue and about two-thirds of our revenue was captured in the R&D space. And we see, you know, continued momentum there as labs start to, you know, return to more normalized operations, higher levels of activity, you know, driving, you know, strong growth in that part of the business. And then Roughly one-third of the platform is our offerings into bioproduction, where we continue to see very, very strong growth. So I think we reflected in our prepared remarks just under 30% growth in the quarter with a very, very strong order book. Order book continues to grow. As we've said in previous quarters, we're sitting on roughly a year of of open orders for that platform, which is a bit unusual or quite unusual, and it continues to grow day by day. Interesting, the makeup of that order book continues to be dominated by our core business. I would say over 80% of the order book is, in fact, you know, related to our offerings into, you know, our core monoclonal antibody cell and gene therapy business, you know, a excluding COVID. So great momentum in both the core and obviously we're well positioned to capture the ongoing benefits of COVID vaccine exposure. But the business overall is quite healthy and contributing at a high level of both organic revenue growth as well as margin expansion given the proprietary offerings that we have in the production portion of that platform.
spk04: Dan, I would also add to what Michael said. If you look at the high teens growth for biopharma in the quarter, two-thirds of the growth was the base business, and roughly a third was driven by COVID.
spk05: Great. Thank you, Tom. And maybe just one on kind of education and government. Obviously, the government looks like it was A bit depressed just given some of the COVID kind of natural slowing. On the education side, just wondering what the outlook is there given the funding environment, you know, juxtaposed against probably some of the term pressure from lab access just, you know, as we're in the fourth quarter and we're looking ahead, would that be a nice tailwind as we get to 22, maybe as that lab pressure alleviates?
spk07: So the education government portion of our business is approximately 15% of our revenue, with two-thirds of that being in education, the other third being in government. government was certainly a headwind for us, really reflecting the strong COVID-related revenues we enjoyed in the prior year period for things like PPE and diagnostic testing that didn't repeat in this particular quarter. On the education front, while there's certainly some level of COVID headwind on a year-over-year basis in the quarter reflected there, You know, we do see continued improvement in, you know, lab utilizations and at the university level, you know, contributing to what I'm, you know, characterizes kind of low single-digit growth for that part of the platform. And then in the science education portion of our business, which is, you know, roughly 2% of that overall education and government platform, you know, continues to be a bit sluggish. We haven't really seen much of a pickup this year in line with our what we would normally expect for curriculum deployment at K-12 districts across the United States. So the next opportunity probably there for that to recover will be going into next year. But we're pleased with how things are developing in the education portion of that business, and the government portion is running into some pretty tough COVID-related offerings in prior year periods.
spk05: Great. Thanks, Michael. Just one housekeeping item. What's the base ex-COVID organic for 4Q that's implicit in the new 10 to 11 full-year range? Can you just give us that number? Just make sure we're doing our math right.
spk04: Yeah. For Q4, I think it works out to, correct me here, but I was going to say 3.5% tailwind for the As you recall, the quarter of 2020 was close to our high mark in terms of COVID-related revenues. As Michael had mentioned, while the vaccines continue to have durability and will have durability in the next year, the impact in the Q4 starts to turn a bit because of the reduction in the peak of diagnostic testing as well as PPE usage.
spk05: Got it. Thank you.
spk09: Your next question is from the line of Jack from Research. Your line is now open.
spk08: Thank you. Good morning. I wanted to start, just get a little bit more color on Ritter. Do you feel like they're still on track for $225 million of sales this year? I look at the M&A contribution of $50 million or so. It was a little below what I was thinking. And then one other Ritter question. Looks like most of the M&A came in Europe. Just thoughts on geographic expansion?
spk07: Yeah, great questions, Jack, to hear from you this morning. As I mentioned when I'm responding to one of the earlier questions, I think we continue to be very, very excited about Ritter. We're almost only a couple months into the acquisition year and integration is going quite well. I think if we go back to what we talked about, at the announcement of that transaction relative to end market exposure, you know, we did acknowledge that there was, you know, a modest exposure to COVID-related applications in line with kind of the market exposure there, you know, somewhere in the, you know, the 10 to 20% range. And, you know, as we had modeled that at the time, you know, I think we had probably would have anticipated that, you know, coming off, you know, perhaps in 2022, you know, time period and I think it's, as we've got into the third quarter here, it's come off a bit quicker than we had initially anticipated. But the core of the business continues to run very strongly and it's enabled us to accelerate our synergy capture by being able to devote more of the capacity towards providing samples and initial stocking volumes for customers in our channel. So our teams are being very aggressive, very energized about placing these products in the hands of our healthcare and biopharma customers around the world. As I mentioned earlier, these products are specification driven. So you have kind of a multi-month process of qualification and sampling before you can start to appreciably ramp the synergies at commercial quantities. And so what you're seeing there in the third quarter is really reflective of kind of the legacy business. And, you know, over time you should start to see, you know, heavier contributions outside of Europe as we, you know, have success in seeing that in our channel. You know, a lot of efforts in stocking supply chains in Asia as well as in the U.S. with both air freight as well as sea freight to get, you know,
spk08: inventories in position outside of europe to support the growth that we anticipate got it that makes sense um and then just another question on 2022 in your initial planning just any thoughts around whether the historical algorithm of proprietary growth outpacing third party should hold um there's obviously a lot of moving parts just trying to think about the implications for margin expansion
spk07: I think we're comfortable with our historical algorithm continuing of, you know, that single-digit organic growth conversion of, you know, revenue to EBITDA, and that's one and a half to two times range that we typically see. And that is obviously, you know, driven in part by, you know, very, very strong proprietary growth with the investments that we've made, you know, this year and the momentum that we have. in our proprietary offerings. We don't see any reason why that wouldn't play out next year as well.
spk08: Great. Thank you.
spk09: Your next question is from the line of Tiha Savant from Morgan Stanley. Your line is now open.
spk02: Hey, guys. Good morning, and thanks for taking the questions here. Michael, I was just curious on Jack's earlier question as well on margins for 22. Can you comment on your ability to, or rather your confidence in passing through inflation on the distribution side of the business, particularly given rising freight costs? And on a somewhat related note, are you guys seeing any sort of deterioration in your on-time delivery metrics at all?
spk07: Yeah, great questions. On your first point around inflation management, clearly the team has done a nice job managing that this year. And as Tom indicated, inflation didn't just show up in the third quarter. It's been higher than historical trend for the better part of the year. And whether that's on the raw material side or on the wage front, we've certainly seen escalations there above historical levels. And You see the execution of the team and the action that the team has in offsetting these through a number of means, including pricing, as evidenced by our strong margin expansion this year. Typically, this time of year is quite busy, and the teams are focused on driving price adjustments into the market going into the new year. I would say one of the differences this year compared to previous years perhaps is the process has started probably a little bit earlier. And you see it both from our suppliers as well as the market at large here. Most folks trying to get ahead of this and get prices effective as early as they can to reflect the rising cost environment that we face. And so we're very active in communicating with our customers about you know, 2022 pricing, as well as, you know, presenting, I think, a number of alternatives here and really, you know, offering choice, which is one of the, you know, strengths of our business model here is, you know, where customers have flexibility on branding, you know, being able to take advantage of the flexibility that our channel provides in trying to offset some of the inflation. But, you know, net-net, you know, you know, price increases will be higher this year than maybe historical to reflect the environment or higher going to next year, excuse me, to reflect, you know, the inflationary environment that we see. But we're, you know, in conversations with our customers, and I think, you know, at this stage are comfortable that, you know, just given the macro backdrop that, you know, we're going to be able to manage the inflation as we normally do.
spk02: Got it. And on my question on on-time delivery metrics?
spk07: Yeah, so certainly the supply chain has been strained over the last 18 months given the rapid run-up in demand. I wouldn't say necessarily that we've seen a deterioration of our on-time metrics. Where we are seeing the impact is the lead times for many of our products have been pushed out to reflect the constraints. And so, you know, against, you know, maybe our historical lead times, you know, certainly, you know, not able to keep pace with those levels. But, you know, with the increased lead times that we have for most of our products, which gets reflected in our order book, then supply chain is holding up well.
spk02: Got it. And one final one on the single-use capacity expansions you've announced recently. Obviously, the Netherlands site is very recent, but can you give us a sense for capacity utilization in Massachusetts and your other facility in North Carolina?
spk07: Yeah, great questions. When you look at what we have done here from both kind of an organic expansion of both North Carolina as well as the Devons, Massachusetts site, together with – the launch of the Greenfield site in Europe and the acquisition in China, we've increased our cleanroom capacity by more than fourfold this year, which is going to give us a lot of flexibility here to recognize significant growth over the next couple of years. But it was needed. Our backlog is you know, been growing in single-use, the demand for our technologies is significant, and so our factories are quite busy. And when we, you know, look ahead here, when we talked about the MasterFlex acquisition and our prepared remarks, you know, that's going to be a nice, you know, complement to our existing single-use offering and give us a complete end-to-end integrated solution. for aseptic fluid transfer technologies. And there are some complementary capabilities on the assembly side of that business that we'll have the opportunity to incorporate the MasterFlex clean room capabilities into our own footprint and then integrate it in with the pumping and tubing capabilities that the MasterFlex brings. So we're super excited about the developments of our single-use business, the capabilities that we'll have, and the offering that we'll be able to take to the market here. But, yeah, no doubt our factories are pretty busy.
spk02: Got it. Appreciate the time this morning.
spk09: Your next question is from the line of Patrick Donnelly from CT. Your line is now open.
spk07: taking the questions, um, maybe just on the MNA side, you know, obviously a little early with master flex, not even closing, but Tom, you talked a little bit about where the leverage is going to be after this deal and where you're heading next year. I mean, how are you guys thinking about, you know, the activity? Is there a certain threshold where you want to be below before you look at the next deal? Um, and maybe just talk a little bit about the pipeline, how active, uh, how active things are for you right now.
spk04: Yeah. Good morning, Patrick. And thanks for the, uh, thanks for the question. Um, You know, as I said in our prepared comments, when we close MasterFlex, which, you know, we expect it to be really any day now, that will obviously take our leverage up a bit. I think of it as, you know, in the four-and-a-half kind of range. I think I said four-seven in my prepared remarks, but, you know, it's in that range. We believe that, you know, very rapidly as we've demonstrated, the last three years, our cash flows will enable us to take a full turn off of that within a year or so. So if you think of us as less than four or closer to three by the end of 2022, we're squarely in the middle of our targeted leverage range of two to four times adjusted EBIT from a debt perspective. When you look at that and look at where we were at the beginning of this year, we're roughly four times, and we're able to deploy capital of $4 billion and kind of get ourselves back to an acceptable leverage range or a targeted leverage range. We sort of feel like we're in the same boat, like we're not in a much different position in terms of our M&A opportunities. And with that said, you know, you know, the types of things we're looking at are very consistent with what we've talked about before. We talk about proprietary. We talk about some of the, you know, proprietary spaces, particularly in biopharma production. You know, some of those unique lab workflows, you know, as well as the service business, all those would be attractive areas we'd want to invest in. But obviously we're going to do it in a disciplined way. We're not, you know, we're not in a hurry. We want to, you know, achieve returns that, are attractive to our shareholders and give us accretion on the top line as well as on our margin rates and keep up on the cash flow. So I think it's full steam ahead, but with the idea that we're fully focused as well on getting to our stated target leverage levels between two and four times.
spk07: understood okay um and then michael maybe just on the advanced technologies applied materials a pretty nice result there can you just talk through the more industrial pieces and i know obviously that's not the biggest piece of it but um you know are you seeing any difference in geography any slowing and kind of those core industrial markets maybe just an update on what you're seeing out there um yeah i know we were uh you know pleased to see the momentum that we had uh in that business continuing to build um and we had a second consecutive quarter year of high single-digit growth. And I would say, looking at the trending as we've moved through the year, we've seen nice progression in all three regions of the world. And maybe most notably, we saw a nice uptick in the India region in the third quarter, maybe to call out there, but I would say the progression in Europe and the Americas was in line with, you know, kind of the sequential improvement that we saw. You know, in particular, kind of here, obviously, the semiconductor space, you know, gets a lot of attention at a macro level, just given the chip shortage and, you know, the fabs are producing it at record levels, and, you know, that's having a nice impact on you know, wafer manufacturing really around the world, but especially in Asia and in the U.S. So good backdrop, I would say, you know, positive fundamentals for us overall.
spk05: Great. Thanks, Seth.
spk09: Your next question is from the line of Catherine Schultz from Beard. Your line is now open.
spk01: Hey, guys. Thanks for the questions. I guess first on proprietary materials and consumables, you had another strong quarter here with high teens growth. Can you just break that down between COVID versus core and kind of how you think about the long-term growth rate for that side of your portfolio?
spk04: Yes. Thanks for the question, Catherine. I mean, when you look at our, you know, COVID offerings, as we said, they're, you know, roughly 40, 50% vaccine-related, which is almost entirely proprietary. The other piece of it, the other 40, 50% is diagnostic testing. That has a higher mix of third party. There is some proprietary in there. So when you go to our overall proprietary growth, You know, the high teens growth that we talked about, you know, the COVID impact was, you know, probably similar to what you saw in the overall growth rate of 10.2%. So I'd say, you know, roughly a couple percentage points is the number.
spk01: Okay, great. And then maybe just on the guide, you talked about now assuming some Master Flex contribution in there. What are the timing assumptions around the deal close and expected revenue contribution in the fourth quarter? It seems like maybe somewhere around $40 million, but just curious to get your assumptions there.
spk04: Catherine, have you been getting inside information here? you're pretty spot on in terms of what we expect for the fourth quarter. That would assume a very imminent close. So you can think of it as roughly two months worth of revenue. And that's pretty much in line with what we've talked about. I think you probably calibrated it based on what we talked about, the size of MasterFlix. So yeah, hope it'll be, you know, taking away pretty quickly here and contributing on that, in that magnitude. As you know, the margin rates are quite attractive for us, certainly accretive to the volunteer margin rates. We're looking forward to good impact starting in the fourth quarter.
spk01: All right, great. Thank you.
spk09: And that concludes our Q&A for today. I will hand it over back to our presenters for closing remarks.
spk07: Thank you again for your participation in our call today, everyone. As we close, I want to express my continued gratitude to our associates around the world who are working hard to live our values and serve our customers each and every day. The resolute and steadfast support of our customers is certainly critical to our mission and our long-term growth strategy and our overall success. I'm really excited about our future, and we're looking forward to updating you when we get an opportunity to meet up next. And until then, take care and be safe, everyone. Thank you.
spk09: And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.
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