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spk11: Good morning. My name is Emily and I'll be your conference operator today. At this time, I would like to welcome everyone to Avantor's fourth quarter and full year 2022 earnings results conference call. After the prepared remarks, you will have the opportunity to ask a question by pressing start followed by the number one on your telephone keypad. I would now like to turn the call over to Christina Jones, Vice President of Investor Relations.
spk00: Mrs. Jones, you may begin the conference. Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom Flozek, 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.avantoursciences.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 statement 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 as a result of new information, future events, or other developments. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the supplemental disclosures package on our IR website. With that, I will now turn the call over to Michael.
spk07: Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on slide three. Fourth quarter results were in line with the guidance provided during our Q3 call. Our business grew 2.7% on a core organic basis, and we expanded adjusted EBITDA margin by over 60 basis points. As customer demand and supply chains continue to normalize as we transition from the COVID-19 pandemic, the temporary headwinds we have faced largely played out as expected. For the full year, we delivered core organic revenue growth of 6%, at the high end of our long-term target of 4% to 6%, with growth across all geographies and product groups. We expanded adjusted EBITDA margin by 110 basis points above our long-term target of 50 to 100 basis points and delivered $1.41 of adjusted EPS, outpacing our updated guidance of $1.38 to $1.40. We continue to execute on our long-term strategy and growth drivers, including advancing a robust innovation pipeline, expanding our manufacturing and distribution capacity, enhancing our digital capabilities, and leveraging the Avantour business system to drive operational rigor. More than 70% of our revenue is in life sciences. And over the course of the year, we introduced a number of new products to support our customers in growing biologics platforms, including monoclonal antibodies, cell and gene therapy, and mRNA. We enhanced our proprietary consumable offering with the extension of our precision plastics portfolio under our JT Baker brand. We also introduced innovative kits and flow cells from Oxford Nanopore. which helped generate next generation sequencing data at the highest consensus accuracy. During the fourth quarter, we further augmented our global footprint and strengthened our ability to provide essential products and services to local biopharma customers as we opened our new CGMP distribution center in Dublin, Ireland, and produced our first commercial batches in our new CGMP manufacturing hub in Singapore. In addition, we continued to improve supply for bioproduction customers, and reduced lead times for a broad range of products across our portfolio. We also completed a number of contract renewals with our largest customers, including our recently announced multi-year agreement with Catalent that significantly expands our relationship, making Avantor their primary supplier across a broad range of lab supplies and services. Continuous improvement is in our DNA, and in 2022, we completed more than 450 Kaizen events focused on improving critical business processes, a 50% year-over-year increase. We also introduced enhancements to our organizational structure to strengthen commercial leadership, and we made significant progress in building out our strategy and corporate development team. We remain focused on execution, and our 14,500 associates are aligned with our enterprise priority of driving growth. We made significant progress in 2022 with our Science for Goodness platform, improving our ESG metrics from four major rating agencies. We are on pace to exceed our 2025 greenhouse gas emissions reduction targets and are accelerating our climate-related commitments in alignment with the latest science and look forward to sharing updates on our progress in this area in the coming months. Looking ahead, our long-term algorithm remains fully intact and highlights the strength and resilience of our business. Our guidance for 2023, which Tom will cover shortly, reflects our confidence in the fundamental growth drivers for life sciences, as well as the headwinds we face in the current operating environment. With that, let me turn it over to Tom to walk you through our financial results in more detail.
spk13: Thank you, Michael, and good morning, everyone. I'm starting on slide four. Starting from the top of the page, reported revenue was $1.795 billion for the quarter at the midpoint of guidance provided on our Q3 results call. Our core organic growth for the quarter was 2.7%. reflecting ongoing strength in our core business, partially offset by inventory destocking and liquid handling and single-use tubing that we flagged in our third quarter call, a weaker-than-expected year-end budget flush, and approximately 170 basis points of headwind as a result of fewer selling days in the fourth quarter of 2022. For the full year, reported revenue was approximately $7.5 billion, and core organic growth was 6%, driven by over 20% core organic growth in bioproduction and double-digit growth in advanced technologies and applied materials, offset by approximately 70 basis points of headwind as a result of fewer selling days in 2022. Adjusted gross profit for the quarter was 34.3% and 34.8% for the full year, an expansion of almost 90 basis points compared to 2021. This expansion was driven by the favorable impact of our 2021 acquisitions, double-digit growth in sales of proprietary products, and ongoing commercial excellence, partially offset by increased cost of materials and freight. Adjusted EBITDA was approximately 360 million in the quarter and 1.571 billion for the year, representing approximately 60 basis points and 110 basis points of margin expansion, respectively. The expansion was driven by our gross margin performance and our ongoing focus on productivity, while we continued to invest in growth. Adjusted earnings per share came in at $0.32 for the quarter and $1.41 for the year, driven by adjusted EBITDA performance, partially offset by higher interest expense and FX translation headwinds. Adjusted net income grew double digits for the year on a constant currency basis. This double-digit earnings growth on 6% core organic growth demonstrates the powerful earnings conversion attributes of our business model. We generated free cash flow of 172 million in Q4 and 710 million for the full year, below our expectations of 800 million. In the fourth quarter, we made investments to support customer contract renewals and extensions, which lowered our free cash flow, but which will support our growth profile in the years to come. We also proactively built inventory levels as a countermeasure against global supply chain constraints and experienced higher accounts receivable balances throughout 2022. We have identified several opportunities to improve our working capital performance in 2023. Our adjusted net leverage ended the year at 3.7 times adjusted EBITDA, down from 4.2 times at the start of the year, putting us within our stated target leverage of 2 to 4 times adjusted EBITDA. Overall, we delevered the balance sheet by 0.5 times in 2022 and remain focused on incremental deleveraging over the course of 2023. Slide 5 outlines the components of our revenue growth in the quarter and the year. Our Q4 core organic revenue growth of 2.7% was in line with our guidance of 2 to 4%. Customer destocking in select product categories like liquid handling consumables and single-use tubing played out as expected, and Europe performed better than we anticipated. COVID-related revenues represented a 4.8% headwind for the quarter versus our expectation of 4%. as vaccine-related sales slowed further in the fourth quarter, resulting in a 2.1% organic revenue decline. We had a modest M&A inorganic contribution of 0.7% in the fourth quarter, associated with October sales for MasterFlex, which lapsed its one-year anniversary on November 1st. Foreign exchange translation represented a 4.5% headwind, driven primarily by the strength of the U.S. dollar versus the euro. resulting in a fourth quarter reported revenue decline of 5.9%. For the full year, the 6% core organic growth ended at the high end of our long-term growth algorithm, a testament of the health and resilience of our core business. COVID headwinds finished the year at 3.6%. We achieved 190 million of COVID-related sales in 2022. M&A contributed 3.6%, and FX represented a 4.3% headwind, resulting in 1.7% reported growth for 2022. On to slide six. From a regional perspective, Americas, which represents approximately 60% of annual global sales, was flat on a core organic basis in the fourth quarter. with strong growth in serum, process ingredients, and excipients for bioprocessing and custom formulations for the semiconductor space, offset by destocking headwinds in liquid-handling consumables and single-use tubing. On a full-year basis, Americas grew 6.1% on a core organic basis, driven by double-digit growth in bioprocessing and advanced technologies and applied materials, and strong contributions from biomaterials. Europe, which represents approximately 35 percent of annual global sales, achieved 6.3 percent core organic revenue growth in the fourth quarter and 5.5 percent for the year, above our expectations for the region, driven by strength in bioproduction and biomaterials. Bioproduction grew double digits in the fourth quarter on a core organic basis, driven by robust demand for our process ingredients, excipients, and single-use solutions. Although industrial demand in Europe continues to be moderate, as expected, our performance in this region reflects the value of our end market exposure and diversified application and customer mix and highlights the overall resilience of our business. EMEA, which represents approximately 5% of annual global sales, grew 5.7% on a core organic basis in the fourth quarter and 7% for the full year, driven by sales of proprietary materials to advanced technologies and applied materials customers, and bioproduction strength in process ingredients and excipients. Slide 7 shows our core organic revenue growth for the quarter by end market and product group. Biopharma, representing almost 55 percent of our annual revenue, grew low single digits in the quarter, including high single-digit growth in bioproduction. Liquid handling and single-use inventory headwinds impacted fourth quarter growth, primarily in the Americas region. For the full year, biopharma grew high single digits led by over 20% growth in bioproduction. Healthcare, which represents approximately 10% of our annual revenue, declined mid-single digits on a core organic basis in the fourth quarter and grew low single digits for the full year, driven by strength in biomaterials offset by inventory destocking and liquid handling consumables, which was particularly pronounced in the fourth quarter. Education and government, representing approximately 10% of our annual revenue, experienced a low single-digit core organic revenue decline in the fourth quarter and full year. Advanced technologies and applied materials, representing approximately 25% of our annual revenue, achieved high single-digit core organic revenue growth in the fourth quarter and double-digit growth for the full year, driven by growth in proprietary materials for semiconductor and electronic device applications, partially offset by a moderation in industrial demand in Europe. By product group, proprietary materials and consumables offerings grew high single digits in the quarter and double digits for the full year, driven by strong demand across our bioproduction, biomaterials, and advanced technologies and applied materials platforms. Sales of third-party materials and consumables declined mid-single digits in the quarter and grew low single digits for the full year, impacted by a moderation in lab consumables demand relating to destocking. Services and specialty procurement declined low single digits in Q4 and grew mid-single digits for the year, driven by strength in lab and production services. Equipment and instrumentation sales grew low single digits in the quarter and the full year, with growth across all three regions. Moving to slide eight, I'd like to provide an update on the contributions from our recent acquisitions. As a reminder, this slide reflects the 12 months revenue and margin from MasterFlex, Ritter, and RIMBio in 2022. Full year results included $393 million of revenue and $136 million of adjusted EBITDA, resulting in a 35% adjusted EBITDA margin. MasterFlex revenues were modestly below our estimates due to ongoing top-line pressures relating to customer destocking in our tubing category and ongoing component shortages for peristaltic pumps. Despite the transitory headwinds, We are highly encouraged by the MasterFlex leading market position, pipeline of exciting new product launches, and robust demand from our bioproduction customers for our end-to-end fluid management solution. Ritter revenue came in slightly above our revised expectations for the year, driven by a stabilization of the research and diagnostics platform as the COVID roll-off concluded in the second quarter. Europe industrial demand was slowed, albeit at a more moderate pace than anticipated. The team is working to convert our pipeline of commercial opportunities and introduce new products in our technology roadmap, including four significant product launches planned for the first half of this year. RIMBio generated $10 million of revenue for the year. A supplier constraint pushed another $10 million of revenue from the fourth quarter to the first quarter of 2023. We are excited with the traction and momentum we have built with this business, including the successful transfer of 2D and 3D bag technology from RimBio to our global customers. Looking at 2023, we expect MasterFlex tubing headwinds to subside by mid-year, with a return to double-digit core organic growth in the back half of 2023. Ritter performance has stabilized, and we expect sequential improvement in Ritter revenue throughout 2023. as the effects of our commercial synergy program and NPI investments take hold. On the right hand of this page, we've provided an update on balance sheet leverage. We exited 2022 at 3.7 times leverage within our target range of two to four times leverage. We were able to mitigate the impact of rising rates on our 2022 interest expense through proactive interest rate management and debt pay down. Given the interest rate environment, we will continue to focus on deleveraging as we move into 2023, while also actively building our pipeline of M&A opportunities. Turning to slide nine, I'd like to walk you through our 2023 guidance. Beginning with revenue, we start with our long-term algorithm of 4% to 6% core organic growth, which is based on our differentiated position serving attractive end markets. We continue to see strong demand in life sciences and expect another year of double-digit core organic revenue growth in bioproduction. We are initiating 2023 core organic revenue growth guidance at 2.5% to 4.5%. We expect continued strength in bioproduction and a healthy overall pricing environment, moderated by the near-term inventory destocking in lab and single-use consumables, which we've discussed, as well as reduced demand from industrial applications globally. notably in our semiconductor end market. Moving forward, we will not be categorizing revenue as COVID-related, as it is expected to be immaterial. Consequently, the COVID headwind for 2023 is predetermined at about 2.5%. This results in organic revenue growth of 0 to 2%. We expect FX to be neutral for the full year at our current planning rates, leading to reported growth of 0 to 2%. On adjusted EBITDA, we expect margin to range from 25 basis points of contraction to 25 basis points of expansion, with commercial excellence, growth in our proprietary offerings, and productivity tempered by the macro inventory headwinds, the dilutive impact of the COVID revenue roll-off, and ongoing inflationary pressures. We have a track record of delivering strong margin expansion, and we are working diligently to find opportunities to offset margin headwinds, including leveraging our Avantor business system to execute on a robust funnel of productivity initiatives. For earnings, we are initiating our 2023 guidance at $1.35 to $1.45 adjusted earnings per share, which reflects the range of our revenue and margin expectations, as well as interest expense of $270 million to $295 million, and a 21.5% tax rate. Our interest expense estimate reflects the impact of current forward yield curves on the roughly 30% of our unhedged variable rate debt. The rate increases are expected to have an unfavorable year-over-year impact on interest expense of about $65 million, but will be largely offset by the impact of deleveraging. We expect to generate approximately $700 million to $800 million of free cash flow, which includes a modest improvement in working capital as our supply chain continues to normalize. Regarding pacing, the more pronounced 2023 first half COVID headwinds and inventory destocking result in more temperate expectations for the first half of 2023 compared with the second half. We expect first quarter core organic revenue declines of 1.5% to 3.5% and COVID headwinds of 4.5%, leading to organic revenue declines of 6% to 8%. This reflects more difficult comparables in the first quarter, as well as our assumptions around industrial demand globally, including semiconductors. We also expect a roughly 2.5% headwind from FX, leading to reported revenue of $17.50 to $17.85. With that, I will now hand the call to Michael. Thanks, Tom.
spk07: As we conclude, I want to emphasize our conviction in our long-term financial algorithm. We view the current headwinds and supply chain normalization as short-term dynamics that will subside in the second half of the year, as supported by internal analysis, ongoing customer interactions, and industry trends. We are confident in our plan for 2023 and are well positioned to execute on our growth strategy. I am encouraged by the strong fundamentals in our end markets, the deep relationships we have with customers, and the positive returns we are generating from our investments in innovation and capacity expansions. Our strong free cash flow enables rapid deleveraging and capital allocation flexibility as we continue to actively build our M&A pipeline. Thank you for your interest in Avantor and for your continued support. I will now turn it over to the operator to begin the question and answer portion of our call.
spk11: Thank you. If you would like to ask a question today, please press star followed by the number one on your telephone keypad now. If you change your mind and would like to be removed from the queue, please press star and then two. To allow everyone an opportunity to ask a question, we will be limiting each question to one per person. Our first question today comes from Patrick Donnelly with Citi. Please go ahead, Patrick. Your line is open.
spk03: Hey, guys. Good morning. Thanks for taking the questions. Michael, maybe just on a couple of those variables as we enter 23 here, it seems like European industrial demand, you guys were pretty cautious last quarter going out some risks in the macro. Seems like you're feeling a little bit better about that. And then the second one, obviously some of that excess inventory in the system on the lab business. particularly in the liquid handling. Can you maybe just talk about those two, what they look like in terms of variability and the guidance, and then the visibility, particularly on that excess inventory, what you're hearing from customers, visibility into that normalizing, and when we should expect that to kind of get back to kind of growth and a little bit more normal. Thank you.
spk07: Thanks for the question, Patrick, and good morning, everyone. Yeah, I think that's a great place to start. When you point out the dynamics that we saw in the fourth quarter on Europe, certainly played out a bit better than we expected. And we're certainly pleased with more than 6% core organic revenue growth there in the quarter, which really continues a strong year that we had there in the region. Entering the quarter, I think we were trying to reflect just some of the uncertainty associated with the energy situation in Europe, certainly the the conflict in Ukraine as well as just overall recessionary concerns. And it certainly played out a bit better than we had anticipated. And as we look ahead into the year, I think we're encouraged by the trends that we see there, although we remain a little bit cautious. From a destocking perspective, I think the quarter played out as we had anticipated, both in liquid handling consumables as well as in the single-use consumables within our bioprocessing offering. And transitioning into 2023, I think the picture for us remains largely unchanged. As we engage with our customers, as we triangulate a number of reports and analytics that we have, I think our view here is that it's probably something that will be with us throughout the first half of the year, which will lead to a dynamic here that Tom referenced with the second half of the year being stronger than the first half. So we'll you know, expect a, you know, ongoing destocking here in the first quarter, you know, should start to improve a bit as we move through the second quarter. And you would expect that to hopefully be behind us as we, you know, get into the second half of the year.
spk11: Our next question comes from Rachel Von Stahl with JP Morgan. Please go ahead, Rachel.
spk09: Great. Thanks, guys. So my question is just around margins. You guys exited 4Q at roughly 19 and a half EBITDA margin. You're guiding to down 25 to up 25 basis points for the year. So can you just talk about some of those puts and takes, very similar to Patrick's question. Given some of these headwinds in the start of the year, how should we think about that EBITDA margin expansion or contraction on a quarterly basis? And then is that mainly driven by price or volume or kind of how should we see that rolling through the P&L? Thank you.
spk07: Thanks for the question, Rachel. I think I'd start by just reiterating our confidence and our ability to continue to expand margins. And I would point to the fourth quarter as a good proof point of that. You know, the environment that we saw in the fourth quarter is probably pretty similar to what we're anticipating as we move into the new year here. And, you know, we're coming off a quarter here where we did expand 60 basis points. So certainly a strong record, a track record of being able to do that. When you look at our margin expansion algorithm, there's, you know, probably, you know, two or three variables that we really focus on, certainly starting with, you know, managing, you know, price versus COGS. A big part of that process plays out in the fourth quarter and early days of the first quarter. We're pretty well through that, and I think we're pretty confident that, you know, although pricing is going to be above our, you know, long-term algorithm and similar to, you know, what we delivered last year, we do think it's going to be, you know, sufficient to contribute at a level that we would historically see. You then get into things like mix, and we've talked openly about the roll-off of the COVID headwinds that are, you know, pretty margin-rich. You know, we're working against this as we move through the year. That's going to be more pronounced in, you know, the first and second quarter than it would be in the second half of the year. And the last variable I'd mention is just around the productivity aspects of our program here. We've got a pretty full pipeline of opportunities that we're driving to help mitigate the impacts of inflation. So I would say largely the algorithm is intact. We've tried to reflect some of the headwinds associated with the mix as well as just the volume impact as destocking and COVID come down and the impacts that that has on absorption. But I think we're cautiously optimistic here out of the gates as we look ahead to margins and look to build on our strong track record.
spk11: Our next question comes from Luke Sergot with Barclays. Please go ahead, Luke.
spk12: Great. Good morning, everyone. um so two for me so just quickly on master flex came in a little light versus your guide for the year um any kind of commentary there what what you guys are seeing in the fourth quarter and any signs that this is troughed and starting to get better um from a destocking perspective and the various headwinds there and then secondly can you talk about i mean you guys have talked about the investments you made in the customers and you just came out with the Luke Dowden, Master Service Agreement with or the service agreement with catalan can you give us any other color that you're around the future or current deals that you guys are working on that kind of underlie the the improving outlook here.
spk07: Luke Dowden, Good morning, thanks for the questions, starting with master flex as Tom mentioned in his remarks, we continue to be incredibly optimistic about. that business, not only from a growth standpoint, but also a margin standpoint. You know, it's one of the leading franchises in the single-use space and gives us, you know, one of the only end-to-end aseptic fluid management solutions in the industry. Really great traction, strong brand recognition, and, you know, we're thrilled to have it as part of the portfolio. The inventory destocking that we've talked about related to particularly the tubing, you know, offering associated with that, you know, continues to play out as expected. You know, it might have been a little bit, you know, stronger in Q4 than maybe what we had anticipated, but, you know, not far off of that. We'll expect to see that to be with us, you know, through the first half of the year, as I mentioned. You know, I imagine as we work through the first quarter and start to transition to the second quarter, we would anticipate things to start to incrementally improve and would anticipate having that behind us as we move into the second half of the year. The other headwind that we faced in MasterFlex is just the ongoing chip and component shortages for our peristaltic pumping technology. We've got a great order book there and a backlog that continues to build. So I think we certainly draw confidence from the strong demand and positioning of that technology, and the supply chain continues to improve. We do still have certain components that we're struggling to get on time, but We're starting to see incremental improvements there, and as Tom mentioned, I think as we get to the second half of the year, we're expecting double-digit core organic growth for that business. Really appreciate your second question as well. We continue to have really great traction and momentum with our customers. This is an important part of our business model, the unparalleled customer access that we do enjoy. And when I look at 2022, the team did just a remarkable job in renewing and extending relationships with new customers as well as acquiring new business. We referenced in the fourth quarter a pretty significant agreement that we were fortunate to put in place with Catalan, where we became their primary supplier of a broad range of laboratory supplies and clinical and production materials. and services that will, you know, significantly expand our current relationship with them. We also extended the duration of our lab supplies and lab services relationship with Johnson, pharmaceutical companies of Johnson & Johnson. And that came with a, you know, pretty significant upfront investment. But we're really excited by, you know, the positioning we have with that business and, you know, the duration that we were able to achieve, you know, So just another good example of the traction we have and momentum we have in the business. Tom mentioned in his comments around free cash flow that some of these relationships do require a bit of an upfront investment that we were able to reflect on our cash flows in Q4, which will give us significant returns as we enjoy the revenues. of those relationships as we move forward. Thanks for the question.
spk11: The next question today comes from Vijay Kumar of Evercore ISI. Vijay, please go ahead.
spk10: Hey, guys, thanks for taking my question. And I had a two-part, Michael, maybe I'll start with you. The guidance here, when I look at the midpoint core organic three and a half for the year, that's 150 basis points below your LRP. And when I look at Q1, I think that number is 750 basis points. So one, is all of this inventory destocking in a macro industrial slowdown, is that happening in Q1? Is that the bridge between your five to three and a half for the annual? And I thought for some reason Q4, those headwinds were around 300 basis points. So why is it accelerating here in Q1? And one for Tom on Q4, On margins here, Tom, I thought you said pricing was positive. Can you clarify what the pricing assumption is for fiscal 23 and why shouldn't pricing aid your margins here in 23?
spk07: Yeah, good morning, Vijay. Thanks for the questions. I'll take the first one. The midpoint of our 2023 core organic guide of three and a half you know percent contemplates roughly 250 basis points of the macro impact and that would include You know certainly the the impacts of the stocking it would include You know our view on kind of just the the general, you know macro environment and impacts on our applied markets perhaps most notably in the semiconductor market as we mentioned in the in the prepared remarks and so that gets you a you know, on that basis to the high end of our, you know, long-term guide of roughly 6%, so very much in line with what we've been doing over the last, you know, several years. As you think about then the phasing within 2023, you know, I think that the headwinds that we've talked about are certainly most pronounced in Q1. You know, we'll have a, you know, the destocking effects in Q1 are certainly most pronounced there, as well as just our view of the macro impacts on some of our applied markets. I'd also note in Q1, kind of relative to where we're at in Q4, Q1 is one of our most difficult comps of the year. I think we're running into a comp that's probably 300 basis points plus in Q1 compared to where we were at in Q4. It's certainly going to be a situation here where the second half will be stronger than the first half as we work through some of these destocking events.
spk13: And Vijay, on the second question, thanks for the question on the margins and in particular on pricing. Just to reiterate what's behind our guidance, I think it's helpful to remind ourselves since the IPO we've we've been tracking to the high end of our margin expansion long range plan of 50 to 100 basis points. Nearly at 100 basis points or so when you look at each of those years. So the drivers are not much different than they've been in the past. And we like to think of it, as Michael said earlier, as three components. The first being the pricing and overall what we call commercial excellence. In other words, balancing pricing against inflationary pressures on COGS inputs and other inputs. I think that this has really proven to be a core capability of Avantor. We've got a fairly sophisticated approach, a lot of data, really strong talent and systems and software to drive this. We're well along in the process for 2023. It's a big annual exercise. starts in early November and really culminates right around now, and working with suppliers and customers. So we're well along. We have a high degree of confidence in our ability to drive price to offset inflationary pressures and be accretive to margins, as Michael had said. So that's definitely a positive factor for us. you know, when you're considering the range that we've given, I certainly think the COVID headwinds need to be taken into account. When you see, you know, roughly $200 million of revenue coming out of the plan from 22 actuals to 23, that's pretty margin-rich content. And since it's mostly in the biopharma production, vaccines, and other kinds of content that go into when a bioproduction vaccines work, reflecting that in the guide as well. And then I think overall, the third aspect, in addition to mix, is just productivity for margins. We have plans in place, as we always do, that address material productivity, that address performance of our factories, performance of our distribution centers, and we'll continue to be pretty vigilant on costs and know that will contribute to some potential movement to the higher end of the guide. I wouldn't look at our guide as reflecting anything materially different than what we talked about in Q3 and Q4 in our various meetings. I think we're setting up in a way that I think as we look ahead, we feel that it's a pretty prudent start for the year in terms of expansion of margin.
spk11: The next question comes from Michael Riskin with Bank of America. Please go ahead, Michael.
spk04: Great. Thanks for taking the question, guys. I got a couple parts, but it's just one question. And I kind of want to touch on debt levels, interest expense, and M&A. So could you just walk us through again the interest expense coming in higher year over year? If the due leveraging remains a top priority, we thought it would kind of come down a little bit despite where rates ended at the end of the year. And then on 3Q, along those lines, previously on 3Q, you said You know, we're concentrating near-term M&A efforts on improving performance of recent acquisitions and, yes, you know, using available free cash to reduce debt. Today, I think you had a comment about actively building pipeline of M&A opportunities. So definitely noticing a tone change there. Could you talk us through what's going on and is that something you're considering towards the end of the year? Is there a certain leverage target you want to hit before you're back to, you know, being in a hunt for more M&A? Just clarify the difference there.
spk13: Yeah, thanks, Mike. And I'll answer the first question. I'll let Michael answer the second. In terms of our leverage and debt levels, things are playing out as we've kind of articulated in our planning. We started out the year north of four times leverage in 2022. We ended at 3.7 times. And when you look at the impacts on interest expense and so forth, they're also playing out as we expected. So we expect to continue on that de-levering path. We'll probably be, when we execute our plan in 23, we expect to be in the low threes, if not at three, and we're encouraged by the momentum. When you look at the key drivers of the de-levering for us, It certainly is free cash flow. And while 2022 didn't exactly hit the mark on free cash for us, we were pretty pleased with how the interest itself was managed. We had articulated at the beginning of the year roughly $260 million of interest expense. We came in roughly $266 million. And that's with over 400 basis points of of increases in the various reference rates that impact our weighted average borrowing costs. So when you look at how we manage that, we did a few things to basically convert variable rate debt to fixed. We also, right before all the interest rate increases had taken place, we had the good fortune of basically refinancing our entire portfolio. So over the course of In 2021, we had significantly lowered our overall weighted average cost of borrowing. And the combination of those two things, that is the repricing as well as some of the things we did in 22 on swapping a variable to – sorry, fixed to a variable in the Euro swap that we did. We ended up improving the mix of our variable versus fixed rate work. where about 30% of our debt is variable rate. Most of that is exposed to the Euro. And as we look to 2023 interest expense, you've got two components there. Certainly that 30% of the debt that's variable, we do have some impacts, as I've talked about and quantified in the past, certainly close to 50 or 60 million of pressure on interest expense from that. you know, the de-levering impact largely offsets most of that. And so, you know, if we deliver at the midpoint of our guidance range, 700 to 800 in free cash flow, you know, I think we'll be in pretty good shape. So we've called debt or interest expense at roughly 270 to 290 in the guide. So it's relative to 266 in 22 and considering the interest rate environment, pretty pleased with how that looks to come in. And the more cash we can generate, the better we'll do on interest expense.
spk07: Michael, I'll pick up the second part of your question there around M&A. Maybe make just a couple of comments. Firstly, we'll just reiterate that M&A has been and will continue to be an important part of our playbook, and we've been actively investing in enhancing our capabilities. You'll recall we announced a new head of strategy and corporate development, Kitty Sahin, who joined the team late last summer, and she's been busy in building out her team to put us in a better position going forward. you know think about the environment for m a in 2022 and where we're at here in the first half of the year certainly we're cognizant of of our own leverage as well as you know the the status of the debt markets and you know consequently uh you know have been and will continue to prioritize uh deleveraging um you know in this environment i think there's still some you know disconnects between buyer and seller expectations and um you know i think there's a reasonable amount of just market uncertainty associated with transactions. So it makes sense for us to focus on delivering the commercial synergies of the deals that we closed in 21 and continue to give ourselves more flexibility by deleveraging. But I think it's prudent to continue to be active in building a pipeline, which we have been doing throughout 22, and we'll certainly remain focused on that as we move here into 2023. Just to ensure that we're positioned as opportunities open up and markets start to normalize perhaps later this year as we move into 2024. So I don't think our position has really changed here in terms of our view of the priority of M&A or just the status of the current market conditions. But we'll continue to invest in this area and make sure that we are prepared if and when things open up again.
spk11: Our next question comes from Dan Brennan with Cohen. Please go ahead, Dan.
spk15: Great. Thank you. Thanks for the question, guys. Maybe just one on bioproduction. So 4Q, I think you said it grew high single digits. Just give us a little color, kind of maybe unpack that number a bit. It was a bit slower than the trend, but obviously there's a lot going on within that. So we'd love to get color and kind of how you actually did the year in bioproduction. And then I know you talked about for 23 strong growth, maybe a little color on, you know, what you're assuming for 23 in terms of a growth rate and included in that, how does some of the new capacity that you're bringing online impact your growth outlook across that business? Thanks.
spk07: Yeah. Thanks for the, for the questions, Dan. You know, I think at a, at a high level, probably, to reflect on just the strength of the overall, you know, bioproduction, you know, space. 2022 was a great year for, you know, novel drug approvals. I think there were 18 large molecules that were approved, you know, including some pretty big ones, you know, in the area of, you know, Alzheimer's, for example. I'm sure you all, you know, saw the news earlier this week around, you know, biosimilar approval, you know, in the Humira space. So there continues to be, I would say, a very favorable backdrop in the core monoclonal antibody space. There's six CAR T therapies that are available in the U.S. and Europe, and there's a big year ahead here in 23 of candidates that are up for approval. So the backdrop for the space, I would say, is incredibly strong, and we remain quite bullish about not only the space, but certainly our position and longstanding track record about growing the broader market by 200 to 300 basis points. We concluded 2022 with more than 20% bioproduction, core organic revenue growth, so another really, really terrific year. Q4 was certainly the lightest quarter of the year for us in that space, really reflecting the impacts of destocking, particularly in the single-use um you know consumables area um you know we obviously have a very broad portfolio uh that touches nearly every you know step of that uh process from upstream downstream to fill and finish and you know i think we had uh you know pretty good performance across the space uh with the expect uh exception of this these liquid handling consumables um and we saw it both in in master flex as well as in our uh legacy business um You know, I think the quarter played out largely as we had anticipated. I think Tom referenced we did have a pretty meaningful order in our rim bio business of nearly $10 million that, you know, slipped, you know, from, you know, our plan in December into the early part of this year due to a supplier constraint. So, you know, absent that, I think it, you know, was another double-digit, you know, quarter and a really, you know, strong finish to the year. As we think about 2023, again, we'll deal with these stocking events through the first half of the year.
spk06: And overall, we expect another year of double-digit core organic revenue growth in bioproduction.
spk11: Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.
spk01: I'd like to ask, your line is open.
spk11: Please proceed with your question.
spk08: Hey, guys. Sorry about that. I was in mute. Just a few follow-ups there, Michael. Starting with bioproduction, can you give us just, you know, what your open order growth was in terms of the order book at year end 22 versus year end 21? And second, in terms of the guide itself, would you be willing to break out what you're assuming for MasterFlex, Ritter, and RIM versus the 393 mil that you did in 22? And then finally, Tom, on your comments on free cash flow, could you elaborate a little bit on some of those working capital improvements that you referenced that you expect to provide an offset to the growth investments here in 23? Thank you.
spk07: Thanks, Tejas, for the questions. Appreciate you joining us today. On bioproduction, I think the setup for that space, as I just mentioned, is quite strong heading into the year. We have a you know, a really terrific order book that reflects, you know, I think the strong underlying, you know, market fundamentals, as well as, you know, I think the investments that we've made in, you know, in capacity to improve, you know, service levels and bring down, you know, lead times. You know, we were fortunate even in the fourth quarter to reduce the lead times on, you know, several hundred you know, GMP materials, which, you know, will support our customers' growth as we, you know, move into the year. So, you know, great backdrop from an order book standpoint to start the year. Relative to our acquisitions in terms of how we think about those shaping up in, you know, 2023, we expect MasterFlex, you know, tubing headwinds to side by mid-year and, you know, would return to double-digit core organic growth in the back half of 2023. Ritter business has certainly stabilized. You know, I think if you look at the outperformance relative to plan in the second half of the year, you know, finishing above the high end of our guide, you know, certainly gives us a little bit of momentum heading into the year. And the way I would think about Ritter is just sequential improvement as we, you know, move quarter to quarter here as the effects of, you know, all the work that we're doing around, end customer conversion through our channel, as well as, and importantly, the impacts of all of the NPIs that will be launched as part of our technology roadmap. We had some pretty meaningful launches in the fourth quarter and another four or so launches planned for the first half of the year that will put us in a position to continue to improve the the trajectory of that business. And I would say, you know, in aggregate, you know, we do expect, you know, on a full year basis growth for our, you know, for these acquisitions.
spk13: Yeah, Ted, just to answer the question on, you know, working capital. I mean, I think the important backdrop here is that the business continues to generate strong amounts of cash and has since the IPO. We're a low CapEx model. and our conversion relative to our net income is generally pretty strong relative to our peers. 2022 was a unique year in many ways, and I think our supply chain was probably the most impacted by the events that we've seen unfold over the course of the last couple of years. We've made a fair amount of investment in our inventories to cushion and manage the availability of inventory and also to protect our customers, their supply chains. So no secret when you look at our statement of cash flows that inventory has been an area of build for us in both 21 and 22. Michael referenced lead times when he was talking about open orders. That certainly has an impact on inventory levels as well. And we are starting to see significant improvements as a result of the the actions that our supply chain teams have taken on reducing lead times, both from our suppliers as well as within our own four walls of our distribution manufacturing. So we're encouraged by that. We think we can take a few days out of inventory over the course of 2023. The other aspect is that 22 was unique for the pricing environment that we were in as well. There were probably an unprecedented level of number of pricing changes. And that makes it challenging to stay synchronized with your customers on individual invoices. And at times, there can be confusion. We've worked through most of that. I think on the receivable side, we're pretty confident that we'll be able to take a couple days out of that as well over the course of the year. So things are looking up. And I think the working capital investments we've made have paid off. but I think we do see some opportunity there, and that's reflected in our free cash flow guide. Thank you.
spk11: The next question comes from Dan Leonard of Credit Suisse. Please go ahead, Dan.
spk14: Thank you. Tom, you mentioned that customer contract renewals pressured free cash flow in the quarter. Could you circle back to that? What types of investments are associated with a contract renewal? And was there anything abnormal in the fourth quarter, or was this just normal course of business?
spk13: Yeah, the business model with most of our customers is to drive volumes and to drive growth. And you typically enter into long-term agreements with the customers. Could be anywhere from three to seven years. and they're often extended. And so it's a natural part of the business that either you have a contract coming up that you extend, or in the case of some of the ones that Michael's mentioned, we actually can expand the services in those. But embedded in the business model are incentives to drive volume growth for the customers. And it's pretty formulaic in terms of the milestones that they achieve on growth, cumulative growth, growth relative in particular product categories and whatnot. And so when you enter into new agreements or extend agreements, there typically is an upfront type of pre-bate as well that gets factored into the equation. And we deal with those all the time. It's just that the size and magnitude of the customers we've talked about in the fourth quarter took more out of our free cash flow than is normal. But we're quite excited by the investments. We think they're going to continue to drive really strong growth for us as we go forward in those customers. So that's the model.
spk11: The next question comes from Brandon Colyard with Jefferies. Please go ahead, Brandon.
spk02: Hey, thanks. Good morning. Mike, can you touch on the service and specialty segment? It was down most single digits in the fourth quarter. Can you unpack that a bit? And Tom, are there any selling day variances to be aware of that you'd like to call out for this year looking forward?
spk07: Yeah, thanks for the question, Brandon. Overall, the services and special procurement part of our offering is an important aspect of the customer intimacy model that we do have and gives us a pretty privileged position with our customers. I would say a couple of factors that drove the underperformance in that part of the offering in the fourth quarter. Certainly, the especially procurement nature that reflects, I would say, you know, just the overall macro environment and the level of activity in our customers' labs, as well as, you know, probably a more muted, you know, year-end budget flush. You know, part of the offering there is to support, you know, procurement of materials that aren't necessarily a core part of our portfolio and You know, we saw, you know, a somewhat muted, you know, finish to the year, you know, particularly in the Americas. So, I don't think, you know, anything that, you know, particularly, you know, caught our attention there other than just a reflection of the environment. You know, activity levels here in the early days of the first quarter have been, you know, strong and we're certainly encouraged by, you know, the trajectory that we've got here out of the gates, but really just related to, you know, I would say the overall, macro environment and, you know, destocking and, you know, a more muted year in budget flesh.
spk13: Thanks, Brandon. On the selling days, I assume you mean going forward. And for 2023, overall for the full year, the number of selling days is the same as 2022, roughly. You'll have a little bit of favorability in the first quarter. And, you know, we end up giving that back in the third quarter. I think the second and fourth quarters, the selling days are roughly equal year over year. Thank you.
spk11: Our next question comes from Josh Waldman of Cleveland Research. Please go ahead, Josh.
spk05: Hey, morning. Thanks for taking my questions. A two-parter for you. It would be helpful to hear your thoughts on just how prudent you view the flat up to organic guide to be. When you consider moving pieces like inventory to stocking price and, I guess, underlying demand, do you think the 2% assumes a base case scenario for these variables? Do you think the first quarter guide, for example, captures the base case?
spk06: Yeah, thanks for the question, you know, Josh.
spk07: You know, what I would say about, you know, our guidance is that, you know, it certainly does reflect, you know, the number of variables that we see and certainly is underpinned by our view of, you know, really strong, you know, end market fundamentals, particularly in the life sciences space. You know, the 250 basis points of kind of, you know, macro headwinds that we've categorized, you know, certainly reflect, you know, you know, our view today of, you know, destocking as well as, I would say, a step down in our applied, you know, growth rates from 22 into 23. We ran well ahead of our long-term algorithm in 22, you know, in that part of the market. Most quarters were high single digit, low double digits in an end market that, you know, more classically for us grows, you know, mid single digits. So within that 250 also, you know, reflects, a normalization of growth in that part of the business and a pretty meaningful step down in the semiconductor end market, for example. On the other side, we do see continued strong contribution from price in the year ahead, maybe not quite as strong as in 22, but certainly above our long-term algorithm. So we're closely monitoring the dynamics that are at play here. We're certainly working hard to identify opportunities to offset you know, some of the headwinds, you know, other parts of our portfolio, like in, you know, biomaterials. We recognize there's a sequential ramp in growth rates throughout the year to achieve the guidance that we've put out there. But we have, you know, certainly confidence in the shape of the plan, you know, given the demand signals, you know, that we see today, as well as, you know, moderation and comparables in the in the back half of the year. So when we put all that together, I think we're confident in the plan. I think it's a prudent place to start.
spk11: Those are all the questions we have time for today. So I'll now turn the call back to Michael for the conclusion remarks.
spk07: Yeah, thank you. And thank you all for participating in our call today. Certainly appreciate your support and look forward to updating you when we meet next. And until then, take care and be well, everyone. Thank you.
spk11: Thank you everyone for joining us today. This concludes our call and you may now disconnect your line.
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