Avantor, Inc.

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 2023 second quarter earnings results conference call. After the prepared remarks, there will be the opportunity for any questions, which you can ask by pressing start, followed by the number one on your telephone keypads. I'll now turn the call over to Christina Jones, Vice President of Investor Relations. 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 Slozek, 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 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 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 disclosure package on our investor relations website. With that, I will now turn the call over to Michael.

Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on slide three. Our second quarter core organic revenue declined 6.5%. Relative to the first quarter, market trends weakened sequentially, particularly in biopharma, where mid- to large-pharma customers moderated their spend and continued to reduce inventory, and ongoing funding constraints for small biotech persisted. Sales in our advanced technology and applied materials end market were impacted by sharp declines in sales of formulated solutions to semiconductor customers. We also experienced sequential weakness in sales of equipment and instrumentation associated with tighter capital budgets across all end markets. The sustained momentum in our biomaterials and education end markets partially offset these declines, and we are encouraged by the double digit growth in our medical grade silicone platform, as well as continued mid single digit growth in education and government. We continue to leverage the Avantour business system to drive cost savings and enhance operational rigor and efficiency. These productivity efforts and cost containment measures helped mitigate the soft demand environment and enabled us to deliver solid bottom line results including 19.7% adjusted EBITDA margin and 28 cents of adjusted EPS. We also have strong free cash flow momentum and generated approximately 85% free cash flow conversion to adjusted net income in the first half and paid down over $400 million of debt in the same period. While current market conditions are negatively impacting the entire industry, we are confident in our platform, market position, and long-term growth outlook. and the resilience of our end markets. We are doubling down on our actions to accelerate our growth strategy and control costs to help offset industry headwinds and ensure that we are positioned to capitalize when market conditions improve. First, we have taken steps to align our organization and key leadership roles to deliver incremental growth. We have added leaders with expertise in high growth segments and welcome new leaders with a proven track record in driving performance. A few examples include strengthening business leadership for proprietary research and materials businesses under Randy Stone, including adding dedicated leadership for our self-manufactured chemicals business and augmenting Ritter leadership to drive revenue synergies and product line expansion. Establishing dedicated strategy leaders under Kitty Sahin's leadership, who partner with business leaders to identify and capture high growth opportunities. adding product management leadership for bioprocessing, fluid handling, and lab digital services, and realigning our regional commercial teams to enable greater focus on customer needs. These efforts are generating results. In the second quarter, in addition to delivering double-digit education and government growth in the Americas, our strength in commercial teams extended multi-year contracts with several renowned institutions and consortiums in the education sector, including the E&I Consortium, which services over 5,000 educational institutions and gives us broad access to the academic community. Second, we are accelerating new product introductions for both third party and proprietary offerings and investing in Avantour's R&D to support customer needs. For example, in the second quarter, we launched integrated pressure sensors for our MasterFlex MasterSense pumps. novel volume sampling systems to support cell and gene therapy workflows, cryogenic storage vials to support long-term storage of critical biological samples, and introduced a new robotics tip line, the JT Baker HT2. We significantly accelerated new product introductions from our supplier partners during the first two quarters, including onboarding several innovative suppliers to bring thousands of new fine chemical and antibody offerings to our customers. as well as introducing new microplate instrumentation and biological sample storage solutions. And we announced plans for a significant expansion of our flagship R&D center in Bridgewater, New Jersey, planned for August 2024. Third, we are well underway with our digital transformation, including enhancing our e-commerce platform and improving campaign execution and commercial activation processes. We will begin introducing our new online buying experience through a phased rollout across geographic markets starting this autumn. At the same time, we are simplifying and streamlining lab inventory and replenishment processes for our customers by integrating leading electronic lab notebook and smart shelf platforms with our upgraded inventory manager enterprise system. We've increased web traffic through a variety of digital tactics, accelerated deployment of new product and application focused email campaigns, and enhance some of our trigger or action-based campaign programs. We are seeing higher campaign conversion rates as a result of these initiatives. Additionally, we've activated commercial process enhancements that are improving effectiveness in our lead-to-order conversion rates. These tactics complement ongoing content upgrades and search engine optimization enhancements across our digital channels. We've also intensified our focus on operational excellence and productivity to control costs as was evident in our second quarter results. Some examples of these efforts include rationalizing our manufacturing footprint through closures and downsizing, streamlining our organizational structure and de-layering, including simplifying our European organization from three subregions to two in order to reduce cost and complexity and better serve customers, proactively addressing structural costs and reducing discretionary and indirect spend across our global organization, Executing numerous Kaizen events as part of our Avantour business system to expedite process improvements and drive stakeholder engagement. And enhancing our supply chain to drive efficiencies, reduce back orders, and improve lead times, including increasing warehouse productivity and efficiency, as well as automation upgrades at our distribution centers in Germany, Sweden, the United Kingdom, and the U.S. Looking ahead, we are revising our full year 2023 guidance to reflect the more challenging environment the industry faced in the second quarter, which we expect to persist for the remainder of the year. We're also taking the opportunity to further accelerate our deleveraging and are now targeting adjusted net leverage below three times. I will walk you through our updated guidance at the end of the presentation. Before I turn it over to Tom to walk you through our second quarter financial results in more detail, I want to remind you of our previously announced CFO transition. As we announced earlier this month, Brent Jones will join Avantor as Executive Vice President and Chief Financial Officer on Monday, August 7th. Over a nearly 30-year career, Brent served as CFO for several public and private life science companies and previously as a senior investment banker. He is currently Executive Vice President, Chief Financial Officer, and Chief Operating Officer at LifeScan Global Corporation, a global leader in blood glucose monitoring and digital health technology. Brent is an innovative thinker and seasoned operator with a strong track record of driving transformation, building teams, and enhancing financial results to increase value for shareholders. He will be an exceptional partner in running the business, and I look forward to working closely with him to advance our growth strategy. As planned, Tom will be leaving Avantor next Friday, August 4th, to start a new CFO role outside the life sciences industry. As we welcome Brent to the team, I want to reiterate my appreciation to Tom for his many contributions to Avantor and his support of a seamless transition. With that, let me turn it over to Tom to walk you through our second quarter results.