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spk12: 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 2023 earnings results conference call. After the presentation, 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 will now turn the call over to Christina Jones, Vice President of Investor Relations. Mrs. Jones, you may begin the conference.
spk01: Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Brent Jones, 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.avonturesciences.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 press release and in the supplemental disclosure package on our Investor Relations website. At our investor day in December, we announced a transformation of our operating model. As of January 1st, 2024, we have transitioned from our former regional structure to our two new business segments, laboratory solutions and bioscience production. The fourth quarter of 2023 is our last quarter of reporting based on geographic segments, and we will report business performance under the new structure beginning with Q1 2024 results. In order to assist with comparability and modeling, this morning we released a Form 8K with recast historical data following the new segment structure. We have also published an incremental supplemental disclosure package that is also available on our investor relations website. With that, I will now turn the call over to Michael.
spk16: Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on slide three. We delivered fourth quarter business results at the high end of our guidance across all key financial metrics, including a core organic revenue decline of 4.8 percent, adjusted EBITDA margin of 17.5 percent, and adjusted EPS of 25 cents. Our free cash flow conversion was over 120 percent in the quarter, and we delivered approximately $725 million of free cash flow in the year. This exceeded our guidance range and enabled us to pay down approximately $850 million of debt. As anticipated, market conditions in the fourth quarter were similar to conditions in recent quarters, as inventory destocking and cautious customer spending continued to impact demand. Despite these industry-wide headwinds, we are encouraged by the relative stability we have seen over the past couple of quarters across our end markets. Our continued execution of our growth strategy led to a number of notable accomplishments in the fourth quarter. We won several new customer accounts in biotech and biopharma, and our sustained commercial intensity in higher education led to new relationships with multiple renowned academic and medical research institutions. Our focus on providing discovery to delivery solutions drove scope expansion with several biopharma customers, including services and bioprocessing contracts. In addition, we renewed multi-year agreements with two significant semiconductor customers. We also launched innovative new products, including our JT Baker viral inactivation solution to address a critical regulatory need in bioprocessing and next generation coatings and custom resins for 3D printing as a part of our new cell high purity silicone platform. Additionally, we continue to realize the impact of investments in our digital capabilities. For the full year, Our multi-channel approach resulted in a double-digit increase in traffic to our e-commerce platform, and our inventory manager digital solution drove a double-digit increase in product pull-through. As a part of our continued commitment to sustainability, we set new science-based climate targets and progressed our renewable energy strategy with several solar projects coming online in multiple locations around the world. Looking ahead to 2024, While we do see early signs of a recovery and are encouraged by healthy customer activity levels and a modest improvement in our bioprocessing order book, we have not yet seen a clear inflection point. Given limited visibility regarding the timing and shape of the expected recovery, our initial guidance is based on a continuation of trends from the last several quarters, giving us upside if a recovery does materialize within the year. Brent will walk you through our 2024 guidance in more detail later in the call. Our focus for 2024 is executing on our business model transformation and growth strategy for laboratory solutions and bioscience production, as well as driving our cost savings initiative that is expected to generate approximately $300 million of annual run rate savings by the end of 2026. We will continue to be agile as we navigate the current environment to ensure we are well positioned to achieve our long-term financial targets. I'll now turn it over to Brent to walk you through our Q4 and full year 2023 results and our 2024 guidance.
spk14: Thank you, Michael, and good morning, everyone. I'm starting with the numbers on slide four. Reported revenue was $1.72 billion for the quarter and $6.97 billion for the full year. While revenue declined 4.8% on a core organic basis in Q4, it was flat on a sequential as reported basis, consistent with our expectations for the quarter. We continue to navigate industry-wide headwinds and view market conditions as stable, but not yet inflecting upward. Throughout the year, we delivered strong performance in our education and services platforms, and despite an expected moderation in Q4, Our biomaterials platform delivered double-digit growth in 2023. Adjusted gross profit for the quarter was $570 million, representing a 33.1 percent margin. For the year, it was $2.36 billion and 33.9 percent. Our gross profit was impacted by lower sales volume, mix, inflation, and negative fixed cost leverage. However, we were able to partially offset these effects with productivity efforts, and we continue to work diligently on improving our cost base. We did experience better mix than expected, which helped our achievement versus expectations in Q4. Adjusted EBITDA was $302 million in Q4 and approximately $1.3 billion for the year, representing 17.5% and 18.8% adjusted EBITDA margin, respectively. Q4 margin was at the high end of our expectations for the quarter, driven by top line results, which were also at the high end of our expected range. Year over year, our EBITDA margin performance was impacted by lower gross profit and negative fixed cost leverage on SG&A. Interest and tax expenses were in line with our expectations. As a result, Adjusted earnings per share came in at $0.25 for the quarter and $1.06 for the year, reflecting the flow through of adjusted EBITDA performance. Moving to cash flow, we generated over $200 million in free cash flow in the quarter, bringing our full year free cash flow to approximately $725 million, representing over 100% conversion of adjusted net income. Our free cash flow performance was enhanced by continued discipline and working capital management. Our adjusted net leverage ended the quarter at 3.9 times adjusted EBITDA, and we paid down approximately $850 million of debt in 2023. Deleveraging remains our top capital allocation priority, and we continue to target an adjusted net leverage ratio below three times. Slide five outlines the components of our fourth quarter and full-year revenue performance. Starting with the fourth quarter, core organic revenue declined 4.8% in the quarter. COVID-related revenues represented a 1.1% headwind, resulting in a 5.9% organic revenue decline. Foreign exchange translation represented a 1.9% tailwind, driven by a modest depreciation of the euro, resulting in a reported revenue decline of 4% for the quarter. For the full year, core organic revenue declined 5.2%. COVID represented a 2.6% headwind, resulting in a 7.8% organic revenue decline. Foreign exchange translation represented a 0.5% tailwind, leading to a 7.3% reported revenue decline. Moving forward with 2024, As we did not highlight any COVID-related revenues in our 2023 results, we will simplify our revenue reporting by only showing organic and reported revenue. On to slide six. From a regional perspective, the Americas declined 3.8% on a core organic basis in the quarter. Our daily rate of sales was relatively consistent from Q3, while our growth rate benefited from an easier comparable. We continue to experience pressure from destocking and lower demand in biopharma, healthcare, and advanced technologies and applied materials and markets. Our increased commercial intensity in education and government is driving share gains and led to the fourth consecutive quarter of growth, with higher education growing high single digits in the quarter. Europe declined 6.8% on a core organic basis in the quarter, consistent with our expectations. On a year-over-year basis, Europe's performance was driven by weakness in the biopharma and healthcare end markets, with softer demand for lab consumables and single-use solutions driven by ongoing destocking. AMIA declined 3.5% on a core organic basis in the fourth quarter, driven by declines in lab consumables, as well as formulated solutions for our semiconductor customers. Despite the macroeconomic challenges, particularly in China, our business delivered another quarter of solid growth in bioprocessing and biomaterials. Slide seven shows our core organic revenue change for the quarter and full year by end market and product group. Biopharma, representing about 50% of our annual revenue, declined high single digits in the quarter in both the research and production environments. In the research environment, we saw a continuation of both destocking and the conservative approach to customer spending that began in the second quarter. While spending is constrained, customers continue to advance meaningful R&D pipelines and fund promising science. In the production environment, sales were similar to our third quarter results as demand continues to be impacted by inventory destocking and customer campaign delays. Cell and gene therapy remains a bright spot, and we delivered another quarter of double-digit growth in several critical product lines targeting these workflows. Within bioprocessing, we again saw promising market signals, but not enough to characterize as a recovery. Specifically, order intake improved modestly compared to the third quarter, customer inventory health continues to improve, and customer sentiment remains positive. And while we still have not seen the inflection, we believe that it is coming. Underpinned by another record year of approvals for new therapies and indications, together with robust pipelines across all modalities, we remain confident in the long-term potential of this critical end market. Healthcare, which represents approximately 10% of our annual revenue, declined high single digits in the quarter on a core organic basis, driven by consumables destocking in Europe and the Americas and an expected moderation in our biomaterials business after several quarters of double-digit growth. Education and government, representing approximately 15% of our annual revenue, grew mid-single digits on a core organic basis in the fourth quarter, the fourth consecutive quarter of growth, driven by share gains in higher education in the Americas. We are encouraged by our recent commercial wins and the success of our digital strategy and expect continued momentum in this platform. Advanced technologies and applied materials, representing approximately 25% of our annual revenue, declined low single digits on a core organic basis in the fourth quarter, driven by declines in the Americas and AMIA in our semiconductor business, partially offset by strong growth in our aerospace and defense business. By product group, proprietary materials and consumables offerings were down high single digits in the quarter, driven by customer inventory destocking within our bioprocessing and semiconductor platforms. Total proprietary materials sales were similar to Q3, while the growth rate improved modestly as a result of easier comparables. Sales of third-party materials and consumables declined mid-single digits impacted by continued destocking of lab consumables and cautious purchasing behavior across research settings. Our nominal sales rate was unchanged from Q3 levels. Services and specialty procurement, which integrate us directly in our customers' critical operations, grew high single digits the fourth consecutive quarter of mid-single digit or higher growth, while equipment and instrumentation declined high single digits reflecting constrained capital spending in the current macro environment and the absence of a typical year-end budget flush. Turning to slide eight, as of January 1st, we successfully transitioned from three geographic segments to two new customer-focused segments, laboratory solutions and bioscience production. In laboratory solutions, which represents roughly two-thirds of our revenue, we provide an industry-leading platform of products and services to support our customers' research, diagnostic, and QC workflows. In our bioscience production segment, which represents about one-third of our revenue and over 45% of our enterprise profitability, we support our customers' production platforms by providing high-purity materials for bioprocessing, ultra-high-purity silicone for medical implants, and custom formulations for semiconductor and advanced technology applications. Echoing Michael's commentary, this has been a critical strategic move. It is sharpening our focus on accelerating growth, streamlining accountability, and unlocking additional cost savings and operating efficiencies. While we are in the early days of our transition to the new operating model and cost optimization initiative, I'm encouraged by our initial progress. On to slide nine. As a part of our transition, we have released some additional financial information today. In addition to filing our Form 10-K and our standard Q4 and fiscal year earnings materials with our legacy geographic segments, we have also filed a Form 8-K and provided a supplemental package containing historical information for the new segments. This is designed to help bridge our transition and assist with financial modeling. Beginning next quarter, we will only report under our new segment structure. Slide 10 shows our full year 2024 guidance. As Michael noted in his overview comments, we do see encouraging leading indicators supporting a market recovery, including improving order book trends and bioprocessing. Our guidance is based on a continuation of current market conditions in both our laboratory and production businesses. Given limited visibility regarding the shape and timing of a recovery and the lack of a clear inflection in the business, we think it is prudent to base our guidance on current sales levels. To the extent that we do see a top line recovery within the year, that would present upside to our current guidance. To get into specifics, we expect full-year organic revenue growth of negative 2% to plus 1%. Based on current FX rates, we expect a modest tailwind from FX of approximately 0.3%, leading to reported revenue growth of negative 1.7% to positive 1.3%. This view reflects a continuation of current market conditions plus a modest contribution from price. On a segment basis, we expect low single-digit growth in lab solutions and a mid-single-digit decline in bioscience production. Moving to profitability, we expect adjusted EBITDA margins of approximately 17.4 percent to approximately 17.9 percent. This reflects our 2023 second half exit rate as well as incremental headwinds due to a reset of incentive compensation systems, wage inflation, and top line expectations. These headwinds will be partially offset by approximately $75 million of gross cost savings from our transformation initiative, as well as customary productivity. While we are not calling a growth inflection, when that does happen, our incremental margins will be very attractive. We expect interest expense to improve by roughly $35 million year over year, resulting in approximately $250 million of interest expense and expect a full-year tax rate of 22.5%. Our adjusted EPS range is 96 cents to $1.04. We also expect free cash flow performance of $600 million to $650 million prior to any one-time cash expenses associated with our cost savings initiative. We are confident in the outlook for the business. Our competitive position is strong, as evidenced by continued share gains in academia and biopharma, and our long-term growth entitlement is unchanged. This guidance is a well-balanced combination of prudence and confidence in our business positioning and our self-help transformation actions. A couple of final comments on phasing. We expect Q1 organic revenue to decline approximately 6.5% to 5.5% and reported revenue to decline approximately 6% to 5%. Adjusted EBITDA margin is forecasted to be approximately 200 basis points below our full year 2024 adjusted EBITDA margin expectation. We expect interest expense of approximately $65 million in the first quarter. Our guidance contemplates a very modest sequential increase in reported revenue dollars each quarter driven by pricing, modest seasonality, timing of known orders, and nominal billing day adjustments. This results in approximately 49% of our revenue in the first half of the year and 51% of our revenue in the second half of the year. We also expect margins to increase each quarter driven by the phasing of our expected cost savings. We are laser focused on executing on the current transformation, and I am confident that our growth strategy and more efficient operating structure will set us up well to achieve our long-term targets. With that, I will turn the call back to Michael.
spk16: Thank you, Brent. As I mentioned at the beginning of the call, we are closely monitoring end market dynamics. While we are seeing encouraging trends, we are taking an appropriately prudent approach to our full year guidance and our position for upside if a market recovery materializes within the year. Our new operating model, which became effective on January 1st, sharpens our focus on accelerating growth with our laboratory and production customers while unlocking significant operating efficiencies. I am already seeing the benefits of the new model in practice through the clarity it is bringing to our forecasting and operating processes. In addition, I am encouraged by the early progress we have been making on our cost optimization initiative. We have launched multiple work streams led by executive leadership team sponsors across each of our four focus areas, organizational efficiency, footprint optimization, reduced cost to serve, and procurement savings. As mentioned at our investor day, this is a multi-year initiative and we will keep you updated on our progress. In closing, While we continue to operate in a dynamic environment, we are implementing proactive initiatives to control costs, enhance productivity and efficiency, and accelerate growth. We remain confident in the rich set of opportunities across our end markets based on the strong pipeline of scientific innovation and our proven ability to win and retain customer relationships, solve scientific challenges, and grow share of wallet. I will now turn it over to the operator to begin the question and answer portion of our call.
spk12: Thank you. If you would like to ask a question today, please do so now by pressing start followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, that is start followed by two. We ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Dan Arias with Stifel. Please go ahead.
spk05: Hi, guys. Thanks for the questions here. Brent, maybe just to start on the outlook. Certainly understand the need for prudence here, but it does sort of feel like the guidance approach is to say that business conditions 10 to 12 months from now are basically the same as they are today, which does seem a little bit out of line maybe with what the peer group is kind of pointing to and maybe even the hints of improvement that you've touched on when you mentioned things like bioprocess, Etc. So, you know, is that the base case that you see, or is this really just more about creating upside potential for the year?
spk14: Yeah, Dan, thanks for the question and absolutely appreciate the sentiments there. You know, as I said in the prepared remarks, we're really looking at the business on a run rate basis now. We sort of reset to doing that after Q2 last year. We believe that approach really served us well through the end of the through the end of the year. It is a dynamic environment and we don't see the inflection yet. And you noted the comment about prudence. We really think this is the prudent and right way to show it here. And I think a really important takeaway from this is we are not banking on a recovery to achieve these results. So we just think it's the right way to forecast the year with what we're seeing now. We're basing our forecast on an order book, not on a hope.
spk05: Okay, fair enough. And then maybe just as a follow-up on the destocking phenomenon, I'm curious how you would describe bioprocess versus routine consumables separately. Is there a difference in terms of how far along in the process we are for one versus the other and when you think one might be flushed out of the system versus the other? Or are they more or less moving at the same pace and likely to resolve themselves at the same time?
spk15: Yeah, Dan, thanks for the question. This is Michael. I think as we've been saying throughout the last year or so, they have seemingly been moving in similar directions in the lab segment. Of course, you know, that's going to be the lab consumables where there was the excess inventory. We've seen that coming down at the very similar rates as what we see on the single-use offerings that we have in our bioprocessing platform. And our, you know, interactions with our customers would indicate, you know, kind of very similar dynamics in terms of you know, where their inventory health stands, which, as we've noted, you know, continues to improve, you know, quarter by quarter. Maybe the one different dynamic I might call out within the bioprocessing business is, you know, as you move downstream from our materials, you know, I think part of what we're seeing in our business is, you know, continual work down of, you know, our customers' inventory of drugs. you know, substance inventories that were built, you know, during the pandemic. And we see that improving as well. But that's probably the only different dynamic that I might call out between what we're seeing in lab versus the production segment.
spk04: Okay. Appreciate it.
spk12: The next question comes from Michael Riskin with Bank of America. Please go ahead.
spk02: Great. Thanks, guys. First question I want to ask is on the cost action. You talked about the $300 million for 2026 and also how that plays out this year. You talked about the impact on the margins improving as you go through the year as those are layered in. Just any additional color on where the cost actions are going to be coming and how should we think about 2024, 2025, 2026 cadence, you know, relatively linear throughout or any big milestones we should be keeping an eye on. And I got to follow up on that.
spk14: Okay. Yeah, Michael, it's Brent. No, thanks for the note. It's obviously a big focus we have here. You know, we have clear line of sight consistent with what we said in investor data, $75 million of cost savings this year, 25% of what we've talked about. We're obviously pushing to outperform on that, but $75 million is what you should assume in your modeling there. There aren't any particular milestones, I would say. I think we'll keep you updated very dynamically, but I'll say it's something we're working really hard at. I think we have really, really good traction, consistent with what we said before. About a third of that will be organizational efficiency-related. About 20% of it will be related to footprint. The balance through procurement and cost to serve broadly, but. And it's really important to think about this is this is unlocked by these statements in this reorganization and Michael's talking about the organizational realignment. That's what's allowing these things to happen. So this is something we're dynamically doing every day, taking costs out of the business.
spk02: Okay, and then a follow-up specifically as it relates to 1Q margin guidance. You just said in the prepared remarks about 200 bits lower than the full year, so something in the 15.5% to 16% range, give or take, even in margins. Relatively high number, even though, as you said, you're only taking cost out throughout the rest of the year. Is that just a mixed component in terms of the top line being down? Sort of what's driving the lower margin in the first quarter?
spk14: Thanks. Yeah, no, I appreciate that note. No, the largest driver is really the reset of incentive comp. How it goes through the year is the costs start right at the beginning of the year, and the cost actions are going to get feathered into the year as we achieve against them. So it's literally the math of just having much higher expenses there. It's not an issue on the gross margin side at all. It's purely a cost piece there. And Q1 will be the low point for the year. And then as a reminder, as those phase in over the year, you'll see margin improvement there driven by cost out, which will help both gross margin and SG&A.
spk04: Great.
spk03: Thanks. Thank you.
spk12: Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.
spk00: Hey, guys. Good morning and appreciate the time here. Michael, one for you that's sort of a follow-up to Dan's question at the top of the call. Specifically at the low end of the guide, you're talking of organic growth down 2%. Is it fair to say that at least at that level, at the low point, you're actually baking in deterioration versus current trends? And then Brent, can you help us just build a bridge on the free cash flow side similar to what you did on the margins, please?
spk15: All right, yeah, Tejas, good morning. Thanks for joining the call today. On your first question, you know, regarding the minus two at the low end of our full-year guide, really what you're picking up there is just the year-over-year, you know, comparables. Q1 last year was the high-water mark, and it, you know, things deteriorated a bit as we moved through throughout the year. Some of the cautious, you know, spending patterns, you know, worked their way in. What way we've guided the business, you know, just with Brent's remarks is, you know, kind of looking at where we exited the year, assuming that that, you know, continues, you know, throughout the year, plus, you know, a modest contribution from price. So, you know, that range kind of reflects, you know, just I would say normal volatility in the business, you know, the impact of the price, and then just the year-over-year comparables.
spk14: Following up on the free cash flow bridge, I mean, that free cash flow is largely ratable to what we're seeing on an EBITDA basis there, so you can largely think of that in the walk. You know, our performance in 2023 was really exceptional on free cash flow conversion. So our guidance still reflects in excess of 90% conversion, which is exactly what we talked about with our long-term financial model there. I would also say we had really, really nice performance on the working capital side, particularly ending 2023. You know, the second half of the year, we did really, really well on the DSO side, and really a story of the year with dramatic work on inventory. So, you know, I'd like to tell you we could get to a higher entitlement. I think this is sort of the right place, and let's continue to execute against that.
spk00: Got it. That's super helpful. And just a follow-up there, Michael, on your comment on pricing. Any color you can share on those new customer wins you flagged in pharma and semis, especially how does the pricing look there? And more broadly, what are you baking in for pricing at the midpoint of the guide? I believe you said modest benefit there from pricing.
spk15: Yeah, I'm able to take them in reverse order. Consistent with kind of our long-term algorithm, we're assuming kind of one to two points of price flowing into our outlook for the year. And then I would say probably nothing out of the ordinary to call out regarding the new customer wins. I think they're in line with the pricing and margins of the rest of the business. Nothing specific notable there.
spk04: Got it. Thanks, guys.
spk12: The next question comes from Vijay Kumar with Evercore ISI. Please go ahead.
spk08: Hi, Michael. Thanks for taking my question. Just one on, I guess, the revenue guidance assumption here. Bioproduction down mid-singles or base organic coming off of minus high singles. I think most of your peers are assuming perhaps first half similar to back half of last year and some improvement in second half. I'm curious what your bio... production segment assumptions are. Is there any quarterly cadence? Looks like you certainly have easier comps given you guys saw a step down in 2Q versus you were up here. So maybe just help us understand the bioproduction, which is driving the minus mid-singles assumptions.
spk15: Yeah, Vijay, thanks for the question. Thanks for joining the call today. I think it's important to just start with we continue to be extremely bullish on this space. We're coming off another year of record approvals And the pipelines are full and, you know, a lot of the new modalities are getting traction. I think, you know, it's also important to recognize the trends we've seen in the order book. As we talked about, you know, over the last couple of months, Q4 order rate of intake did improve sequentially from Q3. And we've seen that, you know, trend continue into the early days of Q1. But to be clear, we've not yet seen what we would consider to be a step change in the order book. We finished the year last year with what I would think is probably best in class performance for that platform down mid-single digits, and we're expecting kind of similar performance in the year ahead. And the way that gets reflected in our guidance, of course, is looking at kind of exit run rates at the end of 23, flowing that through on a full-year basis with modest benefit coming from pricing. The quarter numbers, you know, while the absolute numbers are going to look pretty similar, on a rate basis, you will see, you know, a step down in Q1, just given the comparable of what we're running into on a year-over-year basis. So, you know, Q1 is going to want to be down probably mid-teens, Vijay. but not because we see a difference in the revenue. It's just, you know, the year-over-year, you know, math that flows into that. So assuming, you know, full year of down in single digits.
spk08: And that would imply 2Q to 4Q sort of improves maybe a flattish. Is that what the guidance is? I think it appears you're assuming a normalization by year. I'm curious. Is it guidance? Yeah, but not because the guidance is human.
spk15: Yeah, the guidance assumes, you know, similar absolute revenues throughout the year. Vijay, you might see a little bit, you know, based on, you know, the number of days in a quarter or, you know, how the pricing phase is in. You might see, you know, some differences there, but nothing fundamentally different from an underlying demand perspective. Of course, the way we've guided this does imply that you're going to be, you know, roughly flattish by the time you exit the year, but not because we're you know, forecasting and inflection in the order book.
spk08: That's helpful, Michael. And Brent, maybe one for you on the margins here. Are you assuming OPEX dollars to be flattish up or down year on year? I'm trying to understand, is this margin mostly a function of gross margins and volume leverage or are you assuming operating expense or dollar basis to go up?
spk14: Well, definitely, I mean, implicit in some of the other comments, we have real headwinds on the OpEx side year over year. I mean, we are getting productivity to offset that, but will not be enough to fully offset that. So, yes, there are meaningful year over year OpEx headwinds there.
spk08: And so, gross margin, I guess when you look at the 100 basis points margin step down year on year, how much of that is gross margin versus op margin?
spk14: Well, I would say we have some opportunities in gross margin there in our productivity efforts, and then we're going to keep going at our cost savings initiative here to try and want as much of the SG&A margin headwinds as we can. But that's really the math of how it comes together. It's very consistent with sort of the exit rate. And when you compare, you can say because we exited higher in Q4 that we originally expected there. We had some goodness in MIPS. We had a lot of things run right in Q4 there. But on a rate basis, we expect this year to play out exactly as we had signaled earlier there on a margin basis.
spk08: So gross margin similar to Q4, that's what the guidance is assuming for fiscal 24?
spk14: No, I'm sorry. I said the EBITDA margin coming out very similar to the back half with those additional headwinds because we had somewhat better achievement in Q4.
spk04: We believe there's some upside in the year to gross margin. From the four levels, correct?
spk03: Or the fiscal? Sorry, I'm just asking. Okay, fantastic. Thanks, guys.
spk12: The next question comes from Dan Brennan with TD Cohen. Please go ahead.
spk11: Hey, thanks for taking the questions. Maybe first one, Michael. In prior quarters, you talked about inventories getting close to normal under three months. Just wondering if you can describe kind of what you're seeing amongst your customers there, and if that's the case, I appreciate the conservative guidance, but is something different with sell-through or your share such that if inventories are down at that level, I would assume we should see some kind of pickup here, whether it's first half or, you know, certainly by mid-year.
spk15: Yeah, thanks for the question. You know, I think the trend has continued when we look at the input we're getting from our customers. The inventory health, as I noted in my prepared remarks, does continue to improve. You know, we haven't yet seen an inflection or what we'd consider to be an inflection. We continue to see sequential improvement in the order book, but nothing that we would consider to be a step change. Relative to your last point around just performance of the business relative to the peer set, our 2023 performance, I think, speaks for itself. Although we're not jumping up and down with a business that's down mid-single digits, I think you'll find that is best in class relative to other players that are exposed to the space. And even if you account for maybe more limited exposure to China, I still think that that statement holds up. So, you know, we've had a longstanding, you know, track record here, at least over the last decade, of outgrowing the broader, you know, bioprocessing end market by, you know, 300 to 400 basis points. And I think, you know, that's reflected again in the 2023 numbers. I can't speak to, you know, the ins and outs of how others have guided the, you know, the year ahead. But, you know, I'm confident that our business will hold up. as well as anybody's here and likely outperform as we have done in previous years.
spk11: Great. Thank you for that. And we don't have the quarterly dollar numbers yet for bioprocess. I don't think we have any. We just have the growth numbers going back historically. So I'm just wondering, can you just comment? I know you said bookings grew modestly. Was that the first quarter bookings grew modestly in any color on like Book-to-bill and does your guidance anticipate, like when would that book-to-bill get above one for your guidance in the core buyer process? Thank you.
spk15: Yeah, so a couple of time periods that we've talked about in terms of sequential improvement in order book, you know, firstly, you know, from a Q4 to relative to Q3, we definitely did see a modest improvement in the rate of order intake, and we've seen that trend of sequential improvement continue into Q1, albeit at a slower rate of improvement than what we would hope for that would ultimately enable us to call for a full recovery here. But we're encouraged. I think the activity levels remain strong. Customer sentiment remains quite positive. And our teams are certainly busy working with our customers on supporting their new innovations. From a book-to-bill perspective, I don't think that's something that we've that we've typically or historically quoted, so I don't have a number to give you on that, but we do continue to see modest improvements in the rate of order intake. Great.
spk03: Thank you.
spk12: The next question comes from Patrick Donnelly with Citi. Please go ahead.
spk06: Hey, guys. Good morning. Thanks for taking the questions. Michael, maybe another one just on the recovery path. You know, at the analyst day, you talked about kind of the timeframe to get there and that 20% kind of margin exit rate. You know, any more clarity as to the timeframe, how you're seeing that play out? Obviously, it seems like things are stabilizing a bit, but not yet calling that inflection. Just trying to get a sense for as we go through the year, how to think about approaching that margin rate and, again, the recovery path on the bioprocessing side.
spk15: Yeah, thanks for the question, Patrick. My conviction on, you know, what I've said before about, you know, where we see things exiting 2025 is unchanged. You know, we would see us, you know, in that time period, you know, performing at or better than, you know, kind of where we were at in 2021 on both top line and margins, which does set us up, you know, for a year in 2026 with adjusted EBITDA margin performance above 20%. you know, the end market fundamentals remain robust, you know, which is something I certainly look at to support our view that recovery, you know, is coming. Again, record levels of new drug approvals, you know, really robust, you know, pipelines, positive customer sentiments, you know, when you look at, you know, funding environment, I think, has, you know, stabilized some pockets, including, you know, some of the biotech capital market funding levels, you know, improving. You know, I think there's a lot of, you know, encouraging leading indicators here. And we've taken an approach here to guide the year, not trying to call the timing of recovery and would consider that upside when it happens. But as we think about over the course of the next couple of years, we are optimistic about the recovery. And when you look at the margin rate that we've guided to for 2026, we can largely get there just with the self-help measures that we've talked about at Investor Day and we spent a little bit more time on here today. So we remain quite optimistic about what we've said about this recovery period.
spk06: Okay, that's helpful. And maybe a quick non-bioprocessing question, just in terms of semi-industrial demand, maybe just give a little more color on what you're seeing there and then expectations as we work our way through 24 here. Thank you, guys.
spk15: As we've said before, semis is a relatively, you know, small portion of our business, although it did take up a disproportionate amount of the airtime in 2023, just given how aggressively that end market took out their excess inventories. You know, similar dynamics as what we see in the life sciences space. They just moved a bit more aggressively to reset the inventories on the back end of, you know, the supply chain reset. As we noted, as we moved kind of through the back half of the year and certainly in Q4, you know, we have seen the business, you know, improve and we expect, you know, a return to modest growth in 2024, which, you know, as we, you know, realize that, you know, certainly is factored into our, you know, our guidance just given the trending that we saw at the end of the year and, you know, hopefully it's a platform that we don't need to spend a whole lot of time talking about on in the year ahead.
spk06: Great, thank you.
spk12: The next question comes from Rachel with JPMorgan. Please go ahead.
spk10: Great, good morning. Thanks for taking the question. So I wanted to ask on the trends that you've seen so far since the start of the year. You know, we've had some of your peers talk about how spending has been slow out of the gate. Can you spend a minute talking about how orders have trended in January and into early February? And have you noticed any differences by geography and market or customer type as well?
spk15: A couple of things I would say on that, Rachel. Firstly, I would reiterate the positive customer sentiment and just the level of activity that we're seeing with our customers continues to be encouraging. And when I think about R&D budgets and the discussions we're having with our customers on that front, I think the majority of them are anticipating modest growth of R&D budgets, albeit maybe a bit second-half weighted. We've not tried to reflect that in our outlook, and we'll bank that as upside as things improve throughout the year. Relative to what we've seen in the early days of the year, I'd say it's consistent with the run rates that we experienced at the end of the year. And certainly that's reflected in our guidance or the direction that Brent provided on what we're anticipating for Q1. Order books continue to modestly improve, but we've not yet seen an inflection point. But very consistent, trending, moving sequentially from Q4 to Q1. Okay.
spk10: And then maybe just pushing on that 1Q guide a little bit further. um appreciate on the margin line you have the reset on the incentive comp and that's kind of driving some of the sequential stuff down there but can you walk us through the sequentials on top line expectations um organic declines is down six and a half to down five and a half in one queue just a bit more from a seasonality standpoint than we would have expected typically so are there any other one-timers that we should be aware of then and then just lastly on my follow-up um i want to clarify some of your earlier comments on gross margin to vj's question So can you just clarify, are you implying gross margins for the year to be similar to 4Q23? And then where should we land on that gross margin line for 1Q as well? Thank you.
spk14: Yeah, sure. So on, I mean, honestly, Rachel, in Q1, it's really the issue of the expense reset largely. You go through, I mean, we have well over 100 basis points just due to expense reset there. Then you always have respective noise. You have difference in the top line. You have a little less absorption related to that. So you just do that as a matter of math, and that's very clear that's what Q1 wants to be. There's no unusual one-timer embedded in that, no big change in mix or anything else there. Following up on the comment in connection with gross margins, that was a year-over-year comment. I mean, we are running the transformation. We have Improvements and rooftops and otherwise, they're just indicated. We do see your upside in connection with gross margin. They're not not going to get to guiding the quarters on gross margin that is given all we will on a quarterly basis there. But I think we want to have everything through the scope of the guidance disclosure we've made.
spk12: The next question comes from Matt Sykes with Goldman Sachs. Please go ahead.
spk13: Good morning. Thanks for taking my question. Maybe the first one, just shifting over to the advanced tech and applied materials end market. In Q4, it looks like you had a, you know, sequential a little bit better than what the average for 23 was. You had called out aerospace and defense as having strong growth. Can you maybe talk about some of the drivers within the A&D segment within this end market and kind of what's driving that and what your expectations are for for 24 within that particular segment end market?
spk15: Matt, a couple of things I would say about that end market. Our exposure is principally into two types of workflows. One, kind of QA, QC workflows to support our customers' testing of their finished goods. And then similar to our bioprocessing or other life science platforms, we also have custom materials that are specced into our customers' manufacturing process. In the case of aerospace and defense, that's certainly true where we provide some extremely high performance, high purity materials that are specced into those platforms. And so that reflects just the continued growth and momentum and positioning of our technology in that space. The other thing to call out probably for the quarter is a sequential improvement in the semiconductor in market that I mentioned earlier in response to one of the questions. That had been such a drag on the business throughout the year just given the inventory reset and certainly seeing some of the benefits of that modest improvements coming through in the quarter.
spk13: Got it. Thanks. That's helpful. And then Just as you think about 2024 and you think about the biopharma end market, if you can kind of characterize large pharma versus sort of emerging biotech and where you see the potential delta or upside in each of those kind of customer cohorts, where do you see sort of the best chance of upside coming from? I know that the emerging biotech really depends on capital markets conditions to a certain extent, but I'm just wondering if you can characterize those two customer cohorts and where you see the upside for 2024.
spk15: So probably important to split my answer into the two ends of the workflow. In the research space, whether you're large pharma or biotech, those revenues are going to be captured in our new lab segment. And the way we forecasted that, of course, is a continuation of kind of Q4 run rates adjusted for a bit of price, if you will. You know, I'm encouraged by what we're seeing on biotech. You know, we probably saw the last step down in Q1 a year ago, and things were relatively stable through the back three-quarters of the year. And when I look at the external, you know, data and try to triangulate, you know, the disparate data points around funding, you know, I think there are some green shoots there that give us, you know, a little bit of hope, you know, that they're on their road to recovery, but, you know, certainly You know, we're encouraged by, you know, the stability that we've seen there. The back half of the year on large pharma, certainly we saw the cautionary spending, you know, patterns, you know, work their way in. Reprioritization of pipelines and such, as I mentioned earlier. I think the sentiment and the expectation for most of those large pharma accounts is to see modest growth as we move through the year, particularly in the back half of the year. We haven't factored that in, and we'll realize that, you know, if it doesn't, in fact, work out that way. On the other end of the workflow in the production environment, we don't really have much exposure to the biotech space, just given the way we manage these businesses. The biotech revenues tend to be in the research space, and so the production segment really is reflecting the revenues associated with commercialized platforms, which Again, you've got just the patient demand on one hand and then the launch of new molecules, which continues to run at a high level as key drivers for that platform. And we continue to be extremely well positioned here.
spk13: Got it. Thank you very much.
spk12: The next question comes from Andrew Cooper with Raymond James. Please go ahead.
spk09: Hey, everybody. Thanks for the questions. A lot's been asked, so maybe just one from me. Just thinking about the commentary on EBITDA pacing, you said 1Q about 200 bps lower than the full year. I guess just thinking through that, to me, if we get ratable improvement over the course of the year, it kind of puts the exit rate as approaching that 20% level at the end of this year. Is there something I'm missing there? Or if not, is it that more of the cost saves maybe come in 2Q as opposed to 3Q or 4Q? Just trying to get a sense when the top line clearly is not assuming we're done with that recovery cycle in 24, how we should think about the exit rate of 24 in terms of EBITDA margins relative to that entry point in the, call it mid-teens.
spk14: Andrew, it's Brent. Look, you're good and quick on your calculator there. I mean, it depends upon how you phase the things in there. But look, I mean, that is the beauty of layering in the cost savings against that and the way we're doing the guide. We won't get really specific. as to the exit rates or otherwise there. But look, the self-help initiatives here are going to be very meaningful as we keep executing against them. And I think you broadly are thinking about that the right way.
spk09: Okay, helpful. I said I'd just ask one, so I will stop there and pick it up offline. Thank you.
spk12: The next question comes from Connor McNamara with RBC Capital Markets. Please go ahead.
spk07: Hey, good morning, and thanks for taking the questions. Just on the wage pressures that you talked about this year, how much of that is any of that one-time catch-up from underpayment from prior years, or is that a new baseline for wages? And then on the inflationary pressures, if inflation were to persist throughout this year, what's your ability to take price above and beyond what you guys have guided to?
spk14: Yeah, so on the On the inflationary, I mean, there's a piece there that's the reset of the incentive comp, which is less inflationary and just more of a year-over-year comp. And then that's just merit. And we know wages are running somewhat higher there, but there's not any dramatic or nefarious story in that connection, Connor. And then your second question was?
spk07: Yeah, just on pricing. I mean, I think we all assume that the inflationary pressures that we've seen over the past several years won't persist. But if prices remain elevated or to go, you know, continue to go higher, what's your ability to take price above and beyond what you what you guided to?
spk14: Well, look, I think let's just stick to where we are in the guidance on the pricing there. We've been very consistent with the entitlement we've been able to drive there sort of sort of no matter the weather. So I think you should assume we always try and execute appropriately there. I think you should also assume that we take a long view with our customers on all of those. And we get a nice price entitlement annually here anyway. So, you know, if we execute better, you'll see it through, but I wouldn't assume more.
spk04: Great. Thanks for that, Brad.
spk03: Thank you.
spk12: Unfortunately, those are all the questions we have time for today, so I'll turn the call back to Michael for closing comments.
spk15: Yeah, thank you all for joining us today. As we conclude, I'd just like to reiterate that while we're certainly encouraged by the trends that we're seeing, we're also taking an appropriately prudent approach to our full-year guidance and, indeed, our position for upside if a market recovery does materialize within the year. I'd also like to thank our associates around the world for their many contributions and for their continued commitment to our customers. I look forward to updating you when we meet next, and until then, be well, everyone. Have a great Valentine's Day.
spk12: Thank you everyone for joining us today. This concludes our call. You may now disconnect your lines.
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