This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
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 second quarter 2024 earnings results conference call. If you would like to ask a question today during the presentation, please do so by pressing the star followed by the number one on your telephone keypad. I will now turn the call over to Christina Jones, Vice President of Investor Relations. Ms. 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 Bren 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.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 forward-looking statements within the meaning of the U.S. 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. With that, I will now turn the call over to Michael.
spk15: Thank you, CJ. And good morning, everyone. I appreciate you joining us today. I'm starting on slide three. We delivered another solid quarter with sequential improvement to all key financial metrics. With reported revenue of $1.7 billion, organic revenue declined 2%, modestly above the midpoint of our guidance, driven by stable conditions in the lab and improved demand in our production business, especially bioprocessing. Compared to the first quarter, Adjusted EBITDA margin increased more than 100 basis points to 17.9%, and adjusted EPS grew double digits to 25 cents, both solidly above our guidance for the second quarter. As Brent will outline in his section, our margin improvement was driven by pricing, improved mix, and realization of savings from our multi-year cost transformation initiative. We also generated $235 million of free cash flow in the quarter, inclusive of cash costs related to achieving our transformation savings. Reflecting our strong working capital performance, year-to-date free cash flow conversion has exceeded 100%. We paid down over $200 million of debt in the quarter and remain committed to bringing our adjusted net leverage ratio below three times. We continue to make good progress with the implementation of our new operating model and are seeing early benefits of aligning our teams with our customers' needs in the lab and production environments. In addition to unlocking significant operating efficiencies and streamlining execution of our operating plan, we're also realizing benefits from ongoing commercial intensity. Highlights from the second quarter include the launch of JT Baker cell lysis solution and JT Baker endonuclease, complementary products to sustainably optimize the gene therapy harvest process. We also launched our MasterFlex MasterSense gear pump which has exciting applications in mRNA encapsulation. We secured several new contract wins and renewals, including with Biopharma and CDMO customers, as well as with leading academic and government institutions. As part of our effort to bolster operational excellence and improve service levels, we recently opened our new North America Customer Service Center in Mexico, which is modeled after similar service centers in Europe and in Asia. Sustainability is core to our strategy, and the value we provide to our customers. We published our annual sustainability report in June, highlighting the progress we have made in the past year under our Science for Goodness platform, including broadening our sustainable products offering and working with our suppliers to create a more sustainable supply chain. Finally, our team continues to execute our multi-year cost transformation initiative, including aligning our manufacturing and distribution footprint with current and future areas of growth and improving our organizational efficiency. Accelerated results from this program drove margin performance above our guidance range, and we are on track to meet our in-year cost savings target of $75 million in 2024. The broader market conditions remain consistent with the first quarter, and the tone of our customer dialogue continues to be constructive. It is clear to me that the power of our channel and our commercial intensity are making a difference in the current environment. In laboratory solutions, Consumables and services continued to perform well, validating the strength of our positioning and relevance to our customers. Equipment and instrumentation trends were stable sequentially, and we are encouraged by continued customer engagement and activity levels. From an end market perspective, we're still seeing pockets of inventory destocking and cautious customer spending from our BioPharma customers. At the same time, biotech funding remains up double digits year over year and well above pre-pandemic levels. The improved funding environment is driving positive customer sentiment and strong commercial engagement on new projects, although we do expect that it will take a few quarters for this to translate into increased sales. In our other end markets, core diagnostic testing demand remains strong, and we saw sequential growth from our higher education and applied customers. In bioscience production, the bioprocessing end market remains healthy with a robust pipeline of new therapies, a favorable regulatory landscape, and strong patient demand. The FDA has approved 21 biologics this year, including 14 new molecular entities across MABS, cell and gene therapy, genome editing, proteins, and vaccines. Customers have largely worked down excess inventory of our products, though some isolated pockets of destocking remain. Production activity is improving, but has not yet returned to levels that match underlying end customer demand, largely a result of elevated finished goods inventory at some form of customers. In line with this backdrop, our bioprocessing business continues to gain momentum with another strong quarter of orders. Importantly, the positive order trends are converting to sales as bioprocessing grew high single-digit sequentially. We saw a solid performance in processed ingredients and a return to growth on a year-over-year basis in our fluid handling platform, which includes our master flex and single-use offerings. Within our healthcare and advanced technology end markets, performance was in line with our expectations. with sustained momentum in aerospace and defense and ongoing recovery of semiconductor demand. Given our performance year to date and current market conditions, we remain confident in our guidance and are reaffirming our full year outlook. Brett will provide additional details later in our prepared remarks. In summary, we delivered another quarter of solid performance and are encouraged by our momentum in bioprocessing. Enabled by the Avantour business system, We are ahead of plan in executing our cost transformation initiative and have delivered exceptional free cash flow generation with year-to-date conversion well over 100%. With that, I'll now turn it over to Brent to walk you through our second quarter results in more detail.
spk06: Thank you, Michael, and good morning, everyone. I'm starting with the numbers on slide four. Reported revenue was $1.7 billion for the quarter, declining 2% on an organic basis. Sales trends in our laboratory solution segment were similar to the first quarter levels, and we saw sequential improvement in our bioscience production segment driven by strength in bioprocessing. Adjusted gross profit for the quarter was $583 million, and adjusted gross margin was 34.2%. This represents a 40 basis point expansion year over year with favorable impacts from pricing, mix, and productivity. This also represents a 20 basis point sequential improvement helped by the relative outperformance in bioscience production. Adjusted EBITDA was $306 million, up $23 million sequentially. Adjusted EBITDA margin was 17.9%, up over 100 basis points sequentially. Our sequential adjusted EBITDA improvement was driven by the increase in sales and the impact of our cost transformation initiatives up and down the P&L. On a year-over-year basis, performance was impacted by lower sales volumes and the impact of our incentive compensation reset. Adjusted operating income was $277 million at a 16.3% margin in line with adjusted EBITDA performance and the drivers just noted. Adjusted earnings per share were 25 cents for the quarter, a 3-cent sequential improvement driven by strong operating income performance. We generated $235 million of free cash flow in the quarter. Our free cash flow performance reflects our bottom line results and strong working capital performance, partially offset by cash costs of nearly $40 million from our cost transformation initiative in Q2. When excluding cash costs related to the transformation, we've generated $385 million of free cash flow year to date. Our adjusted net leverage ended the quarter at 3.9 times adjusted EBITDA. As Michael noted, we remain focused on deleveraging and paid down over $200 million of debt in the quarter. Slide five outlines our segment performance. Laboratory Solutions revenue was $1.16 billion for the quarter declining 2.7% versus prior year on an organic basis. Sequentially, sales were stable at Q1 levels. Adjusted operating income for laboratory solutions was $151 million for the quarter, representing a 13.1% margin. The year-over-year adjusted operating income decline was driven by negative sales volume and the impact of our annual incentive compensation reset partially offset by favorable mix and savings from our cost transformation initiative. Sequentially, laboratory solutions adjusted operating income was up modestly, with similar sales volume and mix at the gross margin line and incremental cost savings driving improved conversion. Adjusted operating income margin increased 30 basis points from Q1. Bioscience production revenue was $547 million representing an organic decline of approximately 0.3% versus prior year. Sequentially, reported revenue increased by $24 million, net of a $3 million headwind from FX. Bioprocessing, representing about two-thirds of the segment, outperformed and was down mid-single digits on an organic basis versus our expectation of down mid-to-high single digits. Sequentially, bioprocessing grew high single digits as improved order rates are translating into increased sales and are supportive of continued momentum as we enter the second half of the year. Specific areas of strength include both process ingredients and fluid handling products. As Michael noted, our fluid handling products return to growth on a year-over-year basis, a very encouraging sign for activity in the space. Overall, bioprocessing continues to show signs of improvement consistent with our view that the end market is healthy and inventory is reverting to more normalized levels. To round out the segment, biomaterials and advanced technology performed in line with expectations. Adjusted operating income for bioscience production was $144 million for the quarter, representing a 26.3% margin. Year-over-year adjusted operating income declined as a result of lower sales volume and incentive compensation headwinds. On a sequential basis, adjusted operating income saw an increase of $17 million due to a combination of higher sales and meaningful savings from our cost transformation initiative. Adjusted operating income margin increased by 200 basis points from Q1. This quarter is a great example of the incrementals this business can drive with even modest top-line growth. Overall, a strong quarter for the bioscience production segment. Moving to the next slide. As Michael said earlier, we continue to view our guidance ranges as appropriate, and we are reaffirming our full-year outlook as shown on slide six. In terms of revenue, given our strong year-to-date performance in bioprocessing and continued momentum, we expect bioscience production to exceed original expectations and finish the year down low single digits organically. We expect laboratory solutions to be flat to down low single digits organically with seasonal patterns driving the range. At an enterprise level, the midpoint of our organic growth guidance assumes normal lab seasonality while the lower end accommodates more muted seasonal patterns. Year-to-date margin performance has significantly de-risked our adjusted EBITDA margin and EPS guidance and our year-to-date conversion puts us in a strong position on free cash flow. For the third quarter, we expect organic revenue growth of negative 1% to plus 2%. We also expect Q3 adjusted EBITDA margins to be stable sequentially. I'll now turn the call back to Michael. Thank you, Brent.
spk15: In summary, our team's commercial intensity, alignment with our customer's core research and production needs, and operational discipline generated another quarter of solid performance. Our margin expansion drivers are working. We are seeing relative strength in high margin categories, including bioprocessing, and we continue to drive our multi-year cost transformation initiative. The impacts these actions are having to conversion is evident in our results, and we expect they will continue to drive strong incremental margins as end market demand fully recovers. Additionally, the new operating model that we stood up at the start of the year is generating momentum across our business segments. Our commercial intensity is driving share gains with meaningful new contract wins and expanded customer relationships in our biopharma, education, and applied end markets. Our customer-driven innovation agenda and internal R&D engine continues to develop products that are inherently sticky, and our integrated sales and customer excellence organization is creating a stronger, more cohesive customer experience. As always, we are focused on execution and remain confident in the opportunities that lie ahead for our business. Finally, I'd like to close by thanking our Avantour associates for their dedication to serving our customers and for their many contributions to our transformation and operating results. I will now turn it over to the operator to begin the question and answer portion of our call.
spk11: Thank you. As a reminder, if you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind or you wish to be removed from the queue, you could do so by pressing star and then two. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question comes from the line of Vijay Kumar with Evercore ISI. Vijay, please go ahead.
spk14: Good morning, Michael, and congrats on a steady print share. Maybe my first question here on the bioprocessing, just given the focus, what was, you know, you mentioned destocking. Is there any way to quantify the destocking impact in second quarter, first half, and to get a sense for underlying growth? in what did orders do in the quarter, you know, maybe sequential and year-on-year trends, and maybe comments on where it came from, you know, consumables versus instrumentation.
spk16: Thanks for the question, Vijay. Good to hear from you. You know, as we described in the prepared remarks, Vijay, you know, overall, we're obviously very pleased with what we're seeing in bioprocessing, and the fundamentals are clearly improving, and I think we're encouraged by the outlook here. As we said, you know, we had another you know, quarter of strong orders. You asked about year over year, certainly, you know, good growth year over year as well. You know, we characterize it just, you know, continued momentum and how that order book is building. Perhaps more importantly, I think, Vijay, it's important to realize, you know, given our lead times and such, we are starting to see these positive trends, you know, convert to revenues. And we delivered another quarter of outperformance on the platform. We went into the quarter, you know, thinking about processing being off, you know, high single digits to, to perhaps mid-single digits, and we obviously finished up at the high end of that. And given the momentum, the order book that we've realized in the quarter, it did enable us to improve our outlook on a full-year basis. We're certainly excited to see the platform return to growth exiting the year.
spk14: Understood. Maybe, Brent, one for you on... a nice free cash print in this quarter and in first half. Any timing element on free cash? And, you know, you didn't mention pricing margins. Is that, you know, when volumes do normalize, how should we think about margins? Because you do have to normalize. I think operating model was, you know, 50 to 100 basis points. Should cost savings be incremental to that 50 to 100 basis points outlook?
spk06: So thanks for the question. A few things to unpack there. Look, on the free cash flow side, I would think about it as just the performance in the first half there, a little lighter in Q1, very solid in Q2. You know, if you look, we had really nice improvements in working capital days there, frankly, in all metrics. And I'd put that to a real focus in execution. And we reiterated the guide in connection with that. So I think we'll perform solidly for the year. James Pfeiffer- You know, in terms of other margin acceleration and off being on the algorithm I I would just stick to what we stated the algorithm. James Pfeiffer- There were you know we're still in this dynamic period, right now we have a lot of costs coming out of the business and just stick to the general way we think about the business going forward.
spk14: James Pfeiffer- Thanks guys.
spk11: Our next question comes from Tycho Peterson with Jefferies. Tycho, please go ahead. Your line is now open.
spk07: Hey, good morning. I maybe just want to probe in on some of the bioprocess recovery comments on, you know, process ingredients. You've made some kind of comments on API, so I'm just wondering if you can kind of put the process ingredient comments, you know, in context of, you know, where we are on the API front. And then, you know, how do we think about fluid handling products? You know, you had mentioned that's a good kind of leading indicator. Maybe put some context around that and other remaining pockets of weakness, you can point to and then maybe expectations for the core growth exit rate for bioprocess for the year would be helpful.
spk16: Thanks for the question, Tycho. It's good to hear from you. Welcome back. A few things to get into there. I think, again, just to reiterate what we've been saying, we're very pleased with the momentum that we are And it's broad-based. You asked about, you know, process ingredients. You know, I think one of the things I like about our platform, Tyco, of course, is we're going to have exposure, you know, upstream, downstream, and through, you know, fill, finish. And, you know, we're seeing, you know, good momentum across the portfolio. And, you know, we called out, you know, our master flex and single-use platform. You know, that platform and associated solutions actually return to growth on a year-over-year basis in the quarter. And that was a platform where we were first starting to see some of the green shoots and leading indicators turn favorable for us last year as we really started to see an acceleration of engineering drawing activity. And certainly that's continued and now also starting to translate into improved revenues. So I think there's a lot to like about the momentum that we have on that front. Relative to APIs and inventories and such, I think probably a couple ways to think about that, and I think consistent with the way we've been talking about it probably over the course of the last year or so, the stocking of our products is largely complete. Yes, I'm sure there's a few isolated pockets of inventories at specific customers, but largely that's getting behind us. And I think the elevated inventories of some of the APIs and bulk drug substances that we've seen at our customers, you know, that continues to improve, but still not at a level where we see underlying, you know, production matching, you know, end market demand, but certainly improving and, you know, one of the dynamics that's leading to, you know, the improved, you know, growth rates. I think, to be honest, on the questions here, Tycho, I think your last question there was, you know, just around how we see, you know, bioprocessing, you know, trending through the balance of the year and perhaps, you know, where we see it exiting the fourth quarter. You know, I think we've indicated we're certainly looking forward to the welcome return to growth for the platform in the fourth quarter. Given the momentum, the order book, you know, we have increased, I think, our outlook on a full year basis. You know, we see bioprocessing, you know, probably down low single digits on a full year basis. which you kind of do the math on all that, and that leads you to an exit rate in the mid to high single-digit rate for the platform. Thanks for your question, Steiko.
spk07: Okay. Thanks. One follow-up quickly, just education and government. You had mentioned some improvement there, but it was down mid-single-digit versus down low-single-digit in the first quarter. I just want to understand what you're saying there.
spk16: Yeah, so the end market, education and government, you're right, down mid-single digits. There's probably three key components to that platform, Tycho. We have some exposure to K through 12, which has a real seasonality component to it. Kind of just the return of the school year kind of falls right on top of the quarter. And so you see some dynamics. Sometimes the orders come in June. Revenue comes in June. Sometimes it comes in July. It looks like this year probably a little bit more weighted to the third quarter. Government was down for us a bit. I think the higher education piece, which is probably the most important piece for us here, difficult comp. I think that was part of the high point for the year last year, leading to the results you see there. I think for us, the focus here remains on commercial intensity. We've got a lot of nice wins and ongoing share gains there. I think we're encouraged to see higher education improve sequentially as we move from 1Q to 2Q.
spk07: Okay. Helpful. Thank you.
spk11: The next question comes from Doug Schoenkel with Wolf Research. Please go ahead. Your line is now open.
spk13: Good morning, and thank you for taking my question. My first one is on bioprocessing. You know, recognizing your mix of consumables is a lot higher than equipment. I am just curious if you'd be willing to comment on what you're seeing in terms of, you know, demand for each category, meaning consumables versus equipment, kind of how you're thinking about that, you know, as you incorporate an assumption about that into, you know, your full year guidance. And then, you know, kind of related to that, You know, how does that impact margin? I would think if, you know, consumables are trending better than equipment, you know, that would actually benefit margin for the year. You know, on top of the fact that you're now expecting bioprocessing to be a little bit stronger for the year, I would think those would all be good guys for margin for the year. So any comments on that would be helpful.
spk16: Thanks, Doug. So on bioprocessing, as you indicated, really, really heavy mix. and certainly favoring consumables. Probably, roughly speaking, it's probably 95% consumables on our bioprocessing platform, roughly 5% equipment. And of that equipment, what we're really talking here is primarily, you know, our peristaltic pump platform within MasterFlex. You know, good momentum across both, obviously, and, you know, interesting enough, our MasterFlex line actually returned to growth uh in the in the quarter and i think the margin profile across you know our equipment our consumables pretty similar uh within bioprocessing so uh both components of that you know moving in the right direction and supporting the the improved uh outlook there when i think though i step back across you know at our enterprise level this this uh um discussion around consumables versus you know equipment obviously we're a consumables driven uh platform and I think that's one of the attributes of our business model that I think is particularly attractive, and particularly given the recurring nature of the revenues here above 85%. One of the benefits we saw on margin this quarter was due to improving mix, and certainly the ongoing recovery of consumables and the consumables-driven growth is favorable for mix, just given how much of that is proprietary content. for us. Equipment was stable sequentially in our lab platform, and we'll see where that goes going forward here. But I think we like the mix that we're seeing here, and particularly the return of the proprietary content, which carries a higher margin for us. So I think a lot of favorable dynamics there that support our momentum going forward.
spk13: Okay, one real quick follow-up, you know, and could be for Michael, could be for Brent, but given how things are trending right now, it seems like that, I think it's the 2025 exit rate target of, you know, 20% plus EBITDA margin. It seems like, at least, you know, when we play in Excel, you're on track for that. Just want to make sure that you guys agree with that.
spk16: We do agree with that. You know, Doug, it's squirrelly in our sights. And, you know, there's a lot of different ways to get there. You know, the thing I'm probably most focused on is, you know, how do we get there on, you know, driving the things that are fully within our control. You know, clearly, you know, improved market recovery, you know, will help us, but not necessarily needed in order to get there. We're making great progress on our cost transformation initiative. We're ahead of plan and well on track to deliver our targets for this year. and we'll be exiting the year at a run rate there that has us roughly halfway through the program. So can we layer that in? I think it gives us good line of sight to getting there. And then if we can layer in improving market dynamics, I think that even gives us more of a tailwind. So in short, yes, very confident on being able to deliver that, squarely focused. And the team, I think, continues to execute well against that plan.
spk13: Thank you very much.
spk11: Our next question comes from Daniel Brennan with TD . Please go ahead. Your line is open.
spk04: Great. Thanks for the questions. Congrats on the quarter. Maybe first one is just, you know, you have reiterated the full year guide after the better Q2 with, you know, 3Q kind of in line. You know, your fourth quarter does imply a decent step up like on a stack basis year over year. Maybe just speak to, like, the confidence in the fourth quarter. It looks like it's now with the adjusted guide for lab and bioprocess. It looks like it's definitely, you know, you've got improvement in both, but probably more in bioprocess. Maybe just speak to kind of how your kind of second half sets up, if you will.
spk16: You know, I think we do like the way the year is playing out so far, you know, Dan, and And at this point, as we see it, none of the assumptions that we laid out as we entered the year have really changed. I think all the factors that we called out there that would drive the range and the guidance are still fully intact in terms of how pricing has played out in line with our plans. Obviously, order books are improving. There's some calendar implications to think about as we move from quarter to quarter, and that's certainly factored into the guidance. As we've said from the beginning, there is, I would say, a modest seasonality built into our business. We think about kind of 49% of the revenues coming in the first half. 51% is kind of customary for the second half. And so as we sit here today, I don't think anything has caused to change our view of any of those assumptions. And as I think Brent outlined in his remarks, You know, probably the biggest variable here as we look ahead to the balance of the year is, you know, the production segment, you know, clearly on track to, you know, continue to outperform. You know, we'll see how the seasonality dynamic that we normally see in the lab business, how that plays out. But, you know, I think in terms of confidence, you know, the range of scenarios there I think is, you know, covered, you know, by the ranges that we've given today.
spk04: Great thanks and then I know there's been a few questions just on bioprocessing and I could have missed it but um if we do the math on like a book to bill in the quarter like could could you share like what we what we should come up with in Q2 and for the full year for bioprocessing like what should we be expecting? I know Tycho asked about the exit rate what about just like the full year outlook for that you know for the bioprocessing segment of your bioscience production business? Thanks Michael.
spk16: TAB, Mark McIntyre, yeah no good questions I mean you're relative to things like you know book to go that's not a you know a metric that we actually. TAB, Mark McIntyre, You know monitor that closely here for various reasons so it's not something we've you know historically tried to. TAB, Mark McIntyre, To quantify you know I think we hang our hats here on you know the momentum we're seeing in the order book given the kind of the two to three months lead times we have you know, being able to see that order book convert to revenues in the in the quarter is. you know, encouraging for us, you know, we'll be targeting, you know, somewhere in the low single-digit, you know, range for bioprocessing in Q3, also on a full-year basis, and so that'll have us exiting the year at a, you know, mid to high single-digit range as we enter 2025.
spk11: Our next question comes from Rachel Ransdell with JPMorgan. Rachel, please go ahead.
spk10: Perfect. Good morning. Thanks for taking the questions, you guys. I wanted to dig into some of the seasonality that you talked about, especially on the lab solution segment. So first up, could you walk us through what is typical seasonality from quarter to quarter throughout the year on the lab solution segment? We all have that correct. And then also on the bioprocessing side of the business, one of your peers recently called out some seasonality trends heading into the summer months in 3Q. So walk us through, are you seeing anything from a seasonality standpoint, even on orders versus revenues for bioprocessing as well?
spk16: Yeah, thanks, Rachel. Good to hear from you. You know, look, I think as a general observation, you know, seasonality isn't that big of a factor in our business, this, you know, kind of 49 first half. 51% second half waiting is customary for the business. And that's the same basis that we've managed the guidance all year. There probably is some modest seasonality in our production platform, probably more due to around holiday calendars and such, but not a factor that we overweight in our thinking. It's probably a little bit more pronounced. Again, in the context of a 49-51 split, a little bit more pronounced in the lab business. And I think the patterns that we normally see play out here is what's contemplated in the color we've given on Q3 and then what that implies for Q4. And I think you'll see that that kind of matches what we would customarily see. Of course, the business model doesn't give us transparency on the lab side. from an order book perspective to cover that period, so we'll see how it plays out. But, you know, consistent with what we've said from the beginning, we're, you know, continuing to, you know, I think it's prudent to, you know, base the guidance and the outlook based on current conditions. And, you know, we're obviously leveraging, you know, some of the historical, you know, trends that we see.
spk10: Great. And then I just wanted to follow up on some of the earlier questions just to clarify some of the answers here. Just, I know you guys aren't giving books to Bill, but can you tell us what orders were sequentially for bioprocessing? And then follow up on Dan's question, just full year expectations for the bioscience production segment. I know you guys have given us some details there on bioprocessing specifically, but full segment expectations there for the full year would be helpful. Thank you.
spk16: Yeah, maybe take them in reverse order there. You know, the expectations for the production segment and aggregate, which would include obviously our you know, medical grade silicone offering into the medical device space as well as, you know, what we do into aerospace and defense and semis. Bioprocessing is, you know, roughly two-thirds of that segment, so probably not much of a surprise for you that the, that's largely driving, you know, the outlook for the full year. So with, you know, bioprocessing expected to be down low single digits on a full year basis, that's also how we see the segment trending for the full year as well. Getting to your questions on bioprocessing, you know, order book, you know, again, good momentum, another great solid quarter of intake, supporting not only the growth in the quarter that outperformed, but leading to the improved outlook on a full-year basis. You know, I think you characterized it correctly. We haven't, you know, quantified that or booked a bill historically, but it probably stays for you to assume that our order book, you know, certainly, you know, grew in line with, you know, what you see others talking about.
spk11: The next question comes from Michael Riskin with Bank of America. Michael, please go ahead.
spk12: Great. Thanks for the question, guys. I want to switch to LPS. It seems like there was some revision on the outlook for the year there as well. You know, you talked about TQ came in mostly in line with expectations, but then for the year now, you're expecting a flat down low single digits versus prior. I think I had you at plus little single digits. So just any color on what's going on there, whether it's by product category and a lot of focus on instruments, even a small part of the business, or maybe by customer class. And I've got a follow-up. Thanks.
spk16: No, I think it's a good question, Michael. As we talked in Q1 on the lab part of our business, we were, I think, encouraged by what we're seeing on the consumable side of the business, particularly lab chemicals and some of the diagnostic formulations that we have showing some good momentum. Services has been an element of growth for us this year. And then just given some of the friction in the system on capital spending, particularly within biopharma, we called out equipment and instrumentation headwinds in the first quarter. And as we now move into the second quarter, I don't think we've seen really any change in dynamics. I think we characterized it as pretty stable overall, which implies continued momentum on the consumable side and similar performance on equipment and instruments. Encouragingly, it certainly didn't deteriorate as we move forward. And one of the things that we watched pretty closely there is, again, just activity levels and opportunity pipelines. And we continue to be encouraged by what we're seeing there. Taking a little bit longer than maybe historical to convert those things to orders, but nevertheless, some really good signs.
spk15: We actually have
spk16: You know, a business within our lab that does on an OEM basis a lot of electrical board design and manufacturing for a lot of the, you know, lab equipment and instruments. And that does tend to be a bit of a leading indicator for us. We are really starting to see some, you know, reinitiation of projects that have been halted and, you know, good, you know, good project pipeline there. So, you know, characterize it as, you know, stable sequentially. And if you just look at You know, the performance year to date, which, you know, which was a little bit below, you know, where we exited last year, primarily due to the trends that we've described here on E&I, you know, and kind of consistent with our methodology here of just continuing to, you know, manage guidance according to, you know, current conditions. You see that then reflected on a full year basis. So, you know, lab running a bit slower. a bit below the trends entering the year, you know, production outperformance, you know, leading us to the full-year reiteration.
spk12: Okay. Let me ask a quick follow-up to that, and then I'll throw in my second question. I just want to make sure, on the LPS again, is there, you know, is there any sign you're potentially losing share to one of your competitors? Um, because we have heard more encouraging trends elsewhere and it does seem like the broader end market in terms of biopharma and academic is starting to trend in the right direction. So, um, I mean, I, I hear you that it's, you're seeing encouraging signs and things are stable, but it is still a guide down to just, uh, want to dive into that deeper. And then, um, the followup is on the, um, the total guide update. I mean, just sort of doing a quick and easy. Some of the parts you've got two thirds of your business, which is LPS LSS. uh sorry where you're guiding down by a few percent and then you got one third of your business which is bps where you're guiding up by a few percent um so is there is there some rounding in there it doesn't seem like that should add up to a full reiterated you know you should be taking your bps up significantly more to outweigh the relative sizing of it um so i'm just wondering where i'm missing the math thanks
spk16: both good questions so you know firstly the the question on just the you know share performance in uh in q1 or q2 i think in the lab business i think you'll see from what's been announced our lab business stacks up well against you know every number that certainly that we've uh you know seen in including you know some of the the numbers that were released this uh this week but you know the market's bigger than you know kind of the two leading players there um And it's our strong view, and we think we've got a lot of data to support that, that we continue to enhance our position. And we've talked a lot about our commercial intensity over the last 12 to 18 months that's driving a lot of customer wins and renewals, including in the second quarter across all of our key end markets. You mentioned academia. We saw sequential growth moving from 1Q to 2Q there. think we like the setup there and you know it's been an area of strong focus for us so um yeah i think we we're really uh confident in our value proposition and our you know competitive position uh roughly your second question on trying to unpack the math at a segment level uh you know probably caution you again against trying to be too precise there in your in your math um You know, I think at an enterprise level, we've reiterated the guide, the assumptions we had, you know, coming into the year, we think all still hold. And, you know, I think the ranges that we've provided, you know, for each of the two segments, you know, gets you into the range there at an enterprise level. So I would probably caution you against, you know, trying to get, you know, too detailed there, you know, within the, you know, the ranges that we've implied it, you know, assume that it's, you know, all supportive of our full year guidance. Thanks.
spk11: The next question comes from Jack Mahon with Nefron Research. Jack, please go ahead.
spk03: Thank you. Good morning, guys. I was wondering if you could just give us a mark to market on the $300 million cost savings program. How's that going? And if you've maintained your margin forecast for the year, just any thoughts around kind of getting to the targets that you laid out back in December, what the phasing should look like?
spk06: Yeah, Jack. It's Brent. Thanks for the question. look, we, you know, going back to the cost transformation program, you know, we had four pillars on it, org effectiveness, footprint, cost to serve, and procurement. The, you know, the ones that you can move more quickly on there, depending upon the geography or org effectiveness, as well as procurement, reasonably, as we said, you know, that's, we have a lot of momentum there, and you're seeing that both sequential impact on us, as well as each in-quarter you, you know, You heard Michael talk about, you know, we're going to exit the year at a really nice rate there. So, and I think where it really ties together, and for someone else's question, is that that with the self-help is getting us a long way there towards exiting next year with a 20% EBITDA margin. So, I'd say I think all the pieces are in place there, and it's frankly just a question of phasing and timing of the execution there. But we're very confident we're going to hit the 75 this year.
spk03: Justin Capposian- Okay, and then there were some questions I guess around I was wondering if you could just talk at the segment level, you know, as you consider what the total company guide is for the third quarter in the year kind of like what we should assume. Justin Capposian- You know, at the segment level for the third quarter any comments on phasing on margin line to that would be helpful.
spk06: David Manning, Certainly yeah so in terms of Q3. we'd expect on a sequential basis flat to modest growth in lab solutions. And then, as Michael noted earlier, down low single digits in BPS and in bioprocessing in Q3 there. In terms of margin, we expect gross margins to be pretty similar in Q3 to Q2 on a sequential basis. Oh, I'm sorry. And my comments there were year over year. I'm sorry on those. And got my sequential and year over year backwards. But gross margin to be very similar on a sequential basis. And frankly, the SG&A cost base to be very similar sequentially as well.
spk03: Got it. Sorry, just to confirm. Lab solutions, flat to modest growth. year-over-year bioprocessing.
spk06: Yeah, flat to mostly higher year-over-year and BPS overall and bioproduction down low single digits year-over-year.
spk03: Great, thank you.
spk11: The next question comes from Matt Sykes with Goldman Sachs. Please go ahead, your line is open.
spk05: Good morning, thanks for taking my question. Maybe just the first one, Michael, for you. You made some comments about biotech funding resulting in some elements of starting a positive momentum, yet large pharma remains somewhat constrained. Just what are your expectations for large pharma as we go into the back half of the year, and do you need large pharma to really recover in terms of spend in order to get back to what we would consider normalized, specifically bioprocessing industry growth?
spk16: So, on the biotech side, you know, funding, you know, obviously through the first half of the year has been up, you know, considerably year over year and, you know, above pre-pandemic levels. So, you know, relative to where it was at last year, we certainly see, you know, that as one of the, you know, bright spots that's supporting the improved, you know, market recovery expectations here. You know, consistent with, I think, historical experience, you see the uptake in biotech funding, you know, it likely will take, you know, a few quarters before that translates. And for us, you know, that results in, you know, primarily momentum in the lab as you're talking about new projects getting started and, you know, labs being built out and such that we would engage with there. So good funding, a lot of good activity level, and I think that's just one of the data points we look to in terms of being encouraged as we look forward. You know, relative to large, you know, pharma, obviously, you know, we have kind of exposure to that on both of our segments, if you will. You know, the R&D activities that we support them with. You know, you look at the pipelines, the science that's being developed here. I think there's a lot to like about the setup going forward on, you know, what these customers are working on. And, you know, we're right there to help them with new innovative solutions. On the production side of things, that's really linked to the commercial platforms that are out there and the inpatient demand. So we look closely at a number of new molecular entities getting approved, a number of new launches that are coming into the market, which continues to run at record levels. It's been a really, really strong first half of the year. And of course, we're well positioned across all of these products and customers. and with the destocking of our products coming to an end and improving health of pharma end product inventories, I think there's a lot to like about this setup. We've outperformed all year. You see us improving the outlook as we move into the second half of the year, and we should return to growth as we exit the year. So getting pretty close, I think, to only the order dynamics you know looking a lot more normal uh as they as they used to paralysis you start to see the uh the performance of the of the platform looking a lot more similar to what we would all expect as we move into 2025. great thanks and then brent just on um pricing you guys called it out on your deck as a benefit this quarter could you maybe quantify what the pricing was in the quarter and what benefit you saw and then what pricing expectations are embedded in your full year guide for 24.
spk06: Yeah, I mean, we typically look to get 100 to 200 basis points of price there. I would say everything is rolling really exactly to plan there, and there wasn't significant difference. You know, you do have more of the pricing impact into Q2 just due to timing of the year, but I wouldn't say it was a dramatic story there. That's really just executing against plan.
spk11: The next question comes from Connor McNamara with RBC Capital Markets. Connor, please go ahead.
spk02: Thanks. Good morning, guys, and congrats on a nice quarter. First off, on the inter-quarter progression, either from an order perspective or customer activity or however you want to characterize it, how did things progress throughout the quarter? And can you comment on how things exited June and, if you can, what you're seeing through July?
spk16: Thanks for the question, Connor. I appreciate the support. If we look at the quarter, I'm not sure there's anything that necessarily stands out to me, Connor, in terms of, you know, intra-quarter dynamics. It played out, you know, largely in line with what we would have expected. We certainly exited the, you know, the quarter with some good momentum. And, you know, as we sit here in the early days of Q3, I think, you know, we've seen that, you know, continue and certainly reflected in our you know, thoughts here as we talked about the third and fourth quarter.
spk02: Great, thanks. And then just, I do realize it's a small piece of business for you, but what kind of trends are you seeing in China?
spk16: Yeah, I would first acknowledge your point there that it is a relatively small part of the business. I'd say it's tracking in line with our plan, which has, you know, relatively modest, expectations for the year just given the stocking dynamics that we see in the region, which probably a little bit more of a headwind there than what we see anywhere else in the world. You know, some of the stimulus things that, you know, being talked about there don't really, you know, influence our business, you know, one way or another. So, you know, I think the best way to characterize it for us is it's, you know, performing in line with expectations. probably got a little bit longer runway to get back to normal compared to our other core regions that we support.
spk02: Great. Thanks for the question. Appreciate it.
spk11: The next question comes from Luke Sergot with Barclays. Luke, please go ahead.
spk09: Great thanks for the question here just kind of wanted to dig in here on the on the three Q sequential improvement across the business, particularly in bioprocessing. Just from a number of perspective, because we haven't heard that from any of your peers and just want to get a better understanding of the drivers there. You know if it's kind of like idiosyncratic to particular customers and how they order anything like that just give us confidence, where you get that visibility.
spk16: yeah a couple of things I guess. First, the things to the question but. Um, there's nothing, you know, particularly stands out to me as I look at, you know, the dynamics of, you know, led to the print in Q2 versus, you know, how we see the setup for, for Q3. Clearly, you know, the, the order book as it's, uh, you know, shaping up is, is giving us confidence in what we're seeing. We had a, you know, another really solid quarter of order intake in the, in the quarter. Um, that, you know, I think, you know, matches with what we're seeing from just a customer sentiment perspective and, you know, supports our views that we've, that we've shared here on. on the second half, you know, that order book, you know, does support, you know, continued growth of, you know, our single-use platform, which is, you know, been an area that, you know, we've been really focused on. And, you know, our ingredients, you know, and excipients platform is looking good as well. So, you know, the MABS, you know, platforms clearly, you know, continue to drive the lion's share of the revenues, but these new modalities, particularly, some of the momentum that we see on gene therapy is helping our business as well. So I'd say it's, you know, broad-based across products, modalities, and customers here. And, you know, we're excited and pleased to see, you know, this part of our business, you know, starting to, you know, fall back in line with, you know, our expectations.
spk09: Okay. And then just the last one here for Brent. You know, you have a great, great margin progression, plenty of questions on this. I guess, What I'm thinking about it is you're on track here to hit your guide, or at least the low end for the back half, you know, through the year. Just like how much of this is due to when you guys are doing the cost outs and kind of right-sizing that cost structure, you're finding more than what you thought was there, or is this more of just kind of, oh, things are kind of progressing faster than we expected? Just trying to get a sense of like, you know, how much juice is left in that squeeze versus, you know, though it's a timing issue.
spk06: Yeah, no, Luke, thanks. And I think it's, I think it's a really good point to highlight there. I would, I would definitely put it to the ladder there that it's around execution. You know, I think we had dimensionalized the opportunity here very well. When you dig into a program like this, you always find places that are a little larger than you'd expect and places that, you know, that the juice is and what the squeeze is there. But I think what I'd really emphasize on it is not only are we getting at it faster, which is allowing us to de-risk the margin for the year, but a question we've gotten is, okay, is this much transformation going to cause confusion in the business? And I think what I'd say is it's not an easy thing to do, but not only are we getting at the cost, but we're also getting at the top line. So I think it's proof that we're hitting the right areas at the right times and we're being really prudent about it. and you're seeing it both in the P&L on the expense side as well as on the revenue side that the org is still really focused.
spk09: Great, thanks. You're welcome.
spk11: We have time for one more question, and so our final question today comes from the line of Teja Savant with Morgan Stanley. Please go ahead.
spk08: Hey, guys. Thank you. Michael, I'll ask the two-parter question. One, just really a cleanup on BPS. On your bulk drug substance, you know, DSTAR comments, are there any ways for you to improve visibility there? And how should we be thinking about, you know, guardrails around time to normalization? And can you help us think through how much of a drag that was on your 2Q auto growth, which, you know, you said was pretty good? And then separately, one for Brent, Margins here, again, like 70 bps of upside versus your own guide brand. So can you just pass that out for us between pricing versus the bioprocessing mix help versus the cost outs? And are any of these sort of timing related in nature in your mind, which is why you decided to keep the margin outlook for the year unchanged?
spk16: Thanks, Tejas, for the question. Appreciate the support. On our bioprocessing business, Tad Piper- You know, one of the things we try to triangulate is you're not only the inventories that are customers of our products, but also we walk closely what they're reporting on their balance sheets or inventories of their products. Tad Piper- And open all that gets reflected in you know their production plans they share with Austin you know as it gets reflected in order so. you know, consistent with what they're telling us and what we see in terms of, you know, where inventories stand. You see that being reflected in the order book and, you know, with the momentum that we see there and then living through to revenue, I think we're, you know, very, very encouraged with, you know, how those things are trending. You know, given that, you know, we're still, you know, platform is still, you know, below what you'd see from a long-term growth rate, that evidence that there's, you know, still, you know, room for improvement there, but the the trends are very, very favorable and, you know, seem to be accelerating for us. So, uh, nothing particular that I would call out there around, uh, you know, our customers inventories, we see it improving, uh, rates, production rates don't quite yet match what we see from an end market demand, but, uh, certainly starting to close the gap there. Uh, and Brent, perfect.
spk06: Yeah. On the, on the margin side there. So let me break it down to gross margin and then as well as the EBITDA margin. So on the gross margin side, Q2 had a lot of aspects that were like Q1. Obviously, we had the sequential BPS improvement that was very helpful there, really, as well as pricing actions coming more to fruition. So I would say a significant balance of price and mix there on the gross margin side. But I'd be remiss if I also didn't highlight some of the cost actions as well as really good productivity because in an inflation environment with this much dynamism, not just holding the line but improving on gross margin there is not the easiest thing. And then on the OPEX side, Bruce said that's a confirmation of very direct transformation impacts, you know, offsetting our incentive comp reset and other things there, as well as, again, just general good execution on the cost side generally. So really a balance of the two, obviously a larger impact on the SG&A line there, but really consistent with our other comments. Got it. Thanks, guys. Appreciate it.
spk13: Welcome.
spk11: We have time for no further questions. I'll turn the call back to Michael for closing remarks.
spk16: Yeah, thank you all for joining us today. A couple of things I'd like to cover here in the close. Just reiterate our assumptions for the third quarter. Organic growth, minus one to two percent. The segment level on a year-over-year basis, we'd anticipate flat to modest growth in the lab business and low single-digit decline in our production segment. And then living through on a full-year basis, we've obviously reaffirmed our full-year guidance with lab, now expected to be down low single digits to flat with our production segment, with improving outlook here down low single digits. TAB, Really pleased with how the years playing out the assumptions that you drove our guidance as we entered the year still fully intact. TAB, Clearly very solid performance against our plan call out again and reinforce the strong momentum we're seeing in our in our bio processing business, and you know our comp we're confident in our ability to deliver our our plan for the year and it's unfortunately not predicated on any market recovery or improved conditions. We talked a bit here today about the meaningful progress that we're making on our transformation initiative, and we're well on track to meet our targets for the year as well as over the three-year life of the program. And as always, we look forward to updating you when we get a chance to meet again in October. Until then, be well, everyone.
spk11: Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect.
Disclaimer