Avantor, Inc.

to ask any questions, which you can do so at any time by pressing start followed by the number one on your telephone keypad. I will now turn the call over to Alison Hosack, Senior Vice President of Global Communications. Ms. Hosack, you may begin the conference.

Good morning and 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.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.

Thank you, Ali, and good morning, everyone. I appreciate you joining us today. Before we get into our first quarter results, I want to address the CEO transition announcement we made this morning. After careful consideration, our board of directors and I agreed that now is the right time to initiate a transition in Avantours leadership. The board has initiated a search process to identify the company's next CEO, and we'll look for someone who has a strong track record of delivering growth and value creation. I plan to step down once a successor is in place and I'm committed to a smooth transition. In the meantime, as I will discuss in detail shortly, Our entire leadership team is focused on taking steps to accelerate growth and strengthen the business. With that, let's turn to slide three. I want to acknowledge that we are not satisfied with our first quarter performance. While we delivered earnings and margin in line with our plan, revenue in both segments fell short of our expectations. We entered 2025 with a clear focus on innovation-driven growth, margin expansion, and deleveraging. However, Sentiment in some of our end markets, particularly education and government, turned cautionary as customers reacted to policy changes announced by the new administration. Also, funding fell approximately 40% in the quarter for bench-stage biotech companies, leading to additional demand weakness for this important customer segment in our biopharma end market. We expect this market backdrop to continue, pressuring demand for the foreseeable future. which is reflected in reset guidance. While we cannot change the market environment, we intend to take every action within our control to enhance growth in both lab solutions and bioscience production while continuing to expand margins and reduce leverage. Specific to our lab business, we are making immediate and significant changes to drive growth. We are excited to have Corey Walker, President of Lab Solutions, fully onboarded. Given his prior experience with our business, he has ramped quickly and is conducting a deep dive into the business, evaluating every aspect of our strategy and execution. In the near term, he is working closely with the commercial team to grow and retain key accounts and aggressively pursue new accounts. In addition to the work that Corey has initiated, we have recently implemented a range of actions that will strengthen our business. First, our delivery excellence initiative is focused on ensuring greater supply chain efficiency and resilience. By improving data accuracy, accelerating fulfillment speeds, and optimizing inventory, we are enabling differentiated service levels to our customers that will drive growth across all channels. Second, we are accelerating digital enhancements to our platform, including the rollout of our new AI-enabled e-commerce platform to further streamline the customer experience. Another important step is strategically optimizing our approach to pricing by leveraging the integration of digital technologies. This transformation is expected to unlock new opportunities, maximize value, and improve profitability and growth. The program will be implemented in a phased approach with the first go-live scheduled for later this quarter. We also continue to focus on expanding our portfolio with highly attractive new products. In the first quarter, we made meaningful progress with the addition and advancement of several high-impact platforms, including signing a new distribution agreement with Abcam, a market leader in the antibody space with over 100,000 SKUs that will make their high-quality antibodies and reagents available to Avantor's customers across the globe, broadening our collaboration agreement with Fujifilm Irvine Scientific, a trusted provider of cell culture media and bioproduction reagents. The agreement includes enhanced distribution rights across the United States, Canada, Puerto Rico, Latin America, and Mexico, and makes an additional 1,500 SKUs fully accessible through Avantor's distribution networks. Expanding our collaborative distribution agreement with the life science business of Merck, KGAA, Darmstadt, Germany for Western Europe. Further leveraging their market-leading lab filtration products in our portfolio. This agreement includes over 1,900 SKUs encompassing well-known brands and accelerating commercialization and adoption of recently launched JT Baker viral inactivation solution, which plays a critical role in downstream viral clearance within the monoclonal antibody production workflow. This solution is now specified into a significant number of platforms with many more currently in late stage evaluation. While we take steps to accelerate growth, we're also maintaining our relentless focus on efficiency and cost discipline across the company. We drove another quarter of outperformance in our multi-year cost transformation initiative and remain on track to deliver on our 300 million run rate target exiting 2026. I'm pleased to announce that we have expanded the initiative and now expect to generate approximately 400 million in run rate growth savings by the end of 2027. Brent will share more details on this shortly. Turning to slide four, let's take a closer look at our performance. In the first quarter, our organic revenue declined 2% year over year, driven primarily by underperformance in our lab business. While we were awarded several new contracts and secured extensions of a number of existing contracts in the quarter, including a renewal of our supply agreement with Regeneron, The work Corey and his team are doing to accelerate the pace of new account acquisition will be critical to returning this platform to growth. Organic revenue within our biosciences production segment also came in modestly below plan as growth in process ingredients and excipients, as well as double digit growth in our single use offering, was offset by weaker demand for our controlled environment consumables that are used to maintain the integrity of our customers' clean rooms. While this revenue is sticky and highly recurring in nature, this lower demand is mostly attributable to customers placing tighter controls on usage in response to the current macro environment while still maintaining throughput. Although we are encouraged by in-market fundamentals and continued momentum in our bioprocessing order book, we are not satisfied with overall growth and are taking action to improve performance across our organization. Despite the top line pressure, adjusted EBITDA margin increased 20 basis points year over year to reach 17%. This reflects the continued benefits of our multi-year cost transformation initiative. Adjusted EPS came in at 23 cents, consistent with our plan. Given continued macro and policy-related headwinds, we are revising our full-year revenue guidance. We expect continued spending caution from education and government customers especially in the US, due to concerns about funding. Additionally, the entire market continues to digest potential impact of tariffs, and we have been working diligently to mitigate the impact of current tariffs on our results. Based on the tariffs in place today, we have approximately 2% COGS exposure with China, which is our most significant tariff risk. Our tariff exposure to the rest of the world is modest by comparison. Brent will walk you through the details of our updated guidance at the end of the presentation. As I reflect on the quarter and look ahead, I'm encouraged that we delivered earnings in line with our plan, despite a challenging external environment. That speaks to the strength of our execution and the benefits of our structural cost actions. Nevertheless, we are not satisfied with our growth and we are taking aggressive actions to reignite the top line, regardless of the macro backdrop. With that, I'll now turn it over to Brent.

Thank you, Michael, and good morning, everyone. I'm starting with the numbers on slide five. First quarter reported revenue was $1.58 billion. Taking into account the divestiture of our clinical services business, together with the impact of FX, organic revenue declined 2%. Proprietary content outperformed third party for the second consecutive quarter. Our sales performance was primarily impacted by the headwinds affecting lab solutions that Michael just discussed. While bioscience production overall was modestly below expectations, we saw continued growth with our process ingredients, excipients, and double-digit growth in single-use offerings. We also had another strong quarter of order intake, reflecting continued improvement in the bioprocessing end market. Adjusted gross profit for the quarter was $535 million, representing a 33.8% adjusted gross margin. This is a decline of 20 basis points a year over year, impacted by the clinical services divestiture, but a 40 basis points improvement sequentially. Adjusted EBITDA was $270 million in the quarter, representing a 17% margin and consistent with our expectations. This represents a 20 basis points improvement year over year and 60 basis points excluding the impact of clinical services. Our cost transformation initiative was an important contributor to our margin performance. Notably, adjusted SG&A expense was down $21 million or 7%. Adjusted operating income was $243 million at a 15.4% margin. Interest and tax expenses were in line with our expectations. As a result, adjusted earnings per share were 23 cents for the quarter, a one-cent year-over-year improvement. Our adjusted EPS performance in the quarter reflects the flow-through of our adjusted EBITDA results, as well as continued reductions in net interest expense. Moving to cash flow, we generated $82 million in free cash flow in the quarter. Our free cash flow includes approximately $19 million of one-time costs related to the execution of our cost transformation initiative. Q1's free cash flow was also negatively impacted by working capital timing and annual incentive compensation payments. Our adjusted net leverage ended the quarter at 3.2 times adjusted EBITDA. Deleveraging remains our top capital allocation priority and we continue to target adjusted net leverage sustainably below three times. Let's now take a closer look at each of our segments. Lab Solutions revenue was $1.07 billion for the quarter, a decline of 3% versus prior year on an organic basis. As Michael noted, this decline was due in part to the impact of funding uncertainty within the U.S. higher education system, which comprises approximately 5% of our total enterprise revenue. These impacts largely manifested in reduced levels of capital spend, along with the general slowdown in lab activity affecting consumables demand as well. As Michael noted, funding for bench stage biotech companies continues to be soft, leading to additional demand weakness for this important customer segment in our biopharma end market. Finally, We also felt the impact of increased competitive intensity that reduced volumes at a handful of customers. Turning to profitability, adjusted operating income for lab solutions was $139 million for the quarter with a 13.1% margin. Adjusted operating income margin was flat sequentially from Q4 and up 30 basis points year over year, despite the headwinds to the top line. The margin performance was driven by strong operational cost management and continued savings from our cost transformation initiative. Bioscience production revenue was $516 million in Q1, essentially flat year over year on an organic basis. Bioprocessing, which represents about two-thirds of the segment, delivered low single-digit growth. While this is below expectations, the underlying business fundamentals are very encouraging. As Michael mentioned, we had solid growth in sales of our processing gradients and excipients and double-digit growth in our single-use offerings, including MasterFlex. However, these were offset by lower demand for controlled environment consumables. We had yet another quarter of strong order intake within bioprocessing, reflecting ongoing momentum and recovery of this end market. Our new SIL branded silicones platform grew mid single digits while electronic materials was stable sequentially with an expected year over year decline. Adjusted operating income for bioscience production was $123 million for the quarter, representing a 23.9% margin. Adjusted operating income margin was down year over year due to modest freight and absorption headwinds. As Michael noted in his opening remarks, we are revising our 2025 guidance to reflect the current uncertainties related to funding and policy-related headwinds and competitive intensity. For the full year, we now expect organic revenue growth of negative 1% to positive 1%. Our clinical services divestiture represents a 2% headwind, and based on current spot rates, we now expect a 1% tailwind from FX versus the FX headwind in our prior assumptions. This leads to a reported revenue decline of negative 2 percent to flat. Our key FX assumption is continuation of the dollar-euro exchange rate of approximately 1.12. We also assumed a modest headwind in China related to tariff impacts on demand. On a segment basis, we now expect lab solutions growth to be minus low single digits to flat. We continue to expect bioscience production to be up mid-single digits. However, due to the headwinds in controlled environment consumables, we now expect bioprocessing growth to be mid-single digits. We expect adjusted EBITDA margin to be 50 basis points lower, 17.5 percent to 18.5 percent, while adjusted EPS and free cash flow remain unchanged at $1.02 to $1.10. and $650 million to $700 million, respectively. In terms of Q2, we expect organic revenue growth to be flat to modestly up. Our clinical services divestiture represents a 3% headwind, and based on current spot rates, we expect a 1.5% tailwind from FX. This leads to reported revenue growth of flat to modestly down year over year, On a segment basis, we expect lab solutions to be flat to modestly down and bioscience production to be up mid-single digits. We expect modest sequential improvement in EBITDA margin to the mid-17s. We expect that the external environment will continue to be dynamic, particularly with respect to the potential impacts of a global restructuring of international trade agreements and related taxation. While our manufacturing footprint and supply chain are significantly in Region IV region, we do have a meaningful amount of cross-border trade, particularly in our lab solutions business. The updated guidance does not assume any material impact to demand or earnings from the potential tariffs. In the event renegotiated trade agreements do not adequately prevent tariff-related headwinds, we are prepared to mitigate by leveraging our global supply chain. We have a broad product offering that gives our customers optionality, and we will work closely with our customers to ensure that we are able to offset tariff surcharges to the extent possible. Finally, an update on our cost transformation. This initiative has not only made a material impact on our financial results, but it has also sharpened our focus on conversion to the bottom line and to cash. Our actions have been carefully designed and executed to ensure that our critical capabilities remain intact. As a reminder, we exited 2024 with over $130 million of in-year savings and an exit run rate of approximately $165 million, well ahead of plan. In 2025, we expect to generate an incremental $75 million of in-year gross savings and exit 2025 with run rate savings in excess of $250 million. We have clear line of sight to exiting 2026 with the promised $300 million of run rate cost savings. As we more deeply live into our new segments and operating model, we continue to identify further opportunities for productivity. As a result, we are expanding the initiative and now expect to exit 2027 with at least $400 million of run rate cost savings. While we aren't currently forecasting material impact to fiscal 25, we are committed to front-loading the incremental savings as much as possible. In the current environment, we believe it is critical to control our controllables as much as possible, and these incremental cost actions are an important example of this. With that, I will turn the call back to Michael. Thank you, Brent.

Before we move into Q&A, I would like to briefly recap today's key takeaways and reiterate our priorities moving forward. First, we remain confident in the strength and resilience of the Avantor platform. Our lab solutions segment is built on differentiated capabilities, a broad and expanding portfolio, and global supply chain that enables us to reliably serve our customers around the world. Our bioscience production platform has a leading bioprocessing franchise and we are the leading supplier of medical grade silicone formulations. Second, our multi-year cost transformation initiative continues to be a powerful driver of margin expansion and strong free cash flow, even as we navigate near term top line headwinds. We are expanding this initiative and remain committed to best in class operational discipline and execution. Finally, while growth, particularly in lab solutions, is not where we want it to be, we are taking decisive action. Under Cory Walker's leadership, we are strengthening the foundation of the business and enhancing the commercial strategy to position lab solutions for long-term success. We look forward to updating you on our progress in the quarters ahead. With that, I'll now turn the call over to the operator to begin the Q&A session.

Thank you. To ask a question, please press Start followed by 1 on your telephone keypad now. If you change your mind, please press Start followed by 2. When preparing to ask your question, please ensure your device is unmuted locally. Please limit yourself to one question and one follow-up question. We have a question from Michael Riskin with Bank of America. Please go ahead.

Great. Thanks for taking the question. I guess my first one, Brent, I'll just ask on the guidance because that's kind of where you left off. The 2Q guide, I think you said, you know, mid-single digits, BPS, you know, flat to modestly up for the whole company. That seems like a pretty aggressive step up from 1Q, both in terms of percentage growth and just in dollar amount. You know, was there anything timing-related there? in any of that clean room controlled environment? Was there anything timing related with some of those customer agreements? Are you expecting any change in the underlying market? Just sort of what's driving that improvement, both 1Q to 2Q and for the rest of the year to hit your revised guide?

Yeah, Michael, thanks for the question there. It's really a continuation of the current environment there. When you're talking about growth rates, they're always the year-over-year, so what's going on is comparable. Q2 is always a very strong quarter for us, and obviously it's informed by all the momentum we're seeing in the quarter so far here. So I think the other piece I'd add is we thought very carefully about the re-guide for the year as well as Q2. And to use the line I use all the time, we think we have a balance of – we think it's importantly prudent there. We really view the BPS Q1 as an anomaly there and in terms of timing of things. So we think that's a very sensible guide for the full year. So we're comfortable with what we put out there.

Okay. And then for the follow-up, I think you called out 2% COGS exposure to China as your more significant one. Just to be more specific on tariffs, can you say what are you factoring into the new fiscal year guide? I saw that you didn't change your EPS number. Are you offsetting some of that exposure with price or with other mitigation techniques? What's built into your guide from a tariff set now?

So what we said specifically there is for the full year guide, we have some modest demand reduction in China. As you'll recall, we don't have significant revenue in China there, so that's a very modest piece, and that's due to the bilateral tariffs. Other than that, we don't have any significant tariff assumptions built into the guide here. That's where we walk through the specifics. You know, the primary exposure there is the 2% of COGS related to China, which, you know, we're, you know, as we noted in the remarks, we have a number of levers in region for region, alternate suppliers. We have a wide array of materials. Again, this is primary lab solutions dynamic. And obviously, it offset with price. And if these things became very material, that could adjust things. But we're taking a no impact to the guide from tariffs.

Okay, thank you.

Thank you.

Thank you. Our next question comes from the line of Vijay Kumar with Evercore. Please go ahead, Vijay.

Hi, guys. Good morning, and thank you for taking my question. Michael, maybe my first one for you. I just look at the BPP segment. It looks like... the advanced tech and healthcare were more or less in line with expectations. And most of the changes came from control environment substance. But my understanding is these are products which should be tied with the production volumes. So is that true? And if so, then... You know, why were customers cautious in Q1? Was this just a timing of order, you know, timing element, and that's what gives you the confidence here why BPP should go be up mid-singles in Q2?

Good morning, Vijay, and thanks for the questions. I think that is a really great place to start. When we unpack the performance in BPS segment, you know, consistent with what we said, you know, generally across the enterprise, We're not entirely satisfied with where the quarter played out. And I've taken a number of actions to address the pockets of weakness that we saw in the quarter. And we're certainly starting to see, even over the last several weeks, some impacts of some of those actions. Now, on a little bit more granular level, when we look at bioprocessing, which is about 2 thirds of the revenue on that platform, we remain incredibly optimistic about The end market fundamentals there. We had a great quarter on, you know, process ingredients, excipients. We highlighted, you know, double digit growth on single use, including master flex. You know, that was offset in the quarter by headwinds in the controlled environment consumables category that you mentioned, Vijay. That's an important part of the platform. TAB, Mark McIntyre:" In that it, you know it helps maintain the integrity of these these clean rooms it's specified into the you know these clean rooms and it's quite sticky and revenue. TAB, Mark McIntyre:" What we were seeing in the quarter was you know customers looking for various levers to address the the macro headwinds, including inflation, and you know they serving opportunities that they had in a quarter to. TAB, Mark McIntyre:" optimize usage. we're leaning in there and we're optimistic about or encouraged by some of the actions that we've taken there. And just given the strength of the order book across the bioprocessing platform, we continue to be encouraged by the trending that we're seeing there and feel really confident about the outlook that we've given here today.

Yes, Judd. And maybe my follow-up is on the lab side. I think you mentioned higher comparative intensity. Maybe if you could just elaborate on the comparative dynamics within the channels part of the business.

That's a great question, Vijay. We've talked a lot in our remarks today about, you know, the macro environment and the demand headwinds that we're seeing. across the market, given a lot of the funding and policy-related headwinds that all of us in this space are experiencing. And it's against that macro backdrop that we do see a heightened level of competition. And at an account level, that heightened competition does manifest itself in different ways. We highlighted quite a number of new account wins and extensions, including a really important extension with Regeneron. But as Brent noted in his remarks, we also did see some shifting within a few of our accounts that did lead to lower volumes. Now, against that macro and competitive backdrop, I think it highlights the importance of the decisive actions that we are taking today to strengthen the business. You know, we're certainly focused under, you know, Corey's leadership here of driving aggressively to retain and grow our key accounts. And the overall action plan that we put in place here is really meant to strengthen the business regardless of the macro backdrop that we're in.

Thank you. The next question comes from Rachel with JPMorgan. Please go ahead, Rachel.

Great, good morning, and thanks so much for taking the questions today. So I wanted to dig into the performance within lab solutions. You highlighted some of the weakness within academic and government, given that's 5% of your total co-revenues. You also noted that there's not only weakness on the capital equipment side, but also on the lab activity side. So can you break down for us, what did you see for equipment declines within your academic and government customers? And then also, what did you see for consumable declines? And then within that segment overall for academics and government, what are you assuming for declines this year in the updated guide? Thanks.

Yeah, thanks for the question, Rachel. Obviously very relevant for the environment that we're in. So just to recap a couple of the key points here around the performance in the quarter. Lab platform for us fell roughly 3% in the quarter. And as we think about how we're reflecting the current macro environment in the updated guidance that we've provided, really using a lot of the same approach that we had last year where we're projecting current trends persist through the balance of the year, we have baked in the headwinds that we're seeing here, particularly in the academic and government environment, as you suggest. In the US higher education market, the sentiment did turn decisively you know, more cautious, you know, following the announcements of, you know, the NIH, you know, funding actions. And, you know, we saw that manifest itself with customers in a number of ways. Firstly, looking to, you know, optimize, you know, existing cash and funding. And so you do definitely see a pullback in equipment and instruments. Also, you know, just some caution on, you know, hiring of new, you know, scientists, initiating of new programs. which is a part of how we grow that business, and that's where the consumables piece of this comes in, is just a muted level of activity, generally speaking, given the uncertainty these universities have around funding on a full-year basis. But when we look ahead here, together with the actions that we're taking to strengthen the business, we think the current environment is well covered in our updated outlook for the year.

Great. And then just for my follow-up here, I just wanted to dig into some of the pricing dynamics. So you've highlighted some of the weakened funding on not only the biotech side, but also with your academic and government customers, also just the broader environment with tariffs as well. So there's a few moving pieces on the pricing front. I believe your prior assumption within guidance was 1% to 2% pricing contribution for the year. So what is your ability to take price in this new regime that we're seeing relative to a few months ago? And what are you assuming for pricing contribution in the guide And then if I could sneak in a follow-up, I'm getting a bunch of questions on the tariff answer earlier in the discussion. Can you just clarify for us, is that 2% China cause, is that going to be fully absorbed in the guidance or is that not baked in at this point?

Happy to address both of those. I'll cover the pricing questions, Rachel, and we'll have Brent give you some additional detail on the tariffs there. So as you know, pricing is an important part of our algorithm here. And The level of impact, I think you highlighted, I think is appropriate way to model this. And as we got into the year and got through contracting season and price administration, I think it's played out largely as we had expected and in line with the guidance that we had given there. Probably the one dynamic to consider, which is reflected in Q1 as well as through the rest of the year, is just the increased competition for new accounts, new business. That is printing at modestly lower margins than what we would typically see just given the competitive intensity there. But for the business that we have today and for the contracted customers, pricing has played out. The other thing I would point out or highlight or take you back to is the actions that we outlined that we're taking to strengthen the business. One of those is in the pricing area. And while we think we're pretty good at this and it is a complex platform that we run, to administer pricing across 6 million SKUs. We are taking some additional steps and then making some additional investments to strengthen our pricing capabilities, really looking to leverage the integration of a number of digital technologies that will significantly advance our capabilities in this area, making us more agile, able to do more tailoring. And in this dynamic environment, the capabilities that we're adding here

will enhance profitability and growth and that'll roll out on a phased approach you know starting here this uh this quarter uh brent you want to answer her question sure rachel so the the two percent of cogs was dimensionalizing the total exposure we did have the other comment on we have taken a little demand out in china there Robert Marlayson, On the revenue side, but on the cost side the 2% of cards is the exposure, we have not explicitly included that in the guide for all the commentary we made will do everything to offset that but. Robert Marlayson, You know, one day, the tariff rates are actually other their why you know our view is don't overly speculate we just indicate there's risk around that and we're doing everything we can to execute around it.

Thank you. Our next question comes from the line of Taiko Peterson with Jefferies. Please go ahead, Taiko.

Hey, thanks. Michael, I'll take the data on the bioprocess order book. You characterized it as strong, just maybe a little more color on demand trends. You know, I assume book to bill above one. Can you maybe just give us some flavor of what that looks like? And, you know, is this mostly emerging biotech? Is it CDMOs, a little bit of end market mixed color too? Thanks.

That's a really important point to articulate here today is we are optimistic about the end market fundamentals. And that's really informed by now well more than a year of momentum that we see not only on the top line, but also in the building of the order book, which gives us confidence in the outlook. And we see that strength in the order book, which you can assume is as strong as some of the other numbers that you've seen printed, if not stronger. James Rattling Leafs, Pretty broad based it's a it's across the portfolio ingredients recipients, we were really encouraged by strong double digit growth of our single use offering, including mass reflects in the in the quarter. James Rattling Leafs, And just given how pervasive our platform is you know we're agnostic around modality around indication type. James Rattling Leafs, And so, you know pretty safe to assume with the broad exposure that we that we have and the momentum that we see that we don't really see a lot of differences, you know between. you know, large pharma, biotechs, you know, CDMOs, we see the strength, you know, pretty uniform across the space.

Okay. And then back to this issue on the controlled environmental consumables, can you just break out the percentage of revenues or mix? You know, I mean, we've never really heard you talk about this business before. So how large is it and what do you think it takes to turn it around? I mean, we're still in a tough, you know, budget environment. So is there anything you can do proactively?

Great questions, Tycho. So we actually, you know, incorporate that into our, you know, bioprocessing, you know, categorization. So it's included in the two-thirds of our revenue. And, you know, classically, that application, you know, would reliably grow, you know, mid to high single digits. And, you know, even as recently as fourth quarter, it was growing high single digits. So the, you know, the pullback that we saw in Q1 was certainly unexpected. But as we started to spot some of the optimization and usage, the team has kicked into action and we have really ramped up commercial intensity and account level activities to drive improved performance there. And when we look at order trends, daily rate of sales in those categories over the last month or so, I think we're encouraged by the actions that we're taking are certainly having the intended effect. moving things in the right direction here.

Thank you. Our next question comes from Dan Brennan with TD Cohen. Dan, please go ahead.

Great, thank you. Maybe just one back to the tariff situation. Sorry to kind of revisit this. I just want to kind of make sure I understand it. So for the 145% tariff that the U.S. is placing on China, so that's 2% of COGS, Right. It sounds like you guys are not including any impact from that. I know you're talking about you'll offset it. I'm just trying to figure that out. And could you speak a little bit to more broadly what percent of your U.S. sales are sourced? Oh, U.S. So if you, you know, even outside of China and Europe, because they're still expected to be, you know, right now, a 10 percent minimum tariff on those. I'm just trying to figure out, like, have you have you assumed those impacts and you're just trying to offset them or you're not assuming those impacts at all would be my first question.

Yeah, Dan, so we're not assuming those impacts. It is so dynamic right now. As we noted, the China exposure is the lion's share of the exposure. We do have some of the other jurisdictions. It's obviously a significant difference, 135%, 145% versus 10% tariffs there. But the exposure to China dwarfs the other ones. We will do our best to offset. But again, the environment is so dynamic. we sort of knew any estimation we'd have there would be wrong. So that's the approach we've taken.

And Dan, maybe just to follow on and add a little bit more color to the topic and put that 2% of COGS in context. You know, on our cost basis that we have, that would, you know, in the current, what we know currently about the tariffs on imports from China into the U.S., that's, you know, less than $100 million of exposure for us. And I think it's important to highlight the number of levers that we have to offset that, whether it be alternate sourcing, optionality for our customers. We have a significant number of the SKUs that we've purchased out of China that can be sourced from other suppliers that are specified into our customers' workflows here, and it would be appropriate for them to use. We have inventory hedges against some of these things, and ultimately, we have the flexibility to incorporate tariff surcharges as necessary. But the situation is extremely fluid. There's been talk this week that perhaps the rate could cut in half. So we're continuing to follow it closely. We're working closely with our customers on how best to mitigate this. And I think we're in a good position to offset this as it plays out.

Got it. And then maybe just to follow up on the lab side, I know there's been a few questions asked, but just would love to unpack that a little bit more. So could you just speak to what happened to your higher ed business in the quarter and kind of what you're assuming? And then I don't know if you sized it, the bench stage biotech business, which you talked about being weak, how big is that? And kind of how have you thought about that outlook? And then I, I apologize. You know, you talked about the competitive intensity, Michael, you and I have spoken that there's a lot of mom and pops distributors still out there. So it's not just you and thermo. So I'm just wondering if you could speak a little bit, also just unpack that a little bit. Like, it sounds like you lost some share in the quarter. Just wanted to understand, like, if you think about the overall market for lab distribution, are you growing well below that now, or are you still growing roughly in line? Thank you.

Yeah, I'm going to do my best to unpack, you know, the questions there. I think, you know, the heart of it obviously rests on our shared disappointment with the performance of the platform in the quarter. And it underscores the importance of having Corey on board here and the aggressive actions that we're taking. We acknowledge the macro backdrop is challenging. It's challenging for everyone right now. And we're not just trying to hide behind that and certainly doing everything within our control to maximize the growth of the platform and certainly strengthen it over the long term. Patrick O' Headwinds associated with funding uncertainty in academia and government, I think, are well documented. Patrick O' You know, as a category, you know, at an enterprise level, I think you'll see in some of our disclosures today, Patrick O' you know, we're off mid single digits for the portion of that that's in the US, you know, you're off well into the double digits and, you know, we have Patrick O' assumed that those trends, you know, continued. Biotech funding has been weak, it now rests at levels that were probably lower than where they were at even three years ago. And that is instead, I think a number of occasions at an enterprise level, that's low single digit exposure for us, but it's all in the lab. And when you flip it into the lab segment, that's probably around 10% of our of our overall exposure. And, you know, similar to the assumptions we've made on academia and government, reflected in the current guidance is that those, you know, headwinds persist through the balance of the year, we're not incorporating You know any recovery, you know for that and you know, of course, we are taking actions in into the you know as those actions take hold and are successful, you know that could provide us some upside to you know where we're at. But the market isn't isn't a duopoly it's you know highly fragmented there are a number of players here we're all facing the same challenges and I think we're navigating the you know the headwinds and the competitive intensity, as well as you know anyone. You know, in the quarter, certainly we did see, you know, some movement at, you know, some of the accounts. We also had a number of wins. And so it's, you know, it's hard to say, you know, how, you know, how a number is compared to others, other than to acknowledge we're not satisfied with it. We're well positioned, you know, to serve this space. And, you know, as the actions take hold that we've initiated and the market recovers, we're well positioned for long-term growth here.

Thank you. Our next question comes from Doug Schenkel with Wolf Research. Doug, please go ahead.

Good morning and thank you for taking my questions. And before asking my two, I just want to thank you, Michael, for all your help over the years. So I know today is not the end, but I know you're moving out. So congrats on that. And again, thank you for all your help. So on just a couple of things. First on bioprocessing, obviously this has come up a little bit, but on one hand, you sound good on the order book and trends. On the other hand, you lowered expectations for bioprocessing. Is that largely just a function of the environment and wanting to be a little bit more conservative given everything that's going on outside your control in spite of the fact that that business actually looks okay? And then the second topic is really a longer-term question. I think a lot of us appreciate the efforts you're making to aggressively control what you can control in terms of cost. In a scenario where the company returns to more normal-ish mid-single-digit level growth in 2026 with higher growth from higher margin businesses, it seems like mathematically you could drive 100 to 150 basis points of margin expansion in that scenario. Again, I'm not asking you to guide, but I just want you to tell me if I'm doing my math right. Thank you.

Both very good questions, Doug. Let me take the first one about processing. We'll have Brent give you some color on incremental margins as growth returns to the platform. So starting with You know, BPP, our bioprocessing platform, there is a lot of momentum. I'll just reiterate what I've already said. We're encouraged by the end market fundamentals, and our order book has been strong. And that's across, you know, that platform, whether it be, you know, processed ingredients or single-use or even, you know, these controlled environment consumables. guide at mid-single digits that Brent outlined, you know, does reflect, you know, the low single-digit growth for the platform in Q1 and kind of rolls that into the full guide here. But when we look at the order book and the trending that we're seeing, we do see, you know, the incremental improvement in the business, particularly here in the second quarter, and, you know, think that the guide, to use Brent's word, is prudent. We thought about it you know, quite carefully in looking at the positioning and the data. We are taking action similar to what we're doing on lab to, you know, to drive the business. And, you know, I think there's, you know, a lot working here, you know, in our bioprocessing platform to be excited about.

Doug, talking about the margin point, and again, absolutely not making future guidance there, but just with particularly what we can do on the the bps side of the business the incremental margins you can print there are fantastic once you get to the right levels of growth now obviously the lab you know the lack of growth degrowth we do have meaningful fixed cost against that and that impacts margins for sure you know we've talked about the the 20 percent EBITDA margin slash uh 19.6 account uh Uh, accounting for the clinical services divestiture this platform absolutely wants to be above 20% margin there. We just need the right growth entitlement against it. And, um. No, I think your comments absolutely correct there, but let's get further in the year. Let's get back to the right kind of demand environment. And, you know, that'll absolutely be a topic when we get into guidance for 26.

Thank you. The next question comes from Luke Sergot with Barclays. Luke, please go ahead.

Great. Thanks, guys. I just want to talk about the business transformation, and especially on the lab sciences side. You guys were talking about doing the improvements there. Like, how much of the change that you're taking a look at is due to, you know, substandard or suboptimal portfolio? I'm just trying to get a sense of what you guys need to do from an investment standpoint to kind of send off the competitive dynamics there.

Good questions, Luke. Where I'd start with that is just highlighting our focus on enhancing and positioning the growth of that business to weather the current macro environment. And there's going to be a lot of aspects to it. Corey's now been on the ground here for a month, fortunately. He knows the business well from his time here before and has ramped quickly. And he's moving aggressively to interrogate the business strategy and execution, leaving no stone unturned and working very, very closely with the commercial team in the near term to drive new account acquisition and retention of existing accounts. But there are a number of other things that we are doing to strengthen the business. Investing to deliver differentiated service levels that are important to our customers in these sensitive end markets. Enhancing the customer experience and streamlining that experience through an AI enabled e-commerce platform that's now been live here in the US for a bit and we're in the midst of rolling it out in Europe. Investing in enhanced pricing capabilities and as always continuing to drive innovation into our portfolio. And we're really excited by the, you know, the content that we were able to add to the portfolio in, in the first quarter. And, you know, I wouldn't say any of these actions are specific to, you know, one single data point we're getting out of the market. It really just is a reflection of, you know, we understand the environment that we're in and we understand the expectations that we have for this, for this business. And we are doing everything we can to control the, you know, the business in this environment and strengthen it. And, you know, I think we're confident in the actions that we're taking will give us the best chance to grow this platform long term.

All right, great. And then just to follow up here, talk about the, you know, the incremental 100 million on the cost out. Brent, you talked about trying to do what you can and front load that in the earlier years, like what, what can you do Just dig in a little bit more there on specifics that, you know, you run the risk there or have to strike a balance without disrupting your overall sales force or, you know, the momentum you're trying to build within the two segments.

Yeah, Luke, that's absolutely very well taken. And we tried to address a little bit of that directly in the prepared remarks. I mean, I think the first thing I'd start with there is the program to date, we think it's been done really clean, hasn't lit up. Any disruption, I mean, look, at the end of the day, even though we want to rationalize the cost base, job one is growth, absolutely focused on growth across both sides of the business. And I think another reason we've executed so rapidly or a consequence of that is you want to minimize the disruption to the org. So moving to the left, so to speak, is really valuable there. Some of these things, I mean, these really are the insights. Corey's leadership is going to be really helpful for it as well. But just as you understand the segment structures better here, that unlocks sort of more of what we have existing. But some of these things will take some time, but they're really important. Like we're going to have an initiative on digitization in connection with manufacturing that's going to both make go a long ways towards delighting our customers as well as really enhancing our cost. Michael made a number of the comments on tech enablement on pricing. You're going to see that for many other commercial pieces. So we're going to balance that. Where do we move faster? Where do we move left on it versus some of these things that take time, but we think will have very decisive impacts on the business. So that's how we're thinking about it.

Thank you. Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Good morning and thanks for the time. Brent, maybe starting with you at a relatively high level, you know, that 200 bps reduction in organic growth, can you just bridge us to that between, you know, education and government, the controlled environment, consumables, um the competitive intensity you guys cited and then a little bit of a haircut on china like if you were to park it out that 200 bits how would you do it yeah i what i do bridging that to us is it's it's almost

It's largely driven by the policy environment and then the biotech funding piece. So it's largely lab solutions. When you look at the underlying segment piece of it, very modest piece on the critical environment and our China sales are so small there that that wouldn't be a significant portion of the bridge. So it's all, in many respects, when you think about it, it's taking the Q1 rates on growth and really extending them to the year. And you can see sort of the The Q1 decrement really is what we're turning into the full year guide update.

Got it. That's helpful. And then, Michael, one for you again at a high level. You know, last quarter we spoke a little bit offline about, you know, your ability to help customers navigate the shifting tariff environment and some of the supply chain de-risking that they're looking to do. Why isn't this an opportunity for you to perhaps even gain some share from customers who are currently sourcing direct or sourcing from smaller distributors in the months ahead as vendor consolidation is a theme we hear about from some of these customers? Um, conversely, are any of your customers choosing to go direct and just sort of disintermediate the middleman or in combination with this increased competitive intensity you called out, does that just nullify any benefit from potential share gains at the moment?

A great question. Uh, you know, just when we look at, you know, the environment that we're in and particularly the global nature of our supply chain, the broad, you know, product assortment and optionality that it gives our customers, we think we are uniquely positioned to support our customers through this challenging environment. And, you know, in times of dislocation like this or, you know, where there's friction in the system, it certainly gives you an opportunity to get close to your customers and be a, you know, solution provider to them. And given, you know, all the flexibility that we've talked about and optionality that we offer, you know, we are working very closely with our customers, you know, both existing as well as, you know, potential that are looking to, you know, find ways to address the current, you know, macro headwinds that we're all facing. And so, yeah, certainly would never want to imply, you know, for our remarks today that we're not looking at it that way. And with the work that Corey is certainly leading together with our commercial associates who are, you know, deeply engaged with our customers, we are moving as aggressively as we can, not only to support the customers, but to strengthen and grow the business. And with all that we have here, our value proposition is certainly enhanced in an environment like this. And your point there about our folks cutting out the middleman, that's not a trend that we've experienced in this environment. And that's largely just due to the value proposition and strength of a supply chain that looks like ours, the unparalleled customer access that we provide, the agility, the choice, and the ability to serve these customers the way we do really is an important part of our differentiated platform here.

Got it. Appreciate the color, Michael. Thank you, and thanks for the help over the years.

Thank you.

Thank you. Those are all the questions we have time for today, and so I will hand back to Michael Stubblefield for closing remarks.

Thank you all for joining us today. As you've heard through our prepared remarks and through our Q&A session here, we are not satisfied with our overall results, and hopefully you sense the urgency that we're moving to enhance performance and maximize value in this environment, including through the upsizing of our cost reduction initiatives. The board and our entire leadership team are committed to achieving this objective, and we look forward to discussing our progress as we move forward. Until then, be well, everyone. Thank you.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.