Yahoo Finance Avantor, Inc. (NYSE:AVTR) Q1 2024 Earnings Call Transcript
Avantor, Inc. (NYSE:AVTR) Q1 2024 Earnings Call Transcript April 26, 2024
Avantor, Inc. beats earnings expectations. Reported EPS is $0.22, expectations were $0.2. Avantor, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 First Quarter 2024 Earnings Results Conference Call. After the presentation, there will be an opportunity for you to ask questions. [Operator Instructions] I will now turn the call over to Christina Jones, Vice President of Investor Relations. Ms. Jones, you may begin the conference.
Christina Jones: Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer; and Brent Jones, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our Investor Relations website at ir.avantorsciences.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 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. As a reminder, on January 1st of 2024, we transitioned from our former regional segment structure to two global operating segments: Laboratory Solutions and Bioscience Production. Our Q1 2024 results are presented on this basis.
With that, I will now turn the call over to Michael.
Michael Stubblefield: Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I’m starting on Slide 3. The year is off to a good start as we delivered first quarter revenue in line with our guidance with reported revenue of $1.68 billion and organic growth of minus 6.3%. As anticipated, market conditions remained similar to the fourth quarter. Our team continues to execute well, as evidenced by our margin and profitability outperformance with adjusted EBITDA margin of 16.8% and adjusted EPS of $0.22. As Brent will outline in his section, our margins were driven by pricing, favorable product mix, disciplined cost management and accelerated realization of savings from our multiyear cost transformation initiative.
We also generated $107 million of free cash flow in the quarter. Consistent with our current capital allocation priorities, we paid down approximately $170 million of debt and continue to target an adjusted net leverage ratio below 3x. As CJ noted, our new operating model became effective in January. Our new business segments enhance our focus on customers’ needs in the lab and production environments, positions us for accelerated long-term growth and unlocks significant operating efficiencies. We are early in our journey, but are out of the gate strong and are already realizing benefits from the new model. During the first quarter, we aligned our organization with the new business segments and initiated several work streams to optimize the Avantor customer experience.
Our commercial intensity and the relevance of our workflow solutions resulted in multiple competitive wins and contract renewals with biopharma, healthcare and education and government customers. As part of our innovation strategy, we enhanced our offerings for cell engineering, gene therapy and synthetic biology applications through supplier partnerships and proprietary innovation. We are seeing strong customer response to recent proprietary new product introductions, including our Viral Inactivation Solutions launched earlier this year and our integrated mixing systems and fluid handling assemblies, which are delivering critical efficiency and quality improvements to our bioprocessing customers. We also advanced our multiyear cost transformation initiative, including footprint optimization, organizational efficiency, go-to-market and procurement savings.
Our disciplined execution enabled us to accelerate the realization of some savings into the first quarter, contributing to our margin and profitability outperformance. We continue to be encouraged by the positive trends we are seeing in our end markets. In Laboratory Solutions, biotech funding is improving, and our large pharma customers are engaging with us on new projects that are driving an increase in our commercial opportunity funnel. Core diagnostic testing has returned to growth, and QA/QC workflows in the applied markets have been relatively stable. Additionally, internal and external surveys suggest that inventory health continues to improve. Collectively, these factors resulted in a sequential increase in sales of our consumables and chemicals offerings, both key drivers of our long-term growth.
In Bioscience Production, the bioprocessing end market remains healthy with a robust pipeline of new therapies, a favorable regulatory landscape, including three new cell and gene therapy approvals in the quarter and strong patient demand. Importantly, we saw another quarter of sequential improvement in our bioprocessing order rate. Within healthcare, medical implant procedure rates continue to be positive, and overall demand within the semiconductor end market has rebounded from the lows we experienced in 2023. Consistent with our in-line revenue performance in the quarter, these encouraging market signals have not yet translated into an inflection in aggregate sales levels as pockets of inventory destocking and cautious customer spending, notably in equipment and instrumentation, continue to impact demand.
We believe our current approach to guidance, which assumes a continuation of current market conditions, is appropriate, and we are reaffirming our full year outlook. Should a meaningful market recovery take place within the year that would present upside to our guidance. Before I turn it over to Brent, I’d like to share a few takeaways from the quarter, which show that our model is working. First, momentum in our consumables portfolio, representing the vast majority of our revenue, largely offset industry-wide weakness in capital-driven equipment and instrumentation sales, and translated to outperformance in margins and EPS. Second, our bioprocessing offerings are strategically positioned to benefit from attractive end market fundamentals, and we outperformed our bioprocessing guidance and realized another sequential step up in bioprocessing orders.
Finally, we are taking action to strengthen performance and drive productivity. We made meaningful progress in transforming our operating model, and we are ahead of plan on our cost transformation initiative. With that, I will now turn it over to Brent to walk you through our Q1 results in more detail.
Brent Jones: Thank you, Michael. And good morning, everyone. I am starting with the numbers on Slide 4. Reported revenue was $1.68 billion for the quarter, declining 6.3% on an organic basis. In our Laboratory Solutions segment, sales trends were generally similar to the fourth quarter levels. We are seeing nice momentum in consumables and chemicals, offset by softer-than-expected demand for equipment and instrumentation. Our Bioscience Production segment performed modestly ahead of expectations, driven by upside in bioprocessing and biomaterials. Adjusted gross profit for the quarter was $572 million. And adjusted gross margin was 34%. Year-over-year, our adjusted gross profit was impacted by lower sales volume and unfavorable product mix, partially offset by productivity.
Adjusted gross margin improved nicely on a sequential basis. This was largely due to pricing and the positive mix impact from strength in higher-margin consumables and weakness in lower-margin equipment and instrumentation. Adjusted EBITDA was $283 million. And adjusted EBITDA margin was 16.8%. Adjusted operating income was $258 million at a 15.4% margin. Year-over-year, our adjusted EBITDA and adjusted operating income performance were impacted by lower sales volumes and unfavorable mix. While adjusted EBITDA and adjusted operating income were down sequentially, primarily from the reset of incentive compensation, our margins were well above our expectations. This outperformance was driven by better-than-expected mix and the accelerated impact of certain cost transformation initiatives up and down the P&L.
Net interest expense and adjusted tax expense were in line with our expectations, resulting in adjusted earnings per share above expectations at $0.22 for the quarter. Moving to free cash flow, we generated $107 million in the quarter. Our free cash flow performance was impacted by costs associated with our cost transformation initiative. Our adjusted net leverage ended the quarter at four times adjusted EBITDA. The slight uptick in leverage was driven by a reduction in our trailing 12 months adjusted EBITDA. As Michael noted, we remain focused on deleveraging and paid down approximately $170 million of debt in the quarter. In April, we favorably repriced about $770 million of term loans, reflecting a supportive financing market and strong demand for our debt.
Slide 5 outlines our segment performance. Launching our two new segments has been a critical strategic move to sharpen our focus on accelerating growth and streamlining organizational accountability. It also has the benefit of unlocking significant cost savings. In Laboratory Solutions, which represents roughly two thirds of our revenue, we provide an industry-leading platform of products, services and digital solutions to support our customers’ research, diagnostic and QC workflows. Laboratory Solutions revenue was $1.16 billion for the quarter, declining approximately 4.5% versus prior year on an organic basis. Our consumables and chemicals, both proprietary and third-party, showed sequential growth, performing better than our expectations.
However, momentum in these categories was offset by lower equipment and instrumentation sales in each of our end markets. Adjusted operating income for Laboratory Solutions was $148 million for the quarter, representing a 12.8% margin. Year-over-year adjusted operating income decline was driven by negative sales volume. Sequentially, we saw a favorable mix due to strength in higher-margin consumables and chemicals; and weakness in lower-margin equipment and instrumentation. However, despite the mix impacts on gross profit, adjusted operating income declined due to the impact of our annual incentive compensation reset. This expense increase was partially offset by savings from our cost transformation initiative. Our Bioscience Production segment represents about one third of our revenue and over 45% of our enterprise profitability.
This business supports customers’ production platforms by providing high-purity process ingredients and single-use solutions for bioprocessing, ultra-high-purity silicone formulations for medical implants and custom solutions for semiconductor and advanced technology applications. Bioscience Production revenue was $523 million, representing an organic decline of approximately 10%, slightly ahead of our expectations for the quarter. Bioprocessing was down low teens on an organic basis versus our expectations of down mid-teens. Adjusted operating income for Bioscience Production was $127 million for the quarter, representing a 24.3% margin. Year-over-year adjusted operating income declined as a result of lower sales volume. On a sequential basis, despite revenue performance exceeding our expectations and solid mix, adjusted operating income declined modestly, driven by the expense side.
Like laboratory Solutions, this was largely due to our incentive compensation reset. However, these expense accruals were partially offset by savings from our cost transformation initiative. Altogether, a solid quarter in both segments. Moving to the next slide, Slide 6 shows our full year 2024 guidance. As referenced throughout the call today, we see encouraging signs in our end markets. However, it is still early in the year, and the operating environment remains dynamic. As Michael indicated, we believe it is prudent to base our guidance on the continuation of current market conditions, and we are reaffirming our full year guidance as outlined last quarter. This includes organic revenue growth of negative 2% to plus 1%, adjusted EBITDA margin of 17.4% to 17.9% and adjusted EPS of $0.96 to $1.04.
We also expect free cash flow performance of $600 million to $650 million, excluding any cash costs associated with our cost transformation initiative. On a segment basis, we expect low single-digit growth in Laboratory Solutions and a mid single-digit decline in Bioscience Production. A couple of comments on phasing. As laid out at the beginning of the year, we expect to generate 49% of our full year revenue in the first half and 51% in the second half. This leads to Q2 organic revenue growth of approximately negative 3.5% to negative 1.5%. The modest sequential increase in reported revenue dollars as we progress through the year is driven by pricing phasing, lot of seasonality, timing of known orders and nominal billing day adjustments. In terms of profitability, we expect our Q2 gross margin percentage to be similar to Q1.
Adjusted EBITDA margin should improve by about 25 to 50 basis points sequentially, driven by the impact of our cost transformation initiative. Our ability to accelerate our transformation savings into the first quarter flattens the margin ramp needed to achieve our full year plan. We are executing well against the transformation plan, evidenced by the nice pull forward of savings into Q1. We are solidly on track to achieve at least $75 million of in-year savings in 2024. With that, I will turn the call back to Michael.
Michael Stubblefield: Thank you, Brent. With our new operating model in place, we are well positioned to realize accelerated long-term growth and unlock significant operating efficiencies. We are seeing the benefits of our new business segments in driving commercial momentum with our research and production customers, as well as enhancing our operational rigor and forecasting. I’m pleased with the progress we’ve made on our multiyear cost transformation initiative. We are ahead of plan and are already seeing the impact in our cost structure and margins. As the market recovers, we’ll be well positioned to enhance the conversion of top line growth to improve bottom line profitability. I’d like to close by thanking our Avantor associates for their steadfast dedication to serving our customers and to creating a better, healthier world.
Their contributions enabled us to make meaningful progress on our business transformation and deliver on our operating plan. I will now turn it over to the operator to begin the question-and-answer portion of our call.
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