Avantor Inc (AVTR) 2019 Q2 法說會逐字稿

Good morning.

My name is Jack and I will be your conference operator today.

At this time, I would like to welcome everyone to the Avantor second-quarter earnings call.

(Operator Instructions)

Thank you.

Helen O'Donnell, investor relations contact for Avantor, you may begin your conference.

Thank you and good morning, everyone.

Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Tom Szlosek, Executive Vice President and Chief Financial Officer.

The press release and a slide deck accompanying this call are available on our investor website at ir.avantorsciences.com.

A replay of this webcast will also be available on our website following this call.

Following our prepared remarks, we will open up the line for questions.

I would like to note that we will be making some statements during the call that are forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings.

Actual results might differ materially from any forward-looking statements that we make today.

These forward-looking statements speak only as of the date that they are made.

And we do not assume any obligation to update whether as a result of new information, future events, and developments or otherwise.

This call will include a discussion of non-GAAP measures.

A reconciliation of these non-GAAP measures can be found at the back of the presentation.

With that, I will now turn the call over to Michael.

Thank you, Helen.

Good morning, everyone.

Welcome to Avantor's first quarterly earnings call as a public company following the successful completion of our initial public offering in May.

We are pleased to report strong second-quarter results, with outstanding organic growth, margin expansion, and cash flow generation.

Before discussing the quarter in more detail, I would like to provide a brief overview of the business and Avantor's customer-centric model.

Avantor is among the most recognized and trusted global providers of products and services for the life sciences and advanced technology and applied materials industries.

Our customers rely on us in virtually every stage of the most important research, development, and production activities they perform and they value and trust our integrative approach.

It is the basis for our enduring relationships.

We believe that our customer-centric model differentiates us from other industry participants and suppliers.

One of Avantor's greatest strengths comes from our global footprint that enables us to serve more than 240,000 customer locations, giving us extensive access to research labs and scientists in more than 180 countries.

With this access, we are able to position our comprehensive portfolio of products and solutions for a wide variety of customer workflows.

Importantly, as we engage scientists in early phase discovery work, we can customize solutions that often get specified into customer formulations, driving stickiness and recurring revenue as these platforms are commercialized.

We extend our reach and further embed ourselves in our customers' workflows through our robust service capabilities.

And our offering is underpinned by a world-class quality system and robust supply chain that enables us to meet the stringent requirements of an exacting customer base.

This differentiated framework enables us to partner with our customers every step of the way as they bring critical life-saving therapies to patients around the world.

The value of our model is evident in our attractive growth, margin, and deleveraging profile.

We have a very diverse revenue base that spans a wide range of customer applications and end markets.

When combined with the customized nature of our business, it makes for a very resilient model.

We are well positioned for continued growth in the Americas and Europe and are realizing upside from outsized growth in Asia, the Middle East, and Africa, where our infrastructure and footprint continue to expand.

For example, during my recent trip to China, I was able to see firsthand the progress we are making on the construction of our new application and technology center that will open in Shanghai later this year.

Avantor offers a comprehensive portfolio that includes more than 6 million distinct products and services that enable us to contribute to some of the most demanding and challenging areas of science.

Approximately half of our revenue comes from the Avantor-branded solutions and roughly 85% of our business is recurring.

We strategically serve four end markets that share similar characteristics, including high regulatory oversight and complex development processes.

Our penetration of market leaders and startups alike is a proof point of our relevance and importance in the industries we serve.

We are well diversified, as no single end customer represents more than 4% of our net sales.

With more than half of our revenue in biopharma and healthcare, we are well positioned to leverage the favorable macro trends in the life sciences space.

Our largest customer end market is biopharma, where industry dynamics remain favorable, especially for the large molecule space where we are well positioned to support our customers across a range of disease indications, including oncology, rheumatology, respiratory, and neurodegeneration.

Given the breadth of our solution and our access to the critical phases of early stage development, we ultimately earn specifications that allow us to serve our customers' critical workflows at production scale.

This slide demonstrates the breadth and relevance of our solution for biopharma manufacturing.

Our solution spans the upstream fermentation processes that drive cell growth and protein expression, the downstream protein recovery and purification steps, as well as the final formulation processes.

Our solution is underpinned by our single-use sterile fluid transfer technologies that connect each of the unit operations, helping to minimize the risk of product contamination.

Our penetration of market leaders is a proof point of our relevance and importance in this critical workflow.

We are specified into more than 80% of the top 20 biologic drugs and have a leading position in our core technologies, including buffers and excipients.

Our recently completed IPO was the largest healthcare IPO in US history and provides us with a stronger financial position to continue to grow our business.

Given strong investor demand, we were able to build a high-quality blue-chip investor base and increase the total capital raised to $4.4 billion.

We used the proceeds to retire $2.6 billion of senior preferred equity and pay down $1.6 billion in term loans.

Following the IPO, we received upgrades from all three rating agencies and successfully repriced our term loans.

With these actions, we reduced our annual interest expense by more than $100 million annually.

With our improved capital structure and continued strong business performance, we reduced our leverage 1.8 turns in the second quarter, positioning us to end the year with leverage near 4.5 times.

Turning to our second-quarter business results, our strong momentum continued and we delivered another excellent quarter with 6.1% organic revenue growth and a 140-basis-point improvement in adjusted EBITDA margin.

Importantly, we made great progress in executing our growth strategy.

We had a number of significant contract wins and renewals, made key additions to our product portfolio, and realized a substantial increase in web activity following recent investments to our e-commerce platform.

In addition to delivering a record quarter in our bioproduction platform, we secured a major supply position with our aseptic single-use technology for a leading pharmaceutical customer that is launching a life-saving gene therapy treatment.

We also broke ground on our new biorepository facility in Germany, reinforcing our commitment to the services platform and enabling sustained double-digit growth.

Our integration of VWR continues to track ahead of schedule, including realization of synergies.

As we have previously outlined, we expect to capture more than $300 million of cost and commercial synergies by the end of 2020.

As of the end of the second quarter, our program is more than three-quarters complete with a run rate impact of approximately $230 million.

These synergies are an important driver of our margin expansion and overall value creation.

As I referenced earlier, we reduced our leverage in the second quarter by 1.8 turns with 0.3 turns coming from our operational performance within the quarter.

We remain committed to deleveraging our balance sheet by roughly 1 turn per year as we look to operate in a more normalized leverage range long term.

Before I hand off to Tom to discuss our second-quarter results in more detail, I would like to remind you of our long-term financial goals and convey how well we performed against them this quarter.

Avantor's organic growth of 6% demonstrates the continued momentum of our business as well as the value of our integrated platform.

Our operational discipline and synergy capture drove significant margin expansion and increased unlevered free cash flow.

As I referenced earlier, we are on pace to end the year with leverage near 4.5 times and are well positioned for a strong finish to 2019.

Now I'd like to turn the call over to Tom to review our financial performance in more detail.

Thank you, Michael, and good morning to you all.

I am starting with slide 9. As a reminder, our external reporting segments are the geographic regions.

This is how we run the business and evaluate our performance internally.

The Americas and Europe regions comprise about 95% of our business.

AMEA growth and results certainly stand out, but the other two regions account for the bulk of our overall performance currently.

This ratio will change over time as we continue to invest and deliver outsized growth in AMEA.

We had good momentum coming into the quarter, having experienced 7% growth in 2018 and 8% in the first quarter of 2019, so the 6% growth continues that growth trend.

Starting with the Americas, net sales increased 5.2%, primarily a result of improved pricing and volume growth, offset by a slight foreign currency impact.

Sales to biopharma, our largest customer group, grew by a mid-single digit rate.

Growth was strong across the full spectrum of workflows from discovery to delivery.

We have a comprehensive solution for bioproduction, including process ingredients, excipients, process chromatography, and single-use solutions that is contributing to our customers' innovation and productivity.

We experienced low double-digit growth in education and government, driven by continued volume growth from universities and from the timing of certain seasonal orders in 2019 compared to 2018.

Advanced technologies and applied materials was essentially flat.

This is a diverse set of customers and applications and we play this space in a unique way that somewhat isolates us from macro volatility.

We continue to see growth on the back of new specifications and platform wins in the electronic materials business and in aerospace and defense that is offset by some sluggish demand in other areas like petrochemicals and food and beverage.

In Europe, net sales increased 6.1%, driven by strong volume growth and improved pricing.

On a reported basis, the strengthening US dollar created a currency headwind that almost completely offset the organic growth.

Biopharma grew low double-digits, driven by our broad offering in areas like cell biology and high performance liquid chromatography products as well as continued growth from our larger global customers.

Advanced technologies and applied materials grew in the mid-single-digit range, driven by chemicals and consumables, offset by nonrepeating 2018 projects and equipment and instrumentation.

We experienced low-single-digit growth in education and government as a healthy demand environment was partially offset by the completion of a nonrecurring project sale recognized in 2018.

In AMEA, the 17% organic sales increase was driven by volume growth, principally in our largest customer set, biopharma, as the investments we have made in our sales force, supply chain, and warehousing continue to bear fruit.

We did see some modest declines in the industrial customer set, driven by a softer demand from our semiconductor customers in this region, partially offset by continued growth in industrial labs.

On a reported basis, the strong organic growth for AMEA was slightly offset by an approximate 2% unfavorable foreign currency impact.

Moving to slide 10, where we provide some color on our Q2 global growth by end market and by product group.

Biopharma is our largest end market.

I mentioned it several times in my regional commentary, and you can see that the growth in Q2 was low double-digits.

That growth was fairly consistent across the full spectrum of workflows in the industry from discovery to delivery.

Healthcare is less than 10% of the overall portfolio, although it is very profitable.

Americas was slightly down as strong sales of our biomaterials offerings were offset by slower sales in Canada from customers dependent upon government funding and by our exit of certain lower-margin customer accounts.

In Europe, healthcare was slightly up as the steady growth across the platform was slightly offset by the absence of a nonrepeating project from 2018.

Education and government grew in the high-single-digit range, principally driven by the strength I mentioned in the Americas.

Last, advanced materials -- advanced technologies and applied materials grew in the low-single-digit range.

I mentioned the factors in Americas and Europe contributing to this result.

The right side of the slide depicts the growth across the product groups.

And as a reminder, most of our offerings are rapidly consumed or deployed, making the revenue recurring in its nature and resilient to cyclical variations.

We experienced the highest growth rates in Q2 in our proprietary materials and consumables, which provide a richer mix of margins.

Also, our growth in the services and specialty procurement product group stands out as the investments we continue to make in these spaces continue to pay off.

Moving on to Q2 performance on slide 11, I'm pleased to report that our adjusted EBITDA of $269 million was up 15% on a constant currency basis from 2018 and that we expanded margins 140 basis points.

This continues the trend we had in 2018 where we expanded margins 160 basis points and in the first quarter where we expanded margins 150 basis points.

The performance reflects the accretive margin profile of our business owing to its natural operational leverage in growth environments and to the ongoing realization of synergies from the VWR integration.

I will walk through the drivers of the Q2 margin performance in more detail on a subsequent page.

A little housekeeping on adjusted EBITDA.

Adjusted EBITDA is our primary profitability measure.

It is GAAP-based EBITDA adjusted for nonrecurring items.

We had three meaningful nonrecurring items in the second quarter: share-based compensation expense, which was $43 million; loss on extinguishment of debt of $70 million; and foreign currency gain on intercompany transactions of $14 million.

The share-based compensation item is a non-cash charge that was triggered by the successful completion of our IPO in the quarter.

The loss on extinguishment of debt results from the write-off of previously capitalized costs associated with a debt that was paid down with the May 17 IPO proceeds.

Our cash flow has markedly improved from 2018.

In the second quarter, our free cash flow was up $15 million and for the first half we were up $43 million, going from 0 in 2018 to $43 million in 2019.

We measure the business performance on free cash flow excluding interest expense or unlevered free cash flow.

In the second quarter, our unlevered free cash flow was up 8% and for the year we are up 21%.

I have a subsequent slide with more details on free cash flow.

The last area to cover on the slide is adjusted earnings per share.

For comparability purposes in this presentation and in our press release, we have used a share count of 643 million shares for both 2019 and 2018.

This represents the outstanding share count post-IPO of 565 million shares plus the dilutive impact of the mandatory convertible preferred stock and options outstanding.

Our adjusted earnings per share on this pro forma basis grew from $0.09 in 2018 to $0.14 in 2019 or growth of 60%.

That is approximately $0.055 per share, of which approximately $0.04 or three-quarters of the growth came from operations improvement.

The remainder was driven by the netting of lower interest expense, offset by a slightly higher tax provision.

On slide 12, I want to spend a few minutes highlighting the drivers of our EBITDA margin expansion.

On the gross margin side, we enjoyed 40 basis points of expansion, with pricing being ahead of overall cost inflation for the quarter and synergies from the integration of VWR also contributing.

The bigger impact on the adjusted EBITDA improvement was from SG&A, which contributed 100 basis points of EBITDA margin expansion.

Our 6% organic sales growth resulted in the leverage of the fixed cost base that we have in the business.

In addition, the cost synergies from the integration of VWR also had a meaningful impact.

These factors were slightly offset by some modest cost investments that we have made in our front-end sales, marketing, and technology functions, particularly in the AMEA region.

I also want to give you a brief update on the VWR integration and the resultant cost synergies.

As a reminder, we closed the VWR acquisition in November 2017 and identified $300 million of synergies, including $230 million of cost synergies.

At that time, we expected the cost synergies to be realized over a three-year timeframe, with a heavier proportion of G&A-type synergies at the front end and the supply chain synergies coming at the backend.

Through the end of the second quarter, we have completed actions to earn $153 million of that $230 million.

Of the $153 million, $120 million has already been realized in our P. &L and including the value of the commercial synergies, we have earned $230 million of the $300 million in total deal synergies.

The synergy program is on track and is clearly resulting in attractive profits and cash growth and balance sheet deleveraging.

On slide 13, I'd like to share the P&L results for each of our three segments.

I previously discussed the sales growth drivers for each segment and the adjusted EBITDA growth drivers for the enterprise in total.

So here I will focus on management EBITDA for each region.

We utilize management EBITDA as the measure for segment profitability.

Management EBITDA is similar to adjusted EBITDA but excludes ongoing share-based compensation and a few other less significant items.

Americas margin improved 250 basis points, driven by strong pricing performance, volume growth, and productivity initiatives, including the VWR integration synergies.

Europe margins grew 80 basis points with volume growth and VWR integration synergies more than offsetting the dilutive impacts of the strengthening US dollar on the region's performance.

AMEA margins contracted 430 basis points as the margin benefits from the 17% sales growth were more than offset by cost investments that we have been making in sales, marketing, and technology resources to foster stronger growth in the region.

We have not presented the corporate segment on this page, but corporate costs decreased 16% during the quarter, reflecting ongoing productivity initiatives and the cost synergies from the VWR integration.

On slide 14, we present some additional detail on free cash flow.

Again, this is a very strong story for us, with GAAP-based free cash flow going from 0 in the first half of 2018 to $43 million in the first half of 2019.

And unlevered free cash flow growing 21% in the first half to approximately $200 million.

There are a few drivers of the cash flow growth to point out.

First, the growth in profits -- so adjusted EBITDA -- is clearly benefiting our cash flow.

Second, the impact from the deleveraging and the debt repricing are starting to benefit both interest expense and cash paid for interest.

This impact will accelerate over the course of the next four quarters based solely on what has already been completed, not to mention future repricing opportunities.

Third, cash taxes are becoming a bigger outflow.

But we also have significant opportunity in this area.

In the second quarter, our cash paid for taxes increased $15 million and we expect to pay approximately $145 million in cash tax in 2019, an increase of about $80 million from 2018's $66 million.

The improving profitability in the business and the reduction in the costs incurred to generate the VWR synergies, including restructuring, are driving taxable income higher, particularly in the US.

Additionally, we are subject to a 30% limitation in the amount of interest that can be deducted in the US.

The good news is that amounts over that limit are carried forward and can be used to lower taxes otherwise payable in future periods as we reduce debt.

Additionally, in 2018, we utilized loss carryforward that reduced our total payments by approximately $30 million.

And we also received a refund of approximately $25 million.

Cash taxes and our effective tax rate are a big area of attention for this management team.

We expect our effective tax rate to be 30% to 31% for 2019 and are in the process of implementing actions to further reduce that rate in 2020 and 2021.

The fourth element in the discussion of cash is working capital.

You can see that we added $40 million to our working capital in the second quarter, reflecting some seasonal build of inventory to support certain customer contracts as well as to support growth overall, particularly in AMEA.

Putting inventory aside, we are doing a decent job with receivables, particularly in the Americas and Europe regions, and are carefully managing investments to support growth.

Working capital is receiving a significant amount of attention from our management and our Board.

It comprises 20% of the Companywide incentive plan and is an area very fertile for the application of the Avantor business system, which is our approach to continuous process improvement.

The last item on free cash flow I want to touch on is capital expenditures.

While our model has historically required only modest CapEx investment, we do continue to invest to support attractive growth opportunities.

Recent examples include the European biorepository facility, which Michael mentioned earlier, a new production line in electronic materials application and technology infrastructure in Shanghai, and a new GMP warehouse in Singapore.

Slide 15 provides a leverage update.

We calculate leverage as total debt divided by our adjusted EBITDA.

From that adjusted EBITDA we subtract ongoing share-based compensation expense, a non-cash burden on the enterprise, and add in the cost synergies from the VWR acquisition that had been earned but not yet realized in the P&L.

As you can see from the slide, we started the year at 7 times and are down to 5 times at the midpoint of the year, a 2 times reduction.

1.5 times of that 2 times reduction came from the IPO.

The remaining 0.5 times resulted from the natural deleveraging that our business model provides.

For 2019, we are well positioned to achieve our goal of deleveraging a half to a full turn per year through 2020.

Longer term, we expect to maintain leverage levels in the range of 2 times to 4 times depending on alternative capital deployment opportunities.

M&A will become an important part of our long-term growth strategy and will influence where we are positioned within this leverage range.

As I suggested earlier, the deleveraging and pricing are starting to have a meaningful impact on our interest expense.

In 2018, our interest expense was $530 million.

In 2019, we expect it to approximate $440 million.

And in 2020, we are forecasting approximately $380 million.

Net of tax, that reduction will be greater than $0.05 benefit in EPS for 2020 or more than a 10% increase in EPS.

And these interest expense estimates do not include any further benefit from repricing or deleveraging beyond what has already been done today.

To be more specific: in the second half of 2020, we will have opportunity to reprice a significant portion of our outstanding debt, the majority of which currently carries interest rates in the 6% to 9% range.

Before turning it back over to Michael, I would like to provide some guidance for our 2019 earnings.

I am on slide 16.

We currently expect revenues of $6.08 billion to $6.14 billion, an organic increase of roughly 6% to 7%.

This is comparable to our first-half organic growth rate of approximately 7%.

On adjusted EBITDA, we expect $1.04 billion to $1.06 billion, an increase of 10% to 12%, or 11% to 13% excluding the impacts of foreign exchange.

The relationship of sales to EBITDA growth is in line with what we expect during the period that we are integrating VWR and benefiting from the resultant synergies.

The guidance assumes stable demand and a foreign exchange environment that is also stable; also, a limited impact from Brexit.

Michael will have a few wrap-up comments before we take your questions.

Thanks, Tom.

To conclude, we are pleased with the strong performance and growth we delivered in the second quarter, led by the strength of our biopharma and service platforms.

The execution focus enabled by our Avantor business system yielded significant margin expansion, synergy realization, and deleveraging.

We remain confident in the value of our business model and role as a trusted partner to our customers in the life sciences, advanced technologies, and applied materials industries.

We delivered an outstanding first half and have great momentum heading into the back half of the year.

With that, I will turn the call back over to the operator.

We are ready to take your questions.

(Operator Instructions) Tycho Peterson, JPMorgan.

Good morning.

Congrats on the quarter.

I'd like to start with the EBITDA outlook.

You are coming in at between 70 bps and 100 bps this year, a little bit below your kind of long-term guidance.

Is that all FX impact or is there anything else to factor in for the EBITDA outlook for the remainder of the year?

No, and in fact, the guide of $1.040 billion to $1.060 billion, as you know, is in the 11% to 13% range growth.

And we have carefully considered the second-half opportunities ahead of us.

I would say the margin expansion probably would be on the higher end of what you mentioned, Tycho.

I think will be in the 100% -- or, sorry, 100 basis points or more.

First half has been well over 150 basis points, so I expect that to continue.

And then on the biopharma piece, can you provide a little bit more color on pharma versus biotech?

And you called out the gene therapy wins; if you could just talk a little bit about how big that business is for you today?

That would be helpful.

Yes, thanks for the question, Tycho.

Obviously, biopharma is an important end market for us; represents roughly half of our revenue.

And we are positioned to service that market, as you know, all the way from the research and development activities all the way through to full scale manufacturing.

And we have got great exposure to not only the large players in that market, but importantly to the startup community, where the lion's share of molecules are being developed today.

Naturally, just given our broad exposure, we are going to have some exposure to the small molecule space today, which is an important growth driver for the business.

Or perhaps more excitingly is the investments and the growth that we see in the large molecule space, which is where we see significant upside opportunities not only today but going forward.

Cell and gene therapy, as you mentioned, is an important subset of that biologics therapeutic area.

And we are super excited about the promise that those therapies hold for patients around the world.

And our portfolio is well positioned to serve not only the traditional monoclonal antibody technologies but is also fairly readily transferable into the cell and gene therapy space.

So we have a growing pipeline.

We are going to be specced into or we are specced into all of the commercialized platforms today.

And as we noted in our prepared remarks, secured an important win, particularly with our single-use technologies, on a recently commercialized platform.

So as we have outlined before, we expect to see this platform grow high-single digits to low double-digits going forward and our quarter came right in the middle of it this year or in this quarter.

Okay.

And if I could ask one last quick one for Tom.

Just if we think about the back half of the year 3Q versus 4Q, given the tough comp in 3Q, any color you can give us on kind of pacing for the back half of the year, sequential basis?

It shouldn't be too much different than what we have done historically.

I will say that there was a little bit of timing 2Q to Q3 where there is some seasonal sales that kind of fall on the cusp of that June 30 timeframe, a little bit later.

We were able to pull a little bit of those into the second quarter.

So I think third quarter will be a little more modest than historical patterns, but not significant.

And then you will see our normal fourth-quarter ramp-up.

Thank you.

Patrick Donnelly, Goldman Sachs.

Great.

Thanks, guys.

I had one on Europe.

Pretty impressive results there with 6% organic growth, particularly in the light of what peers are putting out and some of the macro data we are seeing.

Can you just talk through the growth drivers there as well as the sustainability, your outlook in Europe for the rest of the year?

Yes, sure.

Thanks for the question, Patrick.

Others say we are excited about the momentum that we have in our European business.

And would point out that the second quarter can always be a bit tricky, given where Easter holiday falls in the quarter.

And would point out that the 6% top-line growth we delivered in the quarter was despite the fact that the Easter holiday fell squarely in the quarter.

And on a comp basis, we had Easter straddling the quarter in 2018.

So without that effect, you would have actually seen even a bit stronger results.

But we actually see broad-based momentum building in Europe, led, not surprisingly perhaps, by our biopharma space.

We are well positioned across that important end market.

And as we connect in our proprietary materials from our portfolio into our supply chain in Europe, we are seeing considerable growth in the region and would expect it to continue.

Obviously there is noise around the globe at a macro level around the industrial complex.

And in Europe, there are certainly certain pockets where demand is somewhat muted.

But I think when you see our results in that context, obviously it speaks to the resiliency of our portfolio.

The fact that 85% of our revenue is recurring and the fact that we have great not only end market diversity but also a diverse customer set with limited exposure to any single customer.

So we are excited about the momentum that we have there, Patrick, and see that continuing in the second half of the year.

That's helpful.

And maybe just one for Tom.

Appreciate all the color on the tax rate.

Obviously quite a bit higher than your peers there.

Now that you have been able to restructure some debt, you talked through the interest deductibility, maybe just talk through opportunity for further leverage on the tax rate.

What is a realistic rate a couple years out?

Again, given the significant gap between you and peers.

Yes, it's a good question, Patrick.

Thank you.

Certainly this has been a big area of attention for us, and when you look at the guide that we initially provided, we were talking about 29% to 33% for 2019.

We have narrowed that to 30% to 31% and so we see a little bit of progress there.

I think one of the biggest opportunities that we have is in just how we are financing our international operations.

And we are doing some restructuring.

I expect the rate in 2020 to come down markedly, probably in that 25% to 27% range.

And then going forward, there are a number of more meaningful opportunities that we are pursuing that have to be carefully considered in light of how we are serving customers across the globe.

But it's something that is a big focus.

So I think -- to summarize, I think you are right.

I think 2020 will be markedly better and we will continue to pursue opportunities.

Great, thank you.

Derik De Bruin, Bank of America.

Good morning.

So can you talk a little bit about the FX impact for the top line for the rest of the year and 3Q?

Yes, we have assumed a constant rate from here on out for the rest of the year.

And so if you look at the growth for the year, the difference between reported growth and organic growth should be fairly similar to what we saw in the first half.

Got it.

And the organic revenue growth guide was actually more than we were forecasting.

And so I am just curious about the second-half expectations on mix, just given that the EBITDA guide for the second half of the year is a little bit lower than what we had sort of anticipated.

Can you -- is there anything weird going on in the mix that you are looking for in the back half?

Yes, I mean, first of all, I would start with overall margin expansion.

As you saw in the first half, strong 140-basis-points margin expansion.

And we think that for the full year, as I said to answer Tycho's question, we will be certainly north of 100 basis points if not 120 basis points.

Couple things: doing a nice job on managing on the gross margin side the price COGS.

And you are seeing that show up and we have confidence that will continue.

Also, the integration synergies from the VWR acquisition continue to come through.

I'm happy to talk about the details of that, but we are tracking ahead of plan, as I said in my comments.

We do have a little bit of headwind from mix and it's kind of a double-edged sword.

We are growing more in some areas than others.

And so we had faster-than-anticipated growth in consumables, faster-than-anticipated growth in service.

As you know on the service side, it's a higher variable cost model and so you have a little bit of a mix impact from that.

Inflation is pretty well managed; it's probably a little bit more in Europe than we expected, but overall, we are certainly covering that with our commercial activities.

And then there is a modest impact from the integration on the supply chain side in our manufacturing plants.

As we continue on the journey to a fully integrated supply chain, there is some inventory provisioning that has come through.

Pretty focused, pretty narrow; I don't expect it to recur.

But that has had a little bit of a headwind on the margin.

But overall, I think we are comfortable with the ranges that I articulated.

Great.

Thanks, I will get back in the queue.

Jack Meehan, Barclays.

Thank you.

Good morning.

Michael, was hoping you could elaborate a little bit more on the advanced technologies and applied.

I appreciate you kind of have some unique mix there.

But maybe just focus on what is the exposure to some of the more cyclical areas?

How much visibility do you have into the back half?

And what does the guide assume in terms of the growth rate for that business in the second half?

Yes, thanks for the question, Jack.

Obviously given what we see globally from a macro perspective, I can certainly understand the concern about any exposure to the industrial complex.

And fortunately, as you know, any industrial exposure that we have is isolated to that advanced technologies and applied materials portion of our portfolio where we serve a really diverse set of end markets.

Where none of them, whether that be semiconductor or food and beverage or aerospace and defense and many others, none of them on their own represent more than low-single-digit percentage of our overall revenue.

So we don't have a high degree of exposure.

And you see that in our second-quarter numbers, where that part of our business did have low-single-digit growth.

And I think it owes to the unique exposure that we do have to that space, where, similar to our life sciences platform, a lot of what we do there is going to be backed by specifications on commercialized platforms.

So we tend to have more unique project or platform exposure as well as a lot of consumables -- chemicals, reagents -- revenue into the quality control, quality assurance functions within the R&D and production laboratories of those end markets.

So again, resilient, highly recurring portfolio that allows us to kind of weather the ups and downs in that market.

Now clearly, there were some pronounced headwinds in the quarter that offset some of the growth that we did see.

Would specifically point to a weak semiconductor environment in Asia.

We actually grew our semiconductor business in the US quite significantly, but in Asia, there are definitely headwinds as that supply chain resets their inventory levels.

We had some nice growth on the backend of some aerospace and defense specifications.

For example, food and beverage, petchem, a bit weak.

But net-net, we did see low-single-digit growth.

And we look to the back half, I think the guidance that we baked in would come with the expectation of relatively similar performance for the second half of the year relative to the first half.

We don't really see a meaningful change or improvement in the any of the markets where we had any headwinds.

That makes sense.

And then just one follow-up on the commercial side with the integration.

I was actually curious what pricing added in the quarter?

And I know you have been doing work with different algorithms and AI.

Just how you are rolling that out and whether there is any important rollouts in the back half of the year.

Thanks.

Thanks for the question.

Obviously pricing in a business like this is certainly important.

And we have a number of different mechanisms for thinking about price, including capturing the value of the offering that we do have as well as some sophisticated algorithms to manage a really diverse portfolio that includes more than 6 million products.

And Tom referenced kind of the inflationary environment that we've seen through the year.

Our teams have done a really nice job of taking that into account and being able to offset that through pricing.

At an overall level, I would say pricing did play an important role in the growth of the business.

But probably within the historical range of 20% to 40% of our growth coming through pricing, 60% to 80% of our growth coming through volume.

And I think we saw those ratios hold in the second quarter.

Ross Muken, Evercore ISI.

Good morning, guys, and congrats.

You talked a little bit -- maybe I missed -- on the healthcare business.

I know that sort of accelerated a little bit sequentially.

It could be a bit lumpy.

Just give us a little color underlying some of the moving parts there.

Yes, sure, Ross.

I think -- we obviously have a number of different parts of our business that touch that space, including our biomaterials area, our medical grade silicone platform, where we realized record revenue in the quarter, as I mentioned in my remarks.

We have obviously a consumables exposure there through our offerings into the hospital and clinical environment, which continue to see strong growth.

So overall, I would say we saw continued strong momentum in that space, offset on the margin here by a little bit tougher funding environment, especially in Canada.

We had also -- we have got a modest diagnostics kit exposure in Asia that is somewhat dependent on kind of the timing of monsoon season and such, where on a year-over-year basis you see a little bit of a push there in the timing.

So a few kind of one-off items that probably are more timing related with a little bit of funding in Canada that drove that slightly negative.

But the core offering there, those platforms continue to run at a pretty high level.

And then maybe just philosophically, I mean, you talked a little bit about capital allocation.

Obviously near term you would be deleveraging, but ultimately this is a business that could obviously take on quite a bit more assets.

Sort of become a very attractive platform for tuck-in M&A.

I guess how do you think about types of assets or the types of returns?

Or what you will target, whether it is geographic versus product segment or the like just in terms of a blush of what we will expect eventually as we get to more manageable leverage levels?

We would definitely agree with your perspective on that.

When you look at our customer access that we have through our channel, the global nature of our business, we do think this is a platform that will serve as a consolidator of the space going forward.

And we are obviously anxious to be able to deploy capital to accelerate the growth using that mechanism.

Clearly, biopharma is our most important segment and gets certainly a disproportionate share of the capital allocation and I would expect that to play out going forward.

When we think about the type of assets that we would be interested in, they probably fall in two or three different buckets.

Clearly, we are underrepresented in Asia and anything that would accelerate our growth there would be interesting to us.

As you know, we are also structured around our customers' workflows.

And so as we look to enhance the content that we provide to an individual workflow, there is opportunities there that we would look to fill in through M&A.

And then lastly, anything that deepens our technology footprint, particularly with an eye towards biopharma and bioproduction especially, would be interesting to us.

Great.

Thank you, guys.

Doug Schenkel, Cowen.

Good morning.

You mentioned the exit of some less profitable customer accounts within the Americas healthcare end market.

Is there any more detail you can provide on these accounts?

Specifically how much of a headwind did this layer in during the quarter?

And is this something that is going to continue to be a slight headwind through the rest of the year?

No, good question, Doug.

I think the mid -- it's a normal part of our just managing the business and getting clear analytics and business plan on segmenting the portfolio into various pieces, whether it's customer product line or whatever.

And to the extent we have opportunities for deploying our resources in more profitable areas, we are going to continue to do that.

But you shouldn't read into this as the start of any kind of trend.

But as we see opportunities like this and we are not able to resolve them commercially, we have got to make sure that we are addressing it through the means that we control.

If we can't do that, we will deploy the resources elsewhere.

So it's a bit of just an ongoing routine management of the book of business that we have.

Okay, that's helpful.

Thank you for that.

Pivoting to cash flow and specifically working capital, I was just hoping you could give us a little more detail on working capital in the quarter.

That appeared to be the primary driver to weaker cash flow from operations than we were expecting.

So any details here would be helpful.

And I guess looking ahead, how should we be thinking about cash flow from operations for the full year?

Yes.

Well, I mean, I think the performance has been actually quite strong for the first half when you consider that on a GAAP basis we had basically zero free cash flow in the first half of 2018.

We are pushing $50 million in the first half of 2019.

And then on an adjusted basis, it is up 21% when you do the interest adjustment that we do.

So we are making strong progress.

But I think your observation's fair, Doug, that there is a fair amount of investment this quarter into working capital.

I would say that it's more so related to inventory and trying to support the growth in various segments, particularly in Asia.

We referenced the opening of a GMP warehouse in Singapore and certainly we think that is going to drive more growth, but it will require more inventory.

I would also just reemphasize that from an overall management focus and incentive perspective, this is a big deal for us.

Michael and his staff have this as a key element that we are reporting out on and discussing every month.

And as I said, it is a part of our incentive plan as well.

So I think there has been good progress.

I do agree with you that there is more opportunity.

We have to balance supporting the growth with driving the cash performance and we will continue to do so.

Okay, that's great.

Thank you very much.

Brandon Couillard, Jefferies.

Thanks for fitting me in.

Good morning.

Mike, would you just touch on biopharma in the Americas?

I think Tom said it was mid-single digits, which is below the corporate average and I think a step down from kind of the low double-digits you did in the first quarter.

Was there a timing dynamic there or perhaps a tough comp?

A little bit of tough comp, Brandon.

But as you know, that segment there is going to include everything we do in the lab as well as what we do in production.

So you have a little bit of timing that comes through on some of the production platforms that we do see.

But we had a number of significant contract wins in the quarter that will continue to drive strength and momentum in that business over the long term.

So I don't think really anything to point out or to be concerned about there, Brandon.

Thanks.

And then just a clarification, Tom.

I think you said $380 million of interest expense for 2020.

That assumes no further debt repayments from the second quarter on?

Is that right?

Yes, it assumes current debt levels.

There will be -- we will be paying down debt over the course of the second half, but we haven't factored that into that estimate that I gave.

Super, thank you.

I would now like to turn the call back over to management for closing remarks.

Thank you all for participating in our call today.

We really appreciate your support of Avantor.

And certainly, once again, we are excited about the strength of our second-quarter results and believe the business is positioned for a great second half.

We look forward to our next update at the end of the third quarter and certainly look forward to seeing some of you in person here over the next couple of weeks.

So thank you, everyone.

Have a great day.

This concludes the second-quarter earnings call.

We thank you for your participation.

You may now disconnect.