Avantor Inc (AVTR) 2021 Q4 法說會逐字稿

Good morning. My name is Ruel, and I will be your conference operator today. At this time, I would like to welcome everyone to Avantor's Fourth Quarter and Full Year 2021 Earnings Results Conference Call. (Operator Instructions)

Now I would like to hand over the call to Mr. Tommy Thomas, vice President of Investor Relations. Mr. Thomas, you may begin the conference.

Good morning. Thank you for joining us today. 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 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 some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we make today.

These forward-looking statements speak only as of the date that they are made. We do not assume any obligation to update these forward-looking statements, 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 in the appendix to the presentation.

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

Thanks, Tommy, and good morning, everyone. I appreciate you joining us today. I'm starting on Slide 3. As you saw in our press release, we delivered another strong quarter with above-plan performance on all key financial metrics, concluding an outstanding year that reflects strong momentum across our end markets, disciplined execution of our operating plan and the value of our long-term growth strategy.

In the fourth quarter, we achieved mid-single-digit core revenue growth, driven by continued strength in our 2 largest end markets, biopharma and applied technologies and advanced materials. COVID-19 revenues were in line with guidance as vaccine-related demand continues to be strong and revenue associated with diagnostic testing improved sequentially, reflecting increased testing associated with the Omicron variant. Despite continued inflationary pressures, we expanded margins by more than 150 basis points, including the favorable impact of our acquisitions in 2021.

Free cash flow grew double digits and adjusted EPS increased more than 20%. In addition to generating solid financial results in the quarter, we also made significant progress in executing our long-term growth strategy. Most notably, we closed the Masterflex acquisition in November and are making good progress with the integration. Similarly, integration of Ritter and RIM Bio remain on track, and we are starting to realize the anticipated commercial synergies from both of these transactions.

Representing more than 50% of our revenue, biopharma remains a key growth driver for our company, and we continue to drive innovation and growth with investments in manufacturing capacity, people and capabilities. In the fourth quarter, we advanced our expansion initiatives, our key process ingredients used in upstream and downstream applications in the bioproduction workflow, inaugurated our second European single-use facility in the Netherlands, and opened a new single-use logistics hub in Massachusetts. Located near our single-use manufacturing site in the Boston area, the new logistics hub serves as a center for raw material storage, quality control and finished good distribution, and is a critical enabler to the continued double-digit growth of our single-use platform.

An important element of our growth strategy is helping scientists realize the potential of breakthroughs with the ongoing introduction of new products to keep pace with our research and development advances. We recently announced a commercial agreement with Agilent to provide customers with sample preparation content that can be paired with our extensive line of kits and consumables to enhance our liquid chromatography and mass spectroscopy workflow solution. The agreement supports our strong customer relationships across all of our end markets, and will provide scientists broader access to Agilent's content in these fast-growing applications.

Looking ahead to 2022, we are poised for another great year at Avantor. We have good momentum in our end markets and the order book for our proprietary materials remained strong. Consistent with our long-term growth algorithm, we expect mid-single-digit organic growth, more than 125 basis points of adjusted EBITDA margin expansion, more than $1 billion in free cash flow and mid-teens adjusted earnings per share growth. And as you would expect, we are hard at work in integrating our recent acquisitions, while continuing to consider future M&A opportunities.

Moving on to Slide 4, I'd like to summarize our fourth quarter financial results. Core revenue increased nearly 5% on an organic basis and 6.5% on a reported basis, including revenue contributions from Masterflex, Ritter and RIM Bio, offsetting the impact of foreign currency exchange headwinds. As anticipated, core growth was partially offset by COVID-19 headwinds of approximately 2% reflecting strong growth in COVID-19 vaccine-related revenue and year-over-year declines in diagnostic testing and PPE-related revenue.

From an end market perspective, our performance was driven by mid-single-digit organic revenue growth in advanced technologies and applied materials and biopharma, including more than 20% growth in bioproduction. Reflecting the impact of lower year-over-year COVID-19 testing and PPE revenues, we experienced mid-single-digit declines in both health care and education and government. Adjusted EBITDA in the quarter was up 16%, and reflecting volume growth, favorable mix, including low double-digit growth in sales of proprietary materials and consumables, productivity and outstanding execution enabled by our Avantor Business System. Similar to the third quarter, we were able to absorb inflation in raw materials, third-party products, transportation and wages and still expand adjusted EBITDA margin by more than 150 basis points, which included an approximate 90 basis point benefit from M&A.

The strong operating results, coupled with continued traction on borrowing costs and income taxes, resulted in adjusted earnings per share growth of more than 21%. We generated free cash flow of $314 million in the quarter, over 137% of adjusted net income as strong working capital performance partially offset higher capital investments to support our growth initiatives. Our adjusted net leverage ended at 4.2x adjusted EBITDA, essentially flat from the same point in 2020 despite deploying more than $4 billion in M&A capital during the year.

Slide 5 provides an overview of our full year results for 2021. Compared to our initial guidance, we essentially doubled organic growth, nearly quadrupled EBITDA margin expansion and just about doubled adjusted EPS growth. For the full year, our 11.3% organic sales growth included 2.1% in COVID-19 tailwinds, yielding core growth of 9.2%. On adjusted EBITDA, we were able to expand margins by approximately 190 basis points, including 30 basis points from M&A. The operating results, combined with continued progress on interest and income tax expense, resulted in approximately 58% growth in adjusted EPS.

And lastly, free cash flow grew to $920 million in 2021, reflecting more than 100% conversion of adjusted net income. Our continued strong free cash flow supports rapid deleveraging, and is an important enabler of our M&A strategy.

In summary, 2021 was another outstanding year, and our financial results reflect the value of our business model, our significant exposure to the high-growth biopharma space and our team's relentless focus on execution enabled by the Avantor Business System. I'm extremely proud of our team of more than 13,500 global associates, and I remain confident in our outlook for 2022 and beyond.

With that, let me turn it over to Tom to walk you through our financial results in more detail.

Thank you, Michael, and good morning, everyone. I'm starting on Slide 6. Organic growth in the fourth quarter was 2.5% or 4.6%, excluding COVID-19-related headwinds. For the full year, organic growth was 11.3%, which exceeded the high end of our final 2021 guidance. Our 2-year average Q4 core organic growth rate, meaning organic growth, excluding the impact of COVID-19-related revenue was approximately 5.5% and approximately 5.1% for the full year, with both measures ahead of 2020 comparison.

From a regional perspective, Americas, which represents approximately 60% of annual global sales achieved 3% organic revenue growth in the fourth quarter. Excluding COVID-19-related headwinds, Americas core revenues increased nearly 6%, driven by high single-digit sales growth in both biopharma and applied technologies and advanced materials end markets.

Within biopharma, strength continued in our bioproduction business with high teens growth powered by sales for our single-use offerings and process ingredients. Strength in research materials, consumables and services led to high single-digit growth in biopharma R&D, as funding remains robust and customers continue their emphasis on discovery work.

Within advanced technology and applied materials, we continue to experience strong demand for proprietary content, particularly for aerospace and semiconductor customers. Europe, which represents approximately 35% of annual global sales achieved 0.5% total organic revenue growth in the fourth quarter or 2.5% excluding COVID-19-related headwind. Europe experienced strong double-digit growth in bioproduction driven by single-use offerings and process ingredients and excipients.

Within Europe health care, our medical implant platform grew more than 40% in the fourth quarter. partially offsetting the year-over-year decline in revenue from COVID-19 testing. AMEA, representing approximately 5% of annual global sales achieved 9.3% organic revenue growth in the fourth quarter, driven by strong demand for our proprietary offerings in bioproduction and electronic materials. COVID-19-related sales delivered a modest tailwind, net of which core revenue increased approximately 8%.

Slide 7 shows our organic revenue growth for the quarter by end market and product group. Biopharma, representing more than 50% of our annual revenue, experienced mid-single-digit organic growth in the fourth quarter, including more than 20% organic growth in bioproduction, driven by continued strength in our single-use platform as well as double-digit growth in processed ingredients and excipients. Bioproduction demand continued to be strong, with year-end open orders up more than 70% from December 2020.

Health care, which represents approximately 10% of our annual revenue, experienced mid-single-digit organic decline in the fourth quarter driven by lower COVID-19 diagnostic testing sales, offset by continued double-digit growth in our medical-grade silicone offering. Education and government, representing approximately 15% of our annual revenue, experienced mid-single-digit organic revenue decline in the fourth quarter, driven by mid-teens decline in our government customer base, as COVID-19-related demand, particularly for diagnostic testing and PP&E offerings moderated as expected. In the education market, sales were down modestly as recovery in university research labs and K-12 continued, albeit slowly with a modest negative impact from lower COVID-19-related sale.

Advanced technologies and applied materials, representing approximately 25% of our annual revenue, achieved mid-single-digit organic revenue growth in the fourth quarter driven by growth in lab products sold for research and QA/QC, particularly in the Americas and AMEA and in proprietary materials used in aerospace and semiconductor manufacturing.

By product group, proprietary materials and consumables offerings achieved double-digit organic revenue growth, driven by strong demand for our processed ingredients, chromatography resins, excipients and single-use solutions as well as by our biomaterials and electronic chemicals platform. Sales of third-party materials and consumables declined mid-single digits, reflecting year-over-year declines in the COVID-19-related testing and PP&E offerings previously mentioned.

Let me turn to Slide 8 to offer some perspective regarding our key financial performance metrics. In the fourth quarter, we achieved approximately 16% growth in adjusted EBITDA and over 150 basis points of margin expansion to 19.4%. Our strong margin rate expansion was again driven almost entirely by gross margins, reflecting commercial excellence and the impacts from M&A.

Adjusted earnings per share in the fourth quarter were $0.36, up 21%, reflecting a 16% adjusted EBITDA growth and lower interest expense resulting from the series of repricing and refinancing activities over the last year. Our approximate 20% tax rate for the quarter was flat to 2020, but for the full year, our rate improved from 23% in 2020 and to roughly 21.5% in 2021. For the full year, adjusted earnings per share of $1.41 grew approximately 58%.

Free cash flow in the fourth quarter was $314 million compared to $286 million in the prior period. The increase was driven by stronger EBITDA growth and lower working capital requirements offset by higher capital investments to support our ongoing growth as highlighted throughout the year. We finished the year with free cash flow of $920 million with free cash flow conversion well over 100% of adjusted net income. The $52 million in free cash flow growth for the year or 6% was closer to 15% normalizing for the CARES Act and other nonrecurring benefits we received in 2020.

Turning to Slide 9, I wanted to touch briefly on our expected share count for 2022. I'll start with a non-GAAP adjusted share count of $642.7 million that we've used for calculating our adjusted earnings per share since the IPO. This is the shares outstanding at the time of the May 2019 IPO plus the pro forma conversion of the mandatory convertible preferred shares as if the conversion occurred at the time of the IPO. Since conversion will not actually occur until May 2022, the $642.7 million adjusted share count has historically been higher than the U.S. GAAP share count, making our adjusted EPS conservative relative to the U.S. GAAP EPS.

As we have previously communicated, we are changing the adjusted share count to 685 million shares in 2022 to reflect 2 changes: first, an increase of 23.8 million shares to reflect the shares we issued on September 13, 2021, to partially fund the Masterflex acquisition; and second, an increase of 18.5 million shares to reflect the stock option exercises and restricted stock vesting under our stock-based employee compensation program.

This amount covers the period since the IPO, and includes an estimate activity for 2022 based upon historical exercise patterns and no investing date. By incorporating these changes, we anticipate the 685 million adjusted share count will equate with the share count for reporting U.S. GAAP earnings per share by the end of the year. Beginning in 2023, we no longer expect to utilize adjusted share count.

Moving to Slide 10, we are reaffirming the 2022 guidance that was issued in January at the JPMorgan Healthcare Conference. We expect organic sales growth of 4% to 6%, which includes an approximate 2% headwind from reductions in COVID-19 related revenues from diagnostic testing and PP&E. Assumed in this guidance is biopharma growth of high single digits, applied technologies and advanced materials growth of mid-single digits, education and government growth of low single digits and health care growth of mid-single digits. We expect M&A to add approximately 5%, and FX to be an approximate 2% headwind resulting in reported revenue growth of 7% to 9%.

We expect to achieve more than 125 basis points of margin expansion, resulting in a nearly 21% adjusted EBITDA margin rate. This reflects strong commercial excellence, continued favorable mix of higher-margin content, ongoing productivity and integration benefits from M&A, offsetting the inflation pressures impacting most of our cost category.

For adjusted earnings per share, we are forecasting a range of $1.45 to $1.53, representing approximately 13% growth at the midpoint using a share count of 685 million in both 2021 and 2022. We model approximately $260 million in annual interest expense, reflecting the current forward yield curve with a portion of our debt that carries a variable interest rate. Our tax rate is expected to be approximately 22%.

Finally, free cash flow is expected to be more than $1 billion, once again representing nearly 100% conversion of adjusted net income. Incorporated in this guidance is CapEx of approximately $150 million for ongoing capacity expansions and higher working capital to support our growth.

One final comment regarding leverage, we are confident in the attractive cash generation capability of our business model and are committed to approaching the midpoint of our targeted 2x to 4x adjusted EBITDA leverage range by the end of 2022.

This concludes my prepared remarks. I'll now hand the call back over to Michael.

Thanks, Tom. I'm now on Slide 11. Despite the challenging operating environment, 2021 was clearly another outstanding year at Avantor due to the relevance of our business model, the importance of our mission and our team's ability to execute. I am encouraged by the growth momentum we have in our end markets and by our traction with commercial excellence and productivity initiatives that will enable continued margin expansion despite expected high levels of inflation.

We remain committed to our long-term growth strategy, and we'll continue to make investments in manufacturing capacity and innovation to ensure we have the capabilities to support our global customers. We continue to integrate the 3 acquisitions we closed in 2021 and are encouraged by the progress thus far.

Our strong free cash flow and rapid deleveraging position us to consider additional capital deployment opportunities and our pipeline of potential M&A is robust. And we recognize our immense responsibility to our Avantor associates, customers, supplier partners, lenders, investors and the communities we serve and are committed to advancing sustainability through our Science For Goodness platform.

As we look ahead, Avantor is well positioned to deliver another outstanding year in 2022. The role of our products and services in enabling scientific breakthroughs has never been more important, and we're helping scientists every step of the way. We remain focused on meeting the evolving needs of our customers and relentlessly advancing life-changing science, and we are committed to achieving our 2022 and longer-term financial objectives.

I want to thank you for your interest in Avantor and for your ongoing support. I will now turn it over to the operator to begin the question-and-answer portion of our call.

(Operator Instructions) Your first question is from the line of Tycho Peterson from JPMorgan.

This is Rachel on for Tycho. So first off, can you just walk us through your COVID expectations for 2022? I know you were previously expecting the 200 basis points of headwind just given the testing dynamics. But can you just give us an update on the testing side of things, and then also vaccine and therapies, so what you're expecting heading into the year?

Yes, thanks, Rachel. This is Tom. I'll take that. And by the way, your [Ann Lorie] says hello. But anyway, I used to work with Rachel and Ann. When you look at 2021, it pretty much came in line with what we had expected, roughly $400 million or so of COVID-related tailwinds. It was probably half back and the rest of it was split between testing and PP&E. It -- the mix has kind of varied a little bit over the course of the year. But for the fourth quarter, we came in about where we expected in aggregate.

For 2022, as we've said, we've got a roughly 2% headwind from COVID. So we're expecting about between -- well relative to the 400 million for the full year, it will be somewhere around 250 in terms of COVID revenue. And the mix continues to shift, as I said, half and half between testing and vaccination in the 2021, and it should be -- have a higher vaccination content in 2022.

So next up, could you just talk about Masterflex, RIM and Ritter BIO performance in the quarter? M&A contributed about $90 million during 4Q, which is a little lighter than we were modeling. So is there anything to look into there? And then you mentioned integration is going well for all 3, so can you just give us some additional color on early integration progress?

This is Michael, I'm happy to take that question. As I indicated in my prepared remarks, we continue to be excited about the progress we're making on integrating, really, all 3 acquisitions in the quarter. I think they came in essentially in line with our expectations. We're obviously in the early days with Masterflex, the contribution in the quarter reflects 2 months of having them in our portfolio, the strong performance out of the gate in line with expectations. We've got a great order book similar to our own bioproduction order book, and we're off to a great start there.

On the other 2 acquisitions, obviously, more modest in size. But again, we're also starting to realize some of the commercial synergies that we had anticipated. There's some great technologies there in the RIM Bio acquisition that we're now starting to leverage, particularly some of the bag technology that we're now moving into our European business, for example.

And in the case of Ritter, we've got some really great progress there, not only with the pipeline and the specification work that we're driving. But we mentioned early on that one of the things we were planning to do was obviously to embed our quality and regulatory capabilities in that business, and we were able to launch our sterile product line as well as earn IVD certification in Europe, for example.

And we're making good progress on expanding the production -- the product capabilities in that business to increase not only the scope of tips, for example, that we provide, but also introducing a number of other new product categories, PCR plates, for example. So we have a pretty clear line of sight for 2022 to a number of investments that we're making to continue to progress the capabilities of that platform, which we remain extremely excited about.

Great. And then last one for me. So you ended the quarter at net leverage of 4.2x. I think you were targeting to hit roughly 4.7% post Masterflex. So that was just a bit faster than we expected. So you previously said you're targeting to reach the 2x to 4x leverage range by the end of 2022. So first up, is there a possibility to bring that forward? And then how should we think about that with your capacity on M&A?

And then 1 follow-up on M&A, just given valuations that we're seeing in the markets right now, can you just talk about how you're thinking about the pipeline, just given I'm sure management teams would prefer to sell at a higher range? So can you talk about how that pipeline...

Yes, sure. Thanks. The leverage, right, it came in, as Michael said, pretty close to where we were at the beginning of the year. And that's despite having deployed $3 billion worth of capital that was funded by borrowings and came in at 4.2x at the end of the year, pretty much in line with our expectations. We should probably connect off-line on the 4.7%. That was probably the leverage as of the acquisition date when we had initially thought it, but we can talk more about that.

The expectation going forward is really strong free cash flow, as you've seen, probably $1 billion or so of free cash flow that would -- that's available. The really nice thing that we've got going for us is in the second half of '22, we'll no longer be paying the dividend on the mandatory convertible. So that's probably another $65 million or $70 million of available cash for delevering as well. So if you take that into account and look at our EBITDA and expected debt levels, we expect to be somewhere in the middle of our targeted 2 to 4 leverage range by the end of the year. That does not anticipate any utilization of deployment towards M&A. And I know Michael wants to touch on the second part of your question.

Yes, you mentioned valuations and expectations from sellers. Clearly, there's been a higher level of volatility in the capital markets as we get into 2022. I think my perspective is it's probably a bit early to see expectations change meaningfully one way or another at this stage. It's been only a few weeks. Probably at these levels, I would anticipate needing a bit more time to season before you might see things settle out in terms of seller and buyer expectations coming together here. So probably a bit early to make a call on how we see valuations changing in the M&A space.

Your next question is from the line of Derik De Bruin from Bank of America.

I just want to ask some of the obligatory questions on supply chains and what are you sort of seeing. I think some of your peers have seen some headwinds. And was just sort of wondering what's that given your -- you being such a broad network. Just any sort of issues with suppliers, any issues or disruptions?

Derik, thanks for the question. We've mentioned that, I think probably since the beginning of the pandemic, that supply chains have been certainly strained. And the hotspots, if you will, have probably moved around a bit over the course of the last couple of years. Certainly, transportation has been strained, labor availability, particularly in the U.S. has been an issue. More recently, things like just workforce availability due to COVID, for example, and then various raw material and product constraints that have ebbed and flowed across the period.

So I think in the fourth quarter, probably in aggregate, no really different impact on the business in what we have seen maybe in previous quarters. Like I said, the hot spots probably have moved around events. I think I said in the last call, some of the single-use components, for example, are probably a bit more constrained at this phase than they were earlier in the year and on the heels of really strong growth throughout the year. But in aggregate, I don't think we're seeing any more strain on the business than what we have been seeing.

And certainly, we look at the -- our global manufacturing network, the global supply chain that we have certainly favors our current footprint and providing flexibility and optionality to our customers to keep supplies moving. So I think net-net, we're in pretty good shape here. But the team does a lot of work to overcome a lot of the inefficiencies that are out there right now.

And then just 1 follow up, so what are you assuming for inflationary pressures in your margins in '22, and what are your pricing expectations? How are you hoping to offset that? Are you able to pass price onto your customers?

Yes. So as Tom, I think, mentioned in his remarks, we're seeing inflation across most cost categories, whether that be wage and labor inflation for sure. Transportation costs are up pretty significantly. And then product raw material costs are also up meaningfully. We do think though that our long-term margin expansion algorithm continues to hold even in this environment. And just for context, our base business, as we've indicated before, should expand margins or should expect to expand margins 50 to 100 basis points a year by doing things like driving price to offset cost of goods sold, ongoing productivity initiatives. We certainly benefit from the mix impact in our business. And we saw that again in the fourth quarter with proprietary content significantly outgrowing our third-party content and the corresponding margin benefit that comes from that.

And we see 2022 shaping up no differently. We'll get the requisite 50 to 100 basis point expansion on our base business. And then we will add to that the benefit from the 3 acquisitions that we closed last year. And so between the 2 of them, you get the guide that we have out of the gate here of more than 125 basis points. Pricing, as you mentioned, is going to be an important enabler for the expansion this year.

Historically, about 1/3 of our revenue growth will come from pricing. We're probably looking at something on the order of 2x that -- this year, to account for the inflationary environment that we're seeing. And I don't think anybody is surprised by that given the macro environment, and we've got good traction on the needs on delivering that.

(Operator Instructions) Next question is from the line of Vijay Kumar from Evercore ISI.

One -- maybe, Tom, for you -- or perhaps, Michael, on the guidance here. Just to clarify your organic of 4% to 6%, that includes 200 basis points of forward headwinds. So ex that, that number is up 6% to 8% on an underlying basis. And if that's right, your revenue guidance range, that's a 200 basis points range rate. With your earnings, there's a 6-point [deficit]. So maybe just walk us through on why your earnings range is wider than revenues.

Yes, there's -- thanks, Vijay. I think your math is right. The -- our long-term growth model is 4% to 6%. But when you consider the impacts of COVID, we're still committing to that 4% to 6% and covering for those COVID headwinds I mentioned in the call earlier.

In terms of the fall through to EBITDA and to earnings per share, there's a number of dimensions that you need to give consideration to including the environment that we're living within the context of inflation and you're getting the right assumptions on that and also managing the supply chain aspects of the top line. I think both of those -- we just want to be ultra conservative in terms of the commitments that we're making. I think the -- when you look at what we've done in the last 2 or 3 years, we've been pretty prudent at the outset. And as the year has gone on, we've shared the impacts of both the current quarter and expectations. So I would expect that over the course of the year, you'll see ongoing improvement in the EPS and margin expectation.

And then one follow-up. Your margin expectations for the year, 125 basis points of expansion. Tom, can you talk about what is base margin expansion versus M&A contribution? The reason I ask is, once these deals annualize, their LRP implies 100 basis points of annual expansion to hit the 24% fiscal targets. So what's the visibility in the triple-digit margin expansion?

Yes, it's a great question. Just to remind you, in 2021, we had roughly 30 basis points impact from the M&A on the margin expansion. So it's having its intended effect. And when you look at the fourth quarter, in particular, it was really strong in terms of the impact on the margin rate. So as we go forward in planning, and this is probably a factor for you to consider, the roughly 125 basis points, I think we consider that to be a floor. And I would consider that a composition of our normal 50 to 100 basis points on the organic business, call that 75. And then with the difference made up by M&A -- and I do think that we'll execute well and probably deliver higher than the floor there.

As we go forward, the business becomes -- has more scale to it and has a higher proportion of proprietary content, and that bodes well for our margins and our margin expansion. So as we get into the proprietary areas, whether it's in biopharma production or biomaterials, some of the advanced technologies, applied materials, parts of the business with the growth that we expect and the investments that we're making, both in capacity and in integrating some of the M&A, we're very confident in that long-term projection of margin rate expansion that you mentioned.

Your next question is from the line of Dan Brennan from Cowen.

Congrats on the quarter. So I wanted to ask a first question just on bioproduction. So assume like $45 million to $50 million from that revenue in the fourth quarter. Our math implies like your base business in bioproduction could have grown like north of 20%. So I'm just wondering, can you comment on like the base business, how it did in the fourth quarter? And I know you gave the order trend, I think, on a maybe annual basis. Could you tell us what the order trend was in Q4? And then related to that, you mentioned the single-use technology expansion overseas in the U.S. Just comment how that's going to impact the growth rate of that subsegment.

Great place to start, Dan. Bioproduction is quite important, obviously, to our business model. It's the fastest growing part of our portfolio and the majority of that solution set is comprised of proprietary content, so it carries an important contribution to margin expansion as well. Just to perhaps put it in context, as you all know, biopharma is in aggregate, a little bit more than 50% of our total revenue. And of that, we have Masterflex on the books, you're talking about production being about 40% of our biopharma revenue overall. So it's growing in importance to the business.

In the quarter, we delivered another very strong performance from that platform, well more than 20% growth, as you suggest. And that really is comprised of vaccines continuing to run at a high level and kind of in line with expectations. We've had an order book there that's been pretty robust, and we had great visibility, too. But I do think it is important to recognize that the core business continues to be the key driver of growth in our vial production platform.

Our order book also reflects that. We're sitting with approximately a year's worth of orders on the books for bioproduction. And as we now get a chance to see the Masterflex order book, it's also similarly impressive. And the composition of that order book would reflect probably 80% of that being our core business, so -- and whether that's in the historically strong monoclonal antibody modalities or more recently, some of the traction we're getting in cell and gene therapy, the core business continues to be and exciting growth opportunity. And I think, long term, as we've indicated in some of our recent comments, that part of the business should continue to grow mid-teens plus over the long term. And we've probably doing better than that more recently.

Within bioproduction, single-use has been leading the way over the last couple of years, growing well more than 20% on a core basis. We've invested significantly with expansions at virtually every one of our facilities. We've been pretty transparent about that. I think we more than doubled our footprint last year, our capacity to fuel the growth that we see in that part of the business. So we're very well positioned, we'll continue to drive expansions in our excipients, processed ingredients capacities as well as single use. But the core business is in great shape, and performance again, quite strong in the quarter.

And then just as a related follow up, which maybe -- you kind of answered it. So looking at the proprietary product materials and consumables business, I know that's a really important driver of the gross margin. I know you guys talked about growth of double digits in the quarter. We were calculating north of 20%. Is that in the right zip code? And how do we think about like that segment growing within your 2022 context for guidance?

Yes, as I mentioned earlier around our margin expansion algorithm on the base business, which yields 50 to 100 basis points a year of expansion, there's a number of things that go into that, including mix. And historically, our proprietary content, our proprietary materials and consumables specifically, have grown at a rate of kind of 2x to 3x the third-party materials and consumables, which tend to be more oriented into the lab products area, the lab R&D space. And so we're benefiting from our exposure to the production space with our proprietary content. And that certainly held true in the quarter. We expanded proprietary content in the quarter double digits and certainly -- probably outperformed even our historical 2x to 3x differential to third party. So strong margin expansion in the quarter and certainly, mix was an important driver there.

Your next question is from the line of Jack Meehan from Nephron Research.

I wanted to just go back to M&A in the quarter. Is it possible to get a breakdown of the $92 million between the 3 deals you did last year? And then on Masterflex, is that still on track for $300 million of sales in 2022?

Yes, Jack, I think when you look at the second part of your question there around the $300 million that we provided visibility to at the time that we did the deal, we're still very confident and probably more confident now that we've had the opportunity to have the business in our hands now for at least 90 days or so. Great order book, great innovation pipeline and pretty good visibility to how that business is going to perform.

And given the single-use focus in that business, it will continue to perform in line, I think, with the growth that we've been seeing in our own single-use business. So very confident in the outlook for that and certainly in line with our expectations. And when you then kind of translate that backwards into the 2-month contribution we got from that business, it certainly came in line with our expectations as did the other 2 deals that we had in the quarter. Ritter specifically, we saw some nice sequential 3Q to 4Q step-up in that business. And RIM Bio, obviously, a much, much smaller deal than the other 2. I would say it came in line with our expectations, but contributing at a much more modest level.

Got it. And then one more on bioprocessing, specifically related to the COVID vaccines. Could you call out just how the order book trends compared to the revenue growth in the quarter? And I guess just -- it would be great to get your latest thoughts on the handoff to non-COVID over time and just kind of confidence in that.

When you look at the contribution that we had to the roughly $400 million of COVID tailwinds in the year. Approximately half of that came from COVID vaccines. And given the lead times for those products that go into those vaccines, many -- not all of them but some of them are approaching a year's lead time just given some of the constraints highlighted in the supply chain So when we look ahead, we obviously have a pretty clear line of sight to 2022 and the contributions that we anticipate getting from vaccines in this year. And I think as we look at it, we're expecting similar contributions this year as compared to last year from the vaccines.

Yes. I was going to say, on the -- your question on the comparison of the sales to the order book, the order book has continued to grow significantly as we mentioned before. I mean it's more -- just on biopharma production, it's nearly doubled since the beginning of the year. As Michael mentioned, the proportion of those open orders related to COVID continues to be less than 20% or so of it. So the shift through the migration that you've referenced, Jack, I think, stands out pretty well in those dynamics.

Your next question is from the line of Tejas Savant from Morgan Stanley.

Michael, one for you on China. Can you just talk a little bit about any sort of customer access issues and impacts you're seeing from the zero tolerance COVID policy? And then thoughts on how long this stays in place, given sort of the low level of natural immunity in a vaccine that hasn't worked as well as the mRNA modalities. And if and when, I mean, China decides to relax that policy, are you concerned at all that there might be a sort of disruption from a case surge or some such?

Yes, thanks for the question. I think it's probably first important to put China in context for our business. The entire region is just a bit over 5% of our revenue. And obviously, China would be a subset of that. So we're working off a relatively small base, but we continue to generate some pretty impressive growth numbers off of that small base. And the Masterflex acquisition will only help accelerate that given the footprint of capabilities that, that business brings us in the region and the solution set that, that gives us for our customers. So we're certainly excited about our positioning there, and I think we have a pretty optimistic outlook for that.

In terms of just how we're interacting with our customers, I don't know that China is any different for us than other regions other than we're obviously not able to send a lot of our experts from Europe to the U.S. into the region, at least to be there physically. So you can kind of work around that with some of the video conferencing technologies.

But it was certainly timely that we had opened up an innovation center there just prior to the onset of the pandemic. And as we do reviews on the utilization of that facility and the program pipeline that they're working on, are pretty impressive contribution coming from the work that our teams are doing there. So despite some of the restrictions that we face in China as well as around the world, our teams will continue to find ways to interact and engage with our customers in meaningful ways and progress our pipelines and continue to support their efforts to bring critical therapies to the market.

Got it. That's helpful. And a quick follow-up on education and government. I think Tom, you mentioned expecting sort of low single-digit growth there in '22. I was just curious as to what you're baking into that assumption in terms of the NIH funding outlook, et cetera, being pretty robust. Obviously, there's the testing and PPE sort of COVID-related decline that you have to factor in as well, but curious as to get your take on that.

Thanks, Tejas. The -- no doubt the environment is pretty strong in some of these new potential offshoots at NIH also look promising if they can ever get funded. The environment is definitely improving for us from an education and government perspective. I don't think we're -- we consider it to be all the way back, but we've seen gradual improvement. And the way we're looking at 2022 is roughly mid-single-digit kind of growth in the group in its entirety.

Your next question is from the line of Patrick Donnelly from Citi.

Maybe just one on the advanced tech and materials segment, that continues to put up pretty strong results. Can you just talk about the outlook into '22, your visibility? I know that tends to be a little shorter cycle than in areas like bioproduction where you talked about a year-long order book. But maybe just talk about the strength of the underlying market, where you're seeing pockets of growth there. And again, confidence and visibility into '22 would be helpful.

Yes. Thanks for the question, Patrick. Obviously, that part of our business is highly fragmented across a number of different end markets and application areas. But it certainly works on -- we address a lot of the same workflows that we have in our life science businesses around testing, particularly around QA/QC work as well as in providing proprietary content and formulations to our production environments, and things like semiconductors, aerospace and defense, for example.

As you suggest, pretty strong finish to the year, I think, reflecting pretty strong PMI indices around the world, pretty strong production backdrop that we're supporting there. And I think pretty well noted, some of the frothiness in end markets like semiconductors, for example, with the demand that, that is driving is meaningful.

So I'd say pretty strong macro backdrop that's supporting a pretty strong output across most but not all of the application areas that we support. Visibility, at least on the testing side of that business, the QA/QC work is -- looks a lot like the rest of our business, which is to say a lot of that is kind of book and ship type revenue, so you could be talking days to a few weeks. Certainly, the production platforms in semi for example, we would have a much longer view into those trends, but I think continues to support a pretty bullish outlook for the platform overall. But when we look at it from a year-over-year perspective, I think something in the mid-single digits feels right out of the gates here.

Okay. That's helpful. And then just a housekeeping one for Tom, just on the adjustments for the EBITDA side, it looked like corporate expense might have jumped a little bit, which pushed EBITDA down. Can you just talk through what that was? And -- I just wanted to clarify what we saw there.

Yes, actually, the -- when we look at overall expense for the quarter, in aggregate, it actually came in a little bit better than in our expectations. I mean the environment is not an easy one when it comes to inflation on both our salaries and -- but also when you look at some of the indirect spend that we would have in corporate, I don't think there's anything unusual or any trends or one-offs or anything in there. It's -- I think it's well managed. And I think we've got a good view on it for next year as well.

Your next question is from the line of Matt Sykes from Goldman Sachs.

Maybe my first question, just along lines of the bioprocessing questions that have been asked. Just given the supply-demand picture and the growth you're seeing, just wondering in terms of customer behavior, what you're seeing. Is there some additional stocking going on? Or has the demand been pretty steady throughout last year and the beginning part of this year?

Thanks for the question. Demand continues to obviously be very, very strong. Supply chains continue to be relatively tight to keep up with all of the demand. So there's really not a lot of excess capacity in the system to support incremental buying or inventory. And it's a little bit unique in that there's shelf life considerations and storage considerations for the sensitive and regulated materials that we're providing.

So demand patterns have been strong and lead times for our materials have been extended as we've moved through the year. And so kind of transitory or incremental buying within a relatively tight time line, it really isn't something that can be accommodated easily. So I think the demand that we're servicing is pretty well in line with production levels of our customers.

And then just one more on just China, AMEA. Obviously, you've mentioned before, you want to increase exposure there, you've made an acquisition of RIM Bio. But you also made mentioned that Masterflex gives you some exposure there. As you kind of look at building out your exposure there inorganically, in terms of your pipeline, is it sort of more of a local company that you'd be looking at? Or do you think you can get enough exposure in building exposure through a multinational company with larger exposure to China? How are you thinking about building that exposure inorganically?

Thanks for giving me the opportunity to talk about our strategy. When you look at the way we approach serving these markets, we take a workflow-driven approach to this and looking at what content and solutions that we need to provide in. We then go to work to build a compelling offering to serve our customers. And so when we look at the core workflows in bioproduction, for example, that we're looking to take hold in and participate in, particularly in a place like China, you look at cell and gene therapy as an area that they're moving aggressively in some of the tech transfers on monoclonal antibodies, for example, we're pretty well positioned.

And so up until now, with demand levels where they have been for production in China, we've been able to satisfy the requirements by importing product from our sites in Europe or the Americas. And I think over time, the strategy has always been to localize capabilities as the market dictates to help shorten the supply chains and derisk the supply for our customers and make it a bit more agile. So certainly, RIM Bio gives us an initial footprint in that direction, and we'll continue to look for opportunities to whether it's inorganically or organically, continue to add capacity in region, in line with kind of the ramp up of demand in the region.

So it will be a combination. A lot of these capabilities don't exist locally. So if you can find things that will allow us to execute our strategy, we'd certainly be interested. But we're also cognizant that some of these things might have to be built greenfield by our own investments organically. So it will be a mix.

Your next question is from the line of Dan Leonard from Wells Fargo.

A quick clarification on bioproduction and then a follow-up on medical grade silicone. So in bioproduction, you mentioned the 70% growth in your backlog. I'm curious if that includes Masterflex or is that an organic number? And then on medical grade silicone, you called out the growth there. Just wondering, how big is that business now? And what's the growth outlook going forward?

I'll take it in reverse order for you. If you look at our biomaterials platform, which is an area that we're incredibly excited about, there's a tremendous amount of innovation that is in that part of our business. We've got a very rich and deep pipeline of opportunities that we continue to progress with our customers and the growth outlook there is significant. And when I look at the contribution of that business on a full year basis, it was a very nice year for that part of our business, rebounding strongly from low end of the double digits against a relatively weak comparison in 2020, given some of that COVID-related restrictions. But strong contribution both from the top line as well as margin impact from our business.

The revenue from that platform gets reported in our health care segment. As we've talked before, that's about -- overall about 10% of our revenue. Roughly 50% of that platform would be our solutions that we provide for diagnostic testing and roughly half of that -- the other half would come from a biomaterials platform.

Your second question around the growth of the order book. As we have been anchoring numbers throughout the year here, what Tom shared with you would reflect just our organic order book. The -- we'll start to add in the other order books as they -- into those numbers as they become part of our organic story at the 12-month milestone. But as of now, I think we've quoted here, it would just be on an organic basis. But the order book for Masterflex is indeed significant.

This concludes our question-and-answer session. I will hand it back to Mr. Michael Stubblefield for closing remarks.

Yes, thank you, and certainly thank you all for participating in the call today. I think I would like to end here by just reiterating my confidence in where we're at here heading into 2022. We're extremely well positioned to deliver another very strong year with strong growth, margin expansions and cash flows. Our end markets are strong, and we start the year with significant momentum. So I'm quite excited about the jumping-off point.

I also want to express my continued gratitude for the ongoing efforts of our associates around the world who are living our values every day and setting science in motion to create a better world. It's going to be another great year. I'm excited about what lies ahead for Avantor and look forward to updating you when we meet next. Until then, take care and be safe everyone.

And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.