Avantor Inc (AVTR) 2021 Q2 法說會逐字稿

Good afternoon. My name is Brian, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Avantor Second Quarter 2021 Earnings Results Conference call. (Operator Instructions) And please be advised that today's conference is being recorded. (Operator Instructions)

I will now turn the call over to Tommy Thomas, Vice President, Investor Relations. Mr. Thomas, you may begin.

Good morning. In light of the significant overlap of earnings calls in the life science space during our previously announced time, we made the decision to adjust the timing of our call to better accommodate the investment community. We appreciate your flexibility, and 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 up the line for questions.

During this call, we'll 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 of 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 have seen from our press release, we had an outstanding second quarter that reflects strong momentum across each of our end markets and highlights our team's continued track record of execution.

In the second quarter, we achieved 20.5% organic revenue growth, and our core growth rate improved for the fourth consecutive quarter to 18.5% band. COVID tailwinds contributed approximately 2% to growth, driven largely by sales of raw materials and single-use solutions for COVID vaccine production.

In addition to delivering exceptional top line results, we expanded EBITDA margins approximately 125 basis points, grew our adjusted EPS more than 80% to $0.35 and more than tripled free cash flow. We also realized incremental interest expense savings through successful term loan repricing actions.

We continued to progress our long-term growth strategy and were successful in closing 2 acquisitions in the quarter. In mid-June, we completed the acquisition of Ritter, which adds high-precision proprietary consumables to our portfolio. And we recently launched Ritter's products under the J.T.Baker brand name through our differentiated customer channel.

We also closed on RIM Bio, a China-based manufacturer of single-use solutions to support our bioprocessing platform. This acquisition extends our single-use manufacturing footprint to China and adds critical technology to our portfolio. The addition of RIM's manufacturing facilities doubles our single-use cleanroom capacity globally and enables Avantor to serve customers in the AMEA region with best-in-class lead times.

Also of note for the AMEA region, we were recognized at the Korea Bioprocessing Excellence Awards in June for both our upstream processing capabilities and our single-use solutions, a nice validation of our bioprocessing offering and innovation capabilities.

We continue to invest in biopharma production capacity to support the strong growth in our business. We completed several capacity expansions in the second quarter, including a single-use expansion of our facility in Devens, Massachusetts, the start-up of a new single-use logistics facility in North America as well as several expansion projects at our raw materials manufacturing locations in Aurora, Ohio and St. Louis, Missouri.

As we have discussed previously, access to early phase research and discovery activities is essential to our business model and our sustained growth in the biopharma space. One of the ways that we access this critical customer segment is through our supply agreement with the biotechnology innovation organization known as BIO. BIO is the largest trade organization in the world that represents the biotechnology industry and gives us preferred access to more than 3,700 companies engaged in life science research.

In the second quarter, we proactively extended our agreement with the BIO consortium through 2029. We also issued our inaugural sustainability report this month, a key milestone in our sustainability journey. I will talk more about this report in a minute.

Looking ahead, we expect momentum in our base business to continue, driven by strong fundamentals across all of our end markets. Revenues in July have kept pace with first half results, and our order book for long-cycle proprietary materials continues to grow. We are again raising our 2021 full year guidance, which Tom will cover in more detail later in our presentation.

Moving on to Slide 4. We are excited to have published our inaugural sustainability report. This is an important milestone for us and affirms our long-term commitment to corporate responsibility and improving the world through science. The report includes clearly defined sustainability goals and describes initiatives underway to accelerate Avantor's mission of setting science in motion to create a better world.

Avantor Science for Goodness sustainability platform enhances our framework for creating long-term value by embedding sound environmental, social and governance practices into our business strategy. The platform also enables us to continually measure and report progress against 4 key commitment pillars: people and culture, innovation and environment, community engagement, and governance and integrity.

This report also highlights our progress to date. Of note, we've continued to advance the diversity of our leadership. At the end of 2020, women represented nearly 35% of our management team. We also began to integrate sustainability practices throughout our supply chain and established a goal to reduce Scope 1 and Scope 2 greenhouse gas emissions 15% by 2025.

To support STEM education and health care programs worldwide, we donated a variety of products as well as funds from the Avantor Foundation. And we continue to adopt best-in-class governance provisions, including several enhancements to shareholder rights. I'm encouraged by the work our team has done in this area and keenly aware of the work ahead of us. I look forward to our ongoing progress and remain deeply committed to our global sustainability efforts.

Turning to Slide 5, I'd like to summarize our second quarter financial results. Organic revenues increased 20.5%. All regions and all product groups experienced double-digit organic growth. Overall performance continues to be driven by our biopharma end market where organic revenue growth once again exceeded 20%.

We also experienced strong growth in our other end markets, including sequential improvement in advanced technologies and applied materials, which grew high single digits. COVID-19 tailwinds contributed about 2% to our organic growth, with the largest driver being raw material in single-use sales to support the production of COVID vaccines. Aggregate COVID tailwind revenues were similar to Q1, and our outlook for the full year remains unchanged.

Adjusted EBITDA in the second quarter was up 34%, leading to adjusted earnings per share growth of 87% to $0.35. Our EBITDA margin growth reflects the impact of volume growth, commercial excellence and the favorable mix impact from nearly 30% growth in proprietary materials and consumables.

We generated $265 million in free cash flow in the quarter, driven by strong EBITDA results, working capital leverage and lower interest payments. Our adjusted net leverage ended at 3.8x, within our target range of 2 to 4x and modestly above Q1 leverage of 3.5x, reflecting the Ritter and RIM Bio acquisitions. Absent the acquisitions, leverage would have been approximately 3.2x.

In summary, our financial results reflect the strength and relevance of our portfolio, our integrated offering and exposure to the biopharma space and our unwavering focus on execution enabled by the Avantor Business System. I'm proud of our team for the exceptional results they delivered this quarter, and I'm confident in our outlook for the rest of the year and beyond.

With that, let me turn it over to Tom.

Thank you, Michael, and good morning, everyone.

I'm starting on Slide 6. As Michael noted, organic growth was 20.5% this quarter, leading to year-to-date organic growth of 17%. Our core growth rate, meaning organic growth less the estimated COVID tailwinds, rose from negative 8% in Q2 of last year to positive 18% in the second quarter, representing the fourth consecutive quarter of such acceleration.

From a regional perspective, Americas, which represents approximately 60% of global sales, reported 23.6% organic revenue growth in Q2 and sequential improvement in the daily rate of sales from the first quarter. End market performance in the Americas was driven by greater than 20% growth in biopharma, with our biopharma production sales growing more than 30% this quarter.

Healthcare also had a strong quarter, growing above 30%, driven by materials and consumable sales to hospital and clinical reference lab customers as well as over 50% growth from our proprietary materials offering in the medical device space. Education and government grew double digits as University research and K-12 activities resumed to more normalized levels.

Advanced technologies and applied materials sales were also up mid-single digits this quarter, reflecting the continued recovery of the industrial sector and strong growth of our proprietary materials for the semiconductor market. While all product lines in the Americas grew at double-digit rates, proprietary materials and consumables grew at double the rate of third-party materials and consumables.

Europe, which represents approximately 35% of global sales, achieved 16.5% organic revenue growth, driven by lab product sales, including materials, consumables and equipment. All end markets in the region grew double digits with notable contributions from biopharma and advanced technologies and applied materials, where we've seen a pickup in lab and QA/QC activity.

As was true in the Americas, sales of proprietary offerings grew faster than that of third party, driven by biopharma production, single-use assembly and medical-grade silicones used for implantable medical devices.

AMEA, representing approximately 5% of global sales, achieved 16.4% organic revenue growth, driven by biopharma production and lab products. Sales of biopharma raw materials and single-use assemblies were particularly strong in China and Korea. Higher sales in lab consumables and equipment in India also contributed to the AMEA growth for the quarter.

Let's move to Slide 7, which shows our organic revenue growth by end market and product group for the quarter. Biopharma, representing approximately 50% of our revenue, experienced over 20% organic growth in the second quarter, including over 25% growth in the production business, driven by sales of process ingredients and single-use assemblies.

The R&D portion of the biopharma end market also experienced strong growth, driven by lab reopenings. We continue to witness favorable market indicators, including solid funding from private and public sources, robust clinical trial and FDA activity and strong therapeutic pipelines across mAbs, cell and gene therapy and mRNA.

Healthcare, which represents approximately 10% of our revenue, experienced more than 25% organic revenue growth, driven by strong recovery of our medical-grade silicone offering. We continue to benefit from a global resurgence of elective surgeries, driving end-market demand for our market-leading materials. Lab product sales to support research and diagnostic workflows also contributed meaningfully to our healthcare results this quarter.

Education and government, representing approximately 15% of our revenue, experienced over 40% organic revenue growth in the second quarter, driven primarily by the education market as university research labs continue to reopen and K-12 activities ramp up in North America. The funding environment for academic research is favorable with ongoing increases in NIH outlays in 2021.

Government sales grew mid-single digits despite facing some difficult comps, which included substantial government purchases of diagnostic supplies and personal protective equipment relating to COVID.

Advanced technologies and applied materials, representing approximately 25% of our revenue, increased about 9% on an organic basis in the second quarter. Growth was driven primarily by lab products sold to advanced technologies and applied materials customers engaged in similar workflows as the other segments of our business, including research and QA/QC.

We also benefited from strong demand for our proprietary offerings in the semiconductor space. We view the positive macroeconomic signals regarding industrial activity as constructive drivers for our business and expect the advanced technologies and applied materials recovery to continue throughout the year.

By product group, all of our product categories experienced double-digit revenue growth. This included almost 30% growth in our proprietary materials and consumables, driven by strong demand for our biopharma production raw materials and single-use offerings and our biomaterials platform. Services had a strong quarter, driven by recovery in our market source offering, lab and production services and equipment services, again, reflective of increasing lab activities across our end markets. Equipment and instrumentation also grew double digits, resulting from a strong funding environment and a recovery in equipment sales deferred during the pandemic.

Turning to Slide 8. We achieved 34% growth in adjusted EBITDA and 125 basis points of margin expansion from 18.5% to 19.7%, including over 50 basis points of gross margin expansion. All 3 segments achieved strong EBITDA margin expansion, reflecting productivity, commercial excellence and a favorable mix contribution driven by our proprietary products growing at nearly 3x the rate of our third-party products.

Adjusted earnings per share were $0.35, up 87%, reflecting the strong operating performance and ongoing reduction in interest expense from our deleveraging and debt refinancing and repricing activities.

Free cash flow, a non-GAAP financial measure, which we define as cash from operations, excluding capital expenditures and onetime acquisition costs, was $265 million compared to $76 million in the comparable prior period. Growth was driven by strong EBITDA performance, working capital leverage and lower interest payments, partially offset by increased CapEx to support our growth strategy. We have excluded approximately $25 million of onetime acquisition cost for Ritter and RIM Bio from free cash flow.

Moving to Slide 9. As Michael indicated, we are raising our guidance for the year to reflect strong first half performance, improving end markets and confidence for the second half of the year. We now expect organic sales growth of 9% to 11% for 2021, which includes 1% to 2% from COVID-19 tailwinds.

Our overall guidance for COVID tailwinds remains unchanged at a range of $350 million to $450 million for the year. Consistent with our previous messaging on this topic, we believe vaccines will continue to grow in proportion to our total COVID-related tailwinds and continue to forecast an overall decline in contribution from diagnostic product sales in the second half.

Layering in projected impacts from FX of approximately 2% and M&A of approximately 2%, we are estimating total growth of 13% to 15% for the full year. Our growth in July remained strong, and end-market dynamics are favorable across the board. While we expect moderation in growth rates in the second half of 2021 given the strong comparables from 2020, the average 2-year core organic growth rate, excluding COVID tailwinds, is expected to improve in the second half from 5% in the first half.

We are also increasing our full year adjusted EBITDA margin expansion expectations to be approximately 150 basis points, reflecting our strong first half, continued core business momentum and a modest benefit from M&A. The expansion in the second half may be slightly less robust than that of the first half, reflecting the potential for less favorable sales mix as sales of nonproprietary equipment and instrumentation continue to rebound and higher operating costs reflecting investments to support growth and the gradual return of certain operating costs deferred during the pandemic, such as T&E and employee health care.

We now anticipate adjusted earnings per share growth of approximately 50%, up from our previous guidance of approximately 40%. This guidance reflects our strong first half results, continued operational improvement and lower interest expense from deleveraging and the 2020 debt refinancing and subsequent repricing action. In 2021, we have completed additional debt repricing actions, including one at the beginning of this month that collectively will reduce annual interest expense by $10 million.

Adjusted earnings per share also includes an approximate $0.05 per share contribution from M&A. We are also raising our full year free cash flow guidance to approximately $850 million. Our full year outlook is based on ongoing EBITDA growth and lower interest payments with some modest offsets from increased capital expenditures and working capital needs to support our growth.

One final comment regarding leverage. As noted earlier in the presentation, we ended the second quarter at 3.8x leverage, including the impact of Ritter and RIM Bio or 3.2x excluding these acquisitions, down from 3.5x at the end of the first quarter. We are confident in the attractive cash generation capability of our business model and the capital allocation flexibility it provides.

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

Thanks, Tom.

I'm now on Slide 10. The relevance of Avantor's business model and the importance of our mission is evident in our exceptional second quarter performance and the overall momentum in our core business. We continue to execute well, as evidenced by our margin expansion, EPS growth and our free cash flow results.

We remain committed to our growth strategy, including the ongoing integration of Ritter and RIM Bio. We will continue to focus on biopharma as a key growth driver for our company and will support our growth of ongoing investments in raw material and single-use manufacturing capacity. We're also committed to advancing our sustainability initiatives through our Science for Goodness platform.

As we look ahead, we are well positioned for continued growth across each of our end markets and expect to deliver strong results for the full year. The role of Avantor's products and services in enabling scientific breakthroughs has never been more important.

And one final note before we conclude our prepared remarks. We are hosting a virtual Investor Day on Thursday, September 9 at 9:00 a.m. Eastern Time. Registration is live on our Investor Relations website, and we look forward to sharing more detail about our business and our long-term growth strategy at this event.

I want to thank you for your interest and investment 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) First question, we have Tycho Peterson with JPMorgan.

Great quarter. The 30% growth in proprietary consumables certainly stands out. Michael, I'm just wondering if you could talk to that dynamic. Obviously, that's part of the long-term thesis here that will outgrow third-party distribution and the good financial margin. But -- so are there things you're doing different from a kind of go-to-market strategy to try and drive the higher growth in proprietary products?

Yes. Thanks for the question, Tycho. And you're correct, proprietary content is an important part of our overall long-term growth thesis. As we've talked historically, our proprietary content would grow kind of 2 to 3x at the rate of our third-party content in our portfolio. And much of that is owed to the fact that our proprietary content is preferentially oriented to our production platforms, which grow significantly faster than our R&D platforms.

And I think the -- what you're seeing here play out is just the access that we have in early phase discovery and process development, and it gives us the opportunity to seed our proprietary content on more platforms than we have had historically. I think you're really starting to see the benefits of our integration, VWR, play out here. Our pipelines are more full than they've ever been. We're working on more opportunities than we've ever had.

And I also think it speaks to the strength of our end markets. Clearly, within biopharma, the health and strength of the core monoclonal antibody business is clear as well as the emergence of a number of new therapies in exciting areas like cell and gene therapy and mRNA and others.

So we really are leveraging the access that the VWR gives us to our development partners. And very deliberately, we're seeding more content on more platforms. And the impact that, that will have over time, ultimately, is to accelerate top line growth. And just given the margins associated with our proprietary content, it will also provide a nice margin to our business over time.

And then lastly, we're on the front end of our M&A strategy here. And as we talked a lot about our algorithm and our filter for how we would screen for acquisition opportunities, we will overweight the allocation of capital towards proprietary content, and that will also have an accelerated -- an acceleration effect on growth in margins as we continue to drive higher proportions of proprietary content into our portfolio.

That is a good segue to a question I had on M&A. RIM Bio, I know you're talking about only 2% M&A contribution in the back half of the year. But how material is that to kind of the China strategy? And can you just talk a little bit more about the importance of that deal?

We're super excited about the opportunity to establish single-use manufacturing capacity in the region. Not only does it expand our presence, but it allows us to bring a business model with best-in-class lead time there to a pretty important long-term growth for our business. And so we would view this as something that we'll build around. It gives us manufacturing capacity for our single-use franchise with local capacity now in all 3 regions of the world, which we think is strategic. And it also brought to us some incremental technologies that we'll be able to leverage globally. So while perhaps modest in scale relative to the rest of the business, it is going to be meaningful to our China strategy. And obviously in the early days here, but the customer response has been quite positive. And we're busy kind of seeding kind of new opportunities and integrating that into our system.

Great. And if I could ask one last one on just the segments. You called out some stockpiling in government around diagnostic supplies. I'm just curious how material that was? And then any segment-level commentary you can give for the back half of the year just in terms of mix?

Yes, I think that the comment there relative to government was probably more of a comp issue as we think about the trending over the last year or so. Obviously, there was strong PPE and diagnostic purchases through various government sponsor agencies or there's things like the UN, for example, that we see subsiding over time.

From an end market perspective, there's clearly a lot of momentum across all 4 of our key end markets. You saw the growth that we delivered in the second quarter. And as you kind of screen that through our outlook for the second half of the year, we've obviously not only baked in the overdrive from the second quarter, but we've also elevated our outlook for the core business in the second half, which is a reflection of our view that we'll see continued momentum in each of these end markets for our core business.

And clearly, it's headlined by a really strong environment for biopharma, both in the R&D space where we see accelerated spend levels, including some catch-up spend from maybe some postponement of some of the equipment and instrument purchases that were delayed during the pandemic to pretty frothy production environment.

Our back orders or our open order book for our long-cycle proprietary materials, which covers our offering into bioprocessing and it also covers our offering into the medical device space is as strong as it's ever been. I think when we were looking at our bioproduction order book, for example, we have essentially a full year's worth of demand in our -- sitting in our open order book. And it's at a level that's nearly 5x what we would have normally carried in our open order book pre-pandemic. And it speaks to not only our relevance in vaccine production, but more so, it speaks to our penetration and the strength of the core biopharma business.

Education has, for all intents and purposes, kind of returned to normal levels, at least at the university level in both Europe and the U.S. Elective procedures and our kind of our core diagnostics offering into the health care space has been strong, very, very nice recovery in that part of the business, and we see continued strength there in the second half. And then, obviously, we drove approximately 9% growth in our advanced technologies and applied materials end market in the second quarter. And with PMIs the way they look around the world, semiconductor outlook as strong as they are, I think we're encouraged by continued recovery in that part of the business as well.

Yes. In fact, just to add to what Michael said, Tycho, the -- if you consider the 9% to 11% full year guide, maybe you can think of biopharma, as Michael said, as in the mid-teens for the full year. The second biggest, advanced technologies and applied materials, obviously, coming off a pretty robust second quarter. That will be low to mid-single digits. And I think when you look at education and government, also mid-teens, and the healthcare business should be double digit as well. So that rounds out kind of what we've incorporated into that 9% to 11%.

(Operator Instructions) Next question, we have Derik De Bruin from Bank of America.

Tom, if I missed it, my apologies, but the update -- the guide for the interest expense -- net interest expense for the year?

Yes. I think the run rate for Q2 should be pretty representative of the full year.

Got it. And also, you've added in a lot of capacity. I'm just sort of curious in terms of what's sort of the potential incremental revenue contribution from filling up that capacity.

Derik, we've been pretty transparent. I think that we've been investing over the last year and certainly into this year across our biopharma platform, our process ingredients, excipients, chromatography expansions and certainly in our single-use area. And we've been bringing them on, on kind of a rolling basis. If you think about single use, for example, we've dramatically expanded our capacity with major expansions that are now online in the U.S. We have a brand-new site in Europe, in the Netherlands that will be generating revenue out of this third quarter. And then obviously, we have expansion in China with the acquisition of RIM Bio.

And we have, as you know, and we'll continue to have expansions playing out on a rolling basis that are necessary to fuel the sustainability of our growth outlook, particularly in biopharma. And so when you think about the strength that we're delivering in that business, our ability to keep up with the demand, that really is on the back of the investments that our team is making. And we've got a series of investments that will play out, again, over the next several years. So when we think about our long-term growth algorithm, these investments are in line with the outlook that we provided and certainly contemplated in the guidance that we shared today.

Next question, we have Doug Schenkel with Cowen.

I guess just 2 or 3 quick math ones. On M&A, you've talked about the financial parameters that we should apply when we are thinking about your capacity for M&A. If we're thinking you could do maybe $1 billion in free cash flow over the next 6 quarters, look at our EBITDA forecast and think that you might go to 4x net debt to EBITDA for the right deal, is it right to conclude that you still have, even after a couple of recent deals, about $1.5 billion to $2 billion in capacity, excluding any equity potential?

Yes. Thanks a lot, Doug. I think the -- your math, I think we ended the quarter at 3.8, and we continue the trajectory that we're on. As we said when we did the Ritter deal, we expect to be in the mid-3s or better by the end of the year. You can do the math and say, okay, what's incremental if you just take it up to 4? But it really depends upon the amount of EBITDA that you're acquiring and the multiples that you're paying in terms of how that would impact the leverage levels.

But suffice to say that we think we have more capacity now and even at the end of the year because it grows every day than we had at the beginning of the year. And I think the numbers that you mentioned are quite attainable. Assuming we're going after deals that again have a kind of EBITDA profile that we're targeting, we're not going through development stage companies or anything like that. They're going to be operational with strong cash flows and enhancing our own margin rates. So I wouldn't speak to the range that you've articulated.

Okay. And then I guess a couple on -- I guess it's really just operating margin and operating expense. The first thing I want to get at is on proprietary content. I know Tycho asked the question about how things are evolving there and durability. I'm just wondering if you could maybe take it down a level to kind of how the mix of products within the proprietary content category are evolving. I guess what I'm thinking is things like bioprocessing, bioproduction proprietary products are going to have a higher margin than maybe a proprietary equipment at the other end of the spectrum. So I'm just kind of wondering if you could maybe share a little bit more on how margin within that important category is evolving.

And then the other thing I want to get at is the operating expense increased 17% year-over-year. Obviously, we all know what was going on in Q2 of last year. So some of that is comp. But I think what we are starting to move into is a period where -- and certainly, what we're hoping for is a continued period where travel is picking up, conference schedules are normalizing, more client details are occurring. With that in mind, I'm wondering over the balance of this year, but maybe more importantly, as we look ahead to 2022, how are you looking about -- how are you thinking about operating leverage in a period where, from an operating standpoint, things are hopefully normalizing a little bit more?

Okay. So lots to unpack there. We'll do our best to answer your questions. On your question around proprietary content and kind of what's in there and a little bit around the mix and margin impact, I would highlight within the proprietary materials category, which is going to be the predominant contributor to the overall growth of proprietary content, really focused in probably 3 or 4 principal areas. Certainly, bioprocessing is a really critical driver for that. And I think you're familiar with the margins in that part of the business.

One item that you didn't mention that really is important to call out here is our leading medical-grade silicone formulation platform for medical devices. And clearly, a lot of that is being driven by elective procedures. And when we look at kind of the trajectory of that business through the pandemic and now where we sit today, I think Tom referenced in his prepared remarks that, that part of the business grew nearly 50% in the second quarter. And that business brings considerable margins into the mix, and it is an important driver and certainly was an import driver in the second quarter.

And then the last area would be our custom formulations to support aerospace and defense and our semiconductor activities. And those margins are very similar to the margins that we would have in our bioproduction business. So certainly the materials component of our proprietary mix brings considerable margin into the business.

You were asking about other Avantor offering, whether that be some of our services, particularly in the clinical services area where we have a nice proprietary offering, those margins are going to be in and around the margins for our materials. On an aggregate basis, maybe some of the kitting things we do are going to be lower margin. But when you look at some of the things we do on biorepository, it's a little bit higher margin. But in aggregate, our clinical services offering is going to be similar in gross margin as our -- the rest of our proprietary content.

And then I think your instinct is probably correct on the equipment and instrument piece, which obviously is a much smaller component of our overall offering. It's going to bring with it better margins than our third-party mix, but a little bit lower than what we would find in our materials portfolio. But if you've got some more granular detail with it, Tom, go take it then.

Yes. I think I mean the -- if you look at it for the first half in its entirety, I mean gross margin did expand nicely. And roughly half of that has come from the mix benefits that Michael referenced. And that's obviously the part of the business model here is to try and to drive that and achieve that.

Relative to the OpEx increase, I mean I would say that the 17% in the second quarter, consider that in the light of some of the performance-based incentives that we're required to accrue for. We probably have a little bit heavier weighting of that in the second quarter than the first given the performance as well as the outlook for the rest of the year. And that normalizes as you kind of go into the second half. There's probably $5 million, $6 million worth of, I call it, just catching up the full year to the midpoint based on our updated view of the full year.

So that comes down. And yes, there are some volume-related costs in there as well. So some of that scales up and down with volume. And there have been some investments that we made. We continue to reference some of the CapEx investments that we've made. But there are some SG&A costs that come with those. And truthfully, there is some inflation that we are seeing that ends up showing up in SG&A line. But we think we've contemplated that in our pricing approach as well as some of the productivity initiatives that we've got.

So overall, I mean we'll give you more perspective on 2022 in terms of how we're thinking about SG&A. But there will be -- we will continue to invest and grow the business, and you'll see some of that come through. But we're equally focused on driving productivity, and we try to do things as efficient as possible. So more to come on that when we give our 2022 guidance.

Our next question would be from Vijay Kumar with Evercore.

Congrats on a strong print here. Michael, maybe one for you on your comments around COVID tailwinds. The overall revenue range, $350 million to $450 million, was unchanged. But I think the mix between vaccine and diagnostics changed. I'm curious, what is -- what percentage is vaccine contribution now? And given your comments on the order book, should we assume that vaccine tailwinds should sustain into fiscal '22?

Thanks for the feedback, Vijay. On COVID tailwinds, I think you've read it right that, obviously, our outlook for the full year is unchanged at $350 million to $450 million, which implies roughly 1% to 2% contribution to our organic growth guide. And we'll just highlight that overall, this reflects -- represents less than 5% of our overall revenues. Our views have -- are basically unchanged from what we talked about at the end of the first quarter, meaning that the mix of the business would kind of play out 40% to 50% diagnostics, roughly 40% to 50% vaccines and the balance, PPE.

And I think we've been quite consistent about our view on diagnostics. And certainly, we don't have a lot of visibility into that end market, as we talked about, but we can really only see over the next 1 to 2 weeks. And so we've been quite conservative throughout the year in highlighting that we had already baked in a very aggressive ramp-down of the diagnostic contributions in the second half of the year. And I think that's consistent with what we're seeing.

And clearly, with the lead times associated with our offering into the vaccine space, we've got a very clear view of the order book in that space. And certainly, as we've been able to bring on capacity, I think our confidence has certainly increased. And we're maximizing what we can supply into that end market.

And so as we move through the year, and it's certainly played out this way in the second quarter, and it will be our expectation in the second half of the year that the majority of our tailwinds will be coming from vaccines. As we then transition into 2022, obviously, we're going to have to put together our plans, and we'll share that when we're done.

But when we look at our order book, which -- for bioproduction, which stands at nearly a year's worth of demand now, we do have confidence going into 2022 that the contribution from vaccines will be quite durable. And I think there's a lot of drivers from that. I think the prevailing view is the virus is likely to be endemic. We certainly see the impact of variants. There's a lot of data coming out now about the need for boosters and annual shots and these kinds of things. So I think we're -- at least as we sit here today, our view would probably support the durability of vaccines into 2022 and beyond, and our order book would certainly support that going into next year, Vijay.

That is helpful. And maybe, Tom, one for you on the guidance. The tax rate, it looks like 24%, you've crept up. I'm curious how we should think about tax. And Ritter, $0.05 of contribution seems to be coming in above plan. I'm curious if you're seeing a better -- is that a better top line or a margin contribution on the Ritter side?

Yes. Yes, on the tax, maybe we've been conservative. I think the rate will probably play out the way we guided at the beginning of the year. And there's nothing new or different relative to tax that we've incorporated into it. So I expect something along the lines of 23%.

In terms of Ritter, it's pretty much up the middle, Vijay, in terms of what we talked about when we first went through the announcement in mid-April. We're really excited about the opportunity to accelerate our growth rates, enhance our proprietary offerings, provide more workflow solutions for our customers. We've -- when you look at Ritter, it has a high precision consumables platform, an excellent strategic fit for us. And the financials, as we said in April, will be accretive to our growth rate, will be accretive to our margin rate. And for 2000 -- or for the rest of the year, the revenue is pretty much that we baked into the plan have -- or it's the guidance, pretty much in line with the business model that we articulated in mid-April.

Next, we have Jack Meehan with Nephron Research.

I was hoping you could elaborate a little bit more on the early integration of Ritter. Launching the offering under the J.T.Baker brand sounds like a good move. Just talk about the breadth you're seeing in the channel. And sorry if this is a stupid question, but the deal closed a little early. Why was there no revenue contribution in the quarter?

Thanks, Jack. Good to hear from you. We're super excited about the closing of the transaction and the opportunity to integrate Ritter into our business. Just as a refresher, that acquisition brings significant proprietary high-precision consumables into our business and gives us a much richer solution for the high-growth lab automation workflows that are important to our business. It also brings a pretty attractive financial profile with it. It will accelerate our overall organic growth. Given the proprietary nature of the offering, it's going to expand margins. And as we talked about when we announced the deal, we're confident in a low double-digit ROIC by year 5.

The deal did close obviously a couple of weeks ahead of plan. And we've been busy driving integration with probably the heavy emphasis on getting the offering integrated and up and running in our channel. And that included obviously making some branding decisions. And as you indicated, we have launched the products under the J.T.Baker brand name, which -- within our portfolio, that is our flagship premium proprietary brand within our portfolio.

And I think the Ritter products are a great fit under that brand given what they stand for, high precision, quality, performance. And the product was just recently made available into our channel. We've got inventory position around the world now in our branding. And our teams are fully activated, quote levels are super high and we're starting to deliver meaningful revenues through the channel in addition to supporting the legacy OEM business that came with that acquisition.

Relative to kind of the impact on Q2, I think we look at really just a couple of weeks of selling there. And so you can kind of unpack what the overall side of the business would have been in a relatively short period of time, and it was relatively immaterial to our results.

What we would anticipate doing going forward, Jack, obviously, on the top line, we'll report actual growth, as we always do, which would include the impact of both RIM and Ritter. And we will also provide visibility into organic growth, which starting in the third quarter would exclude the impact of Ritter and RIM.

We obviously don't break out some of these adjustments for M&A lower the P&L. But we will, like we did with the guidance today, try to give you some visibility into the impact on EBITDA as well as contribution from these acquisitions to EPS. As we look at our outlook for the full year on EPS, for example, we highlighted, I think, that we would anticipate M&A to contribute approximately $0.05 to earnings in the second half of the year.

Yes. The other thing I'd add, Jack, is that when you look at the reported guidance growth rate, 13% to 15%, that takes the 9% to 11% organic. In fact, it's in FX and M&A. It's probably split between the 2 of them. So you can kind of get -- do the math from there. And as I said, our integration has started in full throttle. And you mentioned some of the branding that we're doing. But financial modeling-wise, it's pretty much on track with what we had originally modeled and articulated.

Great. And then, Tom, you referenced some of the inflation earlier, certainly getting a lot more questions about supply chain and raw materials. Could you just elaborate on any shortages you might be seeing? And then on the pricing side, do you think you might be able to push that a little bit harder as some of these challenges persist?

Yes, it's a great question, Jack. When you look at the -- when I look at our overall financial algorithm, certainly managing that price/cost dynamic has been something we've demonstrated over time. And that continues to hold true in this environment. And so when we talk about gross margin expansion, certainly, the -- we've been talking about mix earlier, but the commercial aspects of managing the price and cost has been playing out nicely.

With that said, you're right, there are some inflation that we're seeing. And I think the -- it's probably more pronounced on some of the categories where it's just been known -- there's been known difficulties. So if you think about it, first, it was some of these PPE categories, whether it's masks or gloves or apparel, it's kind of migrated. But you definitely are seeing some inflation there. And again, that factors into the pricing I talked about.

And then when you look at our own operating costs, certainly, from a production perspective in our own supply chain and our distribution centers, there is a bit of inflation there that we're contending with. I think it's been manageable. It's not outrageous. It's higher than in the past, but I'd say marginally higher at this point. But as we go into 2022, we definitely need to be mindful of both the purchase inflation that we have and the inflation that's within our own ecosystem. And again, manage that through productivity and through the pricing initiatives that we have.

Next, we have Patrick Donnelly with Citigroup.

Maybe one on China. You talked about the expansion there, both organically and inorganically with RIM Bio. It's an area where you guys are a little bit underpenetrated relative to peers. Can you just talk through trends there that you're seeing and then the opportunity going forward? Again, it sounds like you're making some CapEx investments along with the deal. So I would love just your thoughts on the opportunities that you have.

Thanks, Patrick, for the opportunity to talk a little bit about our broader strategy, including China. Maybe a couple of headline comments. You're correct in that the AMEA region reflects approximately 5%, 6% of our overall revenue, which relative to other peers, certainly at least at the outset, appears somewhat underrepresented. When you unpack that, when you get a little bit under the details, I think probably the key driver here is just the lack of penetration we have probably on the R&D side of the business throughout the region. If you look at the proprietary content that we have seeded in the region for areas like bioproduction, for example, that would represent well over 20% of our bioproduction business globally.

And so when we think about our strategy and where we're focused, clearly, biopharma globally is important, and that is certainly true of the AMEA region. And we are very well represented and as well, if not even better represented than our peers in areas like Singapore and Korea, which today are driving the bulk of the biopharma revenue for the industry in the region. And I think we all see the kind of the strong upside and long-term opportunity coming from China with the investments and, certainly, the focus on biopharma in China.

We're in early days as an industry. Pipelines are building aggressively. There's a strong focus on cell and gene therapy. There's a lot of investments in capital that's helping drive the acceleration of that market. And so as we indicated, we are very aggressively deploying our playbook and our model to position us to capture our entitlement to that growth, and that's everything from commercial and technical resources to the deployment of our application and technology capabilities in the region.

And now we're getting to the point of the business to meaningfully support localized production, and you see us trying to accelerate that strategy through M&A with the addition of RIM Bio. And we will continue to look at what else we can show and put there and the right time to do those things. The business is growing aggressively there. The numbers are pretty impressive on a percentage basis, but it's off a relatively small base at this point. But the fundamentals are strong. And I think we're very encouraged about the trends that we do see playing out in China. And we're investing aggressively and mobilizing our model to ensure that over time that we get our entitlement level of growth there.

That's helpful. And then maybe just one more on the bioprocessing piece side of the vaccines. Certainly appreciate all the color on the order book. A few of your peers have come out and said '22, they feel pretty good about their vaccine revenue being flat, maybe even up relative to '21. I mean, is your order book enough to kind of make that commentary? Or any high-level thoughts on what the revenue could look like in '22 versus '21 just tied to COVID vaccine?

Yes. I don't know that we would -- we'll give off any more color than maybe what you've heard others say. We certainly have, at this stage, sitting here at the end of the second quarter, very good visibility probably at least through the first half of next year just based on the lead times of some raw materials. That gives us a lot of confidence in the outlook. And certainly, there's a lot of data that would support the durability of what we're all doing here. We've got the added dimension of -- we're bringing on incremental capacities throughout this cycle. There's a lot of capacity coming online in our system in the second half of this year and into next year that will allow us to participate at whatever level that is required.

So I think we're certainly encouraged by what we're seeing. And getting down to they're going to be same or above, that's probably a little finer granularity than what we would have at the moment. But I think we're certainly very encouraged and optimistic, and we're well positioned for however the industry trend plays out here.

Yes. Patrick, I would add that the interesting part of our open orders is because of e-pass and some of the other U.S. prioritization, we've been serving, on a priority basis, the COVID vaccines. And so the order book itself is more heavily weighted to non-COVID in a major way. I'd say the COVID piece of it is probably 20%, 30% of it. But it comes -- those orders come in on a more frequent basis. As I said, it's kind of prioritized on a life-for-life basis.

And that concludes our question-and-answer session. I'll turn the call over to Michael.

Thank you. And thank you all for participating in our call today. Certainly, we'd be remiss if I didn't express my continued gratitude to all of our associates around the world for their superb execution and certainly for delivering our corporate values each and every day. Our team is resolute and steadfast in the support of our customers, and this is certainly an important and critical element of our mission and our overall success. I'm excited about Avantor's future, and I look forward to updating you when we get an opportunity to meet in the next.

Until then, take care and be well, everyone. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.