Avantor Inc (AVTR) 2020 Q4 法說會逐字稿

Good afternoon. My name is Grace, 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 2020 Earnings Results Conference Call. (Operator Instructions)

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

Thank you, operator, and good afternoon, everyone. Thank you for joining us on today's call. 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 website at ir.avantorsciences.com. A replay of this webcast will also be made available on our website following this call. Following our prepared remarks, we will open up the line for questions.

I would like to note that we will be making some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update these forward-looking statements, whether 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 afternoon, everyone. I appreciate you joining us today and hope the new year is off to a good start for you. I also hope that you and your families are staying healthy. Reflecting on 2020, the value of the significant transformation we have undergone since acquiring VWR in 2017 is clear. Organic growth has doubled, margins in overall business profitability have increased substantially and our leverage has now reached our target range of 2 to 4x EBITDA. This transformation has positioned Avantor as a global life sciences leader, and there has never been a more exciting time to serve this space.

As shown here on Slide 3, Avantor is deeply embedded in virtually every stage of the most important research, scale up and production activities in the industries we serve. Our model is grounded in supporting our customers' early phase discovery activities and we serve as a one-stop shop in providing scientists all that they need to conduct their research. Our customer-centric innovation model enables us to provide solutions for some of the most demanding applications and we leverage our access to the early stage work to feed content and solutions that ultimately become specified into our customers' approved production platforms. Our fully integrated business model enables us to support our customers' journey every step of the way.

Resiliency is an element of Avantor's business model that was demonstrated throughout 2020. Slide 4 provides an overview of our revenue across several dimensions. Our resiliency stems from the consumables driven nature of our portfolio and our highly recurring revenue base. Approximately half of our revenue comes from proprietary branded products and services. These proprietary products are supplemented by innovative third-party offerings from our critical supplier partners, enabling us to provide comprehensive, workflow-driven solutions to our customers. We serve 4 end markets that feature similar characteristics, including high regulatory oversight and complex development processes.

Approximately 70% of our revenue is in attractive life science end markets, including more than $1 billion in the bioproduction space. We have leading positions in the Americas and Europe and have a growing presence in the EMEA region, driven by our ongoing investments in core biopharma hubs like Singapore, Korea and China.

Moving to Slide 5, I want to share some highlights from the fourth quarter. As pre-announced last month, we ended 2020 with a Q4 organic growth rate of 14.9%, our strongest growth quarter of the year. Combined with solid margin expansion and strong cash flow generation, our results underscore the relevance and value of our business model and our team's ability to execute in a challenging environment. In addition to generating strong financial results, we also remain focused on driving innovation and growth across our core business. We enhanced our bioproduction offering through several technology launches in the quarter. Our Avantor TopMixer single-use mixing system with integrated formulation programming, enables consistency and reproducibility during media and buffer mixing processes. Our new SterilEnz single-use high-pressure fluid handling system sustains pressure up to 150 psi, making it suitable for applications where temperatures are elevated and pressures exceed normal biopharma process conditions. Both technologies are compatible with our full line of single-use solutions, complementing and extending the range of our customer offering.

During the quarter, our biomaterials business commercialized a controlled release, drug delivery technology, for an HIV prevention application, that has received a positive opinion from the European Medicines Agency. The technology leverages our flexible, high-purity silicone to continuously release an anti-HIV drug. We are proud of our role in expanding the HIV prevention options available to women, particularly those in geographies most affected by the HIV epidemic.

We also completed the transformation of our capital structure by refinancing the remaining high cost portions of our debt. Over the last couple of years, we have cut our weighted average cost of debt by nearly 50% and reduced our interest expense by over $300 million. This will give us significant financial flexibility going forward and positions us to pursue M&A opportunities that will accelerate growth and enhance our portfolio of proprietary offerings.

Avantor remains an important partner in the fight against the COVID-19 pandemic. In addition to the PPE and testing solutions we offer, we are relevant in all vaccine modalities, including the mRNA and viral vector modalities, that have already received emergency use authorization in several countries around the world. We continue to make appropriate investments to increase our critical file production cleanroom and manufacturing capacity to meet the growing production needs. The first cleanroom expansion in our North Carolina facility came online in the fourth quarter, and we expect additional capacity to be ready at our Massachusetts site by the summer.

We're also working to increase our raw material manufacturing capacity with plans to bring additional capacity online for key products throughout the year. Additionally, our innovation team recently commercialized a silicone elastomer to support fluid transfer at extremely low temperatures, a critical requirement in the production of some of the COVID-19 vaccines. This is a good example of our integrated business model and highlights the value of leveraging the breadth of our portfolio to solve customer challenges.

Turning to Slide 6 of the presentation, I'd like to summarize our Q4 financial results. Organic revenues increased 14.9%, reflecting approximately 800 to 900 basis points of COVID-19-related tailwinds, improvements in all our end markets, and importantly, mid- to high single-digit growth in our base business. Performance continues to be driven by biopharma, where organic revenue growth exceeded 20%. Biopharma's broad-based strength in the quarter is indicative of the value we offer through our ability to collaborate directly with customers to characterize and scale up their formulations.

In health care, we once again experienced double-digit growth, driven by strong hospital and clinical reference lab activity that offset ongoing elective procedure weakness. It was an outstanding quarter in our government end markets. Growth exceeded 50% as we were favorably impacted by COVID-related purchases.

Adjusted EBITDA in the quarter was up approximately 21%, leading to adjusted earnings per share growth of approximately 57% to $0.29. Our EBITDA margin rate growth continues to reflect the impact of volume leverage, favorable mix from our proprietary offerings, commercial excellence and productivity. Tom will provide more details on adjusted EBITDA and EPS growth in just a few minutes.

Our strong free cash flow generation drove 152% conversion of adjusted net income. For the full year, we generated $868 million in free cash flow, about 75% higher than the high end of our initial 2020 guidance, aided by strong EBITDA growth and lower interest and taxes. This full year performance enabled net leverage to reach our target range of 2 to 4x EBITDA, down from 4.6x at the beginning of the year.

Our results reflect our attractive end market exposure, highly recurring revenue base, trusted and collaborative customer relationships and a strong culture of execution enabled by the Avantor business system, which underpins everything we do. With that, let me turn it over to Tom.

Thank you, Michael, and good afternoon, everyone. Slide 7 shows our organic revenue growth by end market and product group for the quarter. Biopharma, representing approximately 50% of our revenue, experienced organic revenue growth of over 20% in the quarter and double-digit growth for the full year. Strengthening trends in R&D workflows drove growth in our lab products business. In addition, our bioproduction platform experienced very strong growth in production materials and single-use assemblies to support both our base business and COVID-related areas.

Health care, which represents approximately 10% of our revenue, also increased revenues over 20% organically in the fourth quarter and attained mid single-digit growth for the full year. Strength was once again driven by continued COVID testing momentum, offset by ongoing elective procedure weakness, which adversely impacted our medical implants business.

Education and government, representing approximately 15% of our revenue, experienced double-digit organic revenue growth in the fourth quarter and declined mid-single digits in the full year. Fourth quarter growth was driven by government customer purchases, offset by ongoing education declines centered in the Americas.

Advanced technologies and applied materials, representing approximately 25% of our revenue, experienced low single-digit organic revenue growth in the fourth quarter and declined low single-digits for the full year. The core industrials portion of this end market, including oil and gas, petrochemicals and mining, has driven the sequential improvement.

By product group, proprietary materials and consumables experienced approximately 20% revenue growth, with strong growth in the Americas. Third-party materials and consumables also experienced very strong high teens organic growth. Services and specialty procurement increased high single digits, driven by ongoing clinical services strength and continuing equipment services as sites continue to reopen. Equipment and instrumentation experienced a sequential recovery to low single-digit growth, reflecting a modest improvement in CapEx investments.

Let me move to Slide 8. Looking at growth from a regional perspective, Americas, which represents approximately 60% of global sales, reported 16.2% organic revenue growth and strong sequential improvement from Q3 growth of 4%. Full year growth was 4.6%. Most end markets experienced sequential growth improvement in the quarter. Highlights were growth of 20% in biopharma, including strong double-digit growth in biopharma production and greater than 20% growth in health care, driven by hospital and clinical reference lab customers offsetting ongoing elective procedure weakness, which continues to impact our medical implants business.

The declines in education moderated, although lab and school closures are still creating a headwind. Our government business was very strong, essentially doubling, driven by COVID-related purchasing.

Europe, which represents approximately 35% of global sales, reported 14.7% organic revenue growth and strong sequential improvement from Q3. Full year growth was 7.1%. All end markets experienced sequential improvement with growth highlighted by ongoing biopharma strength and strong government sales as both grew by double digits. Similar to the Americas, Q4 strength in research materials and consumables and continuing biopharma production sales drove the biopharma growth. Governments continued their broad-based purchases, largely centered around COVID-related personal protective equipment and diagnostic testing offerings. Health care experienced double-digit growth and education grew by mid-single digits. The first growth quarter in 2020, aided by ongoing lab reopening. Advanced technologies grew by low single digits.

EMEA, representing approximately 5% of global sales, reported 5.2% organic revenue growth. Despite a challenging comparable in the prior year when growth in our biopharma production end market drove overall EMEA growth over 20%.

Slide 9 has our segment results. Americas reported 20.6% in adjusted EBITDA margin rate, approximately 240 basis points higher as compared to the prior period. Key drivers include strong volume growth, favorable mix, driven by strong growth in proprietary materials and consumables content and commercial excellence, offset by additional costs to support the growth. 2020 full year adjusted EBITDA margin expanded approximately 190 basis points in the Americas.

Europe reported an 18.1% adjusted EBITDA margin rate. Approximately 60 basis points lower as compared to the prior period. We continue to experience favorable margin impacts from strong volume growth and commercial excellence. In the quarter, however, some additional investments to support the growth, along with some nonrecurring items, created the margin rate decline. 2020 full year adjusted EBITDA margin has expanded approximately 50 basis points in Europe. EMEA recorded a 21.4% adjusted EBITDA margin rate, approximately 900 basis points lower as compared to the prior period. As you will recall, we had an exceptionally strong adjusted EBITDA margin rate in Q4 2019 in EMEA, driven by this very strong growth in our biopharma production end market. 2020 full year adjusted EBITDA margin declined approximately 170 basis points in EMEA due to the same factor.

Turning to Slide 10. Let me start with our fourth quarter adjusted EBITDA. We achieved approximately 21% growth in reported adjusted EBITDA and 60 basis points of reported margin expansion. Key drivers of the performance were volume growth, favorable mix, including strong growth in biopharma production and proprietary offerings, commercial excellence and continued discretionary cost containment; offset by increased compensation costs, driven by our strong performance.

For the full year, adjusted EBITDA margin expanded approximately 80 basis points. We achieved approximately 57% growth in our adjusted earnings per share for the quarter and approximately 54% growth in adjusted earnings per share for the full year. Primary drivers were the strong operating performance, the ongoing reduction in interest expense from our deleveraging and refinancing and the improvement in our income tax rate. As Michael mentioned, we had a strong quarter of free cash flow generation, with $286 million in the fourth quarter. Full year free cash flow generation was $868 million, almost $400 million higher than the high end of our previously withdrawn guidance. The growth was driven by higher EBITDA, outstanding leverage of working capital and lower tax and interest payments.

Turning to Slide 11, you may recall that we withdrew our 2020 earnings guidance due to the extraordinary uncertainties and volatility created by the global pandemic. Although a path to resolving the pandemic is starting to take shape, significant uncertainty remains with lab utilization, diagnostic testing volumes and vaccine production, distribution and adoption. In addition, the path to full recovery for our education, medical implants and industrial businesses is still unclear. These uncertainties make it extremely challenging to construct an operating plan for 2021. Nevertheless, we do provide some preliminary perspectives for revenues, profits and free cash flow. We will update you on the full year guidance during each quarter's earnings call.

Excluding the impact of the COVID tailwinds, our core business grew approximately 100 to 200 basis points in 2020. We consider a mid-single-digit run rate a reasonable baseline for core revenue growth as we start the new year, and it should be even higher as we move into the second quarter, where the year-over-year comparison becomes significantly easier. However, as we head into the second half of the year and particularly into the fourth quarter, the comparable prior year periods will become more challenging. Based on this outlook for our core business, together with the potential COVID-19 tailwinds of $250 million to $350 million plus, we are currently planning a 4% to 7% organic growth rate range for 2021, including growth of mid- to high single-digit for the first half of the year. Reported growth will reflect the weaker U.S. dollar and will approximate 6% to 10% for the year.

Our preliminary result for January suggests that we are off to a strong start to 2021. We expect adjusted EBITDA margin to improve by about 50 basis points. This improvement reflects our ongoing expectation of strong growth in our proprietary offerings, operating leverage on our fixed cost base, continued focus on managing inflation and productivity. There will likely be a return of certain operating costs like travel and entertainment and employee health care as the impacts of the pandemic subsides over the latter half of the year. We anticipate adjusted earnings per share growth of approximately 30%. This reflects continued strong operational improvement, lower interest expense from deleveraging and completed repricing and refinancing actions and an effective tax rate of 24%.

We also maintain a flat share count for guidance purposes. Last, free cash flow is expected to be approximately $800 million versus $868 million in 2020, also reflecting the strong operational performance, lower interest payments from deleveraging and already completed repricing and refinancing actions. We do expect higher CapEx and working capital investments during the year to support our continued organic growth and for certain nonrecurring 2020 benefits, mainly related to income taxes, to subside in 2021.

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

Reflecting on 2020, we executed extremely well in a challenging environment, and our top line performance, strong EBITDA and adjusted earnings per share and outstanding cash generation reflect the resiliency of our business model. The value of our highly recurring revenue base, broad mission-critical product portfolio and exposure to attractive end markets like biopharma, position us well for continued growth as we head into 2021.

While the uncertainty associated with the current pandemic continues, our business remains strong, and we have embraced our critical role in providing solutions and services to support COVID-19 testing workflows, head-to-toe personal protective equipment and customized materials needed to produce vaccines and therapies. Reflecting our relevance in this critical endeavor, our bioproduction order book continues to experience strong growth, and we are actively investing to capture this opportunity. There has never been a more exciting time to serve the life sciences space.

The COVID-19 pandemic has underscored the importance of science to our society, and Avantor has the scale and resources to capitalize on the opportunities in this thriving industry. We remain steadfast in our focus on executing our long-term growth strategy and are optimistic about our future.

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) The first question comes from the line of Tycho Peterson from JPMorgan.

Michael, when you laid out the guidance for the year, you noted a number of variables, base lab utilization, COVID vaccine trends and non-COVID health care demand. I'm wondering as you think about the 4% to 7% organic outlook, if you could just talk to where you see conservatism in the numbers. Would it be around additional vaccine approvals? Or maybe more durability of COVID tailwinds? I'm just curious, what could get you to the high end or maybe above.

Yes. Thanks, Tycho. Thanks for joining the call, appreciate the question. As we look at how we have kind of constructed the guidance, there's obviously 2 key components that you have: our perspective on how the base business will perform and then obviously trying to take a view on how the COVID-19-related revenues will flow throughout the year. So I'll maybe try to unpack each of those for you in some detail here.

For the base business, as Tom mentioned in his remarks, we grew in 2020, roughly 1% to 2%. And we're estimating somewhere in the mid-single-digit levels for full year 2021. So we're definitely assuming some sequential improvement year-over-year. And if we look at where we finished Q4, obviously, we've seen continued momentum in all of our key end markets. But we still do have some headwinds that we're facing. Our education business is still flattish to modestly down. Our medical implants business have some headwinds to it, and our industrial business is still somewhat below pre-COVID levels. And for most of those end markets, I think we're going to need to see the effects of the pandemic subside before we would anticipate those things growing. So that's, I think, one important assumption.

Obviously, continued strong momentum in our biopharma platform, and particularly in the R&D environment, is going to be key here. And then from a vaccine perspective, we obviously generated significant tailwinds in 2020. And we're out of the gates here, anticipating somewhere around the same level, although the mix would be different. And with more focus or more weight on the vaccine opportunities compared to 2020 now that we have a number of candidates that are in full scale production.

We do have an assumption baked in here that testing, while strong here in the first quarter and likely into the second quarter, that we would anticipate that trailing off somewhat in the second half of the year. Under the assumption that as the vaccine becomes more prevalent in the marketplace and transmission rates decline, the demand for testing will start to fall off somewhat in the second half of the year. I think that's the key assumption that could push the numbers one way or another. If testing, obviously, were to hang out to the levels that we're at the moment, that could provide some momentum to push us to the high side of the range.

And then the vaccine as we've talked in at your conference and in other forums, we're obviously very relevant here across all the modalities. And our order book is ramping and the revenues we're recognizing from the supplies that we're providing there are providing some nice momentum here. There's some functions here, obviously, around how many vaccines get produced, how many doses get produced, which modalities get commercialized or get approved. And then, of course, we have our order book. And I would say at the moment, our outlook is probably more based on our order book than some of the other variables that we can try to take a read on. And as -- if the order book works, continue to grow over time, you could theoretically see some upside coming from that. But obviously, a lot of variables at play there. And so I think we've taken an approach here of trying to be prudent with line of sight to the business in hand at the moment.

And then a follow-up for Tom. If I think about the margins, the 50 basis points, I think you had said 50 to 100 at our conference in January. So can you just clarify why the outlook is a little bit more muted than what you talked about at the beginning of the year? And then secondly, there was a $38 million noncash charge in the cash flow statement for inventory. Was that PPE? Or something else?

Okay. Just on the 50 to 100, long-term guidance, that's what we're quite confident in. And like going into 2020, we guided, I think, 45 to 75, ended up at 80 basis points. I know you can consider the 50 to be somewhat of a minimum. We didn't range the top end given the variables that Michael talked about, because they can have quite an impact on the margin rate.

In terms of noncash items, we continue to have ongoing strength in cash flow and you pick that up in our cash flow statement. But you will -- as you're integrating our acquisitions with VWR and Avantor continuing to complete that, you'll see some nonoperating items come through. But it's provisioning for bad debt, provisioning for inventories is a normal course of business, kind of thing overall. And we do see some improvement in opportunities but, overall, not that big of a factor for us.

The next question comes from the line of Derik De Bruin from Bank of America.

Just a couple of questions. I think on the first one, can you -- I mean, you sort of alluded to it, but can you talk a little bit more about the mix between PPE, diagnostics and bioprocess? I'm also particularly -- I'm particularly interested in, specifically, as the mRNA vaccines roll out, just what essentially -- how is a good way to sort of think about your revenue contribution specifically from the different vaccine types? I know you've laid out some stuff in the past, but I just want to have a little bit more granularity on how we should sort of think about the mix on this and the margin profile on this incremental growth.

Yes, Derik, if you look at kind of where each of the categories that we participate in related to the COVID pandemic. The relative proportions of contribution remains somewhat steady throughout the year, meaning that roughly half of the tailwinds came from diagnostics and then in kind of equal parts, then PPE and vaccines made up the balance.

One right now, we did see, obviously, in the fourth quarter is, as anticipated, given the order book, a meaningful step-up in the absolute contribution from vaccines. But you also then saw COVID tailwinds accelerate from kind of 300, 400 basis points in the third quarter to 800, 900 basis points in the fourth quarter. And in addition to the strong contribution for vaccine, diagnostic testing, obviously, played a meaningful role in the quarter, given the number of tests that were being run. So the proportions didn't actually change that much in the fourth quarter despite vaccines stepping up as much as they did.

Going forward, on a full year basis, we would anticipate the $250 million to $350 million of cost of revenue coming in 2021, roughly half of that we would anticipate coming from vaccines. And then diagnostics kind of being the one that declined and PPE probably similar in 2021 relative to 2020 is how we would see that playing out. We intentionally kind of put the range of $250 million, $350 million plus to indicate there are obviously scenarios here that could evolve here that would cause us to move the range up. I mentioned earlier in response to Tycho's question that we've made an assumption that diagnostic testing falls off in the second half of the year. We'll see how that develops. And then depending on how the vaccine rolls out, you could theoretically see some upside there from additional approvals and more aggressive ramp of production throughout the year.

As we've said in lot of different forums, Derik, we're relevant in all these modalities. You mentioned mRNA, and we're certainly well positioned there with the candidates that are in production at the moment. I think it's also important to point out that the viral vector vaccine, the J&J vaccine, AstraZeneca vaccine, for example, are also pretty significant -- have pretty significant requirements for our raw materials and excipients and single-use systems, actually not that far behind what we would supply to mRNA. And so we're excited about the potential of getting those vaccines approved and in the market as well.

I don't think -- thinking of our view, it probably hasn't changed in terms of the amount of content that is required for each of these various modalities. And we'll just reiterate how well represented we are throughout the pipeline here.

I think once again -- I think that the question I'm getting is like is, in general, the bioprocess contribution, higher-margin in '20 -- basically, that the higher-margin has been the diagnostic contribution. I think that's sort of the question you're getting.

Yes. So if you look at the 3 areas, Derik, let's just stack it up for you in terms of margin contribution. Nearly everything that we're going to be supplying to those vaccines is going to be proprietary content and carry correspondingly than the highest margins of any of the solutions. The diagnostic piece will probably -- second in line there with a mix of kind of third-party content, but we do have quite some proprietary content there as well, whether it be some of the reagents, some of the other consumables or even some of the equipment, thermal cyclers, for example. And then PPE, we'll probably lag that a bit with quite a lot of that, sort of the majority of that being third-party in nature.

Great. And just despite -- you keep me on one follow-up on that one. You mentioned the lab equipment, I mean that sort of -- that grew in the quarter. Could you just sort of characterize sort of that pickup? I mean just given -- is it pent-up spending that's been sort of like pent-up and people are like waiting for it as the new lab is being built out? I'm just wondering, just given your equipment mix is a little bit different than some of your peers, give more sense of like where the laboratory builds are and things that are going on. I'm just sort of curious in terms of what you're seeing in terms of placements of instrumentation equipment.

Right. We definitely did see some acceleration in the quarter. But even with the sequential improvement that we saw moving from third quarter to fourth quarter, still somewhat muted. I think equipment and instrument growth for us in the quarter was low single digits. So it was nice to see the category return to growth. And thinking that, certainly, the budget flush topic that we encounter this time of year kind of played out, I would say, probably at historical levels, which is to say that nothing particularly unusual. But across the biopharma space, for example, we did see probably the strongest acceleration of the equipment instrument purchases in the quarter and to support a lot of the new projects and things that are going on here. But still, even with the growth we did see, still somewhat muted relative to historical levels, Derik.

And your next question comes from the line of Vijay Kumar from Evercore ISI.

Congratulations on a good print here. Michael, if I may start on one in the guidance, the top line here. I guess, if you look at the Q4 number, $130 million of COVID tailwinds, a sequential step-up of $70 million, I'm assuming most of that was vaccines. You annualize that number, I mean we're getting close to 300-ish. If I heard you correctly, I think you said $150 million to $175 million of vaccine revenues in fiscal '21. So I'm curious what would cause the vaccine to drop off. Is that a mix change? And I think on the base, ex the incremental tailwinds, the guide is assuming 3% to 6% on the base, off of a 1% comp. So perhaps talk about the base business as well in the context of easy comps.

Yes. Happy to address both of those elements, Vijay. Firstly, on kind of the Q4 split and contribution, yes, vaccine contribution definitely stepped up. But we also saw a meaningful step-up in the quarter for our diagnostic platform as well. Testing in the quarter was, obviously, at its highest point at any point in the year, and we participate in that in a meaningful level. So that -- probably important for you to account for a meaningful step-up on the testing side of things as well as you're extrapolating out where things come in, in 2021.

I do think the order book that we have in place at the moment and the visibility we have kind of the guidance that we've given around $250 million, $350 million plus and half of that coming from vaccines, still a pretty reasonable estimate. And perhaps as more vaccines get approved and more orders come in, we'll see a way to increase that, but not about jumping off point.

Relative to the base business, if you kind of book end 2020 with the Q1 growth of core growth, a little over 4% and the Q4 growth of 6% to 7%, we're going to have relatively modest comps to address in the second and third quarter, but pretty good comps in the other 2 quarters. And we do have still some headwinds in important parts of our business. Our education business is still down. Improvement, but nevertheless still behind pre-COVID levels. Our raw materials platform and particularly our medical implants business is still off high single digits, and our industrial complex is still lagging pre-COVID levels as well.

So -- and if you remember, last Q1, for example, was a pretty normal quarter, mostly free from COVID impact. So we don't anticipate any of those end markets that I just described as having headwinds, it's completely recovering until later in the year. So I think that's maybe some of the differences you're seeing there. But recovering from 1% to 2% growth into that mid-single-digit level would reflect, I think, kind of the momentum that we've got exiting the year, but does take into account some of the comp dynamics.

That's helpful comment, Michael. And maybe one for Tom. My favorite question on the free cash flow is impressive fiscal '20. It looks like there was some timing element in guiding to free cash of $800 million, a step down for fiscal '21. I guess if that's a normalized level, what should free cash flows grow off of that $800 million normalized level? And it looks like you're guiding to tax rate stepping up. Any comments on why tax rate can step up?

Yes. A couple of things, Vijay, on the free cash flow. First of all, we did $868 million in 2020, which was up significantly from the $300 million we did in 2019. So more than 2x, almost 3x. We were signaling throughout the year that there were some extraordinary items coming through around CARES Act. Just to refresh you, we had some deferrals of employee taxes -- or employer taxes. We also -- on payroll, we also had some interest deductibility improvements or enhancements from the Act. And there were a couple of other things in the tax area. We settled some open audits, and we got some refunds there.

So when you look at the tax area, particularly in cash taxes, in the 2020 number was extraordinarily low. I mean we had roughly $40 million or so in taxes. To return to a normalized level, that will be north of $120 million, given those -- the one-timers that I talked about. I think we're signaling these items throughout most of the year. If I look at what our entitlement is on net income, on adjusted net income, we should be around 110%, 115%. And because of some of these factors, we ended up converting at around 150% in 2020.

One other element that's -- when you look at 2021, there are some investments that we're going to need to make. We have some opportunities. We've talked about the need to add capacity in some of the biopharma production areas. As an example, we've got some projects underway that are going to create some exciting additional growth. And then also in working capital, I mean, to support an ongoing growth, there could be some additional working capital investments there. So between just the onetime out of the ordinary sort of benefits that we had signaled throughout the course of the year as well as some modest investments into 2021, we're starting with an $800 million estimate for free cash flow for 2020 -- sorry, 2021 relative to the $868 million in 2020. Hopefully will drive higher, but we think that's a prudent starting point at this early point in the year. You had a second question, did we get around to that?

The taxes set off, is that in any one-timers in that 24%? And should that step...

No. Yes. Again, on tax rate, if you just kind of recall from where we came from, like, if you started in 2019, you would have seen us north of 30%. For 2020, we guided to an improvement, but we didn't guide to an improvement on the 22.9% that we got to. There certainly was a positive impact from the initiatives that we've talked about in terms of removing some of the inefficiencies, in terms of how we're funding our international operations. We also had some onetime benefits in 2020 around just the excess benefit around employee stock option exercises and some other minor things. Those probably gave us 50 to 100 basis points of improvement on tax rate.

I do expect those to continue on a normal run rate basis. Having factored those into the return and -- or sorry, into the estimate, I do expect that, as we've said, to continue to drive our tax rate down on a long-term basis, kind of to the lower 20s. So I wouldn't read into the starting guide 2021 as any significant change in how we're approaching tax or our confidence in being able to drive continued improvement.

And your next question comes from the line of Doug Schenkel from Cowen.

I'm going to just ask the 2 questions I have and then get back in the queue just because I know I'm heading into a bad reception area. So my first question is really on M&A capacity. You guys have always been a cash flow-generating machine, and that was never more evident than it was in 2020. Given where the balance sheet sits today, I was just wondering if you could provide a little more detail on the parameters that we should be thinking of as we think about the types of deals that you would pursue. And what -- I guess, if you want to give us some parameters mathematically to assess your capacity, that would be appreciated as well. So that's the first thing.

The second on COVID, I'm just curious, as you think about that doing well there by doing good, is that also opening opportunities with new accounts that you would expect to essentially be more durable over time? So I guess put differently, the new account openings because of what you're doing in helping with COVID, are they opening the doors for you that you expect to be durable even after the pandemic ends?

Doug, thanks for the question. I'll take the M&A piece, and Mike will address your second question around COVID. In terms of overall capital deployment, you're right around the cash generation, and it has had a direct impact on improving our balance sheet and our leverage has gone from a 7x at the beginning of '19 to the 4x that you see at the end of 2020. We think that with the continued cash generation, we didn't do anything around M&A, we continue to drive that down between 0.75 and a full 1 point turn a year, such that by the end of 2021, you could be approaching 3x. Our targeted leverage range is 2 to 4x. So we're inside that corridor now. That in itself is one of the governors here. But to get the capacity, we can stay within that quarter and spend all the cash flow that we generate.

And if you were going to argue about it, you could say that we could take leverage up a little bit as well. But if you just started with the $800 million of free cash flow that we projected for 2021, that would be capacity that would be available, plus whatever incremental leverage you'd be comfortable taking on as well as the cash that we have on the balance sheet. So there's well over $1 billion of capacity right now to do something.

And our approach has been, first of all, to improve that flexibility and that is materializing. We're active, but we're certainly not desperate in terms of developing an M&A pipeline. We've got all the businesses engaged. We've been actively pursuing individual deals. So we're going to be disciplined. That's not to say, we're not willing to pay a fair price, but we want to engage with opportunities that can bring good growth and enhance our overall growth rate, but also bring cash and be accretive to our margin rates as well. And so we're typically looking for deals that involve proprietary content and that would be in biopharma production space, some of the lab, the research spaces that we've talked about in the past that we find to be interesting, including genomics and other things in the -- in that lab area.

So it's okay for us. We've got plenty of things to do on the balance sheet. If we're not scoring on M&A every single month or every single quarter, because we have plenty of capacity to continue to deleverage essentially at no cost. So that flexibility is serving us well, has served us well, and we'll continue to be disciplined on that front.

Doug, I'm picking up the second question, probably take the opportunity to expand the question a bit to think about maybe our longer-term perspective on what we've learned or what this experience of COVID has maybe changed our thinking here. Firstly, I think my personal view here that's evolving is that the COVID vaccine world is probably going to be more durable than not. And I think given what we're seeing unfold here with the variance in mutations that are emerging and the work that's going on by even some of the existing vaccine manufacturers, it's likely going to be necessary to even have some kind of a booster market, perhaps, in the latter part of the year heading into the winter flu season again. And speaking of flu, I think that the data is starting to indicate that this is perhaps heading towards being something more endemic in nature, meaning we could be facing kind of an annual COVID vaccine. So I think it's obviously not definitive at this stage, but certainly, the durability of COVID seems to be increasing.

The second piece, which maybe is more responsive to your question, we see a great opportunity here emerging beyond COVID, leveraging the technologies that have been accelerated here. Bioengineered vaccines as a category, I think, is going to take on a whole new level of importance for us. COVID presumably becomes endemic, would be a part of that. But you already see many of these companies initiating research activities to apply the technology to other areas that would maybe more common vaccine technologies that we're used to, that could be potentially replaced by this, which would bring in a biologic player like ourselves into that realm. And that could be exciting.

And I think just the acceleration of modality like mRNA, there was obviously a nice pipeline building for the technology outside the vaccine space, that presumably will have been accelerated through this experience. We've all learned a lot in scaling the technology. And certainly, the benefits of the technology are clear. So we see some nice tailwinds emerging from this that go even beyond COVID that give us a lot of excitement. And we were bullish on the Biologics space pre-COVID. And certainly, as we sit here today, we'll even be more bullish on that as an end market.

And then relative to new account openings, as we've said all along, our technology is very relevant across all these modalities. Many of the names that have emerged in leading candidates are well-known names that we've had as customers for a long time. But there's obviously a really deep pipeline of activities that includes a number of companies we probably haven't done a lot of work with before. And that could be another element of this that produces some value to us over the long term.

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

I wanted to dig in a little bit more around the assumption behind the guidance for COVID testing. It just seems like an important assumption around the back half. And to frame that, I was wondering if you could provide some color on the fourth quarter step up. Did you have any notable wins on the PCR side? And how much did antigen contribute to this step up?

Yes, all fair questions, Jack. Thanks for calling tonight. Diagnostics in the fourth quarter was close to half of the tailwinds that we saw in the quarter. And that was really some nice pickup on the PCR side of things, where we've been well positioned throughout the pandemic quilt and kind of tracking just the daily testing rate there in terms of the volumes that we've been supplying. But we also saw a nice contribution in the quarter from the antigen-based testing workflow that obviously started to take on prominence late in the third quarter, and we kind of got a full quarter's benefit from that. And we did have a number of pretty significant wins.

If you dig into the numbers there, you'll see our government business grew at over 50% in the quarter. A lot of that actually is diagnostic-driven and both PCR, but definitely, we had a number of pretty significant wins on the antigen side, particularly here in the Americas, with some of the state governments and other municipalities that we were able to penetrate in the quarter. So that was -- we anticipated that. I think we signaled that on our last call that we anticipated seeing some pickup from that particular workflow. And it certainly did materialize in the quarter.

Great. That's helpful color. And then looking out to 2021, just wondering if you could give some color on the interplay between proprietary and third-party products. It sounds like from all the commentary, that should remain favorable, but can you just weigh in and maybe confirm that?

It's an important question, Jack, because, as you know, that's a strong driver for margin expansion. And historically, our proprietary product category has outgrown our third-party category by anywhere from 2 to 3x, in large part, driven by just the dynamics of how our production platform grows relative to the R&D space.

That trend didn't exactly hold up exactly like that in 2020. And if you take a look at the fourth quarter, we had phenomenal proprietary growth, 20% or so, in the quarter. But we also had very, very strong third-party growth as well. It only lagged by a few percent. And that really is a reflection of some of the uptick that we saw in the diagnostics space. And particularly on the antigen side, where a lot of that has -- comes from our third-party partners that we work with.

Obviously, we feel comfortable showing at least 50 basis points of expansion moving into the new year. And it is our expectation that this proprietary product category will outgrow the third-party category. The question is by how much. And I think that gets into some of our reluctance to kind of put a specific range on the guidance for the year, given how important mix is to us and depending on how testing workflows hold out for the year, will be one of the stronger determinants of mix for the year. But there's also a couple of other areas that probably were lagging a bit in 2020, mainly our third-party procurement platform as well as the equipment and instruments category that lagged for most of the year. How far back those come to normal will also be an influence on mix and margin for the year, Jack.

Your next question comes from the line of Dan Brennan from UBS.

Great. Michael, you mentioned a few times earlier on in the discussion about the start to the year. I think it was good in January. You also talked about the vaccine order book being solid. Could you just give us some visibility or color about the order book itself, any details about it and kind of how far out the deliveries run through for the order book?

Yes, absolutely. And maybe to just use the same kind of context, as we've quoted in previous quarters, our bioproduction order book ending the year was up approximately 3x the level that it was at heading into last year. And that compares to being up roughly 2x at the end of the third quarter to give you a flavor for how fast the book is accelerating. And I don't have a specific number to share with you for January, but needless to say, it has continued to accelerate into the early weeks here of the new year. And so we're -- a fair bit of momentum there that we're excited about.

That order book in the fourth quarter, obviously stepped up in a meaningful way. A lot of that came from the vaccines. But I would highlight the base business continues to be very robust. And similar to the third quarter, where I think we said roughly 3 quarters, if not a bit more, was from our core business and the balance coming from the vaccine space, the order book for the core business continues to be strong. The mix is shifting, no doubt, towards vaccines. And the proportion of vaccine in that order book probably moved up another 10%, 15%, 20%, something in that range in the fourth quarter and it continues to evolve here in the early weeks of the new year here. So a very strong order book, and it's a mix of very good momentum in the base and, obviously, a growing vaccine order book as we support these production orders.

I would say we've got stronger visibility than we had historically. The core, we probably have some visibility for orders that go out even into the middle of the year and the vaccine is probably similar. Preferably, some are kind of visibility on at least the platforms that are approved for now.

Got it. And then as a follow-up, I wanted to ask, just kind of within bioproduction, obviously, you've got -- you've given a lot of information over the last 3 to 6 months about the areas you play in. But could you highlight within media and resins and buffer, excipients and single-use and you've gotten more listed on some of the charts you've laid out, what would you characterize your real strength? Like what are the 2 or 3 products maybe that you really dialed in that are critical across whether the vaccines that are rolling out or just more growing bioproduction? I'm just wondering how you would highlight the real strength for Avantor's offering in that space.

Yes. Relative to the vaccines, clearly, very, very strong growth and pull from our single-use portfolio. And that's going to be across all the relevant modalities here, very, very strong demand for those technologies. For the mRNA vaccines, while the full breadth of our portfolio is going to be applicable there, probably the piece there that's unique is going to be some of the cholesterols and lipids that are used in the delivery technology of that platform. Some of the buffers and other process ingredients are key there as well. But that's probably something that's a bit unique to mRNA that you might not see in other platforms.

That is all the questions that we have today. I will turn the call over back to Mr. Michael Stubblefield for any closing remarks.

Great. Thank you, operator, and thank you all for participating in our call today. As we close, I would be remiss if I didn't express my sincere gratitude for the tireless efforts of our global associates around the world, who are living our values every day and working to fulfill our mission and setting science in motion to create a better world, as they are giving everything they've got to support our customers during this unprecedented time. And I'm certainly inspired by their passion and dedication to our mission that, in fact, has certainly never mattered more.

As I mentioned earlier, I'm super excited about what lies ahead for our business and for Avantor and look forward to updating you when we meet again soon. Until then, take care and be well, everyone.

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