Avantor, Inc. (AVTR) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Avantor Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Helen O'Donnell. Thank you. Please go ahead.

Thank you, operator, and good morning 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 the presentation accompanying this call are available on our investor website at ir.avantorsciences.com. A replay of this webcast will also be available on our website following this call. Following our prepared remarks, we will open the line up 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 as a result of new information, future events and developments or otherwise. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the Appendix to the presentation. With that, I will now turn the call over to Michael.

Thank you, Helen and good morning everyone. We appreciate you joining our third quarter earnings call. Let's get right into the performance for the quarter. I am on Slide 3. Organic revenue growth was 2.4% for the period, which reflected a couple of factors. First, our strong growth in the Biopharma end-market continued in the quarter. We were up 7% on an organic basis and are up 10% for the year. You may recall that Biopharma represents approximately 50% of our annual revenues and continued momentum in this end-market is a critical element of our model. This growth was partially offset by a low-single-digit decline in education and government, which had significant growth in 2018, driven by the initiation of a new customer contract. Tom will share more details later, but this contract affected the year-over-year comparison by more than 200 basis points. Turning to adjusted EBITDA, we continued to make excellent progress on managing product pricing, relative to product cost inflation and delivering the synergies from the VWR acquisition. However, the positive impact of these factors was offset by foreign currency headwinds and adverse product mix, which together diluted margins by approximately 100 basis points in the quarter. The one-off issue in education and government that I mentioned previously also contributed to the margin performance. We will provide more details in a few minutes. But we are confident that our long-term growth and margin expansion model is intact. Q3 was an excellent quarter for earnings growth, as our adjusted earnings per share increased 49%, driven by our operating performance and the ongoing benefits on interest expense from our deleveraging. We remain on track to deliver adjusted earnings in the range of $0.55 to $0.58 per share for the full year. It was also an outstanding quarter for cash flow generation and continued deleveraging. Our unlevered free cash flow in the quarter was $206 million, representing a 127% of adjusted net income. Working capital was the main contributor to the free cash flow improvement. Net leverage declined to 4.8 times in the quarter, down from five times at the end of the second quarter and from seven times at the beginning of the year. In addition to the impact from the IPO earlier this year, we are on track to reduce leverage through operation performance by almost a full turn this year. While we are pleased with the progress we made in the quarter, there were some notable headwinds worth mentioning. The quarter started off somewhat slow and we saw a modest tightening in capital expenditures, particularly in Europe. Industrial end-markets, which represent approximately 25% of our revenue, also continued to be soft around the world. Despite these challenges and excluding the one-time impact we encountered in our education and government end-markets, we were able to deliver mid single-digit growth in our core business. Also, we were encouraged by the momentum of our business in September that has carried forward into the fourth quarter. Our exposure to Biopharma including the high-growth Bioproduction space, our global presence, broad customer access, and a highly recurring revenue profile make for a resilient model that performs well across economic cycles. I am moving to Slide 4, where on the left, you can see highlighted the sales growth, synergy execution, adjusted EPS growth, and continued balance sheet deleveraging that I previously discussed. I would like to take a minute to cover some non-financial highlights. We were pleased to expand our share of wallet with several existing Biopharma customers. One notable example is an existing account, which we previously only served in Europe. After understanding the value, our integrated offering brought to its European business, this global Biopharma customer decided to expand the contract on a worldwide basis. We also won multi-year contract extensions with several top-tier Biopharma accounts and successfully onboarded several new customer accounts including some important wins in the CRO and education space. During the quarter, we began work to expand our innovation center in Bridgewater, New Jersey. By nearly doubling our footprint, we will be adding capabilities to support our customers in the areas of downstream processing and cell and gene therapy. We also began work to increase production capacity for high-purity, low endotoxin sugars used in both the upstream and downstream workflows of the biologics manufacturing process. We anticipate that this new capacity will be online by the end of 2020. Our digital offering remains a key driver for our business model and continually enhancing user experience is a priority. We implemented additional improvements throughout the third quarter and see additional online traffic leading to revenue growth across our platform. In September, we announced that Bjorn Hofman, the leader of our manufacturing and procurement teams, plans to step down from Avantor later this year to join New Mountain Capital, our private equity sponsor who continues to own approximately 20% of the company. Bjorn has been a valuable member of our executive team for the past five years and we appreciate his contributions to our growth and execution. The good news is that Bjorn will be with us for as long as we need him and will be available to us even after his official transition. With Bjorn's departure, we are pleased to welcome Tanya Foxe, who recently joined as Executive Vice President, Global Operations and Supply Chain. Tanya brings a wealth of experience in Supply Chain Management from her prior roles at Johnson & Johnson, as well as at AVON, Walmart and Ford. Her leadership and experience will be critical in helping us build a fully integrated end-to-end supply chain that will further strengthen our overall value proposition to our customers around the world. With that, let me turn it over to Tom.

Thank you, Michael. I am on Slide 5, where you can see the 2.4% organic growth and the breakdown by region. The quarter was a bit lumpy with low-single-digit growth in July and low-single-digit contraction in August. However, we were pleased to see this trend reverse in September when growth returned to the mid-single-digit level and it is important to note the challenging comparisons we had in the quarter considering the 9% organic growth we had in the third quarter of 2018. The 1% growth in the Americas stands out as this is where the effect of the 2018 one-off that Michael mentioned materialized. For this single account in the education and government space, we had more than $40 million of sales in the third quarter of 2018 reflecting the ramp up at the start of this new contract. In 2019, a large portion of the revenue for this contract was recognized in the second quarter. Additionally, not all the Q3 2018 volume repeated at some portion of the ramp up was to establish a threshold level of inventory to service the business. Absent this factor, the Americas growth would have exceeded 4% in the quarter and the growth of the entire company would have approximated 5%. Europe was strong at 4.5% with growth across all of our end-markets including high-single-digit growth in Biopharma. AMEA at 8% grew a bit more modestly than we have seen recently, although Biopharma reported low double-digit growth and we had a very strong month in September, growing well into the double-digits. Let me move to Slide 6 for a very quick look at sales by end-market and product groups. As you can see Biopharma grew in the high single-digits, while Healthcare and Advanced technologies and Applied Materials were flat. Education & government, as previously noted had a low single-digit decline. By product group, Proprietary Materials and Consumables declined low-single-digits, which in large part reflected the Americas education and government one-offs we have been describing. I will talk more about this product group when covering our adjusted EBITDA performance. Third-party Materials and Consumables grew mid-single-digits. The Services and Specialty Procurement group grew by low-double-digits and the Equipment and Instrumentation group grew low-single-digits, where we saw customers moderate capital expenditures. Slide 7 is a summary of our adjusted EBITDA, free cash flow and adjusted EPS performance. As Michael indicated, we did well on product pricing versus product cost inflation and on synergy realization, but had about a 100 basis points of dilution from adverse foreign exchange and mix. I'll cover this in more detail on the next slide. Cash flow in the quarter was strong. Unlevered free cash flow was $206 million, up 48% and is up 34% for the year-to-date. Our leverage position continues to improve as we ended the quarter at 4.8, down from approximately five times at the end of the second quarter. We expect to see further progress in the fourth quarter. Last, the 49% increase in our adjusted earnings per share reflects the operational performance and the ongoing benefits on interest expense from our deleveraging. Slide 8 shows the adjusted EBITDA bridge from the third quarter of 2018 to the third quarter of 2019. Starting with the $13.7 million price volume factor, we had flat volume in the quarter reflecting the netting of some very strong growth in Biopharma against the negative impact of the one-off in our Americas education and government business. Single-use and serum volumes in the Americas were particularly strong. Product pricing relative to product cost inflation performance was also strong, particularly in the Americas. This was offset by timing of supplier and customer rebates. The productivity factor reflects our continued realization of the SG&A synergies from the VWR acquisition around $9 million in the quarter, largely offset by non-COGS inflation and approximately $5 million in strategic investments. These investments are mostly targeted to customer-facing sales and marketing functions and to new supply chain facilities to support growth in the AMEA region. Sales mix had an adverse impact in the quarter, but it's something we view as temporary in nature. Part of our margin enhancement strategy is to drive the sales of our proprietary products, which are accretive to margins. We have been very successful in doing this and in fact for the six quarters preceding this quarter, the sales growth rate for proprietary products had exceeded the sales growth rate for third-party products. But in the case of this third quarter, sales of our proprietary products were down as I mentioned earlier. The one-off sales decline in the Americas education and government business was the main factor here. This customer volume is largely comprised of proprietary products. Similarly, in the Americas, we experienced a normalization in sales of proprietary materials to the healthcare space, compared to the third quarter of 2018, when sales of these materials grew 25%. Foreign currency is the last bridge item I want to cover. We've been experiencing foreign currency headwinds all year. The impact was the most intense in the first quarter, when, for example, we were comparing the 2018 Euro exchange rate of 123 to 2019 at 114, a $0.09 GAAP at that time. For the third quarter, this difference was down to $0.05, the 116 versus 111, but it still created a $6 million year-over-year headwind for us. We expect this impact to narrow further in the fourth quarter. Combining the $6 million FX impact and the $9 million mix impact, we realized an approximate 100 basis point contraction in margins from 2018. This is not something we expect to continue. Slide 9 has our Segment Results. As I indicated earlier, the 1% organic revenue growth rate in the Americas exceeded 4%, absent the one-off revenue decline in education and government business. We also exited the quarter with mid-single-digit growth for the month of September. We enjoyed another solid quarter for the Biopharma business, our largest customer group with sales up mid-single-digits reflecting new customers and strong volume growth from customer spending on research and development. The Bioproduction business also remained strong with low-double-digit growth. This strength was partially offset by a mid-single-digit contraction in healthcare, which reflected the normalization I mentioned earlier in sales of the proprietary materials to the healthcare space. Absent the normalization from this customer, Q3 sales for Americas healthcare would have been up 3%. We experienced mid-single-digit contraction in education and government. Apart from the one-off item, we actually experienced improved performance in the remainder of this end-market especially in higher education, where we had some recent customer wins. The Advanced Technologies and Applied Materials end-market was down low-single-digits, driven by high-single-digit decreases from food and beverage, agriculture, semiconductor and chemical customers reflecting softness in the industrial sector. This was partially offset by growth in our aerospace and defense platforms. Despite the more challenging revenue comparison, the Americas region reported an improvement in the management EBITDA margin rate, which reflected strong product pricing relative to product cost inflation and SG&A savings driven by the VWR synergies and lower incentive compensation accruals. These were partially offset by the adverse mix factors and timing of customer rebates I referenced in the overall adjusted EBITDA margin bridge. In Europe, net sales increased approximately 4.5% on an organic basis with roughly equal contributions from improved pricing and volume growth. Sales to the Biopharma end-market increased high-single-digits from broad based strength across strategic customer accounts and new customer wins. The Healthcare segment experienced mid-single-digit growth, largely due to strong sales of proprietary materials, partially offset by declines in third-party Consumables and Equipment and Instrumentation products. Sales to education and government consumers grew in the low single digits. We were successful in winning new government projects, but these gains were partially offset by contraction in Equipment and Instrumentation sales. Advanced Technologies and Applied Materials recorded low-single-digit growth, driven by higher sales of third-party Materials and Consumables and relatively flat sales in Electronic Materials. Europe had a modest improvement in the management EBITDA margin rate. We had strong product pricing relative to product cost inflation performance, modest volume leverage, a favorable mix of sales and SG&A savings driven by the VWR synergies and lower incentive compensation accruals. Offsetting these were the unfavorable transactional foreign currency headwinds and the timing of supplier rebates. The AMEA region, reported organic sales up 8.2% due to growth in Biopharma and Advanced Technologies and Applied Materials, our two largest end-markets. We exited the quarter with over 30% growth for the month of September. The Biopharma business experienced low-double-digit growth driven by increased volume in lab products, primarily through sales of third-party Materials and Consumables. These were partially offset by a decline in sales to Biopharma production customers, driven by challenging prior year comparisons and the timing of customer production campaign offset by stronger sales of single-use offerings. Advanced Technologies and Applied Materials experienced mid-single-digit growth, driven by sales of third-party Materials and Consumables. Sales of Electronic Materials were flat year-over-year. AMEA had a decline in the management EBITDA margin rate from 24% in 2018 to 20% in 2019. We had modest volume leverage, offset by a slightly dilutive mix of product sales and investments in customer-facing sales and in marketing functions and new supply chain facilities to support future growth. Turning to slide 10, I want to share some more detail on cash performance for the quarter. For grounding, the green bars on the left show free cash flow, which grew from $99 million in the third quarter of 2018 to a $185 million in the third quarter of 2019. Net working capital contributed approximately $80 million of this $86 million improvement, as you can see in the table on the right. We are clearly getting some traction from the leadership attention this area is receiving. However, we still have an opportunity for significant further improvement. You will also note that the improvement in free cash flow was from lower interest costs driven by our deleveraging was largely offset by higher payments for income taxes, as our net operating loss deductions begin to expire. Excluding cash interest, which is shown in the blue bars, the unlevered free cash flow grew from $139 million in 2018 to $206 million in 2019. This cash generation enabled approximately $157 million of cash deleveraging in the quarter. Speaking of deleveraging, Slide 11 gives a quick update on leverage at the end of the quarter. We started the year at seven times and reduced it to five times by the end of June and further reduced it in the third quarter to 4.8 times. We expect our leverage ratio to approximate 4.5 times by year-end and continue targeting a long-term leverage ratio in the range of two times to four times. Looking ahead, there are some opportunities with our debt structure to further reduce the interest burden. In particular, our $2 billion in senior unsecured debt with a 9% coupon and our $1.5 billion in senior secured debt with a 6% coupon, offer attractive opportunities for refinancing in the second half of 2020. We will share more detail as we get closer to that date. Our full year revenue and earnings guidance is on Slide 12. We are adjusting our full year outlook to reflect the third quarter performance and foreign currency differences between our original guidance and the current environment. We now expect full year revenues to be in the range of $6.02 billion to $6.08 billion with organic growth of 5% to 6% and adjusted EBITDA in the range of $1.025 billion to $1.035 billion or an increase of 8.4% to 9.4%. At the midpoint, the new guidance reflects a 1% reduction in revenues and a reduction in adjusted EBITDA of approximately 2%. Our guidance for adjusted earnings in the range of $0.55 to $0.58 per share or an increase of 52% to 60% remains unchanged. With the updated guidance, we expect a very strong fourth quarter, with inferred sales growth of 5% to 6%, EBITDA margin expansion in excess of 100 basis points and adjusted EPS growth of 57% to 87%. I will now turn it over to the operator to begin the question-and-answer section.

[Operator Instructions] And our first question comes from the line of Tycho Peterson from JPMorgan. Your line is open.

Hey, thanks. Tom, I want to kind of go back to kind of how the quarter played out. If we go back to September, you had made some comments about Europe being soft and that ended up being fine and conversely was the Americas that came in a little bit light against a tough comps that you kind of knew about. So, can you just talk a little bit about where you are feeling better, worse geographically coming out of the quarter, where you surprised at the reversal in Europe and are you able to talk at all about October trend, I know you said September was very strong?

Yes. So, happy to take that. Thank you, Tycho. Just starting with Q3 the – when we look at the growth by months, it's kind of interesting, we were – and I think I tried to say in the comments, we were kind of in that 3%-ish range in the month of July and we actually went negative in August. And it was in part in Europe where we are seeing that. And the month of August is tough always to kind of base a full year projection on given schedules and vacation, particularly in Europe. So, we definitely were sounding a cautionary tone after seeing that. But I'd say that September was very strong for us across the board. I mean, the Americas was mid-single-digits, Europe was high-single-digits and Asia, as I said was, well into the double-digits. So, very strong month of September. In terms of October. We are not closed yet. But we are trending in line with what the guidance that we provided for the full year, as well as what that implies for the fourth quarter. So, they are off to a reasonably good start for the quarter and it's going to be a pretty strong quarter relative to Q3.

And then on Asia, I was a little surprised that AMEA didn't do a little bit better given that the comps slowed. I know you called out some timing issues on Bioproduction. How much of this was just kind of pacing timing of manufacturing campaigns versus a broader slowdown? You are obviously off a small base there.

Yes, Tycho this is Michael. I'll take that question. I think, couple of things to keep in mind for AMEA. Firstly, just the relative magnitude of AMEA for us is, is roughly 5% and the way our portfolio has been built out there, it’s skewed more toward the production environment than the other two regions that we participate in. So, we do see a little bit more volatility in Asia owing to just the batch and campaign cycles that our customers bring us into. And if you look at the third quarter, specifically in Bioproduction in 2018, that was in fact the high watermark for us in the region. There were a number of really, really significant campaigns that we participated in, that just based on the timing of this year, several those have actually slipped into the Q4. So, nothing structural – still very well position there. Our growth continues to be solid and as we look into the fourth quarter in our order book, particularly around Bioproduction, you will see, I think a return to kinds of levels of growth that you would expect in that region.

Okay. And then lastly, just hopefully a quick one, but how much of the EBITDA being lowered is FX versus accelerated growth spending versus the lower organic growth? I know you flagged it already gross spending.

Yes, I mean if you look at it – if you look at the midpoint, Tycho, we were at a 10.50 midpoint. In the prior guidance, or10.30 now, so call it $20 million. Of that $20 million, $15 million is really the Q3 results that we just took you through. And the remainder is mostly FX for Q4. Otherwise, we are pretty in line with what we've talked about before on Q4.

Okay, thank you.

And our next question comes from the line of Derik De Bruin from Bank of America. Your line is open.

Hi, good morning.

Good morning Derik.

Hey, I just wanted to follow-up on Tycho's question on EBITDA. I mean, this is the – I realize that there is a lot of FX mix associated with it. But – the question, I just want to focus on is, it's still a little bit more, more volatile than even we have thought given our experiences with VWR and relative to where the IPO model was. I am just curious, what can you do to help smooth out the EBITDA? And is there anything you can do and it also goes to the question when you look to 2020, are you still comfortable with at least 100 basis points if the EBITDA margin expansion next year given the current trends?

Yes, thanks, Derik. I was having a little bit of difficulty hearing your – the first part of your question. But if we – if I talk about the trends going forward and you can start with the fourth quarter, if you look at our guidance for EBITDA, it does continue in line with the model that we've talked about and just to remind you, during the three year integration period of Avantor and VWR, we have a high degree of confidence of being able to grow the margins in part, because the conversion on organic growth, but also in part because of its synergies in that 100 to 150 basis point range. We did that for the first two quarters of this year. We'll do it for the fourth quarter. Third quarter was - for the reasons we've talked about a little bit of aberration. As you head into 2020, that's the third year of our three-year integration and while we haven't finished our planning yet for 2020, I would expect that we'll adjust the overall baseline to reflect 2019 actuals. But the growth algorithms on organic growth, as well as margin expansion delevering and so forth, still remain intact. Could you help me – can you take me back to the first part of the question?

No, that basically - that basically covers it. That's what – you've got what I asked in the first part on it. I guess another question, I just wanted to bring out was, on – you are seeing some good pricing gains and something it’s in – I am just wondering how sustainable those are, I mean, you are seeing little bit better price than even I would have thought you had. Can you talk about what you are doing to sort of maintain that?

Alright. Derik, as you look at the impact of pricing relative to volume, I think the third quarter played out plus or minus what we've seen in previous quarters, which is to say that we strive to modestly offset the COGS inflation that we do see in some of our transactional part of our portfolio and then, on – more of our proprietary products, which tend to have more value-based pricing approach to those, nothing really new to report there. So, I think as we look at the contribution of pricing in the quarter, we call it out only to indicate that we continue to execute our model that we have had in place for quite some time here. I don't think anything unusual to note there, Derik.

Great. And just lastly a quick one, if you look at – if you back out the one-time on proprietary products, what did that grow in the quarter?

Yes, if you – we were looking at the math on that this morning. But if you take the impact of the science and education piece out of it, we would have been strong mid-single-digits, like 5% to 6% is what you would have seen, which certainly is a tad better than what we would have had on third-party. So that, we think the algorithm of proprietary growth relative the third-party growth still remains intact and that is a tenant of our baseline expansion.

I think, Derik, it's important to point out, when we look at the Proprietary Materials part of our portfolio, in large part, you are talking about our exposure to Bioproduction where most of our solution is manufactured from our own technologies. And then, our exposure into the healthcare space with our medical-grade silicone platform is also an important part of that algorithm that Tom mentioned. And to Tom's point, those end-markets for us continue to be very robust. We continue to see strong double-digit growth in our Bioproduction platform led by more than 20% growth in our single-use platform. So, I would say, it's important to recognize that the Proprietary Materials part of our portfolio does influence margins to a large extent as we've laid out today and the core part of that business continue to run at a very high level and save the one-off here in the Science Education business we talked about another really strong quarter.

Thanks for the clarity.

Our next question comes from the line of Jack Meehan from Barclays. Your line is open.

Thank you. Good morning. Actually, I wanted to follow-up.

Hi Jack.

Good morning

Good morning. Wanted to follow-up on that last point, just as we look at the fourth quarter guidance, it looks like around 5.5% organic. What are – are you expecting proprietary to bounce back and Michael, can you just build off that point related to, maybe some of the proprietary products across J.T. Baker and NuSil? Just – could you maybe, how did they perform in the quarter? And how are you feeling about that going into year-end.

Right, I think that's a good place to focus, Jack. When we look at the inferred Q4 performance, obviously you see strong top-line – our return to kind of the normal margin expansion in line with our long range targets and then, underneath all that, an order flow to happen, you are seeing a bounce back in Proprietary Materials probably right to think about that in the high-single-digits growth levels for Q4. And that is a part of our business, we talked a lot of our limited visibility we have overall for order book. That Proprietary Materials part is particularly in our – of our production space, an area that does have a little bit longer lead times associated with it. So as we sit here in the first week of November, we do have a fairly good line of sight to orders that we would have through the end of the year and are comfortable or kind of the guidance that we've put out for that aspect of the model. When I look into Q3 specifically, around Bioproduction, I referenced the strength of our J.T. Baker brands in our BioProduction Chemicals platform. The single-use platform continues to grow well into the double-digits and well beyond, I think the kind of normalized market growth rate for this space, which I think speaks to our global presence and the success that we are having in growing our part of our business. But you mentioned the NuSil business, in Tom's remarks he did referenced a bit of a pullback in that part of our portfolio as it relates to our healthcare business. And that's another production-oriented platform that from quarter-to-quarter can have a little bit of volatility to it, just given the production cycles and inventory balancing that our customers will go through. And in that particular platform, Q3, a year ago was the high watermark. I think we grew that platform 25% a year ago. So you see a bit of a more normalized environment in the third quarter of this year - that the comp loosens up a bit and we see structurally a return to normal growth in that end-market, as well.

Great, thanks for all the color. And then, in the slide deck, I really like the EBITDA bridge on Slide 8. But the one thing I guess, that to me was, that net productivity was only $0.5 million in terms of the year-over-year contributions. So now you at $247 million of runrate synergies, even annualized some of these – as you go into the numbers. But how much you know, as we exit 2019 and go into 2020, can you give us a sense for how much is left in terms of the potential to expand margins based of synergies?

Right. So, I think I'll provide a little bit high-level cover for your question there and then Tom will get you a specific walk on that net productivity element of the bridge. We are still very confident in delivering the $300 million of synergies that we had outlined at the beginning of the integration of VWR. We are run rating nearly $250 million at the end of the quarter here. And as we look forward into next year and the individual programs that are in line to get us to the $300 million, I would say, we are very, very confident about that. One important point to note that program is comprised of literally hundreds of individual projects, some of which are driving top-line revenue, some of that are driving reduction in COGS, some that are more SG&A-driven. So you are going to see a impact of that $300 million scattered throughout the P&L. And as we look into the balance of this year and moving into the next year, you will continue to see a step-up in the contributions from that program. Now, what we're reflecting here in the bridge and Tom will walk you through it is just kind of the netting of – on the COGS side of - the fixed cost side of things, how that productivity plays out in the quarter.

Yes, so, Jack, just to get right to the productivity number that you saw in there. I mean, it does look a little a measly in the walk, but it really is a reflection of some very strong performance on the value capture. I mean, there is a – this has the SG&A synergies and productivity that we deliver in the quarter. It was approaching $10 million is what I'd say. There is additional synergies and productivity that's embedded in the price volume line for the part of the synergy, the value capture and synergies that are in the operating piece of the business. But just from an SG&A perspective in this net productivity, you've got $10 million, offset by some big investments. We made investments in Asia, in particular is we're continuing to invest in feet on the street and in laboratory capabilities. We've also got some additional investments elsewhere in the enterprise just growth-oriented R&D kind of investments. And you had a little bit of inflation in there, as well from a year-over-year perspective. So, I expect the – that bar to get bigger as we head into the fourth quarter and into 2020.

Thank you guys.

Our next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open.

Hey guys. Thanks for taking my question. Maybe I'll start with this Q4 5% to 6%. Just given, Q3 was a little bit light. Maybe talk about some of the drivers here. I know the comp is easier for Q4. But ex the comp, anything that we should be aware of the confidence that you have in 5% to 6% for Q4?

Yes, Vijay, thanks for the question. Good morning. I think when you – it's important to kind of ground in Q3, I think you're looking at a quarter here that really did want to be 5% on its own absent this one-time issue with the science education, customer that doesn’t repeat going into the quarter. So you are looking at a normalized mid-single-digits growth as a launching point from Q3 going into Q4. The comp does pullback a couple hundred basis points. But we had a number of recent contract wins. We've got obviously visibility as I referenced earlier into the campaign schedules with many of our large Bioproduction customers, especially in Asia, which will print into the quarter here. So as we look at kind of an inferred Q4 here in that 5% to 6% range, it also has the embedded or implied kind of normal year-end budget flush that we would see in our Consumables business. And so, I think we are comfortable with the trends that we've seen exiting September early read on October would be supportive of the guidance that we have in mind here and then rounded out with a pretty robust order book for Bioproduction business.

That's helpful. And then, maybe one on free cash flow comp. I think, the presentation had you guys delevering to sub four turns, end of fiscal 2020, you are at 4.8 right now. I mean, basically with $550 million of free cash guidance for the year. This is implying your free cash flows should grow north of 40% to pay down an incremental billion of debt between now and end of fiscal 2020. Is that – does that math makes sense your free cash $550 million for 2019, that should be catering at 40% or growing 40% for next year?

You have to factor in the EBITDA growth that we'll get as well on the delevering. So I haven't done the math on that. But it is a combination of the growth in the EBITDA, as well as the continued servicing on the debt that we will get.

That's an impressive free cash flow growth number guys. Thanks.

Our next question comes from the line of Brandon Couillard from Jefferies. Your line is open.

Hi, thanks, Good morning.

Hey, Good morning Brandon.

Mike, if you look at the industrial markets globally in the third quarter, could you just kind of unpack the various sub-segments globally, particularly on the more cyclical, say, the chemical and industrial side and what you are embedding for that market in 4Q?

Right. So, just maybe to provide a little bit of context here, roughly 25% of our revenue would have exposure into this industrial end-market, but in a very fragmented way. We are going to serve lots of different applications, whether that be aerospace and defense, semiconductor space, food and beverage, oil and gas, with no end-markets representing more than kind of low-single-digit percentage of our overall revenue. And as we have been signaling for most of the year this part of our business has been relatively soft to negative and certainly haven't really seen a significant change in that trajectory in the third quarter and nor are we anticipating or relying on any significant pickup of those end-markets in the fourth quarter. There are a couple of pockets of bright spot for us. Our exposure to aerospace and defense end-market is rather unique in that we are specked in much the same way you would expect us to be specked into a biologic drug with a very specific specification on a long-term platform that is growing - certainly grew in the third quarter and will continue to grow going into the fourth quarter. The semiconductor space is another important end-market for us and we've seen the business in Asia slide for most of the year. Starting to moderate a bit in the third quarter, I would say. And we feel like we've probably bottomed out in Asia in that end-market and see the signs of a little bit of an uptick nothing that will drive the results in a significant way but certainly of glimmer of hope that things have likely bottomed out there. Europe when you look at an impressive print there on the quarter of 4.5%, it is still 100 or 200 basis points below where we had been running earlier in the year. And I would say, if there was one change I would point out, we did see kind of the industrial end-markets in Europe start to slow down a bit in the third quarter. And I think when you look at 4.5% print, it obviously demonstrates the exposure we have to Biopharma in Europe. But it also does reflect a little bit of a weakening environment in Europe across that industrial sector particularly, as it relates to capital expenditures. And if you recall, roughly 15% of our portfolio in the Equipment and Instrument part of what we offer is going to be subject to our customers’ capital expenditure programs and it certainly saw a tightening of that in Europe. We were off in the quarter, low-single-digits on that platform and see that kind of moderating here through the fourth quarter. So, I would say continued weakness with maybe a couple of areas bright spot and I would say, Europe, have a few more headwinds in the third quarter than what we had seen up to that point in the year.

Thanks. I appreciate that color. And then, Tom, just in terms of the guide, trim in EBITDA a little bit for the year. Just curious if, but holding EPS, just curious is there any changes below the line in terms of net interest and other or tax for the year? Thanks.

Not really, I mean when we put together the original guide, we had some assumed levels of interest expense. We've done a little bit better on that as we progress through the year. I mean, we had repricing in the middle of the year and it's helped a little bit. We've also – the IPO was a little bit bigger than we had modeled. So between those two, we are getting some favorability on the interest line. Taxes will be pretty much in line with what we modeled out in that 30% range. And as I talked about, as we look forward to tax, I mean that's certainly an area of opportunity for us. And we are making good progress on some of the things we need to do to bring that rate down to the levels I've talked about before. But, overall, it's not a significant change other than the fact as I mentioned on the repricing in the IPO side of things.

Super. Thank you.

Our next question comes from the line of Doug Schenkel from Cowen. Your line is open.

Hey, good morning guys.

Good morning, Doug.

Maybe to start with a – I guess sort of a high-level question, as you noted in your prepared remarks and as we've covered a bunch of times already over the course of this call, you had some one-timers and generally speaking, a tough comparison relative to the norm in the quarter that depressed organic revenue growth relative to recent trends. That said, it does seem like something surprised you in the quarter, given that you cut full year guidance. I know that’s basic, but I just want to make sure that's fair. And building off of that probably more importantly, even if something changed relative to your internal model for the second half of this year, is it fair to say that your 5% to 8% long-term revenue growth guidance is very much intact at this point?

Yes, let me take that question. I think your observations on some of the one-time nature of the results that we saw here were somewhat to be expected. Certainly, the tough comp was known certainly kind of the shifting of revenue from Q3 to Q2 from this science education customers was known. What was not known is on that part of the business, was the relative level of inventory that they were carrying and the volume that didn't repeat in the quarter. So, we know that there was a pull-forward of some of the volume, but there was some lack of transparency on just how much inventory that they were carrying and as a consequence, volume would repeat in the quarter. The other dynamic that we didn't anticipate going into the quarter and this is actually relatively normal for that end-market. But in the healthcare space, relatively limited visibility into inventory through the supply chain, you do have relatively volatile production schedules and coming off a quarter where we had 25% revenue a year ago knowing at some point that there would be likely some inventory taken out of the value chain, the timing of which is very difficult to predict. And unfortunately, it looked like more of it came out in Q3 than what we would have anticipated. So, those are probably the two things that I would point to that surprised us a bit on the quarter. Relative to kind of our longer-term guide, absent those two factors, we had a great quarter. Our Consumables business holding up in the mid-single-digit levels. Our Bioproduction business holding up in the low-double-digit range. This model that's really built to deliver over the long-term on a sustainable basis, mid-single-digit growth with the embedded power on various quarters as we've demonstrated to go even into a high-single-digit range is very much intact. And you see that in the optimism we have here around our fourth quarter.

Okay. That's all super helpful. And maybe if I could just slip in one quick follow-up, on tax rate, you came in well below expectations in the quarter. How much of this was a function of timing or something else? And I guess, as we look ahead, do you still expect 2020 adjusted tax rate to be in the 26% to 27% range? Or are you seeing something as we sit here today that could drive that even lower? Thank you.

Yes, yes, I think, I think what you're talking about, Doug, it’s for everybody's reference is, our guide for the tax for the year is roughly 30%. We are still sticking to that. The quarter was a little bit lighter in terms of the rate and it came in around 27%. That's about $2.5 million of net income less than a penny. So not terribly material and there is really nothing to point to structurally or from a longer-term perspective. But I would say that and I repeat what I said earlier that we are on track relative to the things that we need to do to get that, the tax rate lined up for 2020 particularly around the way we are financing our international operations doing that in a much more tax-efficient manner.

Okay. That's great. Super helpful. Thank you.

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

Great, thank you. Thanks for taking the questions. I joined a little late. I had - the first question was just on AMEA. I know it's a smaller portion of your business. But I know it's an important growth opportunity for you and the growth this quarter was below what we were expecting. So, could you just kind of give us some sense of kind of what the trend was in the quarter? And also as we look out, what's the right kind of growth rate to expect for that geography for you?

Yes, we've did cover that question earlier in the call here, but just to reiterate the key points from the answer we gave there. Obviously, it's a relatively small or modest revenue base for us in Asia, roughly 5% of our overall revenues and unlike the other two regions that we serve, it's disproportionately oriented towards our production customers and then naturally the exposure to their campaign cycles. So, we've had a number of really important wins in the region this year. It just so happens that last year was probably the high watermark for our Bioproduction business in the region a year ago. So very difficult comps and a number of those campaigns actually slid into the fourth quarter for this year. So, nothing particularly structural. The business continued to perform well. This is certainly muted by downside in our Electronic Materials platform that continues to be negative. But long-term, we would expect that part of our business to grow at least in the low-double-digit range for the foreseeable future.

And then, Michael, thank you for that. And then, and then, just within Biopharma, there has been kind of varying degrees of kind of growth this quarter from your peers across the different sub-segments within Biopharma. But just, I know the growth this quarter was still positive, a little bit lower than what it had been. Just can you kind of remind us of kind of your split within Biopharma, between the Bioproduction which is obviously robust in other areas and how we think about the trajectory of Biopharma in Q4 and beyond? Thank you.

So, Biopharma for us is roughly 50% of our revenues. So, obviously, it's a critical end-market for us and we are excited about the momentum that we have in the business. We highlighted a number of customer wins that we had in the quarter, which should be a follow-on from a number of specifications and wins that we've had throughout the year. So, really great momentum there. We are going to serve Biopharma across the workflows starting in the research and discovery phase, all the way through to the production environment. As a rule of thumb, you probably wouldn't be too far off to assume roughly two-thirds of that revenue is going to fall into the laboratory and research and discovery phase and somewhere in the range of a third of the revenue falling into the production environment. Clearly, the growth in the production piece of that is going to be a bit more robust. I think if you look at and triangulate most of the market data points Bioproduction growing high-single-digits, low-double-digits. Just given our portfolio, our exposure globally, we would expect to do at least in line with that if not slightly better than that.

Great. Thank you.

Our next question comes from the line of Erin Wright from Credit Suisse. Your line is open.

Great. Thanks. Can you speak to some of the nature of those contract wins in the quarter? I guess, what drove those? Was it the integrated offering that contributed to the wins across euros, as well as in Biopharma and the expansions there? If you could speak a little bit more to those that would be great.

Yes. No, we are always excited to speak about some of the success that we're having. We won't get into specific customer detail for obvious reasons here. But, when I look at the success that we've had in defending our accounts, as well as winning new accounts across Biopharma and across as education especially, it's been, it's been a really successful year. And when I speak to our customers on the back-end of these discussions, two or three things seem to emanate with them. One, the power of our integrated offering is certainly unique for them and as these two platforms have come together, we are able to offer them a much more significant solution today than we ever have before and you see that in kind share of wallet so we are able to gain with some of these accounts. Our global exposure is important as we referenced in our remarks. Example of a customer that we had historically only served in Europe, but as we have built out our capabilities, especially in Asia, but also building on our presence in the Americas, they stuffed up and awarded that business to us globally. The CRO space continues to be an important driver of growth for us. We had a number of important contract wins in the quarter in that space. And then, playing on the theme that we've been running now for multiple quarters, we continue to build momentum in our higher education portion of our business in the Americas. We had - and we have, as we've discussed in other forums, an exclusive relationship with a consortium organization. A lot of the universities in this part of the world would buy across and given that position, as well as just the focused efforts that we've been driving, we've seen a number of important contract wins in the higher education space this year.

Okay, it's great, thanks. And then, digging a little bit deeper into the VWR synergies, I guess, can you give us a geographic update on sort of a productivity and other initiatives there. Specifically in Asia, I know that was an area that you highlighted with the IPO, as far as opportunity with VWR synergies as well. Is that all still intact in terms of the prospects there?

Yes, it is, when we look at synergies kind of two-thirds cost, roughly one third commercial synergies. A good bit of those commercial synergies actually play out in Asia, as you are describing as we integrate the VWR portfolio across. In that case what happens within the legacy onto our infrastructure and we continue to invest and you see that in some of our SG&A numbers and other total operating expenses whether that be in sales reps or marketing resources or commercializing a new application center, that we will open here in a few weeks in Shanghai. So, we'll continue to build out a supply chain to service that and then to be able to capture those synergies. But they definitely - as we see our long-term a region that we grow in double-digits in part due to these synergies.

Okay, great. Thank you.

Thank you. I would now like to turn the call back over to Michael Stubblefield for closing remarks.

Yes, thank you everyone for participating in our call today. We certainly appreciate your support of Avantor. As we talked here, we had a bit of noise in the quarters from some prior year one-offs and mix in foreign currency headwinds. But, we are pleased with the underlying growth that we did generate the strong cash generation and excited about the optionality that the deleveraging trends that we have or provide for our business going forward. Biopharma are certainly our most important end-markets. Continues to grow strong and overall we exited September with great momentum that has carried forward into the fourth quarter. As we talked to you on the call today we did see significant customer wins in the quarter and we are strengthening our overall value proposition by continuing to make strategic investments to better serve our customers. Certainly, our operating performance benefited from continued progress and the operational efficiencies and synergies from our integration program of VWR and overall, we remain on track to deliver the margin expansion and cash flow that's in line with our long-term objectives. As we look at this platform, our businesses is certainly well positioned to further enable the innovation and breakthroughs that help our life science customers dramatically improve patient outcomes. Again, appreciate you joining our call today. We look forward to our next update after the New Year and to seeing some of you in person in the coming weeks. Have a great day everyone. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.