Avantor, Inc. (AVTR) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Avantor Fourth 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, Investor Relations Contact for Avantor. Ms. O'Donnell, you may begin the conference.

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 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 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 fourth quarter earnings call. I’m pleased to report that we finished 2019 with great momentum. In addition to having strong revenue growth across our biopharma business, continued margin expansion and robust cash generation, we made great progress in executing our growth strategy and expanding our global capabilities. Since completing the largest U.S health care IPO in May, we’ve continually improved our leverage position, empowering us to drive the innovations and breakthroughs that help our life science customers dramatically improve patient outcomes. I would like to begin by covering some business highlights since our last earnings call on Slide 3. In November, we announced a new collaboration with the National Institute of Bioprocessing Research and Training in Dublin, Ireland. NIBRT is a global center of excellence for training and research solutions for the biopharmaceutical manufacturing industry, its clients include a number of industry leading companies, such as Pfizer, Eli Lilly, Amgen, Bristol-Myers Squibb, AbbVie and Takeda. Avantor is working with NIBRT to address downstream bottlenecks and buffer preparation when producing monoclonal antibodies. In December, we opened our ninth Innovation and Customer Support Center. Our newest addition is in Shanghai, China and will support accelerated process development for biologic therapies that will advance the development of life-changing treatments for patients in the region. It will specifically focus on enhancing industry capabilities in the development and manufacture of safe and effective biologic medicines, such as monoclonal antibodies and cell and gene therapy. These treatment show great potential in China and our fast growing segment of the bioprocessing industry worldwide. We recently began a capacity expansion initiative at our Gliwice, Poland site that will support the growth of our in biopharma production clients across Europe. It also initiated an expansion to our single use production capabilities in the Mooresville, North Carolina. We continue to experience a high win rate on new customer accounts as well on contract renewals. I’m pleased to report that we are ahead of plan on our integration synergy targets and I remain confident with our goal of achieving 300 million of synergies by the end of 2020. We also recently successfully repriced our term loans, lowering the rate on our U.S dollar and euro denominated term loans by 75 basis points. And we're looking forward to repricing our bonds later this year. I also want to share some organization enhancements that we've implemented in recent weeks, that will enable us to execute our long-term growth strategy. To enhance our ability to deliver workflow-based solutions in the lab, we've established a global laboratory products group, which will be led by Frederic Vanderhaegen, EVP Europe. Frederic and his team will work to enrich our product offerings and improve our solution selling for critical workflows. As with our other platform teams, laboratory products group will work closely with our regional teams to accelerate the growth of our lab products portfolio. We recently announced plans to create two commercial sub-regions within our AMEA region. The substantial growth potential this part of the world, especially in China, warrants more dedicated leadership. So Avantor will now have a commercial organization specifically for the India, Middle East and Africa region, IMEA and another for the Asia-Pacific region APAC that includes Greater China, Korea and Southeast Asia. Dev Ohri is serving as Executive Vice President for IMEA and we’ve hired Sven Henrichwark as our new Executive Vice President for the Asia-Pacific region. Sven brings more than 20 years of leadership in the biotech, life science and medical technology industries, including more than 12 years at GE healthcare. We welcomed Mark Murray to Avantor as Executive Vice President of the Biomaterials and Advanced Technologies platform. Mark brings extensive global sales and marketing, operations and strategy leadership in key related industries through his more than 25 years of experience at McKinsey, Honeywell and Celanese. Lastly, Marc Centrella joined Tom's Organization in December as Vice President Corporate Strategy and M&A. While our top priority remains deleveraging the balance sheet, it is important that we begin to rebuild our M&A capabilities and processes. Mark has a rich background in the life sciences space and has been tasked with rebuilding our M&A capability. Also, earlier today, we announced that Corey Walker, Executive Vice President for the Americas region has resigned from his position to pursue a role outside the life sciences industry, that will allow him to move his family closer to other relatives. We’ve already began our search for a successor, and until one is hired, I will oversee our high-performing Americas region. We are fortunate to have a very experienced leadership team in our Americas region, who are committed to capitalizing on the many opportunities before us in this important region and I’m confident that we won't miss a beat. Including the additions that I just described, we have built a high-caliber leadership team over the last few years and have added significant life sciences capability in depth. Aided by the Avantor Business System, the hallmark of the team continues to be its ability to execute and we are well positioned for another great year. Moving to Slide 4, you can see the financial highlights of the fourth quarter. Organic revenue growth was 4.3% for the period and 5.1% for the full-year, including high single-digit growth in our biopharma business in the fourth quarter, reflecting ongoing strength in our portfolio of customized proprietary solutions. The biopharma end markets remain healthy around the world and we experienced attractive growth in these regions. This segment accounts for approximately half of our total sales and we expect biopharma to continue to be the strongest driver of our future growth. The other growth platforms that we have discussed, including services and biomaterials also had high single-digit growth in the quarter. We did experience a continuation of soft returns in the industrial markets as we noted in the third quarter and our growth was somewhat tempered by a weaker year-end budget flush in both Europe and the Americas. Our adjusted EBITDA margin for the quarter was up 12.7%, excluding adverse currency impacts, reflecting an improvement of 131 basis points for the quarter and 95 basis points for the full-year. These results reflect stronger volumes and pricing, a continued improving mix of proprietary product sales, the ongoing impacts of the VWR synergies and the execution discipline enabled by the Avantor business system. Our adjusted earnings per share increased nearly 90% this quarter to $0.19 per share and are up approximately 52% for the full-year to $0.58 per share, hitting the high-end of our guidance. The excellent performance reflects strong operational execution as well as the benefit of reduced interest expense and an improved tax rate. We expect that these factors will continue to drive significant earnings improvement going forward. The fourth quarter also reflected significant strength in cash flow generation and deleveraging. Our unlevered free cash flow in the quarter was $188 million, representing 97% of the adjusted net income, excluding interest expense. Net leverage declined to 4.6x EBITDA in the quarter, down from 4.8x EBITDA at the end of the third quarter and from 7x EBITDA at the beginning of the year. In addition to the impact from the IPO earlier this year, our growth and EBITDA and focus on working capital have also contributed to 2019 deleveraging. And as Tom will discuss later, we expect further improvements during 2020. With that, let me turn it over to Tom.

Thank you, Michael. I am on Slide 5, where you can see the breakdown of the 4.3% organic growth for the fourth quarter by region. We experienced improved growth in the Americas, reflecting continued strength in the biopharma and education end markets, partially offset by lower government and health care spending, Europe growth was solid at 3.5%, reflecting high single-digit growth in the biopharma business and double-digit growth in the health care end market, partially offset by declines in education in government. The AMEA region enjoyed a very strong 22.7% increase in sales this period, reflecting high double-digit growth in our biopharma business, most notably in proprietary materials for bioproduction. Let me move to Slide 6, which shows sales by end market and product group for the quarter. As you can see biopharma, which comprises about half of our sales grew in the high single digits, while healthcare and advanced technologies and applied materials grew low single digits. Education and government had a low single-digit decline, which reflects softer government spending across the enterprise. By product group, Q4 was a strong quarter for proprietary materials and consumables, which had a high single-digit increase, continuing to outpace the low single-digit growth in the third-party materials and consumables. Services and specialty procurement continues to grow very strongly reflecting strength in all of our service offerings. The equipment and instrumentation group reported a mid single-digit decline, reflecting a soft close of the year, as Michael noted earlier. Let me move to Q4 adjusted EBITDA on Slide 7. We were pleased with the 12.7% growth and 131 basis points of margin expansion. The sales growth converted very well reflecting volume leverage, continued management of pricing versus COGS inflation, the growth in our higher-margin proprietary offerings and productivity, including the VWR synergies. These were slightly offset by the impact of growth investments that we continue to make, particularly in the AMEA region. In the middle of Slide 7, you can see that fourth quarter free cash flow improved from $65 million to $75 million, an increase of 16% and unlevered free cash flow was $187.8 million for the quarter. I will cover cash performance more on a later slide. Last, as Michael mentioned, the 90% growth in our adjusted earnings per share for the quarter primarily reflects the strong operational performance driven by organic sales growth and margin expansion as well as the ongoing reduction in interest expense from our deleveraging. Slide 8 has our segment results. The Americas reported 3.1% organic revenue growth this quarter, which I discussed earlier. Despite the sales growth, management EBITDA in the Americas declined by roughly $2 million and about 70 basis points. In the fourth quarter of 2018, we had a favorable adjustment to inventory without which the Q4 '19 management EBITDA would have grown ahead of the sales growth, reflecting strong price management relative to COGS inflation offset by lower sales of higher-margin biomaterials products and some unfavorable manufacturing variances. In Europe, the organic sales growth of 3.5% resulted in management EBITDA growth of 10.4%, excluding adverse impacts of the stronger U.S dollar and margin expansion of 110 basis points. We benefited in Europe from higher sales of higher-margin biomaterials, bioproduction and other proprietary offerings. AMEA had a very strong performance this quarter, as I previously mentioned, with a 22.7% organic sales growth, management EBITDA in AMEA increased nearly 70% and the margin rate improved by over 850 basis points to 32.4%. The strong sales of proprietary materials into bioproduction and overall volume growth were the main drivers and were slightly offset by the additional growth investments we are making in the region in the form of sales and marketing resources. Slide 9 provides an update of our free cash flow performance for the quarter and the full-year. For the quarter, we generated $75 million in free cash flow, a 16% increase. For the full-year, we generated $302 million in free cash flow, a $140 million increase or 86% from 2018. Operational performance and lower interest expense drove $129 million and $71 million of this full-year improvement, respectively. These benefits were offset by a $47 million growth in taxes paid reflecting a significant growth in our income, notwithstanding the improved effective tax rate. The CapEx requirements to support the growth in the business continue to be modest and overall CapEx grew from $38 million in 2018 to $52 million in 2019. Slide 10 and 11 provide summaries of our performance for the full-year. Slide 10 presents the organic growth, which ended up at just north of 5%, pretty much in line with a model we presented at the outset of the IPO. As expected, AMEA growth exceeded double digits and each of Americas and Europe reflected mid single-digit growth. On Slide 11, you will see a summary of our full-year results in operating profits, cash flow and earnings per share. Following the 5.1% organic sales growth, adjusted EBITDA grew a 11% and EBITDA margin improved from 16.1% to nearly 17.1%, despite some headwinds from higher-than-expected public company costs, share-based compensation and adverse foreign currency movements. On cash flow, I discussed the drivers of the free cash flow earlier. Even excluding the benefit from deleveraging, cash flow grew 24%, which compares nicely to an already attractive 11% adjusted EBITDA growth. Adjusted EPS was $0.58 at the high-end of our guidance and up nearly 62% over 2019. Again, a reflection of attractive growth, margin expansion and the ongoing impacts from deleveraging and debt repricing. Turning to Slide 12, we're pleased with the pace of deleveraging and the reduction in the cost of our debt. During 2019, we reduced debt outstanding by $1.9 billion, comprised of $1.6 billion from our IPO proceeds and $300 million from operations. We started the year at 7x EBITDA leverage and ended at 4.6x. As we've noted before, we are targeting a leverage of 2x to 4x EBITDA, and we expect to be within this range by the end of 2020. We've also been working down the cost of our debt. Through the repricings we've done on our term loans in 2019, we reduced the weighted average cost of our debt to 6.5%. Looking ahead, we see further deleveraging and significant repricing opportunities, in particular, we have $2 billion in senior unsecured debt with a 9% coupon and $1.5 billion in senior secured debt with a 6% coupon, both of which offer attractive opportunities for repricing in the second half of 2020. We will share more details as we get closer to that date. Our 2020 earnings guidance is on Slide 13. We expect organic revenue growth of 4% to 6%. This assumes that the market conditions from 2019 prevail, and the events out of our control, such as the coronavirus do not have a meaningful impact on growth. We are also assuming that the geographic mix of our growth that is high single-digit growth in AMEA and low to mid single-digit growth in the Americas and Europe remains unchanged. We expect adjusted EBITDA of $1.090 billion to $1.135 billion, an increase of 6% to 10%. This reflects our ongoing expectation of a stronger growth in our proprietary offerings versus growth in third-party offerings. Operating leverage on our fixed cost base continued focus on managing the price versus inflation dynamics and the remaining integration synergies. Our guidance for adjusted earnings per share is the range of $0.74 to $0.79 per share, representing growth of 27% to 36%. This reflects continued strong operational improvement, lower interest expense from deleveraging and already completed repricing action and an effective tax rate in the 25% to 26% range. We also maintain a flat share count for guidance purpose. Last, free cash flow is expected to be in the range of $450 million to $500 million versus $302 million in 2019, also reflecting the strong operational performance, lower interest payments from deleveraging and already completed repricing actions, as well as our CapEx light business model. I want to thank you sincerely for your interest and investment in Avantor, and for your ongoing advice and support. I will now turn the call over to the operator to begin the question-and-answer section.

Hey, good morning. I would like to start with EBITDA outlook. At the high-end of the guide here you’re still about $40 million below the Street. So can you maybe just talk, Tom, if there are some offsets on EBITDA expansion, things we have to factor in, in terms of incremental investments that would lead you to be guiding below the Street. And I think what people were assuming for longer term EBITDA growth?

Yes, certainly. Thanks for the question, Tycho. First of all, the guide implies on the high-end about 75 basis points margin expansion. Certainly we're shooting and targeting for more internally. We do have some incremental headwinds from what we would have had in our long-term model. It's a little bit more public company cost between having to become a SOX adaptor this year and a little bit of other things like Directors and Officers' insurance. We're dealing with a little bit more inflation that we had anticipated as well. But again, certainly we are shooting for higher, we're early in the year, we want to be a little bit more prudent in terms of what we commit to at this point. And obviously, we will update you in every quarter in terms of how we're progressing on that.

Okay. And then in terms of trends in the fourth quarter, I guess two questions here. The government piece, was that the weakness there just spill over from the third quarter, or was there anything incremental on the government side? And then, for equipment and instrumentation, down mid single-digit, you reflected -- you commented on the soft close to the year. Can you maybe just talk on dynamics that stick with the business.

Yes, I mean, first of all with the overall growth, we're really pleased with the biopharma piece of it, continues to track away at that high single digits. And when you look at the government piece of it, a smaller piece of the business, certainly down -- sorry, the equipment, government and education, certainly down in aggregate. The government was the bigger driver there, Tycho. I mean it was weird. It was almost all of the month of October was just coming out of September was the slow down across all three regions. Then after that it picked up and kind of flattened out by the end of the year. On the equipment piece of it, probably similar in terms of the months, December was a bit lighter than the other 2 months and we really didn't see as intense equipment purchases in the month of December as we sometimes do when we're closing out the year. More so in Europe than anywhere else. But I don't view either of them as long-term trends. I think it's timing. I mean the government piece was clearly behind us by the time November start.

Okay. Thank you.

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

Hi. Good morning. This is Juan Avendano fir Derik. I have a question. I guess, can you give us an idea of what is the penetration level of the higher margin proprietary legacy of Avantor products in the V WR distribution channel? I'm curious about what percentage of the legacy Avantor products are already being fully offered and distributed globally versus what percentage of these products are yet to be offered in the VWR catalog?

Juan, this is Michael. Thanks for the question. Cleary, you’re hitting on an important aspect of our models and that the growth and margins associate with the proprietary part of our business are really strategic and obviously an area that we spend a lot of time investing in. When you look at our core portfolio that you're referencing, a lot of that content flows into our bioproduction platform, which has been growing for most of the year in the mid teens levels. And we saw that again in the fourth quarter and that’s led by our single use portfolio, our excipients portfolio as well as a lot of our process ingredients and such. Prior to the combination of the two companies, majority of that portfolio was being offered through the VWR channel, and clearly as we come together, we’ve only deepen that especially in geographies outside the Americas. Our biomaterials platform is a unique platform with real strength in the medical technology and implants area, a lot of overlap in the customer set between our legacy new sale customers and the VWR channel customers. And there's been many examples throughout the year where we've been able to leverage that customer access to drive growth on both sides of the equation and those teams continue to work very well. So the trends are positive. It's obviously in a business like this where you’re earning specifications and customizing solutions, there's a bit of a tail here as to how you would expect to see the benefits of the better channel access that we have, we would anticipate those playing out over the next number of years. But we have fully integrated these businesses and are seeing a very strong uptick in our pipeline of opportunities around the world by having proprietary content flowing through our channel.

Got it. Thank you. And then a second question is, are there any other major supplier agreements that are coming up for renewal or that are being renegotiated in the near-term?

Yes, Juan, everything as we’ve just said before, we’ve got a very diverse portfolio here. I don’t think any single supplier represents more than a few percentage of our total revenue. We don't have any significant contracts that would change our ability to access product in the near-term. Great relationships overall and when you look at the growth we've been driving with these partners over the last couple of years and the solutions that they help us enable together with our own content. We are excited by the partnerships that we’ve forged over many years with these suppliers and look forward to working with them going forward.

Thank you.

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

Yes, thank you. Good morning. I wanted to focus a couple of questions on the 2020 outlook. The first one was, I hoping you could weigh in on the pacing of growth this year. You called out, in Asia Pac, I think you -- I heard high single-digit growth for the year, but maybe obviously small percentage of revenue, but what are you assuming in terms of how that might impact the overall growth? And then, also I think you have an extra day in the first quarter, too. I don't know where that necessarily falls, but maybe if you could just talk about the pacing of growth and the different factors, that will be helpful.

Thanks, Jack. Yes, in terms of the 2020 plan, when you look at where we ended up in 2019, most of the trends that were intact to close the year. We -- we are fairly consistent in terms of how that stacks up for 2020. So you can think of it as, as I was saying on the notes, mid single-digit growth for both Americas and Europe. And it'll be in the mid teens kind of for AMEA. That's the overall expectation. Is that getting at what you’re asking?

Yes. Thanks for the clarification. But also, I guess, as you think about how it grows first quarter through fourth quarter, do you think it's more linear, or are there things that just timing wise for the first quarter we should be aware of?

Yes. I mean, when you look -- when you consider the comps over the course of the year, Q1 will probably be on the lower end of the mid single digits. It's not low single digits, and then ramping up. And the second half of the year on the higher end of mid single digits, the way I characterize it.

Okay. And then, Tom, just the second question. You highlighted the potential for some of the refinancings ahead.

Yes.

Within the 2020 guidance, what are you assuming in terms of interest expense? And is there a way you can help quantify us -- for us just what you think that could translate here in 2021 for the refinancing?

Yes, the way I look at it, Jack, is well, first of all, to answer the question, we have not assumed any additional refinancing, repricing or anything in the plan that we presented to you. So as you know, and as probably most people that follow Avantor know, we have some opportunities in the second half of the year, specifically around October, November time frame, where it begins to make more economic sense to consider replacing some of the bonds that we have. We have $2 billion of unsecured bonds at 9%. We have another $1.5 billion of secured -- senior secured at 6%. And depending on where the market conditions are, we will obviously pursue opportunities. You can kind of think of it as, overall as every -- on a quarterly basis, every 100 basis points, it's probably worth about $5 million or so of interest costs. And so you can pick your favorite number and do the math in terms of the impacts that a repricing could potentially have. But going back to what we put into the plan, it is only the pricing that we had after the January pricing that we successfully did, which as you might know we reduced the rates on the term debt, maybe about a $1 billion of term debt that we reduced it by 75 basis points. So that alone gives us a nice pre-tax headwind -- or tailwind of about $8 million. So we continue to keep our eye on that and continue to make good traction on debt portfolio.

Thanks, Tom.

Okay.

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

Hey, guys. Thanks for taking my question. So maybe, Mike, big picture question for you. Past two quarters, we've had some of these one-offs and I appreciate the color on the macro and the guidance range. Just in terms of modeling purposes, should this lead you looking at the bottom half of the range, just given how the last two quarters have shaken out? Is that more -- a more prudent approach, or I’m just curious on where you guys feel comfortable about that guidance range on the top line.

Yes, Vijay, good to hear from you. I mean actually we were really pleased with our overall performance in Q4. And when you look at it relative to some of our prior trends, I think it was really characterized by almost an absence of kind of one-offs. Very little noise in the quarter, and I think if you would have asked me kind of 2.5 months through the quarter kind of where I felt we were going to come in at, probably at that point what I told you, we were trending towards the high-end of our guide. The last 5 to 10 days of the month really were slower than what we had seen historically and we hadn’t planned for anything unusual to finish the year. But certainly it came in slower than what we expected, both in the Americas as well as in Europe. Had we had a normal budget flush out, I think we will be talking about a number that was probably 100, 200 basis points higher from an organic growth standpoint. So, overall, when you look at the core business, biopharma production, the biopharma platform broadly speaking, printing at just a tick under 10%, a return to growth of biomaterials platform nearly 10%, continued strong double-digit growth of our services platform, our core engine is running at full speed here. So when we think about the guide going into 2020, I think it certainly falls squarely in line with the messaging that we’ve been sharing with you all over the number of quarters we view this platform as a mid single digit plus grower. I think our 2019 performance falls right in line with that as does the guide that we’ve given you here. So I think we are optimistic about the year ahead. I think we see the end market conditions at least as we reflected in our guide, essentially continuing in 2020 in similar fashion as 2019.

That's helpful, Mike. And just one follow-up on. I think you mentioned coronavirus. I’m assuming the guide does not bake in coronavirus. Given you guys are under indexed in China, how if -- what if any impact does coronavirus have to your business. And you mentioned there are some leadership transition here in Americas. Did that have any impact at all on sales performance? Thank you.

VJ, let me address your second question first around the leadership changes that we've announced today. First, I’m super excited by some of the capabilities that we’ve been able to bring to the team over the last couple of years. We’ve brought a tremendous amount of life science depth and capability to the business. And the recent additions, particularly in China, are no different. We’ve been excited to introduce you all to Sven as we get an opportunity to interact in the coming months. But he has lived in the Asia region for better part of a decade, driving some of the peer platforms in the bioprocessing space. Really deep experience at there and I’m looking forward to having him take the lead here in driving our growth in the region, especially in China. Relative to the change in the Americas, Corey has been an integral part of the team here over the last 3 years or so. He's still here. We'll go through a transition in the month of February. Really nothing to do with the business as to why he's electing to move on. He's got a personal situation that he's needed to resolve. And we are fully supportive of helping him address that through the transition. So Corey has been in place throughout the quarter. Will continue to be in place here through part of months here in February and we have a really senior team, probably understating how senior team management in the Americas, all the commercial leads that are driving that platform forward, 25 plus years of experience in our business and we're in good hands there. Relative to your first question around the coronavirus, I think with that goal, probably the comments, as you first reflect, which is I think we’re early innings into this. We do have a very formal structure set up to manage a number of key work streams, including the health and safety of our own associates making sure we're able to address any supply chain concerns. As we sit here today, we've certainly seen an uptick in demand around the world for some of the clean room supplies and personal protective equipment, but it's hard to tell the impact that will have because you’re kind of sitting on top of Chinese New Year in any event and I think -- as rightfully mentioned, China for us is a more modest exposure. So at the moment, probably too early to call, but I would anticipate it having a meaningful impact on us one way or another.

Thanks, guys.

Hey, VJ, when Michael was talking about the leadership changes, he forgot to mention the quality of the interim leader that we're putting in the Americas. So you should keep that in mind as well. He's quite capable.

I appreciate the comments, Tom, and I look forward to meeting the leadership team.

Good.

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

Good morning. I wanted to talk about three things: biopharma, gross margin and tax rates. So on biopharma, it was another quarter of really strong growth. What's embedded for biopharma growth within 2020 guide? And recognizing the comparisons are difficult this year, particularly in the first half, kind of going back to an earlier question, should we be thinking about that in the context of how we model out things from a quarterly cadence perspective?

Yes, let me, Doug, take the question on biopharma. Obviously, it's been a tremendous year for that platform and would just reground the audience here on the call today, biopharma for us is about half of our revenue and it reflects the offering both into the laboratory environment and the work flows we service there as well as into the production environment. And we would typically see a little bit stronger growth rates in the production environment and a little bit more muted growth in the laboratory environment. And on an aggregate basis, that platform for us in 2019 grew at a 10%, which is a reflection of kind of high single-digit growth in the lab environment and double-digit, think, kind of mid-teens level growth of our production platform. And as we think about the transition into 2020, we really see no reason to change the outlook for 2020 based on that finish. Pretty similar conditions going forward is our estimate.

Okay. So to be clear, another year of high single or close to double-digit growth is how you're thinking about that end market?

Exactly.

Okay. All right. Gross margin. So It was up 210 basis points year-over-year, but considering the strong proprietary products growth, we actually thought it could have been up a little bit more sequentially versus Q3. How did Q4 gross margin fare versus your internal expectations? And again recognizing some positive trends here, what are you expecting for 2020?

Yes. I mean, when you look at Q4 end of full-year, I mean, we were able to -- Q4 we were up about 100 basis points year-over-year on gross margin. Certainly, as we talked about the volume leverage is a big help, but -- and we do a nice job on managing the price COGS mix. But the shift, the continued growth, higher growth proprietary products, this is also a big factor for us. We get good growth in biopharma production as an example, biomaterials it works out quite well for us. When you look at -- the full-year was -- it was similar. I mean not quite as dramatic from a GM improvement perspective, but still 30 to 40 basis points of gross margin improvement and still seeing those same factors. We expect a similar kind of growth rate over the course of 2020 as we drive the continued proprietary -- the growth in our proprietary products.

Okay. Thank you for that. And last one tax rate. Tax rate was well below our expectations in the quarter. You guided 2020 to 25% to 26%.

Yes.

Do you see any room for upside versus that? And then, I guess at this point, I guess just a question on how you're thinking about the long-term opportunity? Should we expect a steady cadence of annual declines, for say, the next 3 to 5 years building off of what you guided to for 2020?

Yes. Just to address the fourth quarter, first of all, the rate was abnormally low. I think you pick up on. And we -- it's just a matter of cleaning up our year end reserves and finalizing some of the positions around the inter company financing that we talked about. We started before the IPO with a 30% plus tax rate, run right. And we explained that a big part of that was some inefficiencies in our rate structure -- our structure for financing some of our international operations . Over the course of 2019, we’ve kept you up to date on that. And in the fourth quarter really finalized the new structures to enable us to have a much more efficient tax rate. That enable us to adjust the overall tax rate for the full-year and you saw that impact come through in the fourth quarter. I'd say, I would consider the run rate for the full-year to be -- if I take out that, that one-time kind of impact, somewhere in the 28% range. And when I look at 2020, the guide is 25% to 26%. Hopefully we will be at the lower end of that, but we’ve got pretty clear line of sight to being within that range. I think longer term, Doug, we should be low 20s kind of the company. We see this path in the timeframe you talked about 3 to 5 years to certainly get there. It's the activities we have to undertake, impact our operations more than what we’ve had to undertake so far to drive the improvement. And so it's a more enterprise wide type of initiative involving supply chains, commercial teams and the like that we have to engage in to keep that progress going.

Okay. That's super helpful. Thank you.

All right. Thanks.

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

Great. Thank you. Thanks for the questions. I guess, I wanted to go back to the 2020 EBITDA margin outlook. Could you guys walk through what you're assuming the impact is from synergies? How much of the expansion is organic? And kind of how that organic expansion is compared to what you achieved in 2019?

Yes. When you look at the synergies for 2000 -- where we're in the program through the end of 2019, we made -- and just to take you back, for everybody's benefit, the program at the outset started in November 2017, we identified 300 million or so of acquisition synergies, 70 million or so would have been on the commercial side and 230 million or so what would have been on the cost side, making good progress on the impacts of each of those. We are probably near -- nearing completion with the commercial synergies part of it. And overall we're probably on a run rate basis close to 230 million as of the end -- actually closer to 250 million as of the end of 2019. So actions required to get to 350 million more. In terms of the impact on the EBITDA margins next year, you can think of it as somewhere in the $40 million to $50 million range of incremental P&L benefit on our EBITDA in 2020.

Okay, great. And then maybe I wanted to go back to a couple of the customer groups. You already addressed biopharma, but just a few of the areas that or even by product area,. excuse me that, we're more kind of deviated from I think some of the growth rates that you had kind of outlined when you guys came public. So, in particular, advanced materials and then on the equipment instrument side, just how do we think about those going into 2020 like what -- what's kind of baked in, and if you can provide any color around what the environment looks like for those? Thank you.

Yes. On the equipment and instrument side, as Tom I think articulated earlier, we certainly saw a lower finish to the year in that category than what we've seen historically at pretty pronounced in Europe and ended up contributing about a mid single-digit decline overall in the quarter. We wouldn’t expect that to continue into 2020. That would tend to be more in the low single-digit growth levels and that's probably how we would think about it in 2020. Thinking about some of the proprietary platforms that we have, obviously, we’ve talked a bit here on the call today about our bioproduction platform, led by our single use offering that we would expect to continue to grow, probably close to 20% netting us somewhere in the mid teens overall levels. That’s kind of what we saw in 2019 and I think we see a similar environment going forward into 2020. Our biomaterials platform is a platform we talked a bit about this year, particularly in the third quarter where we saw a little bit of inventory drop leading to more of a flattish environment in that quarter. And we're obviously pleased to see as we expected a return to high single-digit growth, not quite 10% in the fourth quarter. That’s a platform that when you think about it over a 12 to 18 months cycle, that's a high single-digit growth platform. And we -- modestly underperformed that level in 2019, really owing to the inventory corrections in the third quarter that we discussed. But would anticipate in 2020 a normalized demand environment and kind of high single-digit growth. Our advanced technology platform, which is a collection of a large number of end markets, applied markets, including aerospace, defense, our semiconductor exposure as well as kind of a collection of a lot of another industrial applications. It's been pretty soft throughout the year. And we saw that again in 2019. And while we would be thrilled to see those markets recover in 2020, as we think about our guidance, we really anticipated and reflected a continuation of those trends into the new year here.

Great. Thank you.

Our next question comes from the line of Glen Santangelo from Guggenheim. Your line is open.

Yes. Thanks for taking the questions. Mike, obviously a lot of focus on this call in the top line growth rates. And in your prepared remarks, you called out some of the softness in Europe and the U.S. And I'm just kind of curious, I mean, have you really considered the competitive landscape here and done any assessment in terms of market share and maybe how that maybe has shifted with respect to some of your major business lines or geographies? Anything on the market share front worth calling out at all? Or [multiple speakers] market driven.

Well, if you look just specifically to the fourth quarter and if you take out the last 5 days of the year, which really is very, very difficult to call and driven by vacation schedules and the like, we have a very, very strong quarter. Like I said earlier, probably -- the quarter probably wanted to be 100 to 200 basis points stronger, which would have been at the high-end of our expectations in the quarter. At the level of growth that you see us driving a little over 5% on a full-year basis, that's at worst case, in line with what we see these end markets growing and in many instances, whether that be in the bioproduction space or whether that be in education market, we do see ourselves, running ahead of the market growth rate and extending our share around the globe. So we're pleased with the positioning that we have and being able to leverage the unparalleled customer access that we have through the channel, really has us positioned well to continue to bring a more complete offering to our customers around the world.

Tom, maybe if I could just follow up with a quick question on the balance sheet. I think in your prepared remarks, you suggested that you'd hope to get the leverage within that target range of 2x to 4x by the end of '20. But based on [technical difficulty] I think you'd have to pay down another $600 million plus in debt and sort of given where your free cash flow estimates are for the year, could you just help us bridge that gap on how you can get there by the end of 2020? And then when you think about the capital deployment opportunities from there, any comments to make on the M&A environment based on where you sit now? Thanks very much.

Yes. Thanks, Glen. Yes, we talked about finishing the year at about 4.6x leverage and talked about being able to get under -- underneath 4x times by the end of 2020. There's basically two factors that are driving that. Obviously, the increase in EBITDA is a big lift and you can see -- you can pick your number out of the range that, you have the most confidence in. But if you think of anywhere between 75 or so of the EBITDA growth, that is a contributor here. And the other one is the free cash flow that we generate. We're guiding to between 450 million and 500. When you apply that to the debt, between those two factors that gets you underneath the 4x. In terms of alternative capital deployment, first and foremost, we continue to focus on of deleveraging. I mean that’s where we plan for most of our cash flow to go in 2020. And that will continue to be the priority. But once we get to that range, once we get into that 2x to 4x, we do think that we'll be in a position to pursue some of the opportunities that are on the market, particularly in things that we see in the proprietary offering space that Michael was referring to, particularly around biopharma, biopharma production and the like. We -- as Michael mentioned, you'll have brought on an M&A leader. We're excited about that and that -- but, yes, that's something that we've clearly focused on a long-term horizon, trying to find and be prepared for opportunities when our capital structure allows it. So that's kind of overall the short-term, medium-term, long-term or the way we're thinking about the leverage and the alternative capital deployment opportunities.

Okay. Thanks for the comments.

Our final question today will come from the line of Erin Wright from Credit Suisse. Your line is open.

Great, thanks. In the Asia region, you did mention some of the stepped up deals investment that you’re making and that -- maybe that was a little bit of a potential offset to the strong growth that we saw across that region in the quarter. I guess, was that meaningful at all? Should that be stabilized? And what exactly is going on there if you could. Thanks.

Yes. Thanks, Erin. It's pretty consistent with what you would have seen over the course of 2019. We've stepped up our investments, particularly on sales and marketing. And also, we have a new lab that we've opened up in Shanghai. We've got a new district clean room and distribution center in Singapore. So we are clearly making some investments to drive the future growth in a region that we know we're underrepresented in. We're also expanding in a way to help us grow further. Michael, talked about the organizational enhancements that we've done in that regard. So it has resulted in higher G&A costs. But we think, we consider those to be investments to further the growth.

Okay, thanks. And bigger picture here over the past few quarters, now you’ve spoken about customer retention, contract wins, I guess how is the merger enhancing your positioning in the marketplace overall and enhancing your win rate. And how is it resonating with your customer base?

Yes, thanks for the question. You know, when we put these two businesses together, we were optimistic that the broad customer access, the VWR channel would provide together with a really strong mix of technologies coming from the legacy of Avantor space, would have been certainly lead to new opportunities over the long-term. And as we've -- now we’ve got a couple of years under our belts here and bringing these models together, I see -- I think you see that reflected in the lift in the revenue profile of the combined businesses. You see that in the momentum that we're seeing, especially in our biopharma business with our offering now into the lab running over the last year plus it's at high single-digit levels. Our customers certainly are benefiting from a more complete integrated offering that we're able to take into this -- into their important workflows. And we see that playing out. Perhaps the piece I'm most excited about actually is the -- when you just look at the opportunity, the number of drugs that we're partnering with our customers on, customizing solutions, earning those specifications that will really seat our longer term growth opportunities and play out as those molecules that we're supporting, those new therapies that we're supporting, work their way through the clinical processes and ultimately get commercialized. And to me, that's probably the more important value driver of bringing these businesses together. It's just what this does to enhance the sustainability and growth of the platform over the long-term.

Okay. Thank you.

I’d now like to turn the call back over to Michael for closing remarks.

Great. Thank you. On behalf of our more than 12,000 associates around the world, we appreciate your support of our business and for participating in our call today. As you can tell from our comments today, we are excited about our 2019 performance, our first year as a public company and are looking forward to another great year of revenue growth and margin expansion, significant cash generation, and as Tom discussed here, continue deleveraging of our balance sheet. I think we see the power of our business model in our 2019 results. We're confident that we're well positioned for another great year and are excited about enabling innovations and breakthroughs that help our life science customers dramatically improve patient outcomes. Again, appreciate everyone's support here on the line. Thanks for joining the call. Have a great day, everyone.

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