Hello, and thank you for standing by. And welcome to Avantor to Acquire Ritter Conference Call. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Michael Stubblefield, President and CEO.
Please go ahead.
Thank you, and good morning, everyone. Thanks for joining us on short notice. We're really excited to be here to discuss our acquisition of Ritter GmbH and its affiliates. They are a fast growing technology leader in high precision consumables for liquid handling, automated analysis and clinical studies. Tom Slosick, our CFO is joining me on the call today and following our prepared remarks, we're glad to take your questions.
As we get started here on Slide 2, I need to remind you that we'll be providing forward looking statements, which reflect our current views but are not guarantees of future performance. Also need to remind you that this presentation may contain certain financial measures, which are not prepared in accordance with U. S. GAAP principles, and a reconciliation of the long term non GAAP measures can be found at the back of the deck that was posted on our website. So you're encouraged to read the rest of our standard disclaimer.
Let's turn now to Slide 3. As we've noted in prior presentations, M and A offers opportunities to accelerate our organic growth, enhance our portfolio of proprietary offerings and ultimately provide more comprehensive workflow driven solutions for our customers. In that context, Ritter's high precision consumables platform is an excellent strategic fit with Avantor as it addresses all these dimensions in applications and end markets that we know well. Additionally, our combined businesses share similar characteristics, including a highly recurring specification driven revenue profile. Ritter is the fastest growing manufacturer of high quality robotic and liquid handling consumables, including conductive tips engineered to exacting standards.
These mission critical consumables are used in a variety of molecular screening and diagnostic applications, including real time PCR, non molecular assays such as immunoassays, emerging high throughput IVD technologies, including next generation sequencing and as part of drug discovery and clinical trial testing in pharma and biotech applications. Collectively, these applications represent a nearly $7,000,000,000 addressable market with attractive high single digit long term growth potential. Bridger's high precision manufacturing footprint includes 40,000 square meters of specialized production space and 6,000 square meters of ISO Class 8 clean rooms and provide significant capacity for continued growth. The bulk of Ritter's current business is focused on serving diagnostic system providers and liquid handling OEMs. The geographic and commercial reach of AvonTour's leading global channel and deep customer access will substantially enhance its revenue potential and provide broad aftermarket opportunities.
This combination will significantly expand Avantor's proprietary offering to the biopharma and healthcare end markets and we anticipate that it will enhance our growth and margin profile. Likewise, we expect that the accretive growth and margin profile from Ritter will further contribute to the value generated for our shareholders. I'm moving now to Slide 4. Similar to Avantor, Ritter serves highly regulated specification driven applications and relies on a collaboration based innovation model to serve its exacting customer base. Headquartered outside of Munich in the Bavaria region of Germany, Ritter has a state of the art fully automated manufacturing complex, including inspection and packaging that is ISO certified from start to finish.
Importantly, the facilities have extensive capacity to support future growth. The company's innovative approach to product and process engineering has been key to its success since its founding in 1965. Ritter has redefined lab consumable manufacturing with its state of the art quality management systems and in house IVD applications lab for product testing. Similar to Avantor, collaboration and customer centricity are also paramount to its success and Ritter's in house testing facilitates the product design and customer qualification processes. I'll now turn the call over to Tom to cover the financial parameters of this transaction.
Thank you, Michael. Slide 5 outlines the Bridger's financial profile and the key parameters of this transaction. Britor will generate approximately €225,000,000 in revenues in 2021 with contribution margins that are very similar to the proprietary offerings that we have in the Algonquin portfolio. Upon closure, the transaction is expected to immediately accretive to be immediately accretive to adjusted earnings per share. We'll acquire Ritter in an all cash transaction with an upfront equity purchase price of approximately €890,000,000 subject to final adjustment at closing and up to €300,000,000 in contingent payments over the next 3 years based on the achievement of certain business performance milestones.
The transaction is expected to be completed in the Q3 of 2021 and is subject to customary closing conditions, including receipt of applicable regulatory approvals in Germany and in Austria. We expect to fund the acquisition with a combination of cash on hand and committed debt financing. Recall that our leverage to start this year was 4 times adjusted EBITDA. By the end of the year, based on the continued strong cash generation of the core of outdoor business, which will be further enhanced by Ritter's strong cash flow, we anticipate that our leverage will be roughly 3.5x adjusted EBITDA. The acquisition is expected to deliver a low double digit return on invested capital by year 5.
This concludes our prepared remarks. At this point, Michael and I will be happy to take your questions.
Okay. Thank you. Your first question comes from Tycho Peterson from JPMorgan. Your line is open.
Hey, good morning. Congrats on the deal. I know you guys have been looking. Can you just talk a little bit more, Michael, about the customer mix here? What percentage are diagnostic service providers?
Any customer concentration issues? And then maybe where do you see the greatest revenue synergies across the portfolio?
Yes. Thanks, Tycho, for joining us this morning. Appreciate the support clearly. As I mentioned in my prepared remarks, it's a big market big addressable market opportunity here, nearly $7,000,000,000 And historically, Ritter has reached that space primarily through an OEM focus. So they're going to be partnered with all of the large OEMs in this space, who are going to be broadly represented across the various application areas.
And I think the piece I'm most excited about here is the opportunity to leverage our customer channel and our deep customer relationships in these core workflows. These are spaces we know well. We have a lot of content already in these workflows. We're calling on the end customers in most cases. And from a synergy standpoint, I think we're going to have an opportunity here to significantly extend the reach of this business, firstly, geographically, especially into the Americas and Asia, and then more specifically into our biopharma and healthcare customer bases.
This is a great fit for our existing business cycle.
Okay. And then I know you talked about accretion this year. Are there any kind of cost interview targets you could put out there?
Yes, Tycho, this is Tom. Good morning. The yes, it will be immediately accretive to 2021 modest EPS, adjusted EPS impact. In terms of synergies, the cost synergies are relatively modest. We do have some opportunities from a back office perspective, but the bulk of the benefits will be on the aspects Michael talked about, the commercial synergies that we've done a lot more work on and are quite confident.
Okay. And then last one for me. Is it 100% consumables? Is it all recurring? Or is there any kind of equipment in the mix here?
You're right, Tycho. It's 100% consumable.
Okay. Thank you. And congrats.
Thank you. Thanks, Tycho.
And your next question will come from Jack Meehan from Nephron Research.
Michael, I was this is the first big deal you've done since the merger of BWR and Avantor. I was wondering if
you could just give us
a little bit more color on how you went about sourcing the deal and diligencing it and just some of the background around how it came together.
Yes. Thanks, Jack. That's a great question. As we've been saying now for quite some time, we have been very active in first building the M and A capability or rebuilding the M and A capability post the integration of PWR. We've had a dedicated team working on our pipeline for well over a year.
We've indicated before that we've been active in a number of deals and clearly is the first one that we've concluded. But it's consistent with the spaces that we've articulated before that we were looking for assets in, this one fits squarely in our life science workflows within the lab, which is a core part of our business. And so as part of the work we did in that vertical, looking for lab life science oriented businesses on workflows that we knew well. This asset came out of that work. Obviously, given our presence in Europe and specifically in Germany, it's a business that we know well historically.
Just from an opportunity standpoint, I would tell you that this particular space is very well known to our leadership team. You might recognize that the backgrounds of, for example, our Head of our European and Americas Business and Lab BU, Fred Vanderhagen. He comes from this space, has a background in this area. And the manufacturing technologies that are practiced here are also very well known to many of us here in the business, including myself. So it's just a great fit from an end market standpoint.
We talked about the similarity in the business characteristics. It's in workflows that we know extremely already have content in and has a financial profile that ticks every one of the boxes that we've laid out from an algorithm standpoint, accretive to growth, accretive to margins, high return on invested capital and certainly rapidly leveraging. So this one for us checked all the boxes and we're excited to get it to
this point.
Great. And on that point, could you give us some color around what you think kind of the ongoing growth profile of the business is going to look like? And off that, how much is the exposure to Europe today? It definitely seems like there's a
lot of
channel synergy potential here pushing into Americas and Asia.
What's the exposure to Europe today?
Yes. I think it's fair to say, Jack, that most of the revenue is coming out of Europe today. That's not to say that the OEMs aren't distributing the products more broadly than that, but certainly the core relationships here are coming out of the European legacy of this particular business. From a growth standpoint, as I mentioned in my prepared remarks, if you look at the end market applications here, whether it's diagnostic or screening activities, molecular, nonmolecular assays or other the various IVD technologies that would leverage these products. And importantly for us, the drug discovery and clinical trial activities, you're talking about ASO applications that comprise a pretty big opportunity, nearly $7,000,000,000 but we see the long term growth characteristics on this being kind of in that high single digit level.
It will probably run a little harder than that here in the short term, just given some of the molecular assays for COVID testing that would be driving a bit of excess demand here out of the gates here. But long term, we think about this as a high single digit grower.
And your next question will come from Vijay Kumar from Evercore. Your line is open.
Hey, guys. Thanks for taking my question. A couple of financial questions from my side. Tom, you mentioned modest EPS accretion. I'm assuming debt incremental debt of around 700,000,000 ish perhaps low to mid single EPS accretion for next year.
Does that seem reasonable for you guys?
Yes, that's fair. Just to be clear, Vijay, you said low to mid single digit percentage wise accretion in EPS?
Yes, correct percentage.
Yes, yes. That's correct.
Great. And Mike, one for you. You mentioned exposure for diagnostics off the $225,000,000 projected revenues for fiscal 'twenty one. What is that, COVID related? And what is base revenues?
And then the CAGR here over the 5 years, is this a high single digit CAGR or should you be assuming perhaps a double digit CAGR?
Yes. And maybe just to clarify, Vijay, on the revenue here, just to make sure we're all aligned on the currency here. The number we quoted there in the prepared remarks was euros. So a base revenue for this year of, call it, EUR 225 million. So just under EUR 300,000,000 on a USD basis.
But from a kind of an end market split of that revenue, I think it's important to recognize that COVID is probably, as we look at roughly 10% of the market today. And given the broad exposure of this business through the OEMs, I think it's a fair assumption that the exposure that we have today to the end market is going to reflect the relative size of each of these application areas. So if we look at the other kind of 90% of the market that's non COVID related, I think we see those as high single digit growers. And certainly to your point, when you add kind of the softness of the COVID piece here in the short term, the math may indeed work out but you may do a bit better than that in this period just given the near term impact of COVID, particularly given our focus, at least out of the gates in Europe and the testing trends that we do see there. But I think long term, the right way to model this, Vijay, would be high single digits.
Okay. Thanks guys.
Your next question will come from Derik De Bruin from Bank of America.
Hi. Hello. Good morning. This is Juan Aventano on behalf of Derek. Congratulations on the deal.
My first question is, can you remind us what the margin profile for proprietary products is given that I believe you said at the beginning that greater margin profile was somewhat similar to that?
Yes. Good morning. When you look at the overall Avantor, call it the gross margins, we're generally low 30s, 32%, 33%. When we look at the spread of the products that make that up, I mean certainly the proprietary products that we have are much higher than that, north of 50% gross margins in a lot of cases. And certainly the products in the portfolio of Ritter fit that profile as well from a proprietary perspective.
Got it. Thank you. Appreciate it. And one of the things that you called out in the press release was the state of the art manufacturing facilities that Ritter has. And so do you foresee manufacturing facilities that Crater has.
And so do you foresee any opportunities to well, first of all, is how would you compare that to your own internal manufacturing capabilities for similar consumables? And do you see an opportunity to achieve cost synergies or cost efficiencies by shifting the manufacturing location of several parts of your portfolio to where they could be more efficiently manufactured?
Yes, Juan. Thanks for the question.
It's Michael.
We noted the manufacturing technologies that are in play here. I think one of the things we're excited about is the opportunity to establish this as a bit of a center of excellence for us and would intend on building our consumables platform around the capabilities that we're acquiring here. But today, we would not have these technologies in our portfolio or at any of our other sites. Now what I would tell you is this manufacturing is done in clean rooms. And when you look at some of our other single use businesses that we have and assets, I think there's certainly an opportunity for us to expand the footprint over time around the world to bring these technologies closer to the end markets, and we're certainly looking to do that.
But this particular business, similar to our other proprietary technologies, operates at the highest levels of quality and the precision here can't be underestimated. These are really exacting specifications. And in reality, there's only a very small handful of manufacturers around the world that can meet these types of requirements. And when you look at the level of automation and robotics that are deployed here, both from a manufacturing standpoint as well as from a product testing perspective, we're thrilled to be building our consumables manufacturing footprint around these assets.
Thank you. I appreciate the insights. Congrats on the deal once again.
Thanks, Paul. Appreciate it.
Your next question comes from Doug Schenkel from Cowen. Your line is open.
Good morning, everybody. My first question is, was there a portion of Ritter's revenue that went through the existing events or VWR channel? And if so, can you quantify and speak to how that leads to almost like an arbitrage situation in terms of immediate margin improvement on existing sales?
Yes, great question. Very little to almost no revenue came through the Avantor or BWR channel, Doug.
Okay. Second one is, this is especially in the market we're in, it looks like a pretty reasonably priced deal on a revenue multiple basis. Can you speak to valuation on an EBITDA basis?
Yes, sure. Thanks, Doug. Yes, I mean, obviously, the earn out will come into play here when you consider the final EBITDA. So but I think when you look at the way way we've negotiated the base case and what we've modeled, it certainly is would be a bit less than what we have traded at. And you can think of it as something that's probably less than 10x on an EBITDA multiple basis given the strength of this portfolio from a margin perspective.
And the strength of the margins themselves.
Okay. So that's on a 21 basis or 1 year forward basis below 10x or on a trailing basis?
Yes.
Okay. So both. Okay. And then very last one, cleanup. I think I can't remember if it's in the deck or in the press release.
I think you said that the purchase price doesn't include net debt. Is there presumably if there was something significant there you would note that?
Yes, that's right. I mean the just to be perfectly clear, the purchase price reflects debt like items and there's a small amount of those. But that's baked into the 8.90 that we talked about. And there are no other aspects of debt in the business.
Okay. All right. That's great. Very helpful and congrats again.
Thank you.
Your next question will come from Dan Brennan from UBS. Your line is open.
Great. Thanks for taking the questions, guys. Just on the growth side, company has obviously been around for 50 years. Just wondering on the high single digit core growth outlook that you're pointing to, can you give us a little sense, is this what the business has been growing at? So if we look back over the last 5 or so years ex COVID?
And then related to that, you talked about, it seems like fairly could be material synergies as we move into new geographies. I'm just wondering if you can help us think through what level of synergies they're kind of baked in to get to the high single digits.
Yes, great questions. When you look at the applications that drive the core products in this portfolio, most of those are associated with technologies where the growth has really started to materialize in a meaningful way here over the last, call it, 5 to 10 years when you look at some of these, whether they're the PCR related workflows and more recently looking at the pickup of things like next gen sequencing, CRISPR technologies and such that are driving this as well as the drug discovery workflows, particularly for biologics. So I would say, yes, the business has been around for a long time. The core life science part of this business, I would say, has really become prominent. Like many other companies with technologies that apply in these spaces has really become prominent over the last 5 to 10 years or so.
And then from a synergy standpoint, as we've indicated, given the relatively low level of employee count as well as the fact that we intend to build around this footprint from a manufacturing standpoint. The cost synergies are modest. And so the opportunity here really is to leverage our channel, as you suggest, particularly geographically, given our strength in the Americas, example, and the fact that these solutions would be new to our offering. They're going to fit really nicely alongside the rest of our portfolio in workflows that we already have credibility with and customers who we have deep relationships with. So we think that there is a great fit here with our business and our channel specifically and would anticipate driving significant commercial synergies going forward here.
Great. And then just maybe just
in terms of their relative share,
obviously, they have a website. Any way to characterize their competitive positioning, maybe across some of the product lines or just who some of the key competitors are just so we can kind of understand where they stand?
Yes, great. I think there's probably a couple of product areas that I focus your attention on. There's a broader portfolio here and we will likely expand that as well as we think about leveraging this capacity and these capabilities for our broader offering. But as you look at where their strength lies, think about conductive robotic tips, for example, think about some of the microplates consumables that are used alongside these tips and things like PCR, for example. Those product categories probably drive the bulk of the revenue here that would be of significance to us.
And from a competitive landscape perspective, going back to my remarks earlier about the high precision and the exacting standards, we're positioned alongside a small handful certainly lots of players that have these capabilities. And they're names that you would know well in the tool space. And from a share standpoint, we probably look at it probably best just from a shared capacity perspective. We're going to have as much capacity for these products as anybody out there. And I think one of the things that we were excited about is structurally, this market is extremely short today, given the kind of the new demand that's come in from COVID.
And Ritter has done a really nice job leveraging their in house molding design capabilities and line capabilities to position capacity here and structurally position them here for growth over the long term. So we're the 1 of the leaders, if not the leader in this space.
And then maybe just one final quick cleanup. Assumed interest expense that we should be plugging in on the debt that's going to be raised and then was this deal competitive? Thank you and congrats.
Yes, good question. In terms of interest, we'll be financing it with term loan Bs. Pricing will be similar to what's in our portfolio today. It will be a euro denominated transaction given where the asset is located. But you can look at some of the rates that we've had, the term loan Bs and the more recent transactions are pretty reflective of what we would expect.
Obviously, we'll be going to market as we get closer to the closing date. And in terms of the competitiveness, I won't speak to all the details, but yes, we were not the only one at the table.
Okay. Thank you.
Your next question will come from Tejas Savant from Morgan Stanley. Your line is open.
Hey, guys. This is Edmond. Congratulations on the deal and thanks for the time for questions. I think to start off,
can you kind of give me a
sense of what this would be for your proprietary offering as a percentage of new going forward given that their contribution will be towards the proprietary offerings in Avanxor?
Yes. Thanks for the question, joining our call today. As we've talked about broadly in previous calls, between our proprietary materials and consumables together with the proprietary content in our services today is we would consider proprietary and would have margins that would kind of track the parameters that Tom outlined in one of the earlier questions. 100% of this content that we're acquiring here, so just under $300,000,000 in revenue this year will be additive to that algorithm. So I don't have math in front of me, but it would be fair for you to take all of the revenue here and add it to the proprietary content in our business.
Got it. That's very helpful. And then from a capacity and space standpoint, it sounds like there's sufficient space here and sufficient capacity. But it also sounds like you guys plan on investing additional money here to grow out its capabilities. Can you give us a sense of what sort of investments or CapEx samples you guys are looking at for these facilities?
Yes, maybe one correction there. There isn't enough capacity in the market today. The market is structurally short. And Ritter has invested ahead of the demand here and would be one, if not the only player in the market today with capacity to serve some of these incremental demands, especially associated with COVID. But I did remark earlier about one of the things we really like about this business is just how similar the business characteristics are to our core proprietary business model.
In that, it's high precision, it's high quality, it operates in highly regulated spaces, it's specification driven. But to your question, it's also CapEx light. We talk a lot about our CapEx requirements kind of being 1% to 2% of revenue. And we're going to continue to be able to invest ahead of growth here in this business and not change our CapEx model meaningfully here. So it's going to fit the mold of how we invest in our businesses that we have today.
And from that standpoint, it's going to be a great platform for us to build off of as we serve a pretty attractive space going forward.
Great. Thank you. That's very helpful. And one final question for me. Now that this transaction is placed, are you guys thinking about M and A going forward?
Yes. So Tom, through kind of the leverage metrics, We'll be covering our Q1 results here in a couple of weeks. And I think suffice it to say, we're excited to have that conversation with you. And I think you'll see continued momentum in cash generation and earnings of business. We entered the year at about 4x adjusted EBITDA leverage.
And in the deck here, we're signaling that we would anticipate ending the year net of this transaction exiting somewhere plus or minus 3.5x. So we're going to have more capacity ending the year than we started. And so we'll continue to execute our playbook here. We'll continue to be focused on the areas that we've outlined to you before bioproduction, some of these high growth or flows in the lab similar to this one, our services area and certainly things would expand our geographic presence. So we'll continue to stay active.
M and A is not something you want to get into turning on and off. This will keep us busy here for the next number of months. But I think it's important to recognize that the strength of the core business enables rapid deleveraging. This will only accelerate that. And in fact, we'll have more capacity for M and A next year than we did this year.
Great. That's very helpful. Thank you, guys.
This will bring us to the end of our Q and A session for today. I turn the call back over to Michael Stubblefield for closing remarks.
Yes. Thank you, operator, and thank you all for joining. I recognize that it's going to be a bit disruptive to do these things on short notice, but appreciate your support. Acquiring Ritter is definitely going to strengthen the Bonfer proprietary offering for diagnostic and drug discovery workflows and will certainly enable the scientific breakthroughs that advance our mission here at Evonforce, setting science in motion to create a better world. We're super excited about this transaction, the opportunity to create value for our customers as well as our shareholders.
Thanks again for joining us and we certainly look forward to speaking with you during our Q1 earnings call here in a couple of weeks. Until then, have a great day, and be well, everyone.
Thank you, everyone. This will conclude today's conference call. You may now disconnect.