Thank you for standing by and welcome to the Avantor second quarter 2020 earnings conference call. At this time, all participants lines are on a listen-only mode. After the speakers' presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to-
Good day, everyone. Thank you for joining us on today's call. Our speakers today are Mike Stubblefield, President and Chief Executive Officer, and Tom Szlosek, Executive Vice President and Chief Financial Officer. The press release and 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 the call. Following our prepared remarks, we will open up the line for questions. I would like to note that we'll be making some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or development 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 filing. Actual results might differ materially from any forward-looking statements that we make today.
These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update these forward-looking statements, whether a result of new information, future events, and developments or otherwise. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the appendix to the presentation. With that, I will now like to turn the call over to Michael. Michael?
Thank you, Tommy, and thanks to all of you for joining us today for our second quarter earnings call. With a brief review of Avantor's revenue profile. You've heard me mention before that our business model is very resilient due to our diversified revenue base, combined with the customized nature of our solutions. We are well-positioned for continued growth in Europe and the Americas, and we are investing to expand our capabilities in emerging markets throughout Asia, the Middle East, and Africa. More than 85% of our business is recurring, and approximately half of our revenue comes from proprietary branded products and services. No single customer represents more than 3% of our revenue is in attractive life science end markets, such as biopharma and healthcare. Our financial results for the second quarter, which I will elaborate on in a moment, further substantiate our resiliency.
The second quarter was the first to be fully affected by the global COVID-19 pandemic. Our business was adversely impacted by lab closures across the R&D and academic landscape, as well as by declines in elective procedures. However, we were able to offset most of the headwinds with new COVID-19 related opportunities in diagnostic testing, vaccine and therapy development, and clinical trial support. Moving to slide four and our second quarter business highlights. Despite the challenging environment resulting from the global pandemic, our dedication to our customers has not wavered. Our distribution, research, and manufacturing sites have remained fully operational. Our broad customer access and extensive portfolio of products and workflow solutions to support patient testing, research and development, clinical trial services, and ultimately, the production of approved treatments and vaccines, make Avantor an important partner.
We are actively working with many of the world's leading pharmaceutical and biotech companies as they develop and test potential COVID-19 therapies and vaccines. Our comprehensive bioproduction portfolio is being leveraged in most of the leading across all major technologies, including recombinant proteins, viral vectors, mRNA, and DNA. In government-sponsored initiatives, such as Operation Warp Speed in the U.S., is another proof point of our relevance in the race to combat COVID-19. Of course, the health and safety of our associates who are working at our distribution, research, and manufacturing sites remains a top priority. We continue to comply with local statutes as well as guidelines from credible health agencies around personal protection, workplace density, symptom monitoring, and symptom identification and reporting. Our sales, customer service, and support personnel continued to work from home throughout the quarter.
We have carefully developed plans to return some of these associates and implement those plans in the third quarter as local conditions permit. Our second quarter results in even the most challenging conditions. Reported organic revenue declined only 2%, including COVID-19 tailwinds of approximately . Despite the organic revenue decline, the resiliency of our model enabled us to expand our adjusted EBITDA margins by 94 basis points, grow adjusted earnings per share approximately 33%, and continue our strong cash generation. Earlier this dollars of our high interest debt, which will result in cash interest savings of more than . As part of the refinancing, we also extended our liquidity by doubling the size of our revolving credit facility. outlook resulted in another credit rating upgrade, giving us the opportunity over the next few quarters to further reduce interest costs by lowering the rates on the remaining $3 billion of debt.
Our mission drives our deep sense of purpose to create a better, more sustainable world, and our teams have been actively engaged on improving the transparency of our environmental, social, and governance, or ESG, reporting. We are pleased to have published our 2020 Corporate Social Responsibility Benchmark Report and look forward to sharing more information about our ESG priorities in the coming months. We've also taken a number of recent actions to reinforce our commitment to providing a positive work environment where all associates feel respected and have an equal opportunity to contribute and succeed. There is no place for racism, prejudice, or hatred of any kind, and we're actively focused on making the company a role model for diversity, equity, and inclusion. Turning to slide five of the presentation, I'd like to share a few financial highlights from the quarter.
Organic revenue declined 2% as COVID-19 related headwinds in our education, healthcare, and applied end markets more than offset continued business where demand continued, especially in bioproduction where we realized more than 20% growth in the quarter. Included in our results are approximately 500- 600 basis points of COVID-19 related tail revenue associated with higher sales of PPE, qPCR testing kits, qPCR reagents and consumables, serological test kits, and the proprietary materials being used to support vaccine and therapy development. Adjusted EBITDA in the quarter was up approximately 3% on a constant currency basis, and adjusted earnings per share increased approximately 33% to $0.19 per share. We continue to generate strong cash flow with first half free cash flow up over $300 million from 2019, enabling continued reduction in our net leverage to 4.3 times EBITDA, down from 4.6 times at the beginning of the year.
We remain committed to continued delevering as we approach our target leverage range of two to four times EBITDA. As I prepare to turn the line over to Tom to discuss the financials in more detail, I want to emphasize that Avantor's mission of setting science in motion to create a better world is more relevant now than ever before. Our second quarter and first half 2020 results are evidence of the mission-critical role we play in supporting our global customers. We are well-positioned with a highly recurring, significant exposure to attractive end markets, culture of execution enabled by the Avantor Business System. Let me turn it over to Tom.
Thank you, Michael, and good afternoon. Let's start on slide six. Organic quarter, which as Michael mentioned, includes a 500 to 600 basis point tailwind from COVID-19 related to PPE, diagnostic testing, vaccine and therapy development, and clinical trial support. These tailwinds were more than offset by the pandemic-driven headwinds, including our education and government business, reflecting the widespread academic lab closures. We also experienced impacts from commercial lab closures as well as declines in our healthcare business, reflecting temporary declines in elective surgical procedures and in our industrial businesses. Looking at growth from a regional perspective, the Americas, which represents approximately 60% of global sales, reported 6.7% organic revenue decline in the quarter. The region sales were impacted by academic and commercial lab closures, fewer elective procedures performed by customers of our healthcare business, and a broad reduction in sales of equipment and instrumentation.
Biopharma production and clinical services were bright spots for the Americas. Europe, which represents approximately 35% of global sales, reported 3% performance in the biopharma and healthcare end markets, offset by COVID-19 related declines in the healthcare, education, and industrial end markets. The stronger second quarter growth rate in Europe versus the Americas reflects the lower exposure in Europe to academic labs and elective procedures, and a higher participation rate in the COVID-related testing opportunities. AMEA, representing approximately 5% of global sales, reported an 18.2% organic revenue increase. Revenue growth was driven by the biopharma and advanced technology and applied materials end markets. Slide seven shows our organic revenue growth by end market and product group for the quarter.
What is notable on the slide is the two areas where we achieved high single-digit growth in the quarter, the biopharma end market on the left side of the slide and the proprietary product group on the right side. These are our most significant and higher profit categories, and their continued strength, despite the overall modest sales decline, was a big factor in the nearly 100 basis point expansion in adjusted EBITDA margins for the quarter. Biopharma, representing approximately 50% of our revenue, once again experienced high single-digit organic revenue growth. Strength came from our biopharma production platform, including single-use solutions, production chemicals, personal protective equipment, and clinical services. Healthcare, which represents approximately 10% of our revenue, declined high single digits, impacted by a reduction in elective procedures and routine clinical diagnostics. Education and government, representing approximately 15% of our revenue, experienced organic revenue declines of over 20%.
This end market was impacted by the full or partial closure of academic and government research labs and K-12 schools for the majority of the quarter. Advanced technologies and applied materials, representing approximately 25% of our revenue, experienced mid-single-digit organic revenue decline, impacted our industrial segments with modest offsets in our non-industrial and the electronic materials business. By product group, proprietary materials and consumables experienced high single-digit growth with strength in the Americas and AMEA. Services and specialty procurement declined mid-single digits, impacted by lower demand for our specialty procurement services. Equipment and instrumentation was down mid-teens, reflecting CapEx investment declines across our customer base. In July, the biopharma momentum has continued with strong growth in lab products and biopharma production. We are actively engaged with our supplier partners and customers on offerings to support diagnostic testing, vaccine and therapy development, and clinical trials.
For the other end markets, the COVID-19 impacts we experienced in the second quarter have moderated slightly. Labs in the academic end market have slowly started to reopen. We also expect modest sequential improvement in healthcare as elective procedures slowly resume. The industrial portion of the advanced technologies and applied materials end market also continues to see modest improvement. Considering these factors, we expect July's revenues to be approximately flat or grow low single digits. Turning to slide eight, let me start with our second quarter adjusted EBITDA. We achieved 3% growth in adjusted EBITDA and 94 basis points of reported margin expansion. Key drivers of the performance were commercial excellence, favorable mix, including strong growth in biopharma production and proprietary offerings, productivity, and continued discretionary cost containment.
Free cash flow improved nearly $100 million to $76 million, reflecting stronger adjusted EBITDA, better working capital performance, and lower interest and tax payments. First half free cash flow generation of $316 million, or 136% of adjusted net income, was seven times the prior year amount. We are on track to achieve or beat our original full-year free to $500 million, recognizing that guidance has since been withdrawn. Finally, we report approximately 33% growth in our adjusted earnings per share for the quarter, primarily reflecting strong operating performance, the ongoing reduction in interest expense from our de-leveraging, and the improvement in our income tax rate. For the first half of 2020, we grew our adjusted earnings per share $0.46 per share. Slide nine has our segment results.
Americas reported 210 basis points of improvement in adjusted commercial excellence, favorable mix driven by a higher proportion of growth in proprietary materials and consumables, productivity, and containment. The first half 2020 margin expanded 90 basis points. Europe reported 120 basis points of. Key drivers include volume growth, favorable mix, productivity, and strong discretionary cost containment. First half 2020 adjusted EBITDA margin expanded 80 basis points. AMEA reported 330 basis points of improvement in adjusted EBITDA. Key drivers include volume growth and favorable mix. First half 2020 adjusted EBITDA margins declined 60 basis points. Let me move to slide ten. In this environment, we occasionally receive questions regarding liquidity. Like we did in the first quarter, we are providing a brief summary of our liquidity. You see on the left half of the slide our liquidity as of December 31st, 2019, and at June 30th, 2020.
The June numbers are shown on a pro forma basis to reflect the July refinancing. As part of the refinancing, we more than doubled the size of our revolving credit facility to $515 million. Recall that in the first quarter of 2020, we expanded our receivable securitization line by $50 million. These facility enhancements and the continued free cash flow generation of the business have enabled a greater than 70% increase in our overall liquidity to $1.037 billion, roughly 100% of our adjusted EBITDA, which is in line with our peer group. Both of these facilities remain undrawn. We have no significant debt maturities, and we have a CapEx-light business model. To summarize, our liquidity and cash flow continue to get even stronger, and we are committed to deleveraging, even in these challenging market conditions.
Since the beginning of the year, we have reduced leverage from 4.6 times EBITDA to 4.3 times. I'm now on slide 11, which summarizes our July. We recently received approval from our board to execute a comprehensive strategy to lower the cost of our $5 billion offering the existing covenant-lite and minimal principal service. This is a continuation of our move toward an investment-grade capital structure typical of a large-cap public company. After the first six to eight weeks of the pandemic, the high yield debt markets began to turn in our favor. Shortly after the July Fourth holiday, we launched a $1 billion U.S. debt offering and a EUR 400 million debt offering to replace in part the $2 billion 9% unsecured notes that were issued as part of the VWR acquisition in 2017.
Each of the tranches offered was significantly oversubscribed, and we were able to upsize the U.S. dollar piece, allowing us to replace the entire $2 billion in unsecured notes and achieve a composite coupon rate of less than 4.5%. This refinancing will generate close to $90 million of interest savings per year and results in a lowering of the weighted average cost of our entire debt portfolio by approximately 180 basis points.
We incurred approximately $180 million in one-time cash costs, which will be recovered within two years under the new financing. In the third quarter, incurred on the early extinguishment. We continue to monitor the remaining $3 billion opportunities. On page 14 of the appendix, you can see that there are remaining in that $3 billion, on the conditions of the pro rata and leveraged loan markets. With that, I will hand it back over to Michael.
Thanks, Tom. I'm on slide 12. We executed well in a challenging environment, and our top-line performance, strong EBITDA growth, and continued de-leveraging reflect the resiliency of our business model. Our ability to complete a debt refinancing in a challenging time like this highlights the value of our highly recurring revenue base, broad mission exposure to attractive end markets like biopharma. While the uncertainty associated with the current pandemic continues to make forecasting difficult for parts of our business, our long-term growth strategy remains intact, and we are steadfast in our commitment to help our customers combat this coronavirus by supporting ongoing initiatives in testing, vaccine and therapy development, and ultimately in the production of approved treatments. Our mission of setting science in motion to create a better world has never mattered more.
I want to sincerely thank you for your interest and investment in Avantor and for your ongoing support. I will now turn it over to the operator for the duration of our call. Operator?
As a reminder, to ask a question, that's star one to ask a question. From Tycho with JPMorgan.
Hey, thanks. Michael, you have 500 basis point-600 basis point COVID tailwind for this quarter. Can you just talk about where that's coming relative to the 50 basis points-100 basis points last quarter? Is it incremental products? Can you just provide a little bit more color on, what's driving the step up?
Yeah. Good evening, Tycho. Thanks for the question. We're getting some tailwinds across a few areas. We continue to see strong demand for PPE, which our supply chain on that particular area is indeed constrained, and we're not able to satisfy all the demand that's coming our way. You're seeing some of the sales. The bigger tailwinds are actually coming from COVID testing, as well as vaccine development. We're pretty deeply engaged in large number of materials across the entire qPCR workflow as well as the lateral flow serological tests. Our proprietary materials portfolio is being broadly used in the process development of the various vaccines across all four of the major technologies that are front running the chase for a cure here. Pretty well positioned across that space, and we got quite a lot of traction in the second quarter in those areas.
A follow-up just on EBITDA margins. Obviously, nice improvement despite the top line this quarter. Can you just talk a little bit about the levers, how much of this was VWR synergy versus other factors and sustainability going forward?
Yeah. Hey, Tycho, it's Tom. I'll take that one. When you look at the 94 basis points, it was a combination of factors. I think the more significant ones continue to be the mix dynamic that we talked about. Of course, in the quarter, we had lower instrumentation equipment sales and other specialty equipment sales. In replacement, we had better sales of some of our higher margin offerings. Michael mentioned a few of them, particularly on the biopharma production side. That was a definite tailwind for us. We also continue to do a really good job of managing the price versus COGS inflation dynamic and got a bit of a tailwind there. I'd say the third thing is just overall productivity, including discretionary cost control. Obviously, nobody's traveling, that helped us.
There are a number of other discretionary categories that we've been pretty careful with across the landscape. I'd say those are the bigger drivers.
Okay. Thanks, guys.
Our next question comes from Derik with Bank of America.
Hi. Good afternoon.
Hey, Derik.
Hey. I just was wondering, when we looked at your, compare the first quarter to the second quarter results, and Americas is a little bit stronger in the first quarter, a little bit softer in the second quarter. Were there any, I guess, were there any stocking or pull forwards into that? I'm just sort of thinking about the dynamics between the two, because this is a question I asked last quarter. I just wonder if you have any further color on it. This obviously leads into the question of how should we think about the Americas and the Europe split as we head into the third quarter?
Yeah. Thanks, Derik. When we look at the performance in the Americas in the first quarter compared to the second quarter, you'll know that there was only probably the last 10 days or so of the first quarter where we were really starting to see any impact of the pandemic hit the Americas. It obviously first started in Asia, spread to Europe, and was last showing up here.
We had relatively modest impacts, plus or minus, in the quarter, and the first significant impact being felt in the education, the higher ed space. Moving into the second quarter, the pandemic hitting our numbers for the quarter with April clearly being the low point with significant headwinds with more than half of the lab work in the university space. The slowdown in elective procedures and routine clinical diagnostics falling off, and then you also had biopharma R&D capacity in the quarter as well.
I don't think we would look at inventory as a driver of the comparison. I think the bigger issue is just the amount of the first quarter that was exposed to the pandemic, relative to kind of the full weight of it hitting in April.
Just to follow up on that, when you look at your July trends, and you talked about a modest improvement in the base, but what about some of the tailwinds that you saw, that 500, 600 basis points of COVID tail in 2Q? Is that a similar level we should expect in the third quarter?
Yeah. When you look at the categories that outline for Tycho around where we're seeing tailwinds, whether it be PPE or testing or vaccine therapy development, we're also doing a fair bit of support through our clinical trial services business in supporting the trials associated with the vaccine development. We've certainly seen each of those categories carry over with some strength into July.
No comment on whether or not it's too early to know whether or not it's going to be of the same magnitude. I'm just thinking about what some of the other companies reported. The organic revenue growth number has been a lot higher for the COVID tail than we would've thought.
Right. Yeah, in July, I think we've seen probably similar magnitude. You obviously see escalation on the number of tests that are being conducted around the country. As we go forward, each day, you see a lot of these vaccines now starting to progress towards late-stage clinical trials, which is driving more demand and more volume. It appears that certainly those fundamentals will be with us for the foreseeable future.
Yeah, that safety category, we're on allocation with our customers and suppliers. There continues to be significant demand there. Michael mentioned that as one of the factors. Like you said, on the biopharma production side as well, where we saw some good tailwinds. Our backlog or open orders is very strong. It's up significantly. We're continuing to see the demand pulls in those tailwind areas that he mentioned.
Great. Just one housekeeping, FX hit to the top line for 3Q and the full year?
Yeah. It's kind of tough with the way the FX rates have moved in the last two weeks. We're continuing to look at it just on an organic basis and try and normalize that. Derik, maybe we can do some follow-up on that, but right now the situation is a bit volatile, so it's tough for us to predict exactly what the FX impact is going to be for the full quarter when we're not giving guidance on the full quarter.
Thank you.
Yeah.
Now our next question comes from Vijay with Evercore ISI.
Hey, guys. Thanks for taking this question, and congrats on the solid execution here. Mike, maybe a bit of a two one for you. The July guidance well, maybe not guidance, but I guess expectation for flat to up low single. Does that include the, I guess, the COVID tailwind, or is that flat to up low single was for the base business? I'm curious, you made some comments around vaccine. Are we now at a time point where we could perhaps frame the longer-term opportunity for the industry overall for what COVID vaccine could mean?
Yeah, Vijay, thanks for joining the call tonight. Your first question, regarding the quarter in July specifically. Trying to give you a flavor here, recognizing we haven't quite completed the month of July yet, just trying to give you some color on how we see things finishing up here as we sit here with a couple of days to go, we're somewhere in that flat up low single digits. That would be inclusive of any of the tailwinds that we're seeing in the business. Your second question about just where we're at with these vaccines, is it too early to start to frame in potential impact? It certainly is a little bit premature, it's moving quickly.
When you look at the front runners, and even some of the second runners that are moving forward, you see a lot of promise across recombinant vaccine, viral vector vaccines, DNA vaccines, and then the Moderna mRNA vaccine, together with Pfizer. When you look at our portfolio within bioproduction, we're going to be relevant across all four of these areas, Vijay. As I mentioned in the prepared remarks, we're working on all of the major programs that are out there, and certainly being pulled into a lot of the activity and planning by the various governments around the world that are following these things as well. We're right in the thick of things with doing all we can to support our customers in this.
When you start to look at the impact that one of these vaccines could have, there's obviously a number of factors that play into this, including the number of doses that an individual patient needs to be given in order for it to be effective. How many patients are we looking to treat? Is it a billion? Is it seven billion? Which technology? The addressable will be dependent on what ultimately prevails. On the low end, you could be looking at adding tens of percent to our addressable market for bioproduction. On the high end, Vijay, you could be looking at doubling our addressable market, and then some within bioproduction. Pretty wide range of potential outcomes here.
I think that'll start to clarify here over the next few months as we start to get some feedback from these phase III clinical trials and we start to hone in on which one of these vaccines or which ones of these vaccines will make it to market first. We're definitely going to be relevant here. It will have an impact in a pretty broad range at the moment, but I think we're optimistic about the role that we're playing here.
Tom, one quick up with that question for you. That's a monster number. I'm just curious, are there any one-time timing related elements that are impacting your free cash flow? What's driving it, and does it get dismissed, and does that improve Avantor's free cash flow over here? Thank you.
Yeah. Thanks for your question, Vijay. You're breaking up a little bit, but relative to the first quarter and second quarter, if you combine the first half, very strong. As you pointed out, we're over $300 million. We're about $320 million of free cash flow through the first half. Our original guidance was $450 million-$550 million percent point of the high end as you mentioned. It has been so far driven by better performance on working capital, certainly. As we've gone into the second quarter and look forward to the third and fourth quarter, we've got some other tailwinds that have emerged. Certainly, the refinancing is helping us. We've lowered our interest bill significantly on a run rate basis for a full year, about $90 million. We should see somewhere on order of a little less than half of that in the second half alone.
We're doing a lot better than we had expected on tax through a combination of both the CARES Act provisions that have helped the deductibility of our interest costs for both 2020 and 2019. We've done well on managing risks on some refunds continue to be a really good driver for this. We can continue the momentum. If you were looking at the second half and if we were able the level of the both that we're talking about in July. If you could keep that going, you would be looking at doubling the amount of cash for the full year on this basis. Now we have to continue to manage working capital like we have. If we do that, some of the other pieces are falling into place nicely, and we should continue the momentum.
Wow, really impressive. Congratulations. Thank you.
Thank you.
Our next question comes from Doug with Cowen.
Hey, good afternoon, guys. Thank you for taking my questions. Just starting as a follow-up to what I think was Vijay's first question on vaccines. It sounds like it is just too early for you guys at this point to quantify in dollar terms what the vaccine opportunity might be, just given all the moving parts, all the unknowns. That said, would you be willing to confirm that you believe vaccine production will drive an either even further acceleration of growth within your bioproduction business versus already robust recent trends, given that things are just getting going there? Bioproduction could keep growing more than 20% year-over-year for the next several, maybe next year or maybe even longer. I just want to make sure we are thinking about it right.
Yeah, Doug. Good evening, and thanks for the question. I think generally you are thinking about it correctly. When you look at the tailwinds that we've seen in the second quarter within the vaccine area, you got to keep in mind that all of that is within just the process development and early phase clinical trial support, which you're talking relatively modest number of doses that we're supporting. Just given the breadth of our coverage here, the number of programs, we're going to have exposure to most of the nearly 200 programs that are out there that are coming through here. I think it is reasonable to assume that when one of these hits, whichever one ultimately comes through, that it will have a meaningful impact on the business. We look at our open order report, for example, Tom referenced it.
Since the pandemic hit, our open orders as we sit here today are up more than 40% and growing. So we're seeing a tremendous pickup in the business. We drove more than 20% growth in the quarter, and I think we see that certainly continuing through July. When you look at the strength of the order book, I think we're optimistic about where this is headed.
Okay. That is super helpful. Moving down the P&L, gross margin increased 120 basis points year-over-year in the quarter, as you know. How much of the increase was driven by higher proprietary product mix? Looking to the second half, assuming bioproduction and your other proprietary products continue outperforming, just layering in the fact that, again, bioproduction is higher margin, is 33% a reasonable floor or is that even too low a stop the rest of the year?
Yeah. A couple of things at work here. Certainly within the quarter, the strength of the growth of our proprietary materials, high single digits, was a significant contributor to the margin expansion that we did see in the quarter. It was also aided by when you look at the headwinds in our business, primarily focused on some of the lower margin components of our portfolio, including our equipment and instrumentation offering as well as our services platform. You're getting the double benefit there of really strong growth in the part of our business that carries the highest margins and that the headwinds were primarily concentrated in the lower margin part of our business. We expect to continue to see strength in the proprietary offering within the portfolio, which will carry the margins with it.
I think one thing to keep in mind, though, is as we see sequential improvements in, say, the education market and the healthcare market and some of our applied markets, where you see a more normalized product mix, you will start to bring back in some of the lower margin components of our portfolio, which will somewhat moderate the strength that we're seeing in the proprietary offering.
Yeah. You'll also get, Doug, at some point, we get beyond this return of some of those discretionary costs that we need to reinvest in here. People will come back and want to see customers and incur a little bit of T&E. That will be a factor we need to consider as we move forward as well.
Okay. Tom, if I could just sneak in one last one. Congrats on the refinancing your highest cost debt. As you know, you still have a $1.5 billion slug of debt at 6%, well above where you recently refinanced. Why wouldn't you refinance that debt as well over the next six months or so? To be clear along those lines, does 2020 and 2021 interest expense guidance assume any incremental refis? Thank you.
Right. Second question first. No incremental refi benefit in what we have laid out in the chart on the interest expense going forward. On your first question, really when we set out to reconsider our capital structure, when we got into COVID, we were really melancholic about the impact that the rates were having. The high yield rates were, instead of improving, they were approaching 7% or 8% on the debt. We just took a pause. Over time, just the high yield piece of the market seemed to improve in our favor. We worked with our partners. They did a great job helping us execute. Yeah, that was a good outcome. As for the rest, you're accessing other parts of the debt market, which have not yet returned to pre-COVID levels and are starting to moderate, but it's going to take some time.
It clearly is our intention to work with our treasury team and the same set of advisors to get us to a point where we're in a position to do something on those higher cost pieces of debt. The exact timeframe remains to be seen. It's really going to be market driven. I will say that when we looked and we reviewed the entire debt portfolio with our board and talked about the potential benefits that we saw from refinancing, I would say more than two-thirds of the benefit was in the unsecureds, which we've done. I don't want to hold out that we're going to be able to generate another $90 million of annual savings. It will be meaningful, but I think we got the bulk of it with the first piece here.
We'll continue, to your point, over the next six months, maybe sooner to address the other parts of the debt as well.
Great. Thank you again.
Okay.
Being mindful of time, please remember to ask one question and one follow-up question. Our next question comes from Jack with Nephron Research.
Hi, guys. Good afternoon.
Hey, Jack.
Hey, Jack.
I was hoping you could comment a little bit more on what you're expecting in terms of the pace of academic and government and lab reopenings in the second half. I think you're probably one of the companies that calls out K-12 exposure historically. Just maybe help us quantify what that represents and how that might be impacted from COVID-19 specifically.
Yeah, Jack, happy to take the question on that. Obviously, the academic market for us has probably been the hardest hit of any of our end markets as the pandemic played out. As we look at it probably hit a low point in April with, I think you can probably see a lot of the same publicly available information that we follow. There was probably less than 20% of the scientific capacity at the bench at that time. We saw incremental improvements as we moved through the quarter. We've seen a steady progression through the month of July as well. Not fully back yet, I would say. We track a couple of things. We track not only just the number of labs that are open, but we try to take a read on how much of the capacity in the lab is being used.
I think we're encouraged by some of the creativity that our customers are deploying there with implementing shift schedules and such to be able to get more of their scientists back in the labs. We're obviously supporting our customers' restarts and talking about how they're going to continue to progress. I think I would make one point here. It does feel like the return of scientists to the bench will be a separate activity from whether or not students come back to a campus in the fall, and I think we're encouraged that our original assumptions that that would happen do seem to be playing out. Our numbers in Europe, for example, I think are a little bit ahead of where we're at in the U.S., just given the timing of recovery there, and I think we're really encouraged by the momentum we have in Europe.
I think we're certainly not back at full run rates in the Americas, but certainly things are continuing to improve week by week there.
Great. I guess with the combination of the refinancing which took place and the outlook seems to be a little brighter today, does it change the way you think about the pace of M&A? Maybe just give us an update on how progress has been at building out the strategic development team.
Yeah, it's a great question. We've been focused and continue to be focused as a priority of taking our leverage into the target range of two to four times, and we're getting very close. Knowing that M&A isn't necessarily a linear event, we at the end of last year, early in the first quarter, started to rebuild our team, put in place all of our processes and cadence and rhythm with our board. We have been active throughout the year in building a pipeline, engaging in a number of discussions, and we continue to be active in that regard. Certainly, the acceleration of cash flow and the strength of our cash flow generation is encouraging.
We look at the outlook for cash flow generation, taking into account the improvements that we're making in the business, and particularly the financing costs, and we think we are well positioned to start to turn this part of our growth strategy on. Having said that, we'll be disciplined about it, and I think we're really focused on bringing in more proprietary technologies. We're very focused on looking at ways of strengthening our bioproduction offering, looking at ways of strengthening our life sciences portfolio within our lab workflows. We'll continue to be opportunistic about extending our capabilities into Asia. I think the filter is pretty clear that we're applying. As we sit here at the end of July, certainly the size of the funnel and sophistication of the funnel is certainly far greater than it was, say when we spoke 90 days ago.
It's getting a lot of our attention, and we're anxious to put capital to work in that area.
The one thing I'd mention on that, Jack, going back to the refinancing, that has moved our weighted average cost of capital, which obviously is a factor in our M&A consideration. I think that will make us more competitive in the way we pursue some of these deals.
Great. Thank you both.
Now our next question comes from Patrick with Citi.
Great. Thanks, guys. Maybe just one on the industrial market trends. I'm just curious in terms of what you guys are seeing there on the more macro sensitive areas, your confidence in the outlook going forward. It seems like sentiment bottomed a bit in 2Q, and then maybe we're on the way back up. I'm wondering what you guys are hearing from the customer base there and visibility for the next couple quarters.
Yeah, it's a good question, certainly we've been focused on I think when you look at our applied markets, as we've said before, it's roughly 25% of our business. Half of it is pretty sensitive to the macro environment. As you suggest, as we've seen the recession hit, that part of the portfolio has certainly been impacted the most and certainly off double digits. The other half of that end market is in more kind of defensive growth-oriented applications, probably headlined by our exposure to the semiconductor space, which we play in a relatively unique way, and we've continued to see nice growth and momentum in that end market. In things like oil and gas and pet chem, that were really hardest hit by the pandemic, we do see some modest recovery starting to come back into the business.
I think when you look at the platform as a whole, given the depths of the pandemic and the recession, to have the platform off mid-single digits in the quarter, I do think it highlights just how diversified that part of our business is and how many levers there are to keep that moving towards a positive direction. I think we're encouraged by some of the factors we're seeing. Still, I think net, we're probably still experiencing some headwinds in the month of July, but are hopeful that we'll see the trend continue.
Makes sense. Then maybe one for Tom, just on the margin side, certainly encouraging the progress so far. Along with the internal initiatives you guys are doing, can you just help us think about the mix shift going forward? Again, things like vaccines have obviously been highlighted quite a bit here tonight. What's the mix look like as you look out a couple quarters? Is that going to continue to trend higher on the margin side?
Yeah. I guess if I knew the specifics of that, I would probably be giving guidance. Not to be smug, Patrick, the dynamics that we've had in this quarter have helped to drive a good portion of that, the EBITDA improvement. It is a combination of the growth in, like the 20% growth in areas like biopharma production. It's also helped by a moderation on, again, that landscape across the tools sector. To the extent that starts to, second half, say third quarter, fourth quarter, that will moderate the margin expansion that we get from, that we continue to benefit from in these higher growth areas we've talked about. It's a tough balance to call right now, because it is a significant impact. We'll continue to watch it and continue to keep you up to date on it.
Okay. Thank you.
Our next question comes from Brandon with Jefferies.
Hey, thanks. Good afternoon. Mike, back on the bioproduction business. Are you capacity constrained there at all, or are you seeing any areas where maybe stocks and you've been able to actually capture some share?
Yeah, Brandon, thanks for the question. Within the bioproduction space, we do have a relatively broad and unique offering. As we sit here today supporting the clinical trial work, I think we're doing a pretty good job keeping up with really unprecedented demand that we're seeing in the business. I think where we spend our time on this topic, Brandon, is trying to project forward, and obviously it's a pretty complex equation when you look at the number of programs that are in flight that we're working on, all different technologies, and each leveraging certain portions of our portfolio. As an industry, we're facing really unprecedented potential demand.
If you think about trying to provide a vaccine for the globe, at the moment with what we know appears that it's not going to be one dose per patient, but it looks like it's trending towards multiple doses and probably annually. I think capacity is definitely as things start to move into commercial production across various elements. I think we're all trying to figure out how you prioritize those bottlenecks and how you can get creative in bringing capacity to the market to support as much production as possible. Probably wouldn't look at it so much in terms of near-term market share gain. I think the way we think about it is probably looking ahead at where the bottlenecks inevitably going to be for all of us, just given the volumes that we're talking about here.
It is going to stress the manufacturing capabilities, and we're going to have to be pretty creative in how we de-
The capacity available.
Thanks. A follow-up for Tom. In terms of the COVID tailwinds of 5%- 6% in the second quarter, I'm curious if the exit rate in June was actually higher than that, if that scaled up through the quarter? Any chance you could share with us the impact of those tailwinds by geography between Americas and Europe, quantify those specifically?
Yeah. I would just say overall, our exit rates were positive in June relative to the entire quarter. That probably was a combination of both further progress on the tailwinds as well as slight moderation on the headwinds. I think, as we head into July, that the positive momentum on the exit rates continues. I think as Michael said earlier, the mix of the tailwinds right now, obviously we're not closed, but the mix of that tailwind looks like it should follow a similar pace that we had in the second quarter. Relative to the mix of the tailwinds amongst the regions, a little bit heavier in Europe, as you saw in the growth rate that we had there. I wouldn't say it was a material part of the growth differential.
I think we were dealing more with the headwinds and the significance of the headwinds in the Americas being more pronounced with the higher concentration of academic and education in the Americas, which was obviously a headwind. As well as higher concentration of our biomaterials business in the healthcare space in the Americas.
Great, thank you.
Okay.
Our next question comes from Dan with UBS.
Great. Thank you for taking the questions, guys. I joined a little late. I kind of got the notes. I'm just wondering, I know there's no guidance for Q3 or the back half. Is it possible to give us a sense? I know you gave a lot of color on July trends and exit rates. Given the repeatability, durability, consumer orientation of your business, I'm wondering if it's possible to even give us some flavor for a range or maybe help a little bit more on thinking through kind of an expectation for Q3.
Thanks, Dan. As Michael was alluding and as we said in our prepared remarks, the exit rates in June have continued and have accelerated into July. I think we're being reasonable with saying flat to low single digit growth. I really wouldn't want to go beyond in terms of forecasting August and September. You've got a number of variables at work beyond just COVID, including seasonal vacations and shutdowns and I think the variables around the duration and the extent, particularly when you consider or talk about demand patterns beyond what's right in front of us. We're a low backlog kind of business, putting aside the biopharma production business. Most of it turns around in 24- 48 hours from the time we get an order.
We're sort of in a position where we know that we're well-positioned with reordering and as things return, but predicting the precise nature of that is difficult from a timeframe perspective and from a precision on the absolute range perspective.
Got it. No, Tom, that makes sense. I know there's been a bunch of questions on the vaccine, but on the testing side for COVID, I think Brandon asked about capacity on your kind of biologics part of the business. On testing, I think expectations are for testing to continue to ramp in the back half, certainly in the U.S., maybe globally. How are you positioned if that does occur, from an ability to benefit from that? You didn't quantify within your COVID contribution how much testing was of that, did you?
We did not. It is significant, and I would say a couple of things about that. One, if you look at the more prevalent testing that's going on right now, the PCR-based testing, and you consider the entire workflow, starting with sample collection to RNA extraction, purification, and ultimately through to reaction set up and the actual testing itself, we're going to be relevant at each phase of that workflow with a very broad portfolio. As testing has accelerated through the quarter and looking ahead at the expectation that testing seems to be an important part of our lives going forward here, I think we are well positioned to continue to build on the position that we've got here and participate in the incremental testing that we see playing out.
Great. Thank you, Michael.
Yeah.
That is our final question for today.
Yeah. Thank you, operator. Thank you all for participating in our call today. As we close, I want to express my gratitude and admiration for all of our associates around the world who continue to live our values and work tirelessly to support our customers as they navigate the COVID-19 pandemic and seek solutions to protect, detect, and treat the virus. Our associates' passion and dedication to our mission of setting science in motion to create a better world really does position us to help bring life-changing therapies that can improve patient outcomes for people across the world. I'm optimistic about what lies ahead for our business and look forward to updating you at the end of the third quarter. Until then, take care and be well, everyone.
That does conclude the phone call. Thank you for your participation. You may now disconnect.