All right. Good morning, everyone. I'm Tejas Savant, and I'm on the Life Sciences sector here at Morgan Stanley. It's my pleasure today to host Avantor, and speaking on behalf of the company, we have Michael Stubblefield, our CEO. Thank you so much for joining us, Michael. Before we get started, important disclosures: please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, do reach out to your sales rep, so Michael, maybe just to kick things off, you know, 2024's been an eventful year for you, both in terms of, you know, the reorg you started at the end of last year, new leadership, a more conservative guidance philosophy, some portfolio shaping more recently as well, and sluggish but improving, you know, end markets coming out of the pandemic.
So just talk to us about how the year's played out so far versus your initial expectations?
Yeah. Firstly, Tejas, thanks for having us. Really happy to be here today, and it's good to see you all. I think it's a good place to start. You know, I'd say at a high level, the year has, you know, plus or minus, played out in line with our expectations. There are a lot of moving pieces. You know, when I look at, you know, kind of the beginning of the year, we were obviously focused on launching our new operating model, which we announced back in December, and that has really brought about a completely different way to not only think about the business, but the way we run the business. You know, focused on our customers' needs in both the lab and in the production environment, and I'm really happy with how that has, you know, is playing out.
You referenced, you know, some of the momentum that we're seeing in some of our end markets, you know, probably highlighted by bioprocessing. It has been good to see, you know, order book momentum over the last number of quarters, you know, now finally starting to translate into revenues. So that feels pretty good. You know, in connection with our new operating model, we also announced, you know, a pretty significant you know, cost transformation targeting $300 million of EBITDA synergies being delivered by you know, the end of 2026. And you know, that's going you know, very, very well.
We were, you know, fortunate to, you know, engineer a really great outcome for our Clinical Services business, which is gonna accelerate some of our deleveraging and, you know, will improve our balance sheet, give us more flexibility going forward. So yeah, I think, you know, we... There is a lot to like about the setup for the year.
Mm-hmm.
You know, we're really focused on, you know, driving growth with our lab and production customers.
Got it. So let's start with BPS and specifically bioprocessing, Michael. You know, despite you know some pockets of weakness, which we'll get to in a minute, you've notched up three consecutive quarters of sequential order rate improvement in bioprocessing, and you increased the guide as well in the second quarter. Has that momentum and order trends continued coming out of the quarter? Is it sort of broad-based enough, where you feel confident in the recovery in that end market?
So for us, you know, bioprocessing, as reported in our Bioproduction, our BPS segment is about two-thirds of the revenues in that segment, so it's obviously an important part of our business. And, you know, as we discussed on the second quarter call, you know, we have been seeing, you know, momentum. It started to build, you know, modestly in the fourth quarter, order book starting to improve. We saw that, you know, carry forward into Q1 and into Q2. And, you know, we're starting to also then see, just given our lead times, which in that business about two to three months, we also started to see, you know, an uptick in, you know, orders now translating into revenues.
And so, you know, to see that over two or three, you know, quarters and to now have, you know, a bit of an outlook into the second half of the year as that order book continues to build, in the second quarter, we did take up our outlook on a full year basis.
Mm-hmm
... for, you know, that part of our, our business and, you know, would now estimate, you know, somewhere in the, the mid to high single digit from an exit rate standpoint, in the fourth quarter. So I think we feel really good about the momentum. There's still some room to run. Obviously, that platform, you know, over the long term will run, you know, higher than that, but certainly we like the direction of travel a lot.
Got it. You know, mAbs remain the core driver of the business today, but can you talk about your positioning in some of the higher growth modalities, such as cell and gene therapy, GLP-1s, mRNA? Where do you think Avantor is most underpenetrated and best positioned to grow? And outside of GLP-1s, has the ongoing sort of pipeline reprioritization that we hear, you know, from the CROs and some of the pharma guys, been an issue for you at all?
So one of the things I really like about our bioprocessing platform is just, you know, how relevant our technologies, whether it's our process ingredients, our excipients, our single-use platforms, how relevant they are across all these modalities. We're obviously very well entrenched, you know, in the mAbs space, which is, you know, driving the bulk of the revenue for our industry. But similarly, you know, we're also ubiquitous across, you know, all the other emerging modalities, which, you know, I think fuels our view on kind of the long-term health and outlook for this space. A lot of great pipeline candidates coming through in mAbs, which-
Mm-hmm
We think is going to continue to make that relevant for a long time. But, you know, a lot of approvals and momentum in cell and gene therapy, where, you know, we have some, you know, really good positions there. You mentioned GLP-1s, our process ingredients and single-use, you know, technologies are relevant there. It's obviously early innings, and I think as we look through that pipeline there, some of the next-generation technologies, you know, probably even use more of our content than the current generation. And so, you know, that's something that we're, you know, spending a lot of time on and watching carefully. You know, mRNA is, you know, as we learn through the pandemic, is going to be an important modality longer term.
And, you know, again, our content is extremely relevant there, and the- I think the collective experience of the value chain during the pandemic has probably pulled forward, you know, those pipelines by a number of years. So I think the setup for this space is incredibly healthy with, you know, strength in the core mAbs, but all these emerging modalities, I think-
Mm-hmm
... just give us a lot of optimism, just given our relevance across, you know, that entire continuum.
Got it. Just double-clicking a little bit on the GLP-1 category, Michael. One of the questions we get is what exactly is your exposure there, both in terms of your portfolio, but more importantly, in the context of the bioprocessing segment itself in terms of revenue? And, you know, there's been a bunch of really exciting label expansions for GLP-1, even relative to your Analyst Day-
Mm-hmm
Last year. So, has that sort of translated into an increasing proportion of bioprocessing revenue from GLP-1s?
As I said, you know, in the answer to your last question, it is a really exciting area. It's obviously getting a lot of headlines and, you know, certainly the promise of the science there is exciting, and to see it extended into new, you know, new indications is, you know, gonna be helpful for the long-term trends there. The technology, I would say, you know, with, you know, kind of in generation one here and, you know, from a tools perspective, there's more modest, you know, consumption of, you know, the content, you know, relative to, say, what we might find in mAbs.
But as a, you know, materials and chemicals, you know, manufacturer, you know, and then a leader in that space, we probably have a bit more exposure into these current generations than maybe, you know, some others out there, and we're certainly benefiting from some of the tailwinds here. But as we look ahead at, you know, the candidates that are coming through the pipeline, second, third generation, you know, technologies, you know, that we'll see how this plays out. But those, you know, probably even have more content. So early innings-
Mm-hmm
... you know, we're certainly, you know, well-positioned here, and we think, you know, long term, this is gonna be, you know, just another one of the exciting growth levers for bioprocessing.
Got it. Switching to, you know, just the mix of the business, how much would be, you know, pharma biotech versus, you know, CDMOs? And do you anticipate any lumpiness in CDMO demand from either the Biosecure legislation or similar proposals or the recent consolidation in the space?
So we're gonna be, you know, quite relevant and well-positioned, as you would expect, in both, you know, the originator platforms as well as with, you know, CDMOs, both really important segments of our business. And in our business model, you know, as a materials provider, you know, we're gonna be accessing these platforms in early phase discovery, and, you know, earning that specification, and then we kind of follow the molecule. The OEM's gonna set the specification, and of course, if they, you know, want the molecule produced at a CDMO, you know, we're gonna be present there. So we have, you know, really good exposure and relationships across both, you know, customer segments. And from a, you know...
As the year has played out, we haven't really seen probably any different dynamics, at least that are worth-
Mm-hmm
... calling out in terms of, you know, CDMOs, you know, performing differently than, you know, what we might find with the originators. Both, you know, I think are seeing momentum, and we're well positioned to capture the, you know-
Got it
... the growth at both.
In steady state, Michael, is there any reason why the bioprocessing business can't grow, you know, almost better than low double digit? And as you think about, you know, your SKU there, or the SKUs you offered there today, are there any obvious gaps in the portfolio that would make sense for you to fill in?
So when I think about, you know, our exposure to bioprocessing, and if we, you know, kind of cut you know the experience here over the last several years, which have been, you know, really hypergrowth, followed by, you know, a reset coming out of the pandemic, and look, you know, kind of on the other side of that, this is an end market that, on its own, has grown, you know, plus or minus, you know, double digits. And we have, you know, historically outgrown the broader market by, you know, 300- 400 basis points in this space.
If you go back to the Analyst Day that you referenced earlier, as we're talking about our long-term algorithm, you know, of mid-single digit growth at an enterprise level, you know, that contemplates, you know, bioprocessing growing, you know, low double digits to kind of mid-teens, which, you know, I think is a pretty clear line of sight to how you get there. The mAb space on its own is, on an end market basis, is, you know, plus or minus-
Mm-hmm
... you know, double-digit growth. And then, you know, we've talked about all these exciting new modalities that are coming in that will just be accretive to that. And so you come up with whatever your favorite assumptions are on those end markets. The end market itself for bioprocessing is clearly long term gonna be a double-digit grower, and, you know, we would tack on, you know, another 300 , 400 basis points, just given the relevance of our portfolio and our content. Certainly, having as much exposure as we have to single use is helpful. You know, our global footprint that gives us, you know, access through our channel, you know, to be able to reach virtually every platform that, that's out there, really underpins, you know, our conviction on that outlook.
Yeah, we'd agree with your view there, that there you know, this will be a strong growth driver for us over the long term.
Got it. So, you know, the part of BPS beyond bioprocessing and biomaterials and advanced technologies, Michael, about a third of the business. On the NuSil piece, are you hearing any concerns from your medical device customers around just tougher utilization comps coming up or headwinds in China starting to weigh on demand?
So one of the things I really like about, you know, our new approach to operating the business and the new segmentation here, is it does, you know, probably give a little bit better visibility into some of the other, you know, attractive platforms that we have in the portfolio. You're talking about our biomaterials or, you know, some of you may know it as our NuSil platform, which is deeply embedded in the medical device space, as well as in, you know, aerospace and defense with a really, you know, terrific offering here.
This is one of the most unique businesses that I've come across in my career, just in terms of the stickiness with the customer, the level of innovation that you're able to bring to bear here, and the value you're able to capture associated with that offering. It's a really fun business to be part of when we're extremely well positioned. So you know, yes, we certainly follow the developments closely in the medical device space, and fortunately, we're really diverse here. There's not you know, probably hard to come up with an implantable device that wouldn't have you know, some exposure that we wouldn't have some exposure to. That's true across all the geographies. [It is a] really diverse platform and a really deep innovation pipeline.
We would be working on, you know, upwards of 600 projects at any one time, on, you know, all of the latest, you know, developments across this space, which, you know, the trends here are pretty exciting. So it's a platform we like an awful lot, and I'm, you know, pleased that with this new segmentation, we get a little bit better visibility for you, you know, into how that business is performing.
Got it. Let's move to Lab Solutions. You know, you took down the guidance there for LSS last quarter. Can you elaborate a bit on the drivers of the change? And what is the relative magnitude of each one in driving the cut?
Yeah, so if we think about, you know, at a high level, you know, how our lab segment, you know, runs, right? It's, you know, it's a really sophisticated, you know, model where we have, you know, inventory positioned around the world to be able to support really dynamic, you know, requirements from our customers. Most of what we do is gonna come in, you know, into our systems electronically, and, you know, we'll turn that around and get that to them within, you know, 24-48 hours. So the forward visibility on that business is limited by, you know, this requirement of our customers that we, you know, kind of book and ship, you know, their orders.
And so from a guidance or a forecasting philosophy, you know, what we have been, you know, doing is taking kind of current run rates and then, you know, extrapolating that forward, you know, through, you know, the number of business days in a particular period, you know, how pricing is phasing in and. And so coming into the year, you know, we had essentially taken the Q4 run rates and, you know, extrapolated those forward into the year. And as we got into Q1, you know, we had a little bit stronger performance on things like consumables and chemicals that where we were seeing some improvement and where we have continued to see improvement.
But we did see a step down, particularly in biopharma, you know, capital spending on equipment and instruments, which within our lab segment is about 20% of our revenue, and it was down pretty meaningfully in the first quarter. Fortunately, we've seen that, you know, stabilize as we've moved through the year at those levels. So consistent with the approach that we've been taking to forecasting the business, really just trying to reflect in our updated outlook for the business, just the reality of what we've seen through the first half of the year and forecasting that forward. So not, you know, trying to bake in an anticipated recovery or-
Mm-hmm
... some change or recovery of that equipment and instrument part of the portfolio. So, you know, based on that, you know, it did, you know, cause a slight, you know, modification, you know, to the outlook on a full year basis, which we were fortunately able to offset by kind of a corresponding increase in the outlook for our bioprocessing business, as we talked about earlier.
Got it. And so in terms of the three Q versus four Q phasing, Michael, is that essentially just a function of normal seasonality?
Yeah, so again, going back to kind of how we guided the year, you know, taking, you know, run rates, you know, exiting the year and then, you know, trying to apply not only just kind of the nominal business days, which a business like this, which is, you know, a daily rate of sales type basis, you know, given, you know, how much of it is consumables focused, you know, timing of known orders or, you know, the how the pricing phases in. We also then applied to it the normal seasonality that we see in a year, and you know, if we go back kind of pre-COVID days, you know, that's about a 49-51% split, and so that's how we set up the year. That's been the assumption from the beginning.
And that seasonality is really more trivial to how our lab business runs. So, you know, we're kind of in that period now where, you know, coming out of kind of the summer vacation season is when you start to typically see the, you know, the seasonality kick in. It's modest, right? It's, you know, a 49-51 split. But that's the assumption, you know, based on kind of historical patterns. And as we talked about on the second quarter call, we don't have the visibility to know, you know, is it gonna play out as it normally has or something different? But, you know, the ranges that we've given for the, you know, for the outlook for the year, we do think, you know, contemplate that.
Mm-hmm.
that if for some reason that, you know, this normal seasonality didn't materialize, we, you know, we think we're well covered by the low end of the range. So I think we feel-
Got it
... good about, you know, the outlook for the year.
Got it. Just double-clicking on the E&I weakness you called out, Michael. What does the order funnel look like? Has the time to conversion metric, you know, improved a little bit? And have the project, you know, reinitiations you flagged and things like electrical board design and manufacturing started to translate into RFPs yet?
Yeah. So I'd say a couple of things. You know, one, I talked earlier about, you know, the consumables and chemicals in the lab, you know, kind of showing steady improvement as we've moved through the year. And in fact, you know, those categories have returned to growth for us, on a year-over-year basis, which is encouraging. And for me, you know, that is also a signal of activity level in a lab. You know, you can't be doing research without, you know, using those materials. So to see those, you know, turn back to growth, I think is a really good sign for us. Now, specific to the equipment and instrument, obviously, if you're trying to constrain, or control cash flows and capital spend, you know, you can optimize, you know, when you make those investments.
If you're reprioritizing your pipeline and you're not outfitting new labs, you know, you're certainly gonna see a downturn in equipment and instruments, but you know, going back to my views on the level of activity, we do see a very healthy pipeline and have seen all year, actually, a really healthy pipeline for new opportunities and projects, you know, that would require equipment and instruments, and so our sales teams have actually been quite bullish all year, despite kind of the underperformance and, you know, in converting it to revenue, and it feels a little bit like what we saw last year on single-use.
So if you remember, some of the leading indicators started to turn green, you know, which had us a bit excited, but, you know, what we experienced was, you know, a little bit different cycle to see those leading indicators convert to orders. We're seeing the same dynamic play out on equipment and instruments that, you know, from quote to or opportunity to quote to order cycle is, you know, being elongated. You know, we've seen it stabilize as we've moved through the year here, but it is, you know, seemingly taking a bit longer for these projects to convert. But we're encouraged by not only the activity level and the pipeline, but the customer sentiment continues to be strong as well.
Got it. What does the pricing environment in the channel business look like, Michael?
Yeah, so, you know, one of the important drivers of margin for us, of course, is how we manage this trade-off between price and COGS, and you know, that has played out, you know, very much in line with what we would have anticipated coming into the year. We're getting our normal contribution, you know, to margins from that. You know, fortunately, you know, coming off of a number of years of kind of hyperinflation, you know, which, you know, required, you know, well above historical, you know, price increases, we've been able to, you know, manage the business this year with more normalized levels of pricing, and it's been, you know, I would say, pretty stable as we've, you know, moved through the year here.
Got it. So last month you announced the divestiture of the Clinical Services portion of LSS. You know, not a huge business in terms of revenue contributions, about $200 million or so. Can you walk us through the strategic motivation for the divestiture? And more importantly, you know, I think you've said in the past that Clinical Services margins are closer to your proprietary margins versus your third-party margins. So, you know, the timing, obviously, of the transaction closing is uncertain, but if you were to assume a December 31 close, what would the dilution be like next year?
Yeah. You know, this was, you know, kind of an exciting strategic move, you know, for us to be able to announce the divestiture of that business. And it was really enabled by, you know, the new operating model and the focus that comes from, you know, specifically aligning yourself with, you know, the needs of our customers in the lab on one hand, and then, you know, with their needs in the production environment on the other hand.
You know, this particular asset, and it's a collection of multiple assets that had actually been you know, purchased you know, well over a decade ago, that you know, had been integrated to you know, reflect our offering in the Clinical Services , was kind of in this you know, middle ground that didn't really fit in lab or didn't fit in production, and it was you know, certainly subscale you know, relative to the marketplace. So as we you know, look at bringing focus and you know, disciplined execution, you know, we kind of flagged it as an opportunity. Unfortunately, it is a you know, an attractive asset just in terms of the customers that it serves and the you know, being able to attach it to you know, the clinical trial work.
And so, you know, it was an asset that was very heavily bid, and, you know, we really liked the outcome that we were able to to engineer. You know, our intent, you know, from the timing of of announcing that, it, you know, to your point, it was a $200 million, you know, transaction, you know, that we covered just with a with a press release, with the full intent that, you know, we'll get into more details on that on our third quarter call as, you know, we get a little bit closer and and more certainty around the the timing of of the close here.
You know, I think the cash generation here and the opportunity to, you know, retire some debt, improve the balance sheet, you know, it's a really good outcome for, you know, for the company, as well as, you know, for our associates in the business to put it in hands that are, you know, probably gonna be more willing to aggressively invest and grow that business.
Got it, and post the Clinical Services divestiture, Michael, is specialty procurement still something you view as core to the offering? I mean, you used to always talk about those two businesses in pairs in the past, so how do you think about that?
Yeah, so it's a really important distinction to derive. So, you know, prior to, you know, the divestiture, services for Avantor were, you know, somewhere between 12, 14, and 15% of our revenue, somewhere in that range, depending on the quarter. And it was comprised of, you know, a number of core offerings. This Clinical Services piece was, you know, certainly a piece of that. You referenced the specialty procurement, you know, services that we provide, that stays behind because that's really critical to how we service our customers in the lab. And probably the biggest part of what we do from a services standpoint is something we call, you know, LPS. And this is-...
You know, the deployment of Avantor associates, now well over 2,000, that wear, you know, our badge and our uniform, but show up and work at our customers' facilities in their laboratories, doing a whole host of activities, including, you know, a lot of bench top work for them. Between, you know, the access we get to our customer through these associates, together with, you know, the view into their, you know, their material requirements that we see through this procurement arm, both, you know, really quite integral to, you know, our offering in the lab. Those will stay behind and, you know, the divestiture only, you know, covers the clinical assets that we have.
Got it. Fair enough. On the biopharma end market, Michael, just wanted to get your pulse check on more recent trends. On the global side, we've had some preclinical CROs talk about, you know, IRA and patent cliff concerns and some reprioritization of pipelines there. On the other hand, on the biotech funding side, I mean, you know, while they've called out a slower recovery, but improvement more recently, I mean, the focus is gonna switch more to interest rate cuts and how that impacts, you know, the biotech landscape. So curious as to what you're hearing in your conversations with that customer base.
So, you know, I think our customers, you know, whether it's patent cliffs or IRA, I mean. I think they've had good visibility of that now for, you know, a few years. And, you know, when we started to see some of the slowdown within biopharma R&D, I think is, you know, very closely linked to when, you know, some of this pipeline reprioritization started to occur last year. And so from our perspective, most of, I think, the impact has probably flushed its way through the system at this point from a, you know, a pipeline standpoint.
And, you know, whether it was directly connected to IRA or just a good opportunity for companies to kinda reprioritize and reposition their portfolios, you know, the net effect was, you know, certainly a slowdown in early-stage activity, in part due to the, you know, some of the funding constraints on biotech. And so, you know, as we've seen kind of that reprioritization activities, you know, start to moderate now and a return of the biotech funding, you know, I think both of those will ultimately provide tailwinds to our business. And, you know, I think if we take it up a notch, you know, ultimately, I guess, you know, our view is good science is gonna get funded.
When I look at these pipelines and these new modalities and the promise that underpins those, you know, various technologies and the promise that it provides for patients around the world, you know, I think there's a lot to like about the long-term setup for this space.
Got it. Switching to academic and government, you know, I think that's about a quarter of LSS for you in terms of end market exposure. So, walk us through the different pieces there. I mean, higher ed is the largest piece, followed by, you know, K-12 , and then, of course, the government piece. Different dynamics for each. So just walk us through how that's, those three, niches there within academic and government are playing out relative to expectations.
Yeah. So at the enterprise level, our exposure to academia and government is about 15% of our revenues, and that's, you know, probably 10-ish% of that is gonna be academia, and, you know, the balance being, you know, government exposure. Over the long term, we would anticipate that this end market for us would grow kind of low single digits. And, you know, we've done-- you know, it's been a bit lumpy over the most recent years, just given, you know, the government funding for, you know, a lot of the COVID, you know, response. And then, you know, we see that, you know, starting to normalize and, you know, the government piece of this has been, you know, somewhat muted, you know, generally over time, and ebbs and flows a bit.
You know, higher ed for us is a really strategic end market. The growth dynamics don't match what you might see in biopharma necessarily, but we like the space a lot because it's oftentimes, you know, a scientist's first exposure to our brands and our offering. And, you know, over the last number of years, we've seen a market pivot, you know, of their focus area into biopharma, and not just, you know, for the sake of, you know, interesting research, but with, you know, an eye towards commercialization. So it's taken on, you know, important, more important prominence for us, you know, given that dynamic and the importance of getting our content seated there so that, you know, if it does ever make its way towards commercialization, that, you know, that we're part of that.
And so we have deliberately doubled down on commercial intensity and coverage into this space, which, you know, historically, we're probably a bit underrepresented here.
Mm-hmm
... to be fair. And, you know, that, you know, that focus and that intensity has really paid, you know, dividends. We were, you know, growing above market in that space last year, and I think, you know, again, this year, even, you know, with the difficult comparisons that we have, you know, we're having a, you know, another great year in, the higher ed space.
Got it. Switching to the financials a little bit. You know, you guided to mid-single-digit long-term organic growth at your Investor Day last year. Just given your comments on, you know, bioprocessing set to exit the year in that mid- to high-single-digit range, relatively easy comps next year, especially in the first half, and an assumption around just that metered end market improvement as well, is 5%-ish growth a fair base case scenario?
So when I look at, you know, the kind of how this year is playing out, which is, you know, plus or minus in line with our expectations, you know, by the time we, you know, get to the fourth quarter and, you know, exiting the year, you know, both of our, you know, segments will have, you know, returned to growth. Still, you know, somewhat below kind of the long-term targets for, for both of those segments, but nevertheless, you know, showing some momentum and, you know, turning into, you know, the green territory as it were. So, you know, I think we're encouraged by, you know, the trajectory here and the momentum that we're seeing building in both parts of our-...
of our business, you know, similar to how we've done in prior years, just given kind of the visibility that our business model, you know, give us. You know, we'll take the time to get through the year, through the fourth quarter, and, you know, we'll come forward with our thoughts on 25, you know, as we get into the first quarter.
Got it. Fair enough. How are you thinking about upside versus the $75 million in cost savings you've identified this year? You saw some very meaningful upside to margins in the second quarter. I think it was more than 70 basis points or so versus your own expectations. How much of that was pricing versus bioprocessing mix versus cost outs?
So, you know, a few things to unpack there. You know, firstly, in reference to the transformation savings, you know, we were targeting $300 million by the time we're exiting 2026, with an in-year impact in 2024 of about $75 million. And, you know, we're still modeling it that way, but we've been, I think, pretty transparent for the first half of the year. You know, we've been able to accelerate some of the savings, and, you know, bring those forward. We even started to see some as early as in Q1. So I'm really, really happy with, you know, Brent's leading that for us and doing a really terrific job on, you know, executing that, you know, together with the organization. So, you know, I like the setup for that.
And what that's enabled us to do, you know, together with, you know, some of the recoveries we're seeing in bioprocessing, which is helping us, you know, improve the mix a bit as we've moved through the year. You know, together, what these have enabled us to do is to kind of flatten the ramp that had been implied by our margin guidance for the year. And so, you know, we like that setup and, you know, at least through the midpoint, you know, we felt it was prudent to maintain it, you know, where it had been. Admittedly, though, you know, significantly de-risked from, you know, maybe where we were at coming into the year, just given the strong execution through the first half of the year.
You know, we're driving as hard as we can on the transformation to deliver, you know, that program. You know, certainly we're trying to accelerate, you know, where we can. We'll keep that in front of you as we move through the quarter. We'll certainly have more to say about that on the third quarter, where we're at.
Mm-hmm.
And, you know, as we get further into the program, you know, we can give you updates on the targets. But it's going very well, and I would say it's probably difficult to parse out the contribution from each of the levers that you-
Mm-hmm
... that you mentioned. I think they're all, you know, certainly accretive. We talked a little bit about price over COGS, you know, working well for us this year. Certainly, the mix is an important part of our algorithm, and you know, when bioprocessing is starting to grow again, that really helps the mix and the margins that come with that, and then, of course, you know, good execution here on transformation, so margin certainly has been one of the bright spots for the story this year.
Got it. You know, you've talked about exiting 2025 at 20% plus EBITDA margin. How should we think about upside to that number? I mean, you've sounded really confident in margins the last couple of quarters, Michael, and it felt like it was more sort of controllables driving the margin expansion versus things beyond Avantor's direct control. So help us think about, you know, upside to those targets, and at a higher level, I mean, just the operating leverage in the model, particularly on the Bioproduction side of the business.
So one of the reasons why I think you hear a lot of conviction in, you know, this target of exiting next year at, you know, 20% plus EBITDA margins, is that we can get there largely, you know, through things that we can control. You know, having, you know, the aggressive cost transformation in play and the solid execution that we're seeing, you know, is showing up. You see it in the numbers. You know, we're just a touch below, you know, 18% and, you know, well on our way to 20 percent by, you know, continuing to drive that program forward. You know, there's lots of ways to get there, and certainly, you know, we'll take any of the tailwinds that come from, you know, a market recovery.
You know, the proof point coming from the second quarter here is, as you start to see momentum in things like bioprocessing, as I referenced earlier, the incrementals here are, you know, pretty significant. You know, we're not having to add, you know, fixed costs to capture the incremental revenues that we're seeing, and it is, you know, certainly driving strong momentum on the margin line. We don't need a strong recovery here to get our targets, you know, exiting next year. But, you know, certainly, if that were to come, you know, we'd view that as a tailwind.
Got it. At what point does M&A become a priority again, Michael?
So, you know, for us, we're really committed to getting leverage below three times. The divestment of the clinical assets will certainly help accelerate us by, you know, probably a half a year at least. But, you know, our priority, you know, until we get there, certainly remains, you know, debt paydown. And just to be clear, it's not a scenario of, "Oh, we're at three, so let's take it back up to four and a half with another big deal." We really do wanna run in an envelope where, you know, three becomes the ceiling. So, we need some help here on the EBITDA line to start to move the leverage, you know, ratio in the right direction. We're certainly generating a lot of cash.
That's a really bright part of the story this year, with year to date conversions well over 100%. So we're generating a lot of cash, making a lot of headway on the debt paydown, but, you know, we're gonna need to get the EBITDA moving in the right direction before we can, you know, get to the levels that we're targeting.
Fair enough. Great place to leave it at. So thank you so much, Michael. Appreciate the time today.
Thank you. Thank you.