Okay, thanks everyone for joining us this morning. I'm Vijay Kumar for the Life Sciences Device Analyst here at Evercore. A pleasure to have with us Avantor. We have CEO Michael Stubblefield, and we have Christina Jones from Investor Relations in the audience. So, Michael, thanks for spending the time with us this morning.
Yeah, good to see you all. Appreciate you being here. It's always great to be in sunny Florida.
Indeed. Can't complain on that. I guess maybe we'll start with what happened in that third quarter. There were some moving parts. Overall revenues were in line with street models, but some moving parts. Some maybe labs a little bit better. Advanced Tech, I think, was the one that stood out. When you review the quarter, talk to us on how it played out versus internal models. What changed and what came in better?
Yeah, that's a good place to start. When we look back at the quarter, I think there's a lot to like about how the business performed in the quarter, as you suggest. I think across the board, the metrics came in line with our expectations. And starting with the top line, it was great to see a return to growth in our lab platform. On the production platform, obviously continued momentum on bioprocessing and another really great quarter there. If you start moving through the P&L, we're in the midst of our $300 million cost transformation initiative, making really good progress there. We had another great quarter of delivering on that program. Cash flow was another really bright story. I think we continue to have industry-leading cash flow conversion. We're year to date over 100% conversion.
And so when you look at the, you mentioned Advanced Tech, some headwinds on the semi side, which we were largely able to offset with good performance in biomaterials and bioprocessing. So net, I think we're encouraged by the momentum that we see building in the businesses, particularly biopharma, with we have now four straight quarters of good, steady improvement in our order book, and more importantly, starting to see that translate into the bottom line.
Gotcha. And you brought up a couple of points out there. Biopharma perhaps coming in slightly better. Can you talk about any particular customer segment or geographic region which stood out within biopharma?
Yeah, so when we think about bioprocessing, which just for context is our content that we supply into the commercial platforms, we've seen over the last year just nice, steady, gradual improvement across the board, both from a geographic standpoint as well as from a customer segment standpoint. So nothing really unique to call out there. We see broad-based recovery as destocking has essentially got behind us, and we're seeing production levels better match demand. And of course, the end market fundamentals have been strong throughout, and we see that continue. Pipelines continue to be very strong. Regulatory approvals continue at record levels. So I think there's a lot to like about the setup here, and we're encouraged by the improvements that we've seen throughout the year.
Understood. And Advanced Tech, you brought up on semis. Can you quantify what the decline was in third quarter? And what is Q4 assuming for Advanced Tech?
So I think what you're referring to there is the semiconductor exposure that we have in our production platform. It's a couple of percentage points of enterprise revenues, so not a significant exposure there. But there's been a lot of volatility in that space over the last couple of years, and we were hopeful that this year would be one of gradual improvement. And through the first half of the year, we certainly did see that. Particularly in the U.S., in the third quarter, we saw some of that recovery take a pause, and you can see some of the headlines and news coming out of some of the larger U.S. producers to underpin kind of the stall and the recovery that we do see there. And certainly some headwinds there. And I think our expectations, we would expect to see that continue through the fourth quarter.
But as I said earlier, fortunately, it's a relatively modest exposure for us. And when I look across our production platform, we were roughly flat in the quarter with the strength and improvements in biomaterials and bioprocessing, largely able to offset the headwinds that we're seeing in semis.
Gotcha. And when you look at all those pieces, in the fourth quarter, I think your guidance assumes sequentially flattish revenues on a dollar basis. What is typical seasonality for Avantor? And when you look at trends so far, would you say it's supportive of your guidance assumptions or perhaps coming in better?
Yeah, so if I look at the setup for the year coming into 2024 and the assumptions that we laid out, fortunately, the business has played out largely in line with those assumptions. And all those assumptions that underpinned the full year guidance are still in play today. And just to take you back, when we guided the year, we said 49% of the revenues would come in the first half, 51% of the revenues would come in the second half. And that's what it's still implied by our outlook for the fourth quarter. The midpoint of the fourth quarter guide, consistent with how we've guided all year, would imply a normal seasonality, while the lower end of the guide would imply a more muted seasonal trend. And that really, this seasonality is really more of a phenomenon in our lab business.
It's not something we generally see in our production platforms, and as you know, in our lab business, the business model there doesn't give us a lot of forward visibility. That's a daily book and ship type business, so we're right in the midst of the quarter here and working hard to finish the year strong, so we'll see where we land there, but the range contemplates, I think, the possibilities around a more muted versus a normal seasonality.
Gotcha. And if it's supposed to be, if it were to be a normalized seasonal quarter, would we have seen any pickup in order trends by now, Michael? And are we seeing that?
Yeah, so if you look at the way that business works, obviously, we're just coming off a holiday here in the U.S., and so things are a little bit different in that time period. But I'd say, look, we've seen a year here of good stability in the lab. And if I look at even in the third quarter, where the business did return to growth in the lab, that included our equipment and instrument platform, which is about 20% of our lab revenues being off mid-single digits. And so despite that as a headwind, which we've seen all year, just given the cautious capital spending environment, our consumables and our chemicals continue to perform well. Our services continue to drive growth.
And so I'm really encouraged by the activity levels that we've seen throughout the year, and we've been able to return that platform, at least in the third quarter, to growth. We're expecting a quarter here in lab of flat to, again, perhaps modest growth. And if we see activity levels at the year end pick up a bit in line with a more traditional seasonal ramp, then that'll have us coming a little bit stronger than that. So we're right in the throes of it, and we'll see how things track over the next month or so.
Understood. No, that's helpful. And I think obviously with the elections, that's going to be a major factor here in how customers are thinking about budget trends. When you look at the macro right now, any change in customer sentiment post-elections?
Yeah, I mean, when you look at the macro environment, there's certainly been a lot of factors at play and a lot of headlines over the last year or two, and certainly with the U.S. elections coming through here over the last several weeks, you've seen a flurry of headlines come out of that. Despite all that, I would say our interactions with our customers remain constructive. The sentiment, I would say, remains positive, and we at least haven't picked up any discernible change in sentiment or posture from our customers post-election. We all certainly see the same headlines that you all see here, but it doesn't seem to be really driving, at least here in the short term, any meaningful change in behavior.
And if you look back at the space here over the last couple of years, there's obviously been a lot of reprioritization of pipelines, whether that's due to inflation or some of the legislation that's come through. And so I would say in large part, our industry has pretty well digested a lot of these factors, and we'll see how things play out going forward here. But I think we're encouraged by the stability that we've seen, particularly in the lab, and we're encouraged by the levels of activity that we see.
Got it. And what is Avantor's exposure to NIH and vaccine markets? I think those are two areas investors have focused on.
Yeah, so let me take those separately. So NIH funding on a direct basis for us would be reflected in some portion of the government and market, which is to say it's going to be rather de minimis. And if I look at more of a macro level, there really isn't any correlation that we can discern from our lab revenues to NIH funding. So not something that we worry about to any large extent there. And if I look at academia, for example, and the performance we've been driving in that business, coming off another quarter here of high single-digit growth, we're now a couple of years into really deliberate ramp in commercial intensity, particularly in academia. And we're taking a share there quarter after quarter, and I really like our positioning there. So I think we're excited about the setup there.
If I look at the vaccine side of things, which would really be more reflective of our revenues in the bioprocessing space, certainly there are some modest levels of vaccine exposure there. But as with most tools players, the overwhelming majority of our revenues are driven by monoclonal antibodies, and that'll continue to be the case going forward.
Gotcha, and maybe on tariff side, I know China is a smaller part of the business for you. Any tariff exposure impact either from China or Mexico?
Yeah, so I'd say a couple of things about the noise around tariffs. This is, I think, a time where having a global footprint and a global supply chain will certainly benefit us and benefit our customers in a whole host of scenarios here. And I think if you look back over history, the business has a long-standing track record of being able to execute well through any supply chain disruptions. And so we're planning for a whole host of scenarios, obviously not knowing exactly how things will play out here. But it's important to understand we do have tremendous flexibility in our supply chain, a lot of redundancy built into both our sourcing strategies as well as our manufacturing footprint. And many of our suppliers also have a fair bit of redundancy built into their footprints as well.
And then maybe the last line of defense here is just the flexibility we have on pricing. And the pricing environment, I think, would certainly enable us to address any gaps we might have there from a pricing standpoint. So I think we'll work with our customers as necessary to deliver goods on a timely basis and with as low cost as possible and leverage the flexibility and footprint that we have.
Gotcha. And then within when you look at your two segments, bioscience production, where you have both your bioprocessing and some healthcare Advanced Tech, when you look at that segment, right, within BPP, what is bioprocessing versus the non-bioprocessing parts of the business?
Yeah, so obviously the bioscience production segment is a really important part of our growth and margin algorithm at Avantor. It's about a third of our enterprise revenues. And if you double-click on that platform, about two-thirds of that is bioprocessing. And just to restate what I said earlier, the bioprocessing revenues that are reported in our production segment would reflect the commercial platforms that we're spec'd into. And then the balance of that platform, that roughly one-third, would be split between healthcare, which for us is our medical-grade silicone formulations for medical implants, as well as custom reagents for specialty diagnostics. And then we have the Advanced Tech platform, which is primarily our space-grade silicones for aerospace and defense, and then the custom chemical formulations for semiconductor manufacturing that I mentioned earlier.
Gotcha. That's helpful. And when you look at that overall bioscience production, right, which is a third of overall Avantor revenues, maybe some details from what is proprietary versus third-party, what is capital versus consumables within that segment?
So within our production segment, the majority of the revenues are underpinned by proprietary products. And that's an important attribute given the differential growth rates between the lab segment and the production segment that really aids our organic margin expansion algorithm of 50-100 basis points in a normal environment. And so the fact that we have so much proprietary content in our production platform is important. 95% of the revenues are consumables-driven, so we have limited equipment exposure in that platform. And the equipment exposure that we have, we do make filtration skids and other custom integrated solutions, but the majority of that would be our Masterflex peristaltic pumping technologies that we offer through that platform.
Gotcha. And in a normalized environment, what should production growth be? Is that above corporate? Is that high singles?
So if you go back to what we laid out at our investor day a year ago, our production segment in a normal environment should be growing high single digits. And within that platform, the headline, of course, would be our bioprocessing platform, which should grow into the double digits in a normal environment.
That's helpful, and then since you brought up bioprocessing, I think one of the questions we get is, what are the key products that you sell within that segment, right? I think for most of us, we're used to looking at single-cell bioreactors, etc.
It's a really terrific platform, and we've carved out a rather impressive niche for ourselves here as the leading materials provider into this space. And if I look kind of through the upstream, downstream, and fill-finish steps, we're going to have more content specked in across that spectrum than just about anybody out there. And I'd probably divide our offering into maybe two categories just to simplify it for you. We would have a part of the business, call it maybe 60% of the business or so, that it's going to be things like process ingredients, media supplements, serums, buffers, high-purity solvents, excipients that are used in the various steps of that process. We also have a pretty comprehensive line of chromatography resins.
And then the other part of the offering would be our single-use franchise, which would include the Masterflex peristaltic pumps, single-use bags, tubing, custom assemblies, manifolds that are implemented downstream of the bioreactor to connect all the unit operations in that workflow and to help move fluids into and out of the process as well as through the various unit operations. So when I look at a typical platform, we're going to have specifications of materials that are going to be throughout that workflow. I think in various investor days in the past, we've shown the portfolio. And one of my favorite charts, if you've seen any of those presentations, we kind of internally refer to it as the Measles Chart, where if you kind of plot that workflow and put a dot at every point that we have something specked in, it gets pretty busy really fast.
Over the last several years, as we've broadened the portfolios, our innovation engine has really delivered, combined with the businesses that we've acquired. That position has only been strengthened. I think we like the setup here in that we're going to be ubiquitous across modalities, across indication types. Given the access we have to customers and our global footprint, we're finding we're putting more content on every platform in the pipeline.
Got it. And when I look at your fourth quarter guidance, I think it assumes mid to high singles growth within bioprocessing. I think bioprocessing BPS did flourish in third quarter. What is driving that Q4 step-up? Is that just easier comps, or are we assuming a normalized market environment?
Yeah, so the year has been one of sequential improvement as we've moved through the year. Q1 was down low teens were down in a mid-single digits Q2 we were flat in Q3, as you suggest. And I think we're on pace to exit the year with mid- to- high single-digit growth rates on the platform. And that's all underpinned by the improvements that we've seen over the last four quarters on the order book. And in our supply chain, which has normalized over the last number of quarters, our average lead time to our customers is about two to three months for our bioprocessing portfolio. And so that's kind of the level of visibility that we have looking ahead.
When I look at our fourth quarter numbers and the guidance that we provided and the comments we made on our third quarter call, we're really underpinned by the visibility that that order book gives us. I would say it's been a year of gradual improvement as the destocking headwinds have dissipated and production levels have better matched our customers' demand. The end market fundamentals continue to be really terrific here. I think using mid to high single digits as a jumping-off point for the year here provides a nice setup going into 2025.
Understood. No, that's helpful. The orders, since you brought it up, given the macro environment and no change in customer behavior, should we assume that order trends remain healthy as we're looking at the first two months here in Q4?
Yeah, I would say starting with the fourth quarter of last year and continuing through today, the order activity has continued to be supportive of our outlook and the momentum that we've seen building in this space. And I think it makes sense, right? The end markets have been really healthy. The patient demand is there. If you look at the number of FDA approvals over the last couple of years, and including this year, it's been a really favorable environment from that standpoint. You have not only the monoclonals that have a lot of important launches here over the last year or two that are helping drive growth, but you're also starting to see contributions from some of the newer modalities, including gene therapy, which we've talked a bit about over the last year or so.
So we're seeing the growth coming from all these areas and from all customer types, whether that be the CDMOs around the world or our partners in large pharma. So I think there's a lot to like about the setup here. It'll be great to see the business grow in the fourth quarter, and we'll see where we land with guidance as we finish the year and get into the early part of next year. But I think the setup for the space is quite constructive.
Gotcha. And since you brought new modalities, any difference between large versus small pharma, pre-revenue companies, etc., when you look at bioprocessing?
So, when we look at bioprocessing. I think the recovery has been broad-based, and we see the order momentum across all customer types, including CDMOs and large pharma. And we see it across the various geographies. And I know Asia gets a lot of attention. China is a relatively modest exposure for us, and we see good momentum in biosimilars as well as traditional platforms. And Southeast Asia, Korea, Europe's been strong. The Americas have been strong in that regard. Now, when you flip into the lab side of the biopharma business and you look at R&D exposure, which ranges anywhere from preclinical activities all the way through late-stage clinical activities, for the Avantor model, we're going to be more exposed to or correlated to preclinical activities, which is where the bulk of our biopharma revenues are going to be in the lab.
That brings in then the dynamics with biotech funding and the various biotech companies that are out there, as well as CROs doing early-stage preclinical work, as well as large pharma. We started to see a little bit of a reset in this space going back to probably the second quarter of 2023 as large pharma started to lean in and reprioritize pipelines. We started to see a bit more cautious approach to capital spending. I think the headlines around biotech funding have been pretty well covered in terms of how that played out last year. Fortunately, we've seen some recovery in that this year. When I look at the trends in that space through the first three quarters, certainly the biopharma business in the lab has stabilized.
What we do see there is within biotech, certainly the traditional small biotech, maybe a small group of scientists or even a single scientist trying to get funding for a new idea, probably still struggling a bit, but we see the more established biotech's starting to grow again. We saw that in the third quarter. If I look at large pharma, again, it's a bit of a mixed picture. There are quite a number of the large pharma accounts where we're actually seeing nice growth with over the last quarter or two. While we still actually see some of the large pharma still reprioritizing things. You put all that together, and it's been a year of stability, but activity levels are certainly improving. We've seen nice growth on services, chemicals, consumables.
Probably the biggest headwind for us in that space right now is in the capital equipment area, which was down double digits first half of the year. It improved sequentially in the third quarter to down mid-single digits. But that weighs on the results somewhat. And as that activity level continues to improve, that'll further aid the recovery of our end market there.
Gotcha. And as you look at fiscal 2025, what gets better versus worse within bioprocessing? Any one of the items we need to be aware of? You mentioned new modalities. Is GLP-1 a driver for Avantor?
Yeah. So when we look ahead, the recovery has been broad-based throughout 2024. You see really healthy pipelines across all the modalities. Monoclonals will continue to drive the majority of our revenues. I think the science is pretty promising on the cell and gene therapy side. You see accelerated rates of improvement there. Our portfolio is quite well positioned there. For example, viral vector production, for example, is going to have a lot of our content on it, and that would support autologous CAR-T therapies as well as gene therapy. Biosimilars is really gaining some momentum around the world. And with our network of 13 innovation centers around the world, I think we're uniquely positioned to help our customers on those platforms. You mentioned GLP-1s. We have exposure to the platforms that are commercialized today, relatively modest amount of content for tools players on those platforms.
We'll see how it plays out longer term. I think if you look at the next generations of GLP-1s that are in the pipeline, some of those include some of the drug antibody conjugates, which have more content in them. And we'll see ultimately which technologies prevail. But all of that is good for research and a constructive backdrop, certainly long-term for our production platform. And I think at the end of the day, what drives us and drives our excitement and bullishness on this space is there's a lot of good science being developed and a lot of great opportunities with these new modalities. And regardless of what's going on in the macro environment, we're confident that long-term this good science will get the funding and things will continue to move ahead.
Gotcha. Gotcha. That's helpful. And I know within BPP, I mean, a third of that is healthcare and Advanced Tech. But specifically on healthcare, right, what did healthcare do in third quarter? And how much visibility do you have given your exposure to, I guess, some of the device end markets?
So if I look at our exposure and the way we play the healthcare space in our production platform, I mentioned two primary platforms before. The bulk of it is going to be our medical-grade silicone formulations for medical implants. And we have a really terrific position there, a leading position in supplying this content into virtually every implantable device that would go inside the body. And that's underpinned by an innovation pipeline that would literally have 500-plus projects ongoing at any one time. And it works the same way as our bioprocessing platform in that we engage in early-phase device development. We customize a solution. We support the regulatory filings with nearly 800 Drug Master Files that our customers would leverage to support their regulatory filings. And then we would support any commercial platform through its lifecycle.
The business has actually performed probably a bit better than our expectations this year. It's coming off a year where supply chains normalized to a large extent last year, which drove double-digit revenue growth for that business, and so the comps coming into this year, we knew were going to be a bit challenging, and we planned for the business to decline somewhat or perhaps at best be flat, and again, it's performed in line with our expectations. The underlying demand is good. The business grew sequentially in the third quarter, and I would expect to see that momentum continue. The business is extremely well positioned, and that's important not only from the digits contribution to the enterprise growth algorithm, but also it carries with it a pretty healthy margin with those products.
The other part of the healthcare platform would be custom diagnostic reagents for various screening applications that are important, as well as various content that gets specced into various diagnostic instruments, so again, a nice niche reagent portfolio there that helps with our growth in that space.
Gotcha. And just given the macro environment, when we look at procedure volumes on the device side, it's been pretty healthy. Is that a direct read-through for Avantor? Should we assume next year's more normalized or easier comps a factor for you guys when you look at fiscal 2025?
So when you look at that space at a macro level, that business should grow mid to high single digits, depending on what's going on from a pricing standpoint and an end market demand. But certainly, I think somewhere in that mid to high single digit growth range is traditional for that space. We have good pricing power that normally adds a few points to our growth. And if I look at the kind of 2023, 2024 on a double-stack basis, we're certainly growing in that range. End market characteristics are, I would say, strong. Our positioning is strong. The pipeline of innovation has been strong. So we'll see where we land with a specific guidance number for next year, but we certainly expect that platform to grow next year.
Gotcha. And I know on the semi side, we've sort of focused on some of the near-term headwinds. But does Avantor have any exposure to AI chips in battery testing? Is that going to be a driver?
Yeah. So the headwinds that we've called out, I think, are probably more particular to the U.S. manufacturers who may have a bit more muted exposure to AI. Of course, it's a relatively consolidated space. There's a handful of key players that drive the space. We're going to have exposure to all of those. The business in Asia specifically continues to perform in line with our expectations. And I think at a macro level, there's a lot to like about the fundamentals in this space long-term, notwithstanding the near-term headwinds. We'll see how that shakes out. As I said before, the fourth quarter contemplates revenues kind of similar to what we experienced in the third quarter.
Gotcha. Then, maybe switching gears to on the lab side, one of the questions we get is comparative dynamics within the end market. Can you just give some details around how concentrated is this market? What is Avantor's market share? And has Avantor held its own from a competitive standpoint?
Yeah. So one of the things I really like about the end market dynamics or backdrop that we operate in is it's a really large space. When we look at the TAM for our lab business, it's more than $55 billion in size. And it's a very fragmented space. If you look at us and maybe the other leading player in the space, between the two of us, we're going to have certainly less than a third of the overall addressable market and maybe even closer to 25%, somewhere in that range. And so there's quite a lot of headroom for growth and share gains. And that's certainly how we drive our strategy. And I think we're incredibly well positioned here with the broadest portfolio, a leading e-commerce platform that drives transaction efficiency for our customers, and then a leading supply chain that supports a really agile global business model.
When I look at the performance of our business against the other public company lab data that you can see, I think you'll see a platform that's performing at the top of our peer set in the lab business. And if you take some of the data I showed you earlier around our academic exposure, for example, that end market isn't growing anywhere near the levels that we've been growing our academic revenues over the last six or seven quarters. And so the business has had another really terrific year here of executing on our growth strategy across many facets, whether it's innovation from a product standpoint and the technologies that we've brought to our customers, to a lot of innovations and investments in our digital capabilities, as well as in our supply chain capabilities. I really like our positioning and the setup for 2025, I think, is pretty strong.
I think we've got a best-in-class lab platform.
Fantastic. And then when you look at that business mix, what is consumables versus capital, biopharma versus non-biopharma within lab? And I think in a normalized environment, you said it's low single digits. Are we at a normalized environment?
If we look at that business or that platform in aggregate, what we've said is we would anticipate in our growth algorithm, our lab segment to perform somewhere in that low- to mid-single-digit growth level. Certainly for us as an enterprise to get to a mid-single-digit growth overall, a low-single-digit performance in the lab is actually more than sufficient. We grew modestly in the first quarter. If I look at the performance of the consumables portfolio, which is about 80% of that revenue compared to a mid-single-digit decline on about 20% of the revenue in the equipment and instruments, you're in that kind of low-single-digit or we were in that low-single-digit level in Q3. Things have certainly improved throughout the year as activity levels in the lab have come back.
About 50% of the platform is going to be biopharma, healthcare. About 25% of it is going to be academia and government, and about 25% would be our exposure into the advanced technology space and the applied end markets.
Gotcha. Gotcha. And maybe last one on labs here. When you look at your win rates within that market, are you happy with your win rates, retention rates?
Yeah. I mean, the hallmark of this lab business certainly is the customer intimacy and our access and connection to the customers. We're going to serve over 300,000 labs in 180 countries around the world. So we're incredibly well positioned here with our platform. And if I look at the renewal rates, the win rates on this business, they're as strong as they've ever been. We've been running the platform here under Avantor for the better part of seven years now. And we've got, I think, a great track record of growing the business and taking share in this space. And I think 2024 is another good example of that.
Gotcha. Maybe switching gears to China. I know it's a small piece, but how big is China for you guys? What did China do in 2023, year-to-date trends, and how are you thinking of the longer-term growth outlook for China?
Right, so this is probably one of the more attractive attributes of our platform, at least in today's environment, is that we have relatively modest exposure to China. The AMEA region, or the acronym we use for Asia, Middle East, Africa, is about 5% of our revenues in aggregate. And China would be a subset of that. So you're talking one or two points at most for China. And the business, I would say, has certainly faced the headwinds that you read about over the last couple of years. It's performed in line with our expectations. We've probably seen some very modest or moderate improvements in the business as we've moved through the year. But the business is still down on a year-over-year basis, but probably in line with our expectations. So I wouldn't put that in a category as a negative relative to our setup for the year.
We'll see how it develops. I mean, I think long-term, the demographic trends are clear. I think as we think about our long-term growth playbook, we still see China as an important part of that, and we'll continue to invest as opportunities arise. The strategy that we've been executing and building our business in China really is one of China for China. Just before the pandemic, we opened the doors on an innovation center there in Shanghai. We've got all the technical capabilities that we need to support the developments in the country, certainly all the product capabilities there. With the acquisition of RIM Bio in 2021, we have a modest manufacturing footprint to service the single-use platform in China. We'll continue to think about it probably in that China for China context.
I don't expect it to be a meaningful part of our revenues here in the short to medium term, but certainly it's something we'll continue to keep part of our long-term playbook and invest as opportunities arise.
Gotcha. And maybe switching gears to margins and portfolio optimization. You've recently divested clinical services. What was the strategic rationale of it? Because for us, it just looks like it was margin diluted, a slight headwind to EPS. Maybe walk us through why it made sense to divest the business now.
Yeah, pretty straightforward, actually. From our standpoint, one of the things that we highlighted when we launched the new segment structure at our investor day a year ago was that this new structure, which aligns our business with our customers' needs in the laboratory environment and in the production environment, that it would enhance the focus of our business. And when we took a step back and looked at all the various businesses we had, this clinical services business was kind of in this hinterland of it wasn't lab and it wasn't production. And so it really gave us an opportunity to take a closer look at that business, the strategy, our competitive positioning. And ultimately, the conclusion we came to was, look, on a long-term basis, it's dilutive to our enterprise growth algorithm. It has a capital intensity that doesn't fit our capital model.
And we ultimately made the decision that it'd be better to enhance the focus of the business and put it in the hands of somebody who would invest in it and view it as a bit more strategically. So ran an auction for the business, and I think we were really, really pleased with the outcome, and particularly for our associates to be able to put them in a position to be with a partner who will invest to grow that business. And certainly, we like the cash that we got for the business, and that will be quite supportive of our deleveraging aspirations. So I think overall, as I look at it, it's a really good outcome for us.
Gotcha. When you look at margins, that divestiture is diluted of margins. In a year-to-date, your margins are down in 2024. But obviously, we're seeing some benefit with cost saves. When you roll all of these factors together, how should we be thinking about margin expansion here when you look at the 2025 and 2026 timeframe?
Yeah. So probably the biggest drag on margins in 2024 was just the reset of our incentive comp structure. We paid out at de minimis levels in 2023. And so we were facing more than a hundred basis point headwind in refunding those programs, which isn't a variable that we'll face going into 2025. The cost transformation program has hit ahead of schedule. We were planning on $75 million of benefits within 2024. We talked on the third quarter call of being closer to $100 million. And on a run rate basis, we're going into 2025 with more than $150 million of savings that will, without doing anything further, contribute to 2025. And given we won't have the step-up headwind in incentive comp, you'll see more of that flow through. And then, of course, we've got some modest inflation in the business.
But when I kind of look at the big picture here, long-term, the algorithm here for margin expansion, I think, is an important element of our value creation strategy here of just on an ongoing basis, 50-100 basis points of margin expansion driven off of good price over COGS discipline. We certainly get a lot of leverage from just our operational footprint. We've talked a little bit today about the importance of mix and the growth of proprietary content relative to third-party content, which gives us a natural lift in our margins and then just ongoing productivity. So the algorithm is fully intact. And in a normalized environment, we should see 50-100 basis points of expansion.
Gotcha. And that gets us to the last question here. I think your peers are looking at, call it mid-singles 4 to 5 organic for next year. Given your mix of business, right, is Avantor sort of a low single-digit grower in fiscal 2025? Does that sound reasonable?
Probably no surprise. We're a bit ahead of ourselves here on commenting on where we think 2025 is going to shake out. We'll keep our heads down here and work to close the year strong and then take advantage of the calendar here, work through January, and see where activity levels are and take full advantage of the data sets that we have to inform our guidance. What I would say is we're encouraged by the stability we've seen in the lab and certainly, there are some indicators here that point to things being better in 2025. The bioprocessing recovery, I think, has, although I would have liked it to have been kind of a step-change recovery, the fact that it's been multiple quarters gives us confidence that it's sustainable.
All signs are that we'll have a good year for next year with a strong jumping-off point here, exiting the year. Look, we're well positioned with the investments that we continue to make in our growth strategy. We'll come forward with our Q4 results and give you more details on how we see 2025 shaping up then.
Fantastic. With that, we're out of time. Michael, thank you for the time this morning.
Excellent. Thank you all.