Good morning. My name is Harry, and I'll be your conference operator today. At this time, I would like to welcome everyone to Avantor's third quarter 2022 earnings results conference call. To ask a question during the Q&A, please dial star then one on your telephone keypad. I'd now like to turn the call over to Christina Jones, Vice President of Investor Relations. Miss Jones, you may begin the conference.
Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Thomas Szlosek, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our investor relations website at ir.avantorsciences.com. A replay of this webcast will also be made available on our website after the call. Following our prepared remarks, we will open the line for questions. During this call, we will be making some forward-looking statements within the meaning of the Federal Securities Laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statement that we make today.
These forward-looking statements speak only as of the date they are made. We do not assume any obligation to update these forward-looking statements as a result of new information, future events, or other developments. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the supplemental disclosures package on our IR website. With that, I will now turn the call over to Michael.
Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on slide 3. As noted in the press release that went out earlier this morning, our third quarter financial results came in modestly ahead of the updated guidance provided in early September, driven primarily by the ongoing strength of our core business. In the quarter, we realized core organic revenue growth of 7.8%, led by strong performance in biopharma and advanced technologies and applied materials. Within biopharma, our bioproduction business remained strong, delivering approximately 30% core organic revenue growth. We expanded adjusted EBITDA margin by more than 100 basis points, reflecting contributions from our 2021 acquisitions, the favorable impact from growth of proprietary products, and our sustained focus on commercial excellence.
Through the first three quarters of the year, our core organic revenue growth of 7% and adjusted EBITDA margin expansion of 130 basis points exceed our long-term targets, and our free cash flow has facilitated over $800 million in net debt reduction. We remain focused on executing our long-term growth strategy, including advancing a robust innovation pipeline, investing in our manufacturing and distribution capacity, and leveraging the Avantor Business System to enhance the performance of our business. During the quarter, we had multiple new product launches to support nucleic acid, mRNA, and cell and gene therapy workflows, including cell lysis and viral inactivation solutions, and multi-compendial synthetic cholesterol. We also entered the final validation phase for the hydration expansion at our Aurora, Ohio facility to support our bioproduction customers with ready-to-use buffer management solutions.
Additionally, we completed construction and produced the first batch from our new cGMP manufacturing hub in Singapore. Looking ahead, we are updating our full year outlook to reflect our third quarter performance, $400 million of expected revenue from our 2021 acquisitions and current market conditions. I will take you through our updated guidance later in the call. Regarding capital allocation, we are concentrating our near-term M&A efforts on improving the performance of recent acquisitions. Also, in this macro environment, we think it is prudent to use our available free cash flow to reduce debt. We exited the third quarter with adjusted net leverage of 3.6 x, down from 4.2 x at the beginning of the year, and will continue to prioritize our strong free cash flows for deleveraging our balance sheet.
We remain focused on execution and are confident in our ability to navigate through the current environment, drive our long-term growth strategy, and continue to build momentum across our core business as we transition into a post-COVID environment and beyond. With that, let me turn it over to Tom to walk you through our financial results in more detail.
Thank you, Michael, and good morning, everyone. I'm starting on slide 4. Starting from the top of the adjusted P&L, reported revenue was $1.857 billion for the quarter, modestly ahead of the guidance provided in early September. Our core organic revenue growth was 7.8%, reflecting the ongoing momentum in our core business across end markets and geographies. Adjusted gross profit expanded to 35%, driven by the favorable impact of our 2021 acquisitions, strong growth in proprietary products, and ongoing commercial excellence. These positive factors were partially offset by increased cost of materials and freight. Adjusted EBITDA was $384 million in the third quarter, representing over 100 basis points of margin expansion and approximately 13% growth from last year after adjusting for FX headwinds.
Margin expansion was driven by our gross margin performance and continued focus on cost management, partially offset by investments to support our growth strategy. Adjusted earnings per share came in at $0.34, driven by adjusted EBITDA performance, partially offset by higher interest expense related to Masterflex borrowings in September 2021 and FX translation headwinds driven by the continued strength in the US dollar. Adjusted net income grew about 9% after adjusting for FX, which represented a $0.02 headwind to adjusted earnings per share this quarter. We generated free cash flow in excess of $219 million in the quarter, representing approximately 95% conversion of adjusted net income. Our adjusted net leverage declined to 3.6x EBITDA, down from 3.9 in the second quarter, underscoring the rapid deleveraging enabled by our strong free cash flow generation.
Page 5 outlines the components of our revenue growth in the quarter. Our core organic revenue growth of 7.8% was modestly stronger than expected, driven by approximately 30% core organic revenue growth in bioproduction and double-digit growth in advanced technologies and applied materials. As anticipated, COVID-related revenues represented a 3.3% headwind for the quarter, resulting in 4.5% organic growth. The inorganic contribution from our 2021 acquisitions accounted for 2.5% growth, representing only the revenue from Masterflex as both Ritter and RIM Bio lapped their one-year anniversaries in the second quarter and are now included in organic growth. Foreign exchange translation represented a 5.8% headwind, driven primarily by the strength of the U.S. dollar versus the euro, resulting in reported revenue growth of 1.2%.
As has been the case every quarter this year, our core organic revenue growth was above our long-term target of 4%-6% and stands at nearly 7% through the first three quarters of the year, demonstrating the strength and resilience of our core business. On to page 6. From a regional perspective, Americas, which represents approximately 60% of annual global sales, achieved 8.8% core organic revenue growth, driven by continued strength in biopharma and advanced technologies and applied materials. Within Americas biopharma, our bioproduction business grew double digits with strength across process ingredients, excipients, single-use solutions and serum. Europe, which represents approximately 35% of annual global sales, achieved 4.8% core organic revenue growth. Proprietary materials grew double digits, outpacing growth in all other categories.
Bioproduction grew over 30% on a core organic basis, driven by demand for our process ingredients, excipients and single-use solutions. Although industrial demand moderated somewhat in the quarter, as we indicated in early September, overall growth has been stable near the high end of our growth targets for the region. EMEA, representing approximately 5% of annual global sales, grew 15.1% on a core organic basis, driven by bioproduction and advanced technology and applied materials, both of which were up over 30% on a core organic basis in the quarter. Slide 7 shows our core organic revenue growth for the quarter by end market and product group. Biopharma, representing almost 55% of our annual revenue, experienced high single-digit core organic growth in the quarter, including approximately 30% core organic growth in bioproduction.
Healthcare, which represents approximately 10% of our annual revenue, grew mid-single digits on a core organic basis in the third quarter, driven by ongoing momentum in our medical-grade silicones platform. Education and government, representing approximately 10% of our annual revenue, experienced a low single-digit core organic revenue decline, driven by low single-digit growth in the Americas, offset by lower consumables demand in Europe. Advanced technologies and applied materials, representing approximately 25% of our annual revenue, achieved double-digit core organic revenue growth in the third quarter, driven by growth of proprietary materials, including those to semiconductor and electronic device customers. Continued strength in this end market reflects the value of the diversified application and customer mix and overall resilience of this platform.
By product group, proprietary materials and consumables offerings achieved double-digit core organic revenue growth, driven by strong demand for our bioproduction offerings as well as for our advanced technologies and applied materials and biomaterials platforms. Sales of third-party materials and consumables increased low single digits, with strong chemical sales partially offset by a moderation in lab consumables demand. Services and specialty procurement grew mid-single digits, driven by strength across all service offerings, including lab and production services, clinical services, and specialty procurement. Equipment and instrumentation sales grew low single digits across all three regions. Moving to slide 8, I'd like to provide an update on our capital allocation strategy. Since the IPO, we've been investing our available capital in the business, deploying $300 million of CapEx, $4 billion for M&A, and deleveraging by more than three turns.
We've also significantly reduced the cost of debt through deleveraging and effective interest rate management. Currently, deleveraging is our top near-term capital allocation priority. While our debt composition is 70% insulated from exposure to rising interest rates, we believe it is prudent in the current environment to focus on paying down our floating rate debt and continuing the positive trend of deleveraging. For 2023, we believe the interest rate exposure on the remaining 30% will be largely offset by the impact of deleveraging. M&A is still a key part of our long-term playbook, especially to add attractive high-margin proprietary content and increase our exposure to high-growth applications and workflows. However, the bar is high for deals in the near term given the current macro environment, and the focus of our team is on optimizing the performance of our most recent acquisitions.
I will now hand the call to Michael.
Thanks, Tom. Turning to slide 9, I'd like to update you on our 2021 acquisitions. Last quarter, there was some confusion regarding the numbers on this slide as compared to the numbers in the press release. As a reminder, this slide reflects all revenue and margin from these three assets, regardless of whether they were categorized as M&A or organic in a particular quarter. We recognize the need to improve the performance of these businesses, and I will share some of our action plans in a moment. We remain convinced that Ritter, Masterflex, and RIM Bio are high-quality assets that will accelerate our expansion in the growing biopharma and healthcare end markets. In early September, we reduced the estimated 2022 revenues from the 2021 acquisitions to $400 million.
This includes $240 million-$260 million for Masterflex, a reflection of top-line pressures related to ongoing component availability for our Peristaltic Pump category, as well as demand softness in our tubing category. Extensive customer surveying has confirmed that the key driver of current tubing demand is temporary and related to elevated customer inventory levels that are expected to normalize over the next few quarters. Masterflex has a leading market position. The installed base remains strong, and we continue to see robust demand from our bioproduction customers for our end-to-end fluid management solution. The $400 million contribution from M&A in 2022 also includes $130 million-$150 million for Ritter. Ritter had a stronger than expected Q3, driven by a modest shift in revenue from Q4, while core growth was in line with our long-term expectations.
As anticipated, Q3 results and the outlook for Q4 reflect a moderation in European industrial demand and a Q2 roll-off of COVID-related revenues. We remain confident in our ability to deliver approximately $400 million of revenue from these businesses and expect adjusted EBITDA margins of over 30% for the full year. Additionally, we are taking aggressive actions to ensure that we deliver on the long-term value of these businesses by enhancing proprietary content, driving growth through our differentiated channel, and delivering strong financial results. We have a detailed new product introduction roadmap that will enhance the proprietary content of our portfolio and capitalize on the technology leadership of the acquired assets. We highlighted the MasterSense product launch last quarter and plan to launch more than a dozen new Masterflex products next year.
At Ritter, there is a clear opportunity to augment the current product line and leverage Ritter's advanced manufacturing capabilities. We are excited about the four significant product launches planned for the first half of next year. Another important tenet of these acquisitions is the ability to drive incremental growth by leveraging our commercial reach and distribution footprint. We have trained over 75% of our sales reps on both product lines and now have a pipeline of over 2,000 unique customer opportunities. We are augmenting our sales force with technical experts to accelerate Masterflex growth, including 35 fluid handling specialists across the globe. Finally, improving the financial performance of these businesses starts at the top with strong leadership driving effective execution. We have made organizational changes to enhance accountability and operational oversight for Ritter and have engaged industry experts to lead sprint teams focused on delivering commercial synergies.
We will continue to focus on improving performance of these assets and will keep you updated as we progress. Moving to 2022 guidance on slide 10. Recall that our last full year guidance update was provided as part of the Q2 earnings call. In early September, we provided a revenue outlook for Q3 and updated our expectations of revenue from acquisitions. We are now updating our full year guidance to reflect our third quarter performance, $400 million of expected revenue from our 2021 acquisitions, changes to foreign exchange rates, and current market conditions, including softening industrial demand in Europe and inventory destocking in select lab consumable categories like liquid handling.
Starting with revenue, we expect full year core organic revenue growth of 6%-6.5% and COVID headwinds of about 3.5%, resulting in organic revenue growth of approximately 2.5%-3%. Including the inorganic contribution from M&A of 4%, or roughly $270 million, and FX headwinds of approximately 5%, or roughly $350 million, we expect reported growth of 1.5%-2% for 2022. For the fourth quarter, this reflects approximately 2%-4% core organic revenue growth and about 4% COVID headwind, resulting in flat to low single-digit decline in organic revenue.
We expect reported revenue of roughly $1.775-$1.815 billion in the fourth quarter. On adjusted EBITDA, we expect to deliver 100-125 basis points of margin expansion for the year and 50-75 basis points of margin expansion in Q4, reflecting the impact of our revenue assumptions and persistent inflation. As a reminder, fourth quarter margins only have one month of inorganic lift from Masterflex, as the business passed its one-year anniversary on November 1st. We are updating our adjusted EPS range to $1.38-$1.40, reflecting a $0.03 impact from M&A outlook, a $0.03 Impact from second half organic growth, and approximately $0.01 impact from foreign exchange.
We have reduced free cash flow expectations to approximately $800 million to reflect these factors and the additional investments we have made in working capital to ensure the continuity of our supply chain. As we wrap up, I want to reiterate that there is nothing we are seeing that changes our deep conviction about the enduring attractiveness of our end markets or Avantor's ability to continue its long-term growth and margin expansion trajectory by capitalizing on the many opportunities ahead of us. We believe our long-term financial algorithm is firmly intact. Looking ahead to 2023, we are facing some headwinds that are dilutive to our long-term growth target of 4%-6%. Notably, we do see risk in the European macro environment as well as excess inventory in select lab consumable categories.
In 2022, we expect to realize approximately $180 million-$200 million of COVID-related revenue, including $150 million-$180 million from our core business and another $20 million from our 2021 acquisitions. We plan to remove all COVID-related revenue from our plan for next year, resulting in a 2%-3% headwind to 2023 organic growth. We also plan to retire core organic revenue reporting and return to our pre-COVID convention of providing reported revenue growth and organic revenue growth. Also, we are anticipating a $200 million impact from foreign exchange, yielding a 2%-3% headwind to reported revenue and a $0.05 impact to EPS. Following our usual cadence, we'll provide 2023 guidance early next year.
Looking back over the last couple of years, we have operated in a very dynamic and somewhat unpredictable environment. As we continue to work our way through these challenging times, I'm encouraged by the long-term strength and performance of this business and the setup heading into 2023 and beyond. Where we are experiencing challenges that are within our control, we are leveraging the Avantor Business System and taking decisive actions to strengthen our business and mitigate their impact. We have a clear plan to improve the performance of our acquisitions and deploy capital in a way that maximizes value for our shareholders over the long term. We believe in the resiliency of our business and look forward to continued growth as we set science in motion to create a better world. I want to thank you for your interest in Avantor and for your continued support.
I will now turn it over to the operator to begin the question and answer portion of our call.
Thank you. To ask a question, please dial star followed by one on your telephone keypad now. Our first question is from the line of Derik De Bruin of Bank of America. Derik, your line is now-
Hi, good morning, everyone. Thanks for taking my question.
Good morning, Derik.
Sir, can we just sort of like elaborate on the two points you talked about, the European macro and the excess inventory in the system? Just can you elaborate a little bit more on those and sort of what you're seeing there? Just a little bit more color in terms of what's going on with it. I mean, didn't think that you had as much macro exposure into those markets, so any color would be helpful.
Yeah. Thanks for the question, Derik. I think, you know, relative to Europe, I think it's probably important to highlight that our European business performed actually pretty well in the third quarter. We grew mid-single digits in the quarter, which is certainly in line with our expectations. As you know, remark, we do have a very diversified portfolio that covers a number of end markets, including biopharma and healthcare, which continue to perform well and run at a high level for us. Of course, the situation in Europe is a bit dynamic and you know, something we're following pretty closely.
As we indicated in early September, within our industrial exposure that is closely linked to kind of production output in application or end markets such as, you know, oil and gas and pet chem, for example, there are pockets of softening there that you know, certainly were reflected somewhat in the third quarter. I think as we look into the fourth quarter, we see you know, many of those same pressures continuing. Regarding you know, consumables softness within the laboratory environment, that's a, I think, an element that we see both in Europe as well as in our Americas lab business, and that's probably not confined to any particular end market.
We see that, you know, pretty broad-based within, you know, a certain set of consumable categories that were severely constrained during the pandemic. You know, as we look back here to combat some of those constraints, you know, it's clear that customers opportunistically built inventory outside the normal procurement channels and, you know, over the course of the pandemic, you know, brought their inventories to an elevated level. This would be, Derik, for products like, you know, manual pipette tips and plates and
You know, things like Centrifuge Tubes, for example. Now that across most of those categories, supply chains have normalized, raw materials are more available, lead times have been restored, you know, we see customers being more comfortable in drawing down inventories back to, you know, more normal levels, destocking, if you will. It's a dynamic that I think we see certainly, you know, somewhat in Q3 and persisting probably for the next couple of quarters, as those supply chains return to normal stocking levels. Certainly we view it as temporary. The engagement that we have with our customers would certainly indicate that's the case. You know, we're confident that the fundamental end market demand across all of our geographies and end markets remains strong.
Yeah. Just to clarify some of your initial thoughts on 2023. You still sort of see that 4%-6% as the long-term algorithm, right, on the business. I mean, is, you know, when you sort of think about 2023, you know, I mean, if excluding headwinds, I mean, that would be the right place to start, right? Sort of like total organic 4%-6% because you're not gonna break out the core anymore, right?
Yeah. I mean, as we approach any year, we of course start with our, you know, expectations around our long-term algorithm. I indicated in my prepared remarks, our conviction around our ability to continue to grow at those levels is firmly intact. If we look at the first three quarters of the year, we're still running outside the high end of that range. I think your perspective is spot on there, Derik. As we look ahead, you know, what we try to do here today is just provide, you know, a few data points that we're certainly aware of around how we see COVID being handled for next year. Certainly from a reported standpoint, you know, FX is gonna be a bit of an issue.
We see continued strength in our end markets, save, you know, a couple of these headwinds that we've referenced, you know, here in the second half of this year that, you know, they're likely to persist. The magnitude of which is a little bit unknown at this point, you know, around Europe, and how quickly some of the consumables inventory comes out. Around those, the dynamics for those products are, you know, short cycle as you're aware, kind of book and ship type order dynamics. We'll certainly take the benefit of the next, you know, several months here to see how that evolves here as we work through the fourth quarter.
You know, we'll bake that into our outlook heading into the New Year as we get into you know, the early part of next year. You know, I would say the core business continues to be strong and will reflect you know, these headwinds as we get a little bit more clarity on those moving forward. Your point around our conviction around 4%-6% long-term growth is accurate and, you know, we view it as still intact.
Thank you. Our next question is from the line of Vijay Kumar, Evercore ISI. Vijay, your line is now open.
Hey, guys. Thanks for taking my question. Michael, maybe my first question on this fourth quarter guidance. I think the core organic ex-COVID headwinds, we're looking at, perhaps 3.5%-4%, somewhere in that range. That's a comp adjusted slowdown of 800 basis points. What portion of that is this inventory stocking versus a slowdown in Europe? You know, when you think about the first half of next year, you know, given your commentary about, you know, these stocking dynamics take about six months to flow through, should we expect a similar magnitude of impact in first half of next year?
Thanks for the question, Vijay. Good morning. As you've seen, we've delivered more than 7% core organic growth to date, which certainly reflects the ongoing strength of the core business and especially our biopharma platform. You know, we've reflected you know some of the headwinds that you've referenced around European industrial exposure and, you know, these liquid handling consumables. Our expectation for Q4 core organic growth is in that you know kind of 2%-4% range. It is important, I think if you're looking at kind of a sequential comparison to Q3, you do need to adjust for the impact of a day's headwind that we have in the fourth quarter.
There's a couple 100 basis points, in fact, you know, with fewer, you know, billing days in Q4 this year as compared to last year. When you know, kind of consider that, you'll see that our guide for the fourth quarter is certainly square in the middle of our long-term, you know, 4%-6% algorithm. You know, as we look ahead with only two months to go in the year, we're certainly well positioned to deliver on the guidance that we've outlined today.
In terms of, you know, the step down from, let's say Q3 or maybe even where we've been this year, beyond just the structural headwind of a fewer days in the quarter, you know, the impact that we're reflecting here on Europe and the lab consumables headwinds is you can probably think about that as roughly equally split, Vijay.
Thank you. Our next question is from the line of Tejas Savant of Morgan Stanley. Tejas, your line is now open.
Hey guys, good morning. Michael, a couple of quick ones for you here on first on pricing and then on margins. I mean, on pricing, can you just talk to us about your confidence in your ability to pass through, you know, the inflation that you're seeing on your cost structure, particularly on the third-party side of the business in 2023? Then, you know, given the moving parts that you laid out here between, you know, the macro and the excess inventory and the COVID coming out and the FX, how should we be thinking about sort of margin trajectory in 2023, at least at the qualitative level?
Yeah, good morning, Tejas. Thanks for the question. You know, maybe starting firstly around margins, would reiterate the 130 basis points of margin expansion that we've delivered to date, which is obviously well above our long-term average of 50 - 100 basis points. The key levers that drive that are certainly how we manage price relative to, you know, the COGS inflation that we take on, as well as, you know, the mix impact of outsized, you know, growth of our proprietary materials platform. Clearly, those levers have been, you know, fully intact and are certainly reflected in the margins that we've delivered.
The team has done a really terrific job, I think reflecting the impact of inflation in our pricing. You know, we've done a nice job, I think, working collaboratively with our customers to get that, you know, reflected in a productive way. As we look ahead, I don't think there's anything about the current inflationary environment or the pricing environment that would cause us to change our views in terms of the contribution of that lever to margin expansion going forward.
In terms of, you know, the margin, you know, profile for next year, clearly we'll not have the incremental inorganic impact from our 2021 acquisitions, as all of those will have, you know, become fully organic here in the fourth quarter. You're certainly targeting that 50-100 basis points range. Our view on inflation, you know, would indicate that it's gonna be certainly higher than normal, and, you know, we'll have to get that reflected up and down the P&L. You know, we'll look at the volume assumptions and the impact on, you know, operational leverage, which is an important, you know, element here.
You know, we'll obviously have to reflect the growth off of our, you know, the assets that we've purchased here. I think, you know, that will be our starting point. As we work through the quarter here and complete our planning going into next year, we'll see where we land. You know, margin expansion of 50-100 basis points continues to be our expectation over the long term. You know, with some of the COVID revenues, you know, and the magnitude of those coming out next year and giving them a lot of those proprietary content, you know, we'll have to, you know, put all that together and see where we land here.
Certainly the margin expansion engine is, you know, still charging ahead, you know, fully intact.
Thank you. Our next question is from the line of Brandon Couillard of Jefferies. Brandon, please go ahead.
Hey, thanks. Good morning. Mike, a couple follow-up questions on, you know, the steps you're taking around Ritter and Masterflex. When you talk about improved accountability, what does that exactly mean, and what was suboptimal about how you approached that before? Then the 14 products Masterflex plans to launch next year, how does that compare to its historical cadence? Is that substantially, you know, higher, or is it more of a normal year?
Yeah. Thanks for the question, Brandon. Appreciate you joining this this morning. Yeah, I think, you know, where I'd start is just, you know, reiterating, you know, our perspective that, you know, firstly, these are, you know, super high quality assets that we've purchased, all three of them. You know, our conviction around their long-term contributions is, you know, as high as, you know, as the time that we purchased these assets. You know, particular to Ritter, you know, I think we've spent some time talking about the strategy for that business is to, you know, transform it from an OEM-only model, and to leverage our, you know, strong customer access and our channel to position the capabilities directly with the end customers.
You know, we're very active in how we're doing that with you know, very targeted you know, sales activities, you know, a lot of training, you know, of our reps to help them you know, position these products you know, with our customers. You know, we've got you know, several thousand customer projects in flight. I think the lead time to drive the qualifications has certainly been impaired a bit by you know, the rapid roll-off of COVID and the impact on you know, inventory through the channel for these liquid handling consumables that we produce. As we you know, kind of transition from this year and into next year, we see that you know, rolling off, which you know, should give us a bit more traction.
From an accountability standpoint, you know, the business has been tucked in under our, you know, regional structure, and, you know, we've, you know, recently made some changes to pull it out, and manage it alongside, you know, a dedicated, you know, a set of, leaders that run, you know, some of our proprietary assets to give it a more dedicated, you know, focus, and, you know, help, you know, give it, a bit more bandwidth and attention. From a new product introduction standpoint, I would, you know, indicate that historically it was a, you know, fairly, you know, narrow and somewhat of a nascent, you know, roadmap that was in place there, you know, just given the focus on, you know, servicing the OEMs.
As we now leverage the high precision consumables capabilities that they do have and interact directly with our customers, we see a lot of opportunity to expand the portfolio to serve a broader, you know, set of our customers' needs. The pipeline's been invigorated to a large degree. Many of these investments that are necessary to support the launches that I referenced, you know, were initiated, you know, even up to 12 or 18 months ago. The timeline there to launch is really governed by, you know, just the timeline to put the assets in place to produce the expanded portfolio.
On kind of a rolling basis through the second half of this year and through the first half of next year, you know, a set of these NPIs come online and will certainly help strengthen our positioning with the end customers.
Our next question comes from the line of Dan Arias of Stifel. Dan, your line is now open.
Hey, good morning, guys. Thanks for the questions. On Masterflex, it sounds like $240-$260 for the year is still the outlook there, which I think implies about a $20 million or so step up sequentially from 3Q. Can you just talk to the expected acceleration there and the extent to which there's a seasonality element that you think might play a role?
Yeah, thanks for the question. As we talked a little bit in early September, you know, Masterflex revenue in the third quarter was, you know, impacted by, you know, some of the persistent supply chain challenges we're having around our Peristaltic Pump category, particularly around component availability and things like, you know, printed circuit boards. You know, I think we'll continue to, you know, deal with some of the challenges in that supply chain. We have a really terrific order book and backlog for that category. As you know, some of the supply chain challenges ease on that part of the offering, you know, we'll continue to see a step up in growth of that category.
The other key challenge in the business, you know, kind of linked to this theme of, you know, consumables destocking, you know, related to supply chain security concerns and, you know, that kind of were persistent throughout the pandemic. There was certainly a softness in the tubing demand associated with these platforms that, you know, started to become evident in the third quarter, and we'll see that, you know, continuing into the fourth quarter. Nothing structural. You know, we're obviously pretty close with our customers on this and, you know, I think you'll start to see them incrementally, you know, returning to the market, you know, here in the fourth quarter and as we move into the first half of next year.
You know, the guidance that you referenced, you know, we're probably, you know, focused more on the lower end of that, you know, range as we look ahead, which does imply a probably a modest step up here in the fourth quarter. Which is, you know, linked to, you know, a bit better, you know, supply chain conditions perhaps and, you know, similar, if not, you know, incrementally better, you know, demand in the tubing category. We'll be in and around that, probably the low end of that range on Masterflex.
Hey, Dan, this is Tom. Just to add a little bit more on your question on seasonality. As you know, one-third of the Masterflex business is, you know, the pumping and the rest of it is the consumables. 2/3s is consumables. You know, on the pumps themselves, we've got a decent open order book subject to the constraints we talked about on the supply chain. But as you would expect, Q4 tends to be a little bit, you know, bigger quarter from a capital perspective if your customers are, you know, releasing or consuming the rest of their capital budget. That element of it, you know, supports the incremental as well.
Great. Our next question comes from the line of Dan Brennan of Cowen. Dan, your line is now open.
Great. Thank you. Thank you guys for taking the question. Sounds like it's a one-question Q&A. Maybe I'll ask a kind of multi-parter, if you don't mind. Just so Europe obviously was solid this quarter, mid-single-digit. You did note obviously some of the pressure points there. Just kind of how are you thinking about like kind of what's assumed in 4Q and the jumping off point as we look ahead? And then on bioproduction, obviously a really solid quarter, again, 30%. Just similarly, kind of what's the right way to think about that growth rate? Obviously, that's running pretty hot right now. And as we look out in 4Q and beyond, kind of what's the right trajectory there?
The final one would just be, can you just remind us what is an Avantor cyclical exposure? Like, how much of your business goes into end markets you consider cyclical? I know there's different definitions today, given some of the semi business is probably more structural growth, but just if you can help us define that. Thank you.
All right. I'll do my best to stay on track there with your multi-part question. Maybe taking them in the order I've written them down here. Your point around you know bioproduction is an important one. That's obviously been a really important driver of our growth and will continue to be so. You know year to date we're running off you know 20%. We had a great quarter in the third quarter with more than 30%. You know we continue to experience you know a healthy end market demand for our offerings and certainly are confident in the industry drivers behind that, that we see as persisting.
We've got a super strong order book that's at this stage by more than three times our historical level, and we've got a historically high backlog as well. Obviously, we're making a lot of investments in our supply chain. Raw materials are becoming a bit easier to come by, and we're really focused on improving, you know, service levels and lead times to our customers. As I look ahead, you know, we're poised to have another strong fourth quarter and, you know, we'll deliver good momentum going into next year as well. As it pertains to Europe, obviously there's a lot of noise around Europe at a macro environment.
When I look over the last, you know, couple of quarters on a core basis, which is probably the right way to think about it given, you know, our COVID headwinds are a bit more allocated into Europe, given you know we did more testing related revenues there in 2021 than any other regions. But on a core basis, you know, we've been running the last couple of quarters kind of right in the middle of our expectations for that region of mid-single digits. Which, you know, I think compares pretty favorably to how the region has performed historically. You know, continue to get you know really good traction from a pricing perspective.
We do see, you know, strong momentum, you know, particularly in biopharma, continuing. Where I'd say we've seen, you know, probably the most pronounced headwinds has been a little bit in the academic sector in Europe, around some of the consumables destocking that we've referenced, and then certainly within our applied markets. The thing I like about our business at a high level is, you know, we talk a lot about it being resilient, a highly recurring revenue profile, and that's certainly the case, even within our applied markets. It's a little bit of a mixed bag there. All of the production platforms where we would add content specified into those platforms continues to run on a high level.
Some of the more GDP or, you know, macro sensitive applications like the QA/QC workflows that we would support in things like oil and gas or pet chem are obviously, you know, being impacted by, you know, the price of energy and oil and some of the slowdown that you see in some of those end markets. The diversification of the platform, I think comes through as we, you know, again, reported the double-digit growth in our applied markets overall. That's, you know, the pockets within Europe that probably most impacted are those as I've just indicated. From a cyclicality perspective, you know, couple of comments I think to make there.
One, I think it's important to recognize that for the lab research, you know, business and the diagnostic workflows that we would support in our healthcare application areas, and generally the work that we would do around QA/QC, it is a function of the number of billing days in a particular quarter. From a seasonality standpoint, you do have some influence in terms of, you know, Q4 tends to be a bit lighter in terms of number of days, you know, compared to some of the other quarters. That's certainly true of this quarter. In addition, we have one less billing day this year than we did, you know, even last year in the fourth quarter.
You get that somewhat offset by, you know, the so-called year-end budget flush, which, you know, we've baked in as, you know, being normal for this year. Absent those factors, the business doesn't have a lot of cyclicality to it, you know, which I think adds to the resiliency and, you know, just the building off of the recurring nature of our revenue profile and the consumables focus of our portfolio. You know, absent major shocks in demand or macro input impacts, you know, tends to be a pretty steady business, obviously.
The other thing, Dan, just to point out back to Europe is, you know, we're not talking about any, like, significant step down. I mean, there still is growth. It does moderate. I mean, the first three quarters of the year, we were, you know, 5%-6% on a core organic basis, and we've modeled that, you know, lower single digits in Q4. It's a moderation and not anything else.
Thank you. Our next question is from the line of Jack Meehan from Nephron Research. Jack, please go ahead.
Thank you. Good morning. Just wanted to focus on the balance sheet, make sure we're all aligned around interest expense expectations. What does the fourth quarter guide assume for interest expense? If we follow the rate curve and assume the debt paydown in 2023, just where would interest expense land in 2023?
Yeah, thanks, Jack. Couple things to point out. I know there's been some sensitivity to this. I mean, our model continues to work on debt. We've actually paid down over $500 million of debt in the current year. You know, we've taken actions to fix our interest rate exposure. I mean, we're probably at roughly 70% fixed when you consider or incorporate you know, the impacts of the hedging that we've talked about.
We've been able to, over the course of the year, maintain, you know, our interest expense exposure in that, you know, $260 range, in line with the original guide, despite all the, y ou know, the increases you've seen.
It may be a little north of $260, you know, by the time the year rolls out, but it's been well contained, particularly in light of those increases. For next year, you know, we've talked about a shift in short-term priorities of delevering and to more delevering, and we'll continue to do that. I think the impacts of delevering will give us a nice offset to impacts of the rising interest rates on that 30% of the portfolio that's not fixed. When you factor that in, I would expect us to continue to be able to maintain interest rate expense below $260.
We'll give you more refined guidance on that as we give the 2023 guidance.
Thank you. The next question today comes from John Sourbeer at UBS. John, your line is now open.
Hi. Thanks for taking the questions. Just maybe a little bit on M&A here. You know, it sounds like you're not gonna do any deals here over the near term, but the deal model hasn't changed. I guess, you know, what would it take for the company to become more active in M&A over the next 12 months? Any learnings, additional learnings you can provide from the recent deals as you integrate them, as you look to potentially do more on M&A? Thanks.
Yeah. Good morning. Thanks for the question. As I think Tom indicated in, you know, his prepared remarks, M&A continues to be an important part of our playbook and our long-term value creation, you know, story. Certainly something we're committed to doing. You know, as you have seen us announce here in the last couple of quarters, you know, we're continuing to invest in enhancing our capabilities there. You know, Kitty Sahin has joined the team and really hit the ground running and brings an incredible depth to the team both around organic as well as inorganic, you know, growth experiences across the core end markets that we're focused on.
She continues to build out her team and start to refine our playbook here. I think we're excited about the capabilities that we'll have to support our strategy going forward. That's certainly a big part of the focus. Her and her team are actively engaged in supporting us with the integration and synergy capture activities with the deals that we concluded last year in helping support some of the sprint teams that I mentioned that are meant to drive an acceleration in our commercial synergies that have been identified in those businesses.
In terms of, you know, what would cause us to, you know, be able to, you know, conclude a deal or when we might be ready to conclude a deal, you know, it's a challenging macro environment for sure. Debt markets are, you know, more than dislocated at the moment. You know, there continues to be, I think, a pretty meaningful valuation disconnect in the market, particularly for, you know, a lot of the private assets that would be in our pipeline. You know, with, you know, some of the, you know, macro concerns that are out there, together with, you know, some of the challenges around the debt markets, I think it's prudent in our case. You know, we've made great progress on deleveraging.
You know, we'll finish the year 3.5x levered or below, and we'll be able to drive that down meaningfully in the coming quarters as we apply free cash flow to do that. That's an important element of what Tom just described around managing interest rate expenses. You know, look, we'll continue to drive pipeline activity and enhance our capabilities and watch the markets closely. You know, I don't know that we necessarily have a particular time on the calendar mark that would trigger us to be more active here. We'll continue to watch the markets as they develop, and we'll continue to work our pipeline.
As Tom mentioned, the bar is high here in the near term, and we think we can add a lot of value to our shareholders by you know deleveraging and managing our interest costs.
Thank you. Our next question is from the line of Tim Daley of Wells Fargo. Tim, your line is now open.
Great. Thank you. I just wanted to dig a bit more into the moving pieces around the margin outlook. You know, Michael, you described two major factors in 2023 that we've gone through a lot in this call, impacting the growth framework. You know, the two big ones are European macro softness and inventory destock. Just thinking about those two buckets, you know, Europe is the lowest margin region in your business. Outside of Masterflex, correct me if I'm wrong, it seems like most of the destocking is happening within the legacy VWR portfolio, which, you know, is lower margin than the proprietary book. You know, these two pieces, you know, being kind of the headwinds to growth would suggest a bit of a tailwind to margin.
How should we think about, you know, those two pieces, the other moving pieces, obviously, you know, heading into next year and then, you know, relative to the kind of margin accretion framework that you guys have for a, you know, multi-year basis?
Yeah. I think there's probably a couple other factors worth pointing out. You know, the takedown of more than $200 million of COVID-related revenues in the year, which does bring with it a fair bit of proprietary content, is important to consider and the impact that that will have on margin expansion. You know, just on a comparative basis, you know, we're not gonna get the inorganic lift from M&A like we experienced this year. Important to keep that in front of you as well.
You know, the other item here is just around inflation and kind of what the spread is that we can drive from a device relative to that inflation, which you know, I think we're confident that will be positive and you know, I think we're still kind of refining those models to see how much expansion that's gonna drive. It'll certainly be an important, you know, contributor for the next year. Those are probably the factors. You know, you mentioned you know, some of the revenue headwinds around liquid handling consumables and you know, maybe some of the industrial concerns in Europe. You know, as I look ahead, I think we'll certainly see margin expansion next year.
You know, given the confluence of these factors, you're probably, you know, on the lower end of our, you know, historical algorithm. We'll see where we land here as we, you know, work through the next couple of months and, you know, come out with some more fulsome guidance early in the new year.
Great. Our next question is from the line of Andrew Cooper from Raymond James. Andrew, please go ahead.
Great. Thanks, everybody, and a lot's already been asked. Maybe just diving in on one more piece in fourth quarter. You know, you mentioned the $20 million contribution from COVID in the acquired businesses this year, but obviously that feels like it's getting folded into the organic piece for 4Q. So can you give us a sense for how much, you know, quote unquote "COVID revenue" is maybe coming out there? And then just on the M&A at a higher level, obviously the EBITDA margins from 3Q are nice, year to date are nice, but as we think about some of these headwinds in those businesses, how do you feel like you're doing on the margin side there, especially with some of the investments that are coming? Is that stable? Is it on plan? What should we be thinking about for 2023?
Yeah. Andrew, you're talking margins specifically on the acquisitions?
Yes. Correct.
Those continue as you've seen this year. The gross margins on those proprietary products in both Ritter and Masterflex have far superior gross margins to Avantor. I mean, they scale very, very nicely. If we can get the sales engine going in each of those, you'll see some nice accretion. The growth rate there continues to be a nice driver for us. Overall, the EBITDA margins on each of them, you can see the impact. They're in the mid-30s, if not approaching 40%. Definitely intact. Again, the volume and the scale on that is pretty important.
Back to the, you know, the COVID question and on the the COVID revenues. You're right that, you know, the additional COVID exposure from, you know, the two deals gets factored into our overall COVID headwinds at the point that each of those deals becomes organic. For Ritter, it was June 12th of 2022, it reached its one-year mark. Going forward from that point, you know, you would, you know, wanna reflect the reduction in COVID-related revenues for Ritter. Same thing for Masterflex. That happens on November 1st. The additional impact is more so related to Masterflex than Ritter. You're right, you got the numbers roughly right there.
Thank you.
Thanks. Our last question of the day comes from Matt Sykes from Goldman Sachs. Matt, your line is now open.
Great. Good morning. Thanks for squeezing me in. Just one long-term question. Michael, as you think about 2022 with it, you know, sort of in line of sight and as a jumping off point, could you just talk about sort of how you feel about the progress towards the 2025 targets you set out last year at the Investor Day? You know, 23% margin, $2.40 EPS, $9 billion-$9.5 billion in revenue. Just, you mentioned the growth algorithm's intact, but obviously there's gonna be a lot of macro challenges you also outlined. Maybe can you just kind of talk through how you're thinking about those 2025 targets you had set out?
Yeah, thanks for the question, Matt. It's certainly an important one. As we think about our long-term algorithm, mid-single-digit organic growth, margin expansion of 50-100 basis points, and kind of mid-teens EPS expansion, you know, coupled with, you know, really strong, you know, cash flow and high conversion, I mean, that's the sense of the model that we're focused on and running. As I've iterated a couple of times today, there's nothing that we've seen in the end markets or experience of this year that would cause us to change that.
Clearly our growth strategy and the investments that we're making would have us, you know, looking to find ways to even, you know, accelerate and move, you know, higher than the low end. At some point, hopefully we'll push those, you know, targets even higher. But, you know, as we're sitting here today, that's the algorithm that we're working, and you see it, you know, playing out even through the first three quarters I think sort of, you know, well in line with that algorithm. There's nothing around that that changes.
Obviously, you know, the jumping off point here as we, you know, work through the COVID takedowns and some of the macro pressures and such, you know, could influence the absolute, you know, targets that are out there. You know, something we'll revisit it, you know, probably as in line with another investor date, you know, so at some point perhaps later next year. You know, I think the key point here being mid-single digit growth, strong margin expansion, strong flow through to EPS is clearly in sight here, and the model is in fact, you know, running on the high end of all those elements today.
Great. I'm afraid we have no more time for any further questions, so I'd like to hand back to Michael Stubblefield for any closing remarks.
Yeah. Thank you. Thank you all for participating in our call today. As I close, I'd be remiss if I didn't express my gratitude for the ongoing efforts of our nearly 15,000 associates around the world that inspire me every day with their commitment and their contributions to our business and to our customers. I'm confident in the strength and resilience of our business and look forward to updating you when we meet next. Until then, take care and be well, everyone.
This concludes Avantor's third quarter 2022 earnings results conference call. Thank you all for joining, and you may now disconnect your lines.