Joining us. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. I'm excited to host for our next session. We are joined by Avantor, and we have Michael Stubblefield, President and CEO, with us. Michael, thanks so much for being here.
Yeah, Michael, thanks for having us. We're happy to be here today.
Forum will be the usual fireside chat. Just to kick things off, let's talk about first quarter results and how that played out. I think it came in a little bit below investor expectations. Any comments you want to make in terms of, at a high level, what you saw in the quarter versus your internal expectations versus your plan for the year?
I think to start, what I'd just reiterate is just our confidence in the strength and resilience of our platform. If I think about our lab solutions segment, we have differentiated capabilities, a broad and expanding portfolio, and a supply chain that enables us to serve more than 300,000 customers reliably around the world. In our bioscience production segment, we have a leading bioprocessing franchise, and we are the leading supplier of medical-grade silicone formulations. In thinking about our financial results over the, certainly the first quarter and even back into 2024, I think you see strong margin execution, best-in-class free cash flow conversion, and earnings in line with our plans and our targets. I think that's notable, and I think it speaks to our team's ability to execute in a relatively challenging environment. It also underscores the impact of the structural cost actions that we have taken.
On the first quarter call, we talked about some decisive actions that we're taking to stimulate our top line, even in the midst of a challenging macro backdrop. Corey Walker has joined the team to lead our lab solutions segment, and he's leaning in aggressively to evaluate all aspects of our strategy and our execution. He's partnering very closely with our commercial teams to not only retain existing accounts; we highlighted the extension of our Regeneron contract in the quarter, but also aggressively go after new accounts in this environment. Quite a number of actions that have been in flight now for a couple of quarters around differentiated supply chain performance, expanding our portfolio with innovative new partners, as well as investments in our digital capabilities and pricing. Those will certainly improve the top line as we move forward.
We highlighted some incremental cost actions that we've identified that will play out over the next several years.
Okay. All right. A lot to unpack there. I'll dive into those over time. The other topic I want to touch on was the other big change announced a couple of weeks ago was the CEO transition. I mean, at a high level, can you talk about how that decision came about? Why is now the right time? Just how do you think about that playing out?
I've led the Avantor business now for a bit more than 11 years. As you can imagine, the board and I have had regular discussions around succession planning. When I think back to when I started, the business was just a bit over $400 million in revenue. We have touched $7 billion here more recently. I've had the privilege of leading the business through a successful IPO, orchestrating our organization to respond to the pandemic, and we're incredibly proud of the role we played there. More recently, we have stood up a new operating model that's essentially complete. There's a lot I'd like to do both personally as well as professionally still. It felt like for me, it was a natural time for a transition.
When I think about it from the business's perspective, we've highlighted the work we're doing to look at our strategy over the long term. I do think having a fresh perspective in that context will be helpful for the business. The board and I took a look at it and agreed that now would be a good time to announce this. It gives us a long runway for us to drive a smooth transition. You can certainly count on me to run through the tape and continue to serve as the CEO until my successor is named.
On that long runway for the transition, how should we think about timing? How far along in the search is the board? Any indications?
Yeah, so nothing really incremental to add beyond what we announced a couple of weeks ago, which is the board has initiated a process. They've got a retained recruiter that's now been in the market for a number of weeks. Anytime you announce these things, you certainly don't want to draw it out longer than it needs to be. I know both for the organization's perspective as well as our investors, I'm sure the board will move expeditiously as they can. Certainly, we've got the benefit of time to ensure that we get the right candidate in here with the right track record and focus on growth and value creation.
You mentioned that track record. Is there anything in particular that the board is looking for, whether it's internal candidate, external candidate, industry expertise, just sort of what's the right background to be the next Avantor CEO?
Yeah, certainly do not want to get ahead of them on that. We have a talented team internally, and we have indicated that they are also looking externally for the right leader. Given where we are at today, a growth mindset is critical. An innovation background, focus on execution and delivering results and creating tangible value, I think, are all going to be important attributes of the next leader, for sure.
Okay. Okay. All right. Going back to some of the macro and policy things that we talked about that have happened over the last couple of months, I want to touch on tariffs. Sort of you gave a lot of color on what the tariff exposure could be in terms of COGS to China, modest in comparison to the rest of the world. Could you talk a little bit more about your methodology or your thought process for tariff impact to Avantor this year, mitigation strategies against that, and just sort of how that's being implemented over the course of the year?
I think we could all agree that it's a dynamic situation, as underscored by the announcements yesterday on U.S.-China trade agreements. Let me just clarify for how we see tariffs as we sit here today based on the agreements that are in place and the rates that are in play. Our biggest exposure is to imports from China into the U.S. We size the COGS exposure that we have on that trade lane. Based on the rates that were announced yesterday and that are now in place, at least for the next 90 days, for the balance of 2025, I'd probably size that exposure at roughly $20 million-$25 million, somewhere in that range. More modest exposure to the rest of the world probably adds another $5 million or $10 million of exposure.
Net net, as we sit here today, based on the rates that are in place, I think about our exposure in that $30 million range. If you convert that to an EPS, that's probably $0.03-$0.04 cents if you were unable to mitigate any of it. Now, to be very clear, we did not incorporate any headwinds into our earnings in our updated guide because we do not think there will be any. We are incredibly confident about our ability to offset these headwinds through a number of specific levers that we think are unique to Avantor. Firstly, I highlighted earlier our broad and expanding portfolio and our global supply chain. That is where we start with our customers.
That's the focus that we've had with our customers over the last number of months as this topic has evolved, is trying to be very transparent with them about the goods that would be impacted by tariffs and making sure they understand what the potential alternative products could be or sourcing arrangements that we would have for them to help them mitigate the exposure to the tariffs. Secondly, we have an incredibly sophisticated pricing framework, and we have the flexibility within our commercial relationships. If necessary, we can certainly pass this through. That's kind of how we're framing it with our customers, quite honestly, is, look, we have alternatives. We're being very transparent about what those alternatives will be.
If either you do not like the alternative or in the cases where there is not an alternative, if you still want to buy, here is the price that you are going to have to pay. I think that has worked well with our customers. Now that at least for the short term here, we seem to have a little bit of clarity on how China is going to play out, I am sure we will be able to move forward here in the coming weeks with more specificity around, is the customer ultimately going to choose an alternative product? Are they okay paying the higher tariff? Lastly, we have taken a lot of cost actions over the last couple of years, and certainly 2025 will be another strong year of execution on that front.
That will also help offset some of the and help mitigate some of the impacts that we see coming from tariffs. Net net, we do not think that we will have any headwinds accrue to the bottom line, which is why we have not incorporated anything there. The other side of it is on the revenue side. We think that it is likely that our imports out of the US into China, which are relatively insignificant, we have essentially in the second half of the year, as we have burned down that inventory, we have taken that to zero. That is reflected in our current guidance. We have not tried to speculate on what decisions our customers are going to take on whether to buy an alternative product or to pay a tariff-impacted price.
To the extent that they do end up paying some of the tariff-impacted prices, that would be a little bit of a tailwind to the top line, but we've not tried to reflect that in our current guidance.
Okay. Just to clarify that, that $30 million you talked about earlier, is that a net income number or a COGS number, revenue number?
That would be a COGS number that, if unmitigated, would flow through to EPS. I gave you the range there. In the worst of cases, it would be $0.03-$0.04. To be very clear, we do not anticipate that. We are quite confident we can offset that.
Okay. And that's as of the yesterday new rates of 30% to China, 10%, right? 30, 10%?
Exactly. Exactly.
Okay. That is the biggest area that you're concerned about, is US-China.
That's the bulk of it. As we highlighted on the first quarter call, that's the biggest exposure that we have. It's roughly 2% of COGS. That's about $20 million, as I said. The rest of the world is relatively smaller by comparison, and maybe it's another $5 million-$10 million to get to the $30 million.
When you think about, you outlined various mitigation, whether it's cost actions, alternatives, price, et cetera, as we think to 2026 and beyond, there's no reason that you shouldn't continue to be able to mitigate that. None of this is sort of temporary, and you're not going to have a surprise hit next year.
No. I think we would agree to that framework. We're being very transparent with our customers on what the optionality is to the extent that they choose to switch to products that'll continue to flow through. If we have to put tariff surcharges in place or incorporate that into pricing and the tariffs persist into 2026, then that mechanism will survive as well. No, I think we feel good about the levers that we have to offset this, not only in 2025, but beyond.
Okay. Switching to the organic guide and sort of your expectations for markets for the rest of the year, you updated the fiscal year 2025 guide on the call, organic sales decline of - 1% to + 1%. Can you talk about what's implied there for BPS and bioprosthetic specifically versus LSS? Just sort of what are the moving pieces there? What are the market conditions that rolled up to that new guide?
Yeah. When we put out the original guide, it was the day before some of the policy changes were announced on NIH and funding. We did not anticipate that as we got into the year. Obviously, that did impact how the first quarter played out. Consistent with how we have guided last year and even coming into this year, we are not trying to call incremental downside that we cannot foresee. By the same token, we are also not trying to anticipate a market recovery that we do not have line of sight to. As you know, we have, from a structural standpoint, relatively little forward visibility just based on the shape of our order book. Particularly in our lab segment, it is more of a book and ship type framework.
The guidance that we have now on a full year basis does contemplate the rates that we were seeing as we exited first quarter, persisting through the balance of the year. Similarly, on the bioscience side of things, there was a little bit of a couple of pockets of weakness in the first quarter that we do not think are going to play out that way on a full year basis. We have just applied normal seasonality to that part of the business, which means Q1 was the low point. It gets a little bit better as you move through the year. We have incorporated, obviously, the number of business days in each quarter, as well as just the visibility we have on the order book itself.
The way that it plays out then at the enterprise level is about 49% of our revenues on the full year basis are in the first half, 51% are in the second half. Very similar to how we've thought about this in previous years.
You called out some of those pockets of weakness in the first quarter that you do not expect to continue through the rest of the year. Can you expand on that?
Yeah. The primary one in our bioscience business was in the controlled environment consumables. That's a part of our bioprocessing platform that's important in maintaining the integrity of the clean rooms that these therapies and these molecules are produced in. We did see some modest levels of destocking there and inventory optimization in the quarter. Rates have improved as we've kind of moved from March into April, as we talked about on our call. We have seen that continue to improve as we've moved into the month of May as well.
Why do you think that controlled environment consumables was experiencing that destocking? That's not something we've really talked about in the past, and it didn't really jive with anything in terms of bioprocess demand elsewhere. It seemed like a really unusual move. What do you think was driving that?
A couple of things I'd say about this category. First of all, it's a staple. It's a classic pick and shovel kind of product for the tool space and for our customers. They can't run these clean rooms without the products and the services that we provide in that environment. They are part of our customers' SOPs, and in many cases, they're also part of the regulatory filings. It's an incredibly steady category for us. Think mid to high single digits on a steady state basis. In Q4 even, we drove high single digit growth in that category. We were certainly surprised as we got into the quarter to see order rates drop off. It wasn't widespread.
It was in a handful of accounts where I think they made some decisions based on where they were at from an inventory standpoint that played out as a bit of a headwind for us in the quarter, but nothing that we see as structural or very widespread. As we've monitored the rates moving from March into April and May, we see it improving each day.
You talked about not expecting any particular recovery nor any further weakness through the year, but your EPS guide, I think for the year is mid to mid single digits. It is a pretty meaningful acceleration from the first quarter. Is that really just tied to this controlled environment consumables? Is that the only difference between what you saw in Q1 versus your expectations for the rest of the year?
Yeah. Our guide coming into the year was mid to high single digits for bioprocessing. We have scaled that back to mid single digits to take into account the pockets of weakness we saw in the first quarter, which we do not see persisting. We are incredibly bullish on this end market. We think the end market fundamentals are incredibly strong. Approval rates of new therapies, production levels are up. Our order book now for quite a number of quarters, even going well back into last year, continued to outpace our revenues. We saw that in Q1. We see that order book strength continuing in the second quarter as well. It is plus or minus operating normally at this level.
We think that when you just look at the fundamentals, broadly speaking, we're not concerned about the ingredients and single-use side of this business continuing to run at these rates. We talked about coming into the year, Q1 is the low point from a seasonality standpoint. We'll see more business days and things as we move into the rest of the year, even the second quarter. You'll see a meaningful step up here sequentially just based off of those seasonality factors and business days. The order book is very, very strong. I think we're quite confident about the outlook of that platform for 2025 and beyond.
You just touched on the order book. Sounds like visibility remains pretty solid. Is there really, besides what we talked about in the controlled environment, any sign that bioprocessing is not sort of back to normal operating environment? It's been a very choppy last couple of years.
Lead times for our platform are roughly two to three months, and that's been in place now for well over a year. Our supply chains have normalized. We've seen order patterns for our customers as destocking has essentially been eliminated, returned to normal in terms of they're providing new orders, respecting your lead times. When we think about visibility in that business, it's current quarter. As we sit here in the middle of May, we're starting to see orders flow into the third quarter as well. We look at it on a daily basis, and orders continue to outpace revenues as we move forward here. Visibility is within, at least in that context of our lead times, continues to be good, and the fundamentals continue to be quite strong.
Okay. The other question we've got on bioprocessing, and maybe this could be a broader pharma consumables or even A&G consumables question, was could there have been some pull forward in the first quarter from customers looking to get ahead of tariff hits, whether it's pharma or CDMO trying to stockpile more finished drug or even work in progress reagents, just to be able to relocate them to the US to get ahead of tariffs, imports from Ireland, things like that. Did you see any indication that there was any unusual order timing or patterns from your major customers?
I think the experience of COVID certainly taught us to say never say never, but we do not really have any indications that there was any pull forward. We watch these order rates daily. We see shipping patterns, and there was really nothing that has stood out to us. Even when you look at moving from Q4 into Q1 at both a product category level or a customer level, I think from what we can see, nothing stood out to us as unusual. None of the analytics that we run have flagged anything that has caught our attention.
Okay. Moving to some of the other end markets and maybe customer groups, I want to talk about within LSS, especially more of the traditional distribution side of the business, sort of the legacy VWR, some of that portfolio, the more commoditized products. How do you feel like the competitive landscape and the shared gains and shared losses have gone in that market? There's always a little bit of tension between you and the other larger distributor in the tool space. Just have you noticed any change in that environment?
I'd say a few things here. Firstly, we've highlighted and we've talked a lot about the macro environment and the impact of some of the policy changes around NIH funding, which has impacted our academic and government sector. Some of the market or capital market-related headwinds around biotech and then just some of the inflationary and GDP-driven headwinds impacting some of the other end markets. The fact that the growth has been more challenging to come by has created a more competitive environment, I would say, just broadly speaking. It's important to note that it's not just a duopoly here. It is a very fragmented space. Yes, there are two large players in this space, but there's also quite a number of important smaller regional players that are critical to meeting the collective needs of these end markets.
When we look at how these competitive dynamics are playing out at an account level, we see a few different things happening. We highlighted, at least at a handful of accounts, some shifting within categories at some of these accounts, but we also noted quite a number of new account wins and extensions. I would say the bar for our customers or potential customers to consider new suppliers has probably been lowered just given the macro environment. When that plays out at your customer, it can be a little bit painful. On the other hand, we see it as a significant opportunity for us as well to go into accounts where maybe we haven't historically had such a strong presence.
Flipping then to the actions that we announced, I think it puts a spotlight on how important that is and how bullish we are about the impact of the actions. We have an incredibly strong platform. We are extremely well positioned with a great portfolio, a great supply chain, and we can provide an incredible set of services to this marketplace. Under Corey's leadership, he and the team are leaning in aggressively to drive activity at the account level, both to defend existing business as well as to go after new business.
When we think about the second quarter, we think there'll be some certainly incorporated into the guide is continuation of the current market conditions, but we anticipate being somewhere in that low single-digit to flat range, and with the actions that we're taking, we see the opportunity here to drive some upside over time.
Okay. You touched on these things in a couple of different areas, but I want to ask about academic and government, maybe tie that into the instrument side of the portfolio. Obviously, a lot of weakness there from US policy, NIH cuts, things like that. Remind us sort of what your exposure is to US academic and government, US NIH, what your expectation is for the rest of the year from that customer group.
It's about 5% of our enterprise revenues are linked to the higher education in the U.S. region. As I mentioned earlier, the policy changes and funding changes that were announced happened to come out the day after we made our full-year guidance. We didn't have the opportunity to take that into account. The environment shortly thereafter, those announcements turned decisively cautionary. When we look at an individual university account, it probably impacted them in two or three specific ways. Firstly, I think very naturally, broad movement to preserve cash and optimize cash. The easiest way to do that is to pull back on capital spending. Your nod there to equipment and instrument softness comes from that dynamic of just preserving the cash that you've got in an uncertain funding environment.
We also saw either a freeze or a pullback in hiring, which in a consumables-driven model like Avantor has, we're an activity-driven business, meaning we need the lights to be on. We need scientists and labs doing research. That's an important part of the growth algorithm. A pullback in hiring or even layoffs can be a bit detrimental, and it ultimately leads to fewer new programs getting started, which is just an important part of the model. That does bring in the breadth of the portfolio, not just equipment and instruments, but also consumables. We saw general weakness across the board, and it happened pretty quickly after some of these changes were announced. We have seen it stable from February, March, April into May. We haven't really seen much change once we saw that initial step down.
Those rates have been factored into the outlook that we updated at the end of as part of our first quarter call.
For A&G and US A&G for the rest of the year, you're essentially assuming what you saw in March, April continues at that level throughout.
We are.
Yeah. Okay. All right.
No additional deterioration and conversely, no upside either.
I want to talk a little bit about the cost actions you've announced, both more recently, just over the last couple of years. You've expanded your cost savings plan to $400 million exiting 2027. Just sort of where are the areas where you're able to take out the most cost and how do you balance that between sort of staying nimble in this environment, making sure you're not cutting too far?
A couple of things I think to highlight here. Firstly, this has been an important aspect of us being able to deliver on our margin, cash flow, and profitability targets last year as well as in the first quarter. It does underscore, I think, the team's ability to execute. We announced the original $300 million program in connection with a new operating model. There were a lot of costs that just fell out of the model when you went from three regions to just two business units. You take Brent's finance function, for example, you no longer had three reporting segments and now just two. You are able to cut proportionally. That played out really across the organization. Coming off a number of years of high inflation, the procurement lever has been a really solid contributor to our targets over the last couple of years.
We have made significant investments in our business. The last two or three years have all been record levels of investments in footprint optimizations and expansions, investments in digitization, robotics, automation to help combat some of the inflationary factors that we see, which did enable significant rooftop consolidation and footprint optimization. We call it transformation for a reason and why it was playing out initially over a three-year period. As we have expanded it, we have added another year to the program. We are making significant investments to change the way work is getting done to make it sustainable. All the while, we continue to invest at record levels to continue to grow the business and position us for sustained growth over the long term.
On the topic of some of those cost doubts, you previously talked about a 20% or greater than 20% EBITDA margin, sort of longer-term exit rate once some of the market uncertainty dies down. If anything, I think we've probably seen more market uncertainty since then. How would you characterize your thoughts about that long-term margin opportunity and the roadmap to get there?
Yeah. So a couple of things. Firstly, the target of exceeding 20% is not really aspirational. We've run at those levels before. This is a really important part of the Avantor story, our ability to drive margin expansion with price over COGS performance each year, growing proprietary content, growth or bioscience production segment is a nice contributor to margin expansion. Of course, the cost actions that we're taking. We do have a significant footprint that in an environment where volumes are contracting can be pretty punitive. That is what you've seen over the last couple of years. Volume growth is an important part of the story here. We said coming into the year that we were targeting to exit at 20% or, taking into account our clinical services divestiture, at 19.6% on an adjusted basis.
We expected to exit at those rates this year and said that we could get most of the way there based on the self-help actions that we've been driving, but that we did need to see some market recovery to help offset some of the absorption. Clearly, things have turned more cautionary since we got into the year. As we've updated our margin guide for the year, I think we're centered on 18. We'll see where we get on an exit rate, but not likely to be in that mid-19s. Over the long term, whether that's in 2026 or 2027 as these markets normalize, I think the margin expansion part of this story is going to be an important one.
Okay. We're almost out of time, so maybe just a quick closing question, Michael, as you look back at your lengthy tenure at Avantor, just sort of what do you think is still most underappreciated or misunderstood about the business?
Look, the platform has come a long way. I highlighted where it was at when I started and kind of where we're sitting here today. There's a lot still to be done here. I would just reiterate our confidence in not only the strength, but also the resilience of the platform, its positioning. When I look at the segments and the capabilities that we have, the market needs a strong Avantor, both in the lab as well as in the production environment. We have a terrific portfolio, a supply chain that allows us to deliver to our customers with confidence. We're doing all the right things to drive top-line growth, and the team is incredibly introspective and working hard to tweak the strategy to ensure that even in a macro environment like we're in, that you can still drive top-line momentum.
Of course, we are doing all the right things to continue to make the business more productive with the self-help cost actions that we're taking.
Great. With that, thanks everyone for joining us. We're out of time. Michael, thank you. It's been a pleasure.
Thank you.
Forward.