Avantor, Inc. Q4 FY2021 Earnings Call

Good morning. My name is Ruel, and I will be your conference operator today. At this time, I would like to welcome everyone to Avantor’s Fourth Quarter and Full Year 2021 Earnings Results Conference Call. All lines have been placed in mute to prevent any background noise. After the speakers’ presentation, there will be a question-and-answer session. Now I would like to hand over the call to Mr. Tommy Thomas, Vice President of Investor Relations. Mr. Thomas, you may begin the conference.

Good morning. Thank you for joining us today. Our speakers today are Michael Stubblefield, President and Chief Executive Officer; and Tom Szlosek, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our Investor Relations website. 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 statements that we make today. These forward-looking statements speak only as of the date that they are made. We do not assume any obligation to update these forward-looking statements whether as a result of new information, future events and developments or otherwise. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the appendix to the presentation. With that, I will now turn the call over to Michael.

Thanks, Tommy, and good morning, everyone. I appreciate you joining us today. I am starting on Slide 3. As you saw in our press release, we delivered another strong quarter, with above-plan performance on all key financial metrics, concluding an outstanding year that reflects strong momentum across our end markets, disciplined execution of our operating plan, and the value of our long-term growth strategy. In the fourth quarter, we achieved mid single-digit core revenue growth, driven by continued strength in our two largest end markets, biopharma and applied technologies and advanced materials. COVID-19 revenues were in line with guidance, and vaccine-related demand continues to be strong, and revenue associated with diagnostic testing improved sequentially, reflecting increased testing associated with the Omicron variant. Despite continued inflationary pressures, we expanded margins by more than 150 basis points, including the favorable impact of our acquisitions in 2021. Free cash flow grew double digits, and adjusted EPS increased more than 20%. In addition to generating solid financial results in the quarter, we also made significant progress in executing our long-term growth strategy. Most notably, we closed the Masterflex acquisition in November and are making good progress with the integration. Similarly, integration of Ritter and RIM Bio remains on track, and we are starting to realize the anticipated commercial synergies from both of these transactions. Representing more than 50% of our revenue, biopharma remains the key growth driver for our company, and we continue to drive innovation and growth with investments in manufacturing capacity, people and capabilities. In the fourth quarter, we advanced our expansion initiatives with key process ingredients used in upstream and downstream applications in the bioproduction workflow. We inaugurated our second European single-use facility in the Netherlands and opened a new single-use logistics hub in Massachusetts. Located near our single-use manufacturing site in the Boston area, the new logistics hub serves as a center for raw material storage, quality control and finished goods distribution, and is a critical enabler to the continued double-digit growth of our single-use platform. An important element of our growth strategy is helping scientists realize the potential of breakthroughs with the ongoing introduction of new products to keep pace with our research and development advances. We recently announced a commercial agreement with Agilent to provide customers with sample preparation content that can be paired with our extensive line of kits and consumables to enhance our liquid chromatography and mass-spec workflow solution. The agreement supports our strong customer relationships across all of our end markets and will provide scientists broader access to Agilent’s content in these fast-growing applications. Looking ahead to 2022, we are poised for another great year at Avantor. We have good momentum in our end markets, and the order book for proprietary materials remains strong. Consistent with our long-term growth algorithm, we expect mid-single-digit organic growth, more than 125 basis points of adjusted EBITDA margin expansion, more than $1 billion in free cash flow and mid-teens adjusted earnings per share growth. And as you would expect, we are hard at work in integrating our recent acquisitions while continuing to consider future M&A opportunities. Moving on to Slide 4, I’d like to summarize our fourth quarter financial results. Core revenue increased nearly 5% on an organic basis and 6.5% on a reported basis, including revenue contributions from Masterflex, Ritter, and RIM Bio, offsetting the impact of foreign currency exchange headwinds. As anticipated, core growth was partially offset by COVID-19 headwinds of approximately 2%, reflecting strong growth in COVID-19 vaccine-related revenue and year-over-year declines in diagnostic testing and PPE-related revenue. From an end-market perspective, our performance was driven by mid-single-digit organic revenue growth in advanced technologies and applied materials and biopharma, including more than 20% growth in bioproduction. Reflecting the impact of lower year-over-year COVID-19 testing and PPE revenues, we experienced mid-single-digit declines in both Healthcare and Education and Government. Adjusted EBITDA on the quarter was up 16%, reflecting volume growth, favorable mix, including low double-digit growth in sales of proprietary materials and consumables. Similar to the third quarter, we were able to absorb inflation in raw materials, third-party products, transportation, and wages, and still expand adjusted EBITDA margin by more than 150 basis points, which included an approximate 90 basis point benefit from M&A. The strong operating results, coupled with continued traction on borrowing costs and income taxes, resulted in adjusted earnings per share growth of more than 21%. We generated free cash flow of $314 million in the quarter, over 137% of adjusted net income, and strong working capital performance partially offset higher capital investments to support our growth initiatives. Our adjusted net leverage ended at 2.2 times adjusted EBITDA, essentially flat from the same point in 2020, despite deploying more than $4 billion in M&A capital during the year. Slide 5 provides an overview of our full-year results for 2021. Compared to our initial guidance, we essentially doubled organic growth, nearly quadrupled EBITDA margin expansion and just about doubled the adjusted EPS growth. For the full year, our 11.3% organic sales growth included 2.1% in COVID-19 tailwinds, yielding core growth of 9.2%. On adjusted EBITDA, we were able to expand margins by approximately 190 basis points, including 30 basis points for M&A. The operating results, combined with continued progress on interest and income tax expense, resulted in approximately 58% growth in adjusted EPS. And lastly, free cash flow grew to $920 million in 2021, reflecting more than 100% conversion of adjusted net income. Our continued strong free cash flow supports rapid deleveraging and is an important enabler of our M&A strategy. In summary, 2021 was another outstanding year, and our financial results reflect the value of our business model, our significant exposure to the high-growth biopharma space and our team’s relentless focus on execution. I am extremely proud of our team of more than 1,350 global associates and I remain confident in our outlook for 2022 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 am starting on Slide 6. Organic growth in the fourth quarter was 2.5% or 4.6%, excluding COVID-19-related headwinds. For the full year, organic growth was 11.3%, which exceeded the high end of our final 2021 guidance. Our two-year average Q4 organic growth rate, meaning organic growth, excluding the impact of COVID-19-related revenue, was approximately 5.5% and approximately 5.1% for the full year with both measures ahead of 2020 comparison. From a regional perspective, Americas, which represents approximately 60% of annual global sales, achieved 3% organic revenue growth in the fourth quarter. Excluding COVID-19-related headwinds, Americas core revenues increased nearly 6%, driven by high single-digit sales growth in both biopharma and applied technologies and advanced materials end markets. Within biopharma, strength continued in our bioproduction business, with high-teens growth powered by sales for our single-use offerings and processed ingredients. Strength in research materials, consumables and services led to high single-digit growth in biopharma R&D, as funding remains robust and customers continue their emphasis on discovery work. Within advanced technology and applied materials, we continue to experience strong demand for proprietary content, particularly for aerospace and semiconductor customers. Europe, which represents approximately 35% of annual global sales, achieved 0.5% total organic revenue growth in the fourth quarter or 2.5% excluding COVID-19-related headwinds. Europe experienced strong double-digit growth in bioproduction, driven by single-use offerings and processed ingredients and excipients. Within Europe Healthcare, our medical implant platform grew more than 40% in the fourth quarter, partially offsetting the year-over-year decline in revenue from COVID-19 testing. EMEA, representing approximately 5% of annual global sales, achieved 9.3% organic revenue growth in the fourth quarter, driven by strong demand for our proprietary offerings in bioproduction and electronic material. COVID-19-related sales delivered a modest tailwind, net of which core revenue increased approximately 8%. Slide 7 shows our organic revenue growth for the quarter by end market and product group, biopharma representing more than 50% of our annual revenue experienced mid-single-digit organic growth in the fourth quarter, including more than 20% organic growth in bioproduction, driven by a continued strength in our single-use platform, as well as double-digit growth in processed ingredients and excipients. Bioproduction demand continued to be strong, with year-end open orders up more than 70% from December 2020. Healthcare which represents approximately 10% of our annual revenue, experienced mid-single-digit organic decline in the fourth quarter, driven by lower COVID-19 diagnostic testing sales, offset by continued double-digit growth in our medical grade silicone offering. Education and Government representing approximately 15% of our annual revenue, experienced mid-single-digit organic revenue decline in the fourth quarter, driven by mid-teens decline in our government customer base, as COVID-19-related demand, particularly for diagnostic testing and PP&E offerings moderated as expected. In the education market, sales were down modestly, as recovery in university research labs and K-12 continued, albeit slowly, with a modest negative impact from lower COVID-19-related sales. Advanced technologies and applied materials representing approximately 25% of our annual revenue achieved mid-single-digit organic revenue growth in the fourth quarter, driven by growth in lab products sold for research and QA/QC particularly in the Americas and EMEA, and in proprietary materials used in aerospace and semiconductor manufacturing. By product group, proprietary materials and consumables offerings achieved double-digit organic revenue growth, driven by strong demand for our processed ingredients, chromatography resins, excipients and single-use solutions, as well as by our biomaterials and electronic chemicals platform. Sales of third-party materials and consumables declined mid-single digits, reflecting year-over-year declines in the COVID-19-related testing and PP&E offerings. Let me turn to Slide 8 to offer some perspective regarding our key financial performance metrics. In the fourth quarter, we achieved approximately 16% growth in adjusted EBITDA and over 150 basis points of margin expansion to 19.4%. Our strong margin rate expansion was again driven almost entirely by gross margins, reflecting commercial excellence and the impacts from M&A. Adjusted earnings per share in the fourth quarter were $0.36, up 21%, reflecting the 16% adjusted EBITDA growth and lower interest expense resulting from the series of repricing and refinancing activities over the last year. Our approximate 20% tax rate for the quarter was flat to 2020, but for the full year, our rate improved from 23% in 2020 to roughly 21.5% in 2021. For the full year, adjusted earnings per share of $1.41 grew approximately 58%. Free cash flow in the fourth quarter was $314 million, compared to $286 million in the prior period. The increase was driven by stronger EBITDA growth and lower working capital requirements, offset by higher capital investments to support our ongoing growth as highlighted throughout the year. We finished the year with free cash flow of $920 million, with free cash flow conversion well over 100% of adjusted net income. The $52 million in free cash flow growth for the year or 6% was closer to 15% normalizing for the CARES Act and other non-recurring benefits we received in 2020. Turning to Slide 9, I wanted to touch briefly on our expected share count for 2022. I will start with the non-GAAP adjusted share count of 642.7 million that we have used for calculating our adjusted earnings per share since the IPO. This is the shares outstanding at the time of the May 2019 IPO, plus the pro forma conversion of the mandatory convertible preferred shares, as the conversion occurred at the time of the IPO. Since conversion will not actually occur until May 2022, the 642.7 million adjusted share count has historically been higher than the U.S. GAAP share count, making our adjusted EPS conservative relative to the U.S. GAAP EPS. As we have previously communicated, we are changing the adjusted share count to 685 million shares in 2022 to reflect two changes. First, an increase of 23.8 million shares to reflect the shares we issued on September 13, 2021, to partially fund the Masterflex acquisition. And second, an increase of 18.5 million shares to reflect the stock option exercised and restricted stock vesting under our Stock-Based Employee Compensation Program. By incorporating these changes, we anticipate the 685 million adjusted share count will equate with the share count for reporting U.S. GAAP earnings per share by the end of the year. Beginning in 2023, we no longer expect to utilize adjusted share count. Moving to Slide 10, we are reaffirming the 2022 guidance that was issued in January at the JPMorgan HealthCare Conference. We expect organic sales growth of 4% to 6%, which includes an approximately 2% headwind from reductions in COVID-19-related revenues from diagnostic testing and PPE. Assumed in this guidance is biopharma growth of high single digits, applied technology and advanced materials growth of mid-single digits, Education and Government growth of low single digits and Healthcare growth of mid-single digits. We expect M&A to add approximately 5% and FX to be an approximate 2% headwind, resulting in reported revenue growth of 7% to 9%. We expect to achieve more than 125 basis points of margin expansion, resulting in a nearly 21% adjusted EBITDA margin rate. This reflects strong commercial excellence, continued favorable mix of higher margin content, ongoing productivity and integration benefits from M&A, offsetting the inflation pressures impacting most of our cost categories. For adjusted earnings per share, we are forecasting a range of $1.45 to $1.53, representing approximately 13% growth at the midpoint, using a share count of 685 million in both 2021 and 2022. We model approximately $260 million in annual interest expense, reflecting the current forward yield curve for the portion of our debt that carries a variable interest rate. Our tax rate is expected to be approximately 22%. Finally, free cash flow is expected to be more than $1 billion, once again representing nearly 100% conversion of adjusted net income. Incorporated in this guidance is CapEx of approximately $150 million for ongoing capacity expansions and higher working capital to support our growth. One final comment regarding leverage, we are confident in the attractive cash generation capability of our business model and are committed to approach the midpoint of our target at a 2 times to 4 times adjusted EBITDA leverage range by the end of 2022. This concludes my prepared remarks. I will now hand the call back over to Michael.

Thanks, Tom. I am now on Slide 11. Despite the challenging operating environment, 2021 was clearly another outstanding year at Avantor, due to the relevance of our business model, the importance of our mission, and our team’s ability to execute. I am encouraged by the growth momentum we have in our end markets and by our traction with commercial excellence and productivity initiatives, that will enable continued margin expansion despite expected high levels of inflation. We remain committed to our long-term growth strategy and we will continue to make investments in manufacturing capacity and innovation to ensure we have the capabilities to support our global customers. We continue to integrate the three acquisitions we closed in 2021 and are encouraged by the progress thus far. Our strong free cash flow and rapid deleveraging position us to consider additional capital deployment opportunities, and our pipeline of potential M&A is robust. And we recognize our immense responsibility to our Avantor associates, customers, supplier partners, lenders, investors and the communities we serve, and are committed to advancing sustainability through our science for goodness platform. As we look ahead, Avantor is well-positioned to deliver another outstanding year in 2022. The role of our products and services in enabling scientific breakthroughs has never been more important, and we are helping scientists every step of the way. We remain focused on meeting the evolving needs of our customers and relentlessly advancing life-changing science. And we are committed to achieving our 2022 and longer-term financial objectives. I want to thank you for your interest in Avantor and for your ongoing support. I will now turn it over to the Operator to begin the question-and-answer portion of our call.

Thank you, sir. And we will now begin the question-and-answer session. Your first question is from the line of Tycho Peterson from JPMorgan. Your line is now open.

Good morning. This is Rachel on for Tycho. Thanks for taking the questions. And so, first off, can you just walk us through your COVID expectations for 2022? I know you were previously expecting the 200 basis points of headwind just given the testing dynamics, but can you just give us an update on the testing side of things, and then also, vaccine and therapies for what you are expecting heading into the year?

Yeah. Thanks, Rachel. This is Tom. I will take that. When you look at 2021, it pretty much came in line with what we had expected: roughly $400 million or so of COVID-related tailwinds. It was probably half vaccines and the rest was split between testing and PPE. The mix has kind of varied a little bit over the course of the year. But for the fourth quarter, we came in above where we expected in aggregate. For 2022, as we have said, we have got roughly a 2% headwind from COVID. So we are expecting about $250 million in terms of COVID revenue. And the mix continues to shift, as I said, half and half between testing and vaccination in 2021 and it should have a higher vaccination content in 2022.

Great. Thank you. And yes, I will make sure to say hi to Laurie. So, next up, could you just talk about Masterflex, RIM and Ritter Bio performance in the quarter? And M&A contributed about $90 million during 4Q, which is a little lighter than we were modeling. So, is there anything to look into there? And then, you mentioned integration is going well for all three. So, can you just give us some additional color on early integration progress?

Yes. Good morning, Rachel. This is Michael. I am happy to take that question. As I indicated in my prepared remarks, we continue to be excited about the progress we are making on integrating all three acquisitions in the quarter; I think they came in essentially in line with our expectations. We are obviously in the early days with Masterflex. The contribution in the quarter reflects two months of having them in our portfolio, their strong performance out of the gate in line with expectations. We've got a great order book similar to our own bioproduction order book and we are off to a great start there. On the other two acquisitions, I would say, more modest in size. But, again, we are also starting to realize some of the commercial synergies that we anticipated under some great technology in the RIM Bio acquisition that we are now starting to leverage, particularly in some of the bag technology that we are now moving into our European business, for example. And in the case of Ritter, we have made great progress, not only with the pipeline and the specification work that we are driving, but we mentioned early on that one of the things we were planning to do is to embed our quality and regulatory capabilities in that business and we were able to launch our sterile product line, as well as earn IBD certification in Europe, for example. We are making good progress on expanding the production or product capabilities in that business to increase not only the scope of tips, for example, that we provide, but also introduce a number of other new product categories, PCR plates, for example. So we have a pretty clear line of sight for 2022 to a number of investments that we are making to continue to progress the capabilities of that platform which we remain extremely excited about.

Great. And then last one for me. So you exited the quarter at net leverage of 4.2 times. I think you are targeting to hit roughly 4.7 post-Masterflex. So that was just a bit faster than we expected. So, can you bring that forward? And then, how should we think about that with your capacity on M&A? And then one follow-up on M&A, just given valuations that we are seeing in the markets right now, can you just talk about how you are thinking about the pipeline, just given, I am sure management teams would prefer to sell at a higher range? So, can you talk about how that pipeline is progressing?

Yeah. Sure. Thanks. The leverage range came in, as Michael said, pretty close to where we were at the beginning of the year, and that’s despite having deployed $3 billion worth of capital that was funded by borrowings. At 4.2 times at the end of the year, it came in pretty much in line with our expectations about connecting to our plan on the 4.7 times; that was probably the leverage as of the acquisition date when we initially thought of it, but we can talk more about that. The expectation going forward is really strong free cash flow, as you have seen, probably around a $1 billion or so of free cash flow that’s available. The only nice thing that we have going for us is, in the second half of 2022, I will no longer be paying the dividend on the mandatory convertible. That’s probably another $65 million or $70 million of available cash for deleveraging as well. So if you take that into account and you look at our EBITDA and expected debt levels, we expect to be somewhere in the middle of our targeted 2 times to 4 times leverage range by the end of the year. That does not anticipate any utilization or deployment towards M&A.

Yeah. You mentioned valuations and expectations from sellers. Clearly, there’s been a higher level of volatility in the capital markets as we get into 2022. I think my perspective is probably a bit early to see expectations change meaningfully one way or another at this stage. It’s been only a few weeks probably at these levels. I would anticipate, meaning a bit more time to the season before you might see things settle out in terms of seller and buyer expectations coming together here. So probably a bit early to call on how we see evaluations changing in the M&A space? Thanks for the question, Rachel.

I would like to ask about supply chains and what you are currently experiencing. Some of your competitors have encountered challenges, so I am curious about your situation given your extensive network. Are there any problems with suppliers or disruptions? Thank you.

Good morning, Derik. Thanks for the question. We have mentioned, I think, Derik, probably, since the beginning of the pandemic that supply chains have certainly been strained and the hot spots, if you will, have probably moved around a bit over the course of the last couple of years. Certainly, new transportation has been strained. Labor availability particularly in the United States has been an issue. More recently, things like workforce availability due to COVID, for example, and then various raw material and product constraints have been slower across the period. So, I think in the fourth quarter, probably, in aggregate, there was really different impact on the business than what we have seen maybe in the previous quarters. Like I said, the hot spots probably have moved around a bit. And I think we have said at the last call some of the single-use components, for example, probably, are a bit more constrained than they were earlier in the year and on the heels of really strong growth throughout the year. But in aggregate in the quarter, we are seeing any more strain on the business than what we have been seeing. And certainly, we look at our global manufacturing network, the global supply chain that we have, certainly favors our current footprints in providing flexibility and optionality to our customers to keep supplies moving. So, I think, net-net, we are in pretty good shape here, but the team does a lot of work to overcome a lot of inefficiencies around there right now.

Great. And then just one follow-up, so what are you assuming for inflationary pressures in your margins in 2022, and what are your pricing expectations? How are you helping to offset that? Are you able to press price on your customers?

We are experiencing inflation across various cost areas, including significant increases in wage, labor, and transportation costs, along with meaningful rises in product raw material costs. However, we believe that our long-term margin expansion strategy remains effective in this environment. Our base business is expected to expand margins by 50 to 100 basis points annually by implementing strategies such as price increases to counterbalance the cost of goods sold and enhancing productivity initiatives. We also benefit from a favorable mix in our business, as seen in the fourth quarter, where proprietary content is growing significantly faster than third-party content, resulting in a corresponding margin increase. We anticipate that 2022 will follow a similar pattern, achieving the expected 50 to 100 basis points margin expansion from our core operations, along with additional contributions from the three acquisitions completed last year. This combination leads us to project a margin expansion of more than 125 basis points. Pricing will play a crucial role in this year's growth, with historical data indicating that about one-third of our revenue increase typically comes from pricing adjustments. This year, we are looking at potentially doubling that figure due to the inflationary pressures we are facing, which may be surprising given the current macroeconomic conditions. We have solid momentum supporting these assumptions.

Good morning, Michael and Tom. Thank you for addressing my questions. I have one for you, Tom, or perhaps Michael regarding the guidance. Just to clarify, your organic growth of 4% to 6% includes 200 basis points of anticipated headwinds. So excluding that, the underlying number would be 6% to 8%, which suggests that your revenue guidance range has a 200 basis points upper end. However, your earnings range is wider than that. Could you explain why that is?

Thank you, Vijay. I believe your calculations are accurate. Our long-term growth model targets 4% to 6%. Despite the effects of COVID, we remain committed to that growth range while addressing the challenges posed by the pandemic that I mentioned earlier. When considering the impact on EBITDA and earnings per share, there are several factors to take into account, including the current inflation environment and the importance of making the right assumptions, as well as managing supply chain issues related to revenue. We aim to be very cautious with the commitments we make. Looking at our performance over the last two to three years, we have approached things responsibly from the beginning. Throughout the year, we have communicated the effects of the current quarter and our future expectations. Therefore, I anticipate that you will see continued improvement in earnings per share and margin expectations as the year progresses.

Understood. And then one follow-up, your margin expectations for the year indicate 125 basis points of expansion. Tom, can you talk about what is base margin expansion versus M&A contribution? The reason I asked is that once these deals annualize, your long-range plan implies 100 basis points of annual expansion to reach the 24% fiscal targets.

That's a great question. In 2021, we saw about a 30 basis points impact from M&A on margin expansion, which is what we expected. Particularly in the fourth quarter, the effect on the margin rate was very strong. As we plan for the future, it's important to consider that we view the roughly 125 basis points as a baseline. This includes our usual 50 to 100 basis points from organic growth, which I estimate at around 75 basis points, with the difference coming from M&A. I believe we will perform well and likely exceed that baseline. As the business grows and incorporates more proprietary content, this should positively influence our margins and margin expansion. We anticipate growth in areas such as biopharma production, biomaterials, and advanced technologies, supported by our investments in capacity and in integrating M&A. We are very confident in our long-term projections for margin expansion.

Guys, good morning. Congrats on the quarter. So, I wanted to ask, first question is on bioproduction. So, assuming like $45 million to $50 million from that revenue in the fourth quarter, my math implies like your base business in bioproduction could have grown like north of 20%. I am just wondering can you comment on like the base business, how it did in the fourth quarter and I know you gave the order trend, I think, on the annual basis. Could you tell us what the order trend was in Q4? And then, related to that, you mentioned the single-use technology expansion overseas and in the U.S., just comment how that’s going to impact the growth rate of that sub-segment?

Great questions to start, Dan. Bioproduction is obviously crucial to our business model. It’s the fastest-growing segment of our portfolio, and most of those solutions consist of proprietary content, which significantly contributes to margin expansion. To put it in perspective, biopharma accounts for a little over 50% of our total revenue, and when including Masterflex, bioproduction represents about 40% of our biopharma revenue. Its importance to the business is increasing. In the last quarter, we achieved strong performance in that area, with growth exceeding 20%, driven by high levels of vaccine activity that met our expectations. We have a solid order book that offers good visibility. However, it’s important to note that the core business remains the main growth driver for our bioproduction platform. Our order growth reflects this, with around a year’s worth of orders in hand for bioproduction. The Masterflex order forecast is also impressive, with about 80% of the orders likely coming from our core business. The historically strong demand for monoclonal antibody modalities and the recent traction in cell and gene therapy indicate that our core business remains a promising growth opportunity. Long-term, as we've mentioned in our recent discussions, we expect that segment to grow in the mid-teens percentage over the long-term, and we might be outperforming that target recently. In bioproduction, single-use technology has been leading the growth over the past couple of years, with core growth well over 20%. We have made significant investments in expanding nearly all our facilities to support the growth in this segment. We are open about these efforts. Last year, we more than doubled our capacity to accommodate the growth we anticipate in this business area. We are well positioned and will continue to expand our capabilities in excipients, process ingredients, and single-use technologies. Overall, the core business remains in excellent shape and has shown strong performance again.

Great. Thanks, Michael. And then, I mean, as a related follow-up, which may be you kind of answered it. So looking at proprietary materials in consumables business, I know it’s a really important driver of the gross margin. I know you guys talked about growth of double digits in the quarter. We were calculating north of 20%. Is that in the right zip code and how do we think about like that segment growing within your 2022 context for guidance? Thanks.

Yeah. As I mentioned earlier, around our margin expansion algorithm on the base business, which yields 50 basis points to 100 basis points a year of expansion. There’s a number of things that go into that including the mix. Historically, our proprietary content, our proprietary materials and consumables specifically have grown at a rate of kind of 2 times to 3 times the third-party materials and consumables, which tend to be more oriented into the lab products area, the lab RV space, and so we are benefiting from our exposure to the production space with the proprietary content. And that certainly held true in the quarter. We expanded proprietary content in the quarter double digits, and certainly, we probably outperformed even our historical 2 times to 3 times differential to third-party. So strong margin expansion in the quarter and certainly mix was an important aggregate.

Thank you and good morning. I wanted to just go back to M&A in the quarter. Is it possible to get a breakdown of the $92 million between the three deals you did last year? And then on Masterflex, is that still on track for $300 million of sales in 2022?

Yeah. Jack, I think, when you look at your second part of your question around the $300 million that we provided visibility to at the time that we did the deal, we are still very confident, and probably more confident now that we have had the opportunity to have the business in our hands now for at least 90 days or so. Great order book, great innovation pipeline and improving visibility to how that business is going to perform, given the single-use focus in that business, it will continue to perform in line, I think, with the growth that we have been seeing in our own single-use business. So, I am very confident in the outlook for that, and certainly, in line with our expectations. And when you then kind of translate that backwards into the two-month contribution we got from that business, it certainly came in line with our expectations in the other two deals that we have in the quarter. Ritter, specifically, we saw some nice sequential 3Q to 4Q step up in that business, and RIM Bio, obviously, much, much smaller deal than the other two, I would say, came in line with our expectations, but contributing at a much more modest growth.

Got it. And then, one more on bioprocessing, specifically related to the COVID vaccines. Could you call out just how the order book trends compared to the revenue growth in the quarter? And I guess, just it would be great to get your latest thoughts on the hand-off to non-COVID over time and just kind of confidence in that?

If you look at the contribution that we had to the roughly $400 million of COVID tailwinds in the year, approximately half of that came from COVID vaccines. And given the lead times for those products that go into those vaccines, many of them, not all of them, but some of are approaching a year’s lead time just given some of the constraints that highlighted in the supply chain. So when we look ahead and we obviously have pretty clear line of sight to 2022 and the contributions that we anticipate getting from vaccines in this year, and I think as we look at it, we are expecting similar contribution this year as compared to last year from the vaccines.

I’d say regarding your question about the comparison of sales to the order book, the order book has continued to grow significantly, nearly doubling since the beginning of the year. As Michael mentioned, the proportion of those open orders related to COVID remains less than around 20%. Therefore, the shift through the migration that you referenced stands out clearly in these dynamics.

Hey, guys. Good morning and thanks for the time here. Michael, I want your view on China. Can you just talk a little bit about any sort of customer asset issues and impacts you are seeing from the zero-tolerance COVID policy? And then talk to how long this season plays given sort of the low level of natural immunity and a vaccine that hasn’t worked, as well as the mRNA modalities? And if and when, I mean, China decides to relax that policy, are you concerned at all that there might be a sort of disruption from a case surge or some such?

Thank you for the questions. Good morning. It's important to put China in context for our business. The entire region has generated just over 5% of our revenue, with China being a part of that. We are starting from a relatively small base, but we're seeing impressive growth numbers from that small business. The Masterflex acquisition will help accelerate this growth due to the capabilities it brings us in the region and the solutions it provides to our customers. We are excited about our positioning there and have an optimistic outlook. In terms of how we interact with our customers, China's situation isn't much different for us compared to other regions, except that we're currently unable to send many of our exports from Europe and the U.S. into the region. We've adapted by using video conferencing technologies. It was fortunate that we opened an innovation center there just before the pandemic began. As we review the utilization of our facility and the program pipeline, we see a significant contribution from the work our teams are doing there. Despite the restrictions we face in China and around the world, our teams will continue to find ways to engage with our customers effectively, advance our pipelines, and support their efforts to bring clinical therapies to market.

Got it. That’s helpful. And a quick follow-up on Education and Government, I think Tom, you mentioned, expecting sort of low single-digit growth there in 2022. I was just curious as to what you are baking in into that assumption in terms of the NIH funding outlook, etcetera, being pretty robust. Obviously, there is the testing and PPE sort of COVID-related decline that you have to factor in as well, but curious as to get your take on that?

Thank you, Tejas. The environment is quite strong for some of these new potential offshoots, and NIH looks promising if they can secure funding. We are definitely seeing improvements from an Education and Government perspective. While it's not fully back to where we were, we have noted gradual progress. For 2022, we anticipate mid-single-digit growth across the entire group.

Hey. Good morning, guys. Thanks for taking the questions. Maybe just one of the advanced tech and material segment that continues to put up pretty strong results, can you just talk about the outlook into 2022, your visibility? I know that it tends to be a little shorter cycle within areas of bioproduction. We talked about a yearlong order book or maybe just talk about the strength in the underlying market where you are seeing pockets of growth there, and again, confidence and visibility into 2022 will be helpful?

Thank you for the question, Patrick. That segment of our business is quite diverse across various end markets and applications. We focus on similar workflows as we do in our life sciences segment, particularly testing related to quality assurance and quality control, as well as supplying proprietary content and formulations for production environments like semiconductors, aerospace, and defense. As you've mentioned, we've had a strong finish to the year, which is reflected in the solid PMI indices globally and the robust production backdrop we are supporting. There has indeed been notable volatility in end markets such as semiconductors, driven by significant demand. Overall, the macroeconomic environment is strong, which is supporting impressive output across most, if not all, application areas we cater to. On the testing side, the quality assurance and quality control revenues resemble much of our other business, characterized by quick turnarounds of a few days to weeks. However, in the production platforms for semiconductors, we have a much longer-term view on trends. This gives us a positive outlook for the platform overall, and when assessing from a year-over-year perspective, we feel mid-single-digit growth looks appropriate in leading terms.

Yeah. Actually, when we look at overall expense for the quarter, in aggregate, actually came in a little bit better than our expectations. I mean, the environment is not an easy one when it comes to inflation on both our salaries and but also when you look at some of the indirect spend that we would have in corporate. I don’t think there’s anything unusual or any trends or one-offs or anything in there. I think it’s well-managed and I think we have got a good view on it for next year as well.

Great. Maybe my first question, just on the line to the bioproduction question that have been asked, just given the supply/demand picture and the growth you are seeing. Just wondering in terms of customer behavior, what you are seeing, is there some additional stocking going on or is the demand have been pretty steady throughout the last year and the beginning part of this year?

Demand continues to, obviously, be very, very strong. Supply chains continued to be relatively tight to keep up with all of the demands. So, there’s really not a lot of excess capacity in the system to support incremental buying or inventory. And it’s a little bit unique in that there’s shelf life considerations and storage considerations for the sensitive regulated materials that we are providing. So demand patterns have been strong and lead times for our materials have been extended as we move through the year. It’s kind of transitory or incremental buying within a relatively tight timeline, really isn’t something that can be accommodated easily. So, I think, the demand that we are servicing is pretty well in line with production levels of our customers. Thanks for the question. Demand continues to, obviously, be very, very strong. Supply chains continue to be relatively tight to keep up with all of the demands. So there’s really not a lot of excess capacity in the system to support incremental buying or inventory. It’s a little bit unique in that there’s shelf life considerations and storage considerations for the sensitive regulated materials that we are providing. Demand patterns have been strong and lead times for our materials have been extended as we move through the year. It’s kind of transitory or incremental buying within a relatively tight timeline, which isn’t something that can be accommodated easily. So, I think, the demand that we are servicing is pretty well in line with production levels of our customers. Thanks for the participation in the call today. I would like to end here by just reiterating my confidence in where we are at heading into 2022. We are extremely well-positioned to deliver another very strong year with strong growth, margin expansions, and cash flows. Our end markets are strong and we started the year with significant momentum. So I am quite excited about the jumping-off point. Also, I want to express my continued gratitude for the ongoing efforts of our associates around the world who are living our values every day and setting science in motion to create a better world. It’s going to be another great year. I am excited about what lies ahead for Avantor and look forward to updating you when we meet next. Until then take care and be safe everyone.

And with that, this concludes today’s conference call. Thank you for attending. You may now disconnect.