Avantor, Inc. Q1 FY2024 Earnings Call

Good morning. My name is Emily, and I'll be your conference operator today. I would like to welcome everyone to Avantor's First Quarter 2024 Earnings Results Conference Call. I will now turn the call over to Christina Jones, Vice President of Investor Relations. Ms. 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 Brent Jones, 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 forward-looking statements within the meaning of the U.S. 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 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 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 press release and in the supplemental disclosure package on our Investor Relations website. As a reminder, on January 1, 2024, we transitioned from our former regional segment structure to two global operating segments, Laboratory Solutions and Bioscience Production. Our Q1 2024 results are presented on this basis. 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. The year is off to a good start as we delivered first quarter revenue in line with our guidance, with reported revenue of $1.68 billion and organic growth of minus 6.3%. As anticipated, market conditions remained similar to the fourth quarter. Our team continues to execute well, as evidenced by our margin and profitability outperformance with adjusted EBITDA margin of 16.8% and adjusted EPS of $0.22. As Brent will outline in his section, our margins were driven by pricing, favorable product mix, disciplined cost management, and accelerated realization of savings from our multiyear cost transformation initiative. We also generated $107 million of free cash flow in the quarter. Consistent with our current capital allocation priorities, we paid down approximately $170 million of debt and continue to target an adjusted net leverage ratio below 3x. As CJ noted, our new operating model became effective in January. Our new business segments enhance our focus on customers' needs in the lab and production environments, position us for accelerated long-term growth, and unlock significant operating efficiencies. We are early in our journey but are off to a strong start and are already realizing benefits from the new model. During the first quarter, we aligned our organization with the new business segments and initiated several work streams to optimize the Avantor customer experience. Our commercial intensity and the relevance of our workflow solutions resulted in multiple competitive wins and contract renewals with biopharma, healthcare, education, and government customers. As part of our innovation strategy, we enhanced our offerings for cell engineering, gene therapy, and synthetic biology applications through supplier partnerships and proprietary innovation. We are seeing strong customer response to recent proprietary product introductions, including our Viral Inactivation solutions launched earlier this year and our integrated mixing systems and fluid handling assemblies, which are delivering critical efficiency and quality improvements to our bioprocessing customers. We also advanced our multiyear cost transformation initiative, including footprint optimization, organizational efficiency, go-to-market and procurement savings. Our disciplined execution enabled us to accelerate the realization of some savings into the first quarter, contributing to our margin and profitability outperformance. We continue to be encouraged by the positive trends we are seeing in our end markets. In Laboratory Solutions, biotech funding is improving, and our large pharma customers are engaging with us on new projects that are driving an increase in our commercial opportunity funnel. Core diagnostic testing has returned to growth, and QA/QC workflows in the applied markets have been relatively stable. Additionally, internal and external surveys suggest that inventory health continues to improve. Collectively, these factors resulted in a sequential increase in sales of our consumables and chemicals offerings, both key drivers of our long-term growth. In Bioscience Production, the bioprocessing end market remains healthy with a robust pipeline of new therapies, a favorable regulatory landscape, including three new cell and gene therapy approvals in the quarter and strong patient demand. Importantly, we saw another quarter of sequential improvement in our bioprocessing order rate. Within healthcare, medical implant procedure rates continue to be positive, and overall demand within the semiconductor end market has rebounded from the lows we experienced in 2023. Consistent with our in-line revenue performance in the quarter, these encouraging market signals have not yet translated into an inflection in aggregate sales levels as pockets of inventory destocking and cautious customer spending, notably in equipment and instrumentation, continue to impact demand. We believe our current approach to guidance, which assumes a continuation of current market conditions, is appropriate, and we are reaffirming our full-year outlook. Should a meaningful market recovery take place within the year, that would present upside to our guidance. Before I turn it over to Brent, I'd like to share a few takeaways from the quarter which show that our model is working. First, momentum in our consumables portfolio, representing the vast majority of our revenue, largely offset industry-wide weakness in capital-driven equipment and instrumentation sales and translated to outperformance in margins and EPS. Second, our bioprocessing offerings are strategically positioned to benefit from attractive end market fundamentals, and we outperformed our bioprocessing guidance and realized another sequential step-up in bioprocessing orders. Finally, we are taking action to strengthen performance and drive productivity. We made meaningful progress in transforming our operating model, and we are ahead of plan on our cost transformation initiative. With that, I'll now turn it over to Brent to walk you through our Q1 results in more detail.

Thank you, Michael, and good morning, everyone. I'm starting with the numbers on Slide 4. Reported revenue was $1.68 billion for the quarter, declining 6.3% on an organic basis. In our Laboratory Solutions segment, sales trends were generally similar to the fourth quarter levels. We are seeing nice momentum in consumables and chemicals, offset by softer-than-expected demand for equipment and instrumentation. Our Bioscience Production segment performed modestly ahead of expectations, driven by upside in bioprocessing and biomaterials. Adjusted gross profit for the quarter was $572 million, and adjusted gross margin was 34%. Year-over-year, our adjusted gross profit was impacted by lower sales volume and unfavorable product mix, partially offset by productivity. Adjusted gross margin improved nicely on a sequential basis. This was largely due to pricing and the positive mix impact from strength in higher-margin consumables and weakness in lower-margin equipment and instrumentation. Adjusted EBITDA was $283 million, and adjusted EBITDA margin was 16.8%. Adjusted operating income was $258 million at a 15.4% margin. Year-over-year, our adjusted EBITDA and adjusted operating income performance were impacted by lower sales volumes and unfavorable mix. While adjusted EBITDA and adjusted operating income were down sequentially, primarily from the reset of incentive compensation, our margins were well above our expectations. This outperformance was driven by better-than-expected mix and the accelerated impact of certain cost transformation initiatives up and down the P&L. Net interest expense and adjusted tax expense were in line with our expectations, resulting in adjusted earnings per share above expectations at $0.22 for the quarter. Moving to free cash flow. We generated $107 million in the quarter. Our free cash flow performance was impacted by costs associated with our cost transformation initiative. Our adjusted net leverage ended the quarter at 4x adjusted EBITDA. The slight uptick in leverage was driven by a reduction in our trailing 12 months adjusted EBITDA. As Michael noted, we remain focused on deleveraging and paid down approximately $170 million of debt in the quarter. In April, we favorably repriced about $770 million of term loans, reflecting a supportive financing market and strong demand for our debt. Slide 5 outlines our segment performance. Launching our two new segments has been a critical strategic move to sharpen our focus on accelerating growth and streamlining organizational accountability. It also has the benefit of unlocking significant cost savings. In Laboratory Solutions, which represents roughly two-thirds of our revenue, we provide an industry-leading platform of products, services, and digital solutions to support our customers' research, diagnostic, and QC workflows. Laboratory Solutions revenue was $1.16 billion for the quarter, declining approximately 4.5% versus prior year on an organic basis. Our consumables and chemicals, both proprietary and third-party, showed sequential growth, performing better than our expectations. However, momentum in these categories was offset by lower equipment and instrumentation sales in each of our end markets. Adjusted operating income for Laboratory Solutions was $148 million for the quarter, representing a 12.8% margin. Year-over-year adjusted operating income decline was driven by negative sales volume. Sequentially, we saw a favorable mix due to strength in higher-margin consumables and chemicals and weakness in lower-margin equipment and instrumentation. However, despite the mix impacts on gross profit, adjusted operating income declined due to the impact of our annual incentive compensation reset. This expense increase was partially offset by savings from our cost transformation initiative. Our Bioscience Production segment represents about one-third of our revenue and over 45% of our enterprise profitability. This business supports customers' production platforms by providing high-purity process ingredients and single-use solutions for bioprocessing, ultra-high purity silicone formulations for medical implants, and custom solutions for semiconductor and advanced technology applications. Bioscience Production revenue was $523 million, representing an organic decline of approximately 10% and slightly ahead of our expectations for the quarter. Bioprocessing was down low teens on an organic basis versus our expectations of down mid-teens. Adjusted operating income for Bioscience Production was $127 million for the quarter, representing a 24.3% margin. Year-over-year adjusted operating income declined as a result of lower sales volume. On a sequential basis, despite revenue performance exceeding our expectations and solid mix, adjusted operating income declined modestly, driven by the expense side. Like Laboratory Solutions, this was largely due to our incentive compensation reset. However, these expense accruals were partially offset by savings from our cost transformation initiative. Altogether, a solid quarter in both segments. Moving to the next slide. Slide 6 shows our full-year 2024 guidance. As referenced throughout the call today, we see encouraging signs in our end markets. However, it is still early in the year, and the operating environment remains dynamic. As Michael indicated, we believe it is prudent to base our guidance on the continuation of current market conditions, and we are reaffirming our full-year guidance as outlined last quarter. This includes organic revenue growth of negative 2% to positive 1%, adjusted EBITDA margin of 17.4% to 17.9%, and adjusted EPS of $0.96 to $1.04. We also expect free cash flow performance of $600 million to $650 million, excluding any cash costs associated with our cost transformation initiative. On a segment basis, we expect low single-digit growth in Laboratory Solutions and a mid-single-digit decline in Bioscience Production. A couple of comments on phasing. As laid out at the beginning of the year, we expect to generate 49% of our full-year revenue in the first half and 51% in the second half. This leads to Q2 organic revenue growth of approximately negative 3.5% to negative 1.5%. The modest sequential increase in reported revenue dollars as we progress through the year is driven by pricing phasing, seasonality, timing of known orders, and nominal billing day adjustments. In terms of profitability, we expect our Q2 gross margin percentage to be similar to Q1. Adjusted EBITDA margin should improve by about 25 to 50 basis points sequentially, driven by the impact of our cost transformation initiative. Our ability to accelerate our transformation savings into the first quarter flattens the margin ramp needed to achieve our full-year plan. We are executing well against the transformation plan, evidenced by the nice pull forward of savings into Q1. We are solidly on track to achieve at least $75 million of in-year savings in 2024. With that, I will turn the call back to Michael.

Thank you, Brent. With our new operating model in place, we are well positioned to realize accelerated long-term growth and unlock significant operating efficiencies. We are seeing the benefits of our new business segments in driving commercial momentum with our research and production customers, as well as enhancing our operational rigor and forecasting. I am pleased with the progress we've made on our multiyear cost transformation initiative. We are ahead of plan and are already seeing the impact in our cost structure and margins. As the market recovers, we'll be well positioned to enhance the conversion of top-line growth to improved bottom-line profitability. I'd like to close by thanking our Avantor associates for their steadfast dedication to serving our customers and to creating a better, healthier world. Their contributions enabled us to make meaningful progress on our business transformation and deliver on our operating plan. I will now turn it over to the operator to begin the question-and-answer portion of our call.

Thank you. Our first question today comes from Michael Ryskin with Bank of America.

Great. Michael, I want to start with one for you if I could. You talked throughout the call about consistent market conditions, no real change there. But you also did call out some encouraging market signals that just haven't translated to sales yet. When we think about Avantor, we typically think of it as being a relatively fast order cycle. So could you just help us understand, if the market signals do start to flow through, if the market conditions do improve, sort of like what's the lag between when you start seeing that and when it starts shows up in the revenues? And obviously, there could be differences between different end markets, maybe touch on some bioprocessing, anything else?

Yes, Michael, thank you for the question. You're correct that we are reasonably encouraged by our observations in the marketplace, especially regarding leading indicators such as funding, improvements in order books—particularly in bioprocessing—customer activity, pipeline building, and the approval of new drugs. In fact, there was another drug approval announced this morning. Overall, we have a lot to be optimistic about in our end markets. We operate with a relatively short order cycle business model, which we have discussed before. In our Lab Solutions segment, our business model is more about booking and shipping orders. We generally accept orders in real time and expect to ship them within a 24- to 48-hour timeframe. Thus, as these market signals lead to increased orders and revenue, we will see that reflected almost immediately. Our Bioscience Production segment, on the other hand, generally has longer lead times that have returned to normal post-pandemic. Typically, we are looking at an average of 2 to 3 months to fulfill a customer order. Therefore, we can expect to see this within a quarter at most, possibly with a one-quarter lag.

That's really helpful. And then a quick follow-up. You did call out in Lab Solutions a little bit of pressure on equipment and instrumentation. I realize it's a very small part of your overall mix. But anything specific you can touch on there, whether it's a big pharma or biotech that's still a little bit lagging? And just there, you would have a little bit better visibility. So do you think that's just the timing thing to start the year? Or is that budget still be constrained?

So I'd probably highlight a couple of things here, Michael. Firstly, as you suggest, equipment and instrumentation (E&I) for us is a relatively modest part of the business. About 15% of our overall revenue, a little bit more pronounced in our Lab Solutions segment. We are seeing industry-wide pressures for the purchase of equipment and instruments driven by project delays and extended times to get projects approved and a little bit more cautious approach to just getting capital-related purchasing items approved in real time here. So it was a slow start to the year in that, which isn't unusual coming out of year-end, where folks will typically try to buy ahead for some of their demand. But unlike a normal year, where you'd see that kind of pick up as you move through the quarter, we didn't really see that acceleration. And so unlike the momentum that we saw in our consumables portfolio, where both in consumables and chemicals, we saw a nice acceleration coming from Q4 to Q1, we didn't really see that in the E&I piece. I'd probably say it's probably most notably in biopharma where we see it, but we probably look at it across all of our end markets at some level.

I have a follow-up on that last question. Michael, could you possibly frame the magnitude of the decline in equipment and instrumentation in the quarter? And I ask because it's not a big part of your business, but it seems to have fully offset the outperformance in recurring revenue within your Lab business specifically.

Yes. I guess I'd say probably a couple of things to maybe leave some tracks for you on that. If I look at our Bioscience Production segment, as an example, you saw the modest outperformance that we drove there, reflecting a bit of momentum in bioprocessing and certainly our biomaterials business. Our electronics business has recovered from the lows that we experienced in '23. But again, it was somewhat modest, but encouraging nonetheless, but nothing that we would consider to be an inflection point. And we have relatively modest equipment and instrumentation exposure in that segment. Now if I look at the Lab Solutions segment, by comparison, we have a bit more exposure there. It's probably on the order of 20% of the revenues or thereabouts would be in the equipment and instrument space. So reasonably meaningful. We did see similar upside to our consumables and chemicals growth is what we saw in our production segment that was basically fully offset by the sequential weakness in the E&I. So although we are a consumables-driven business, roughly 15% of our overall sales are linked to equipment and instrumentation. So weakness certainly does get reflected. Fortunately, with the consumables portfolio and the higher margins that are associated with that part of the portfolio, you see the impact on mix. And as I highlighted in my script, we really focus here on the consumables business, and I'm quite encouraged by not only the momentum on the top line but the flow-through of that to margins on the bottom line, and you see that helping with some of the outperformance on the margin line.

Appreciate that. And then as a follow-up, you mentioned that bioprocessing is doing a bit better, but not yet an inflection. I was hoping you could elaborate on the performance of any of the leading indicator product categories within bioprocessing and what they're telling you?

We are very pleased to see a second consecutive quarter of improvement in the trends of our bioprocessing order book. Additionally, the pace of this improvement accelerated in the first quarter, slightly exceeding what we observed in the fourth quarter. This positive trend is broad-based, impacting both the process ingredients and excipients segments of our business, as well as our single-use platform. We've discussed the recent uptick in engineering activity, which has historically been a strong indicator for our single-use business. While this activity hadn't yet translated into order book gains, it seems we are beginning to see that change. This trend appears to be strong across large pharmaceuticals and CDMOs, and we appreciate the broad nature of this improvement. However, as we've indicated in our guidance, we have yet to see this uptick reflected in a significant change in our sales trends. Our guidance continues to reflect current conditions, but we are definitely encouraged by the past couple of quarters.

Great. Michael, could you provide some insight into the Lab Solutions business since it performed a bit below expectations? Can you discuss how the quarter unfolded? What aspects were lighter than anticipated, and what gives you confidence in the full year outlook?

Yes. So I think we called for roughly low single-digit decline in the quarter. It came out maybe a point or so weaker than that, really all on the back of the E&I trends that we've discussed here in the call and in the early questions. The 80% of that segment, that's consumables and chemicals services actually performed better than our expectations, and we're starting to see some nice acceleration there, which I think is reflective of the destocking trends that we're seeing and the improvement of inventory health as well as just a good indicator of funding and activity levels, engagement with our customers across the board. So the two largely offset one another. But yes, the weakness there was really driven by a continued cautious approach to capital purchase spending there in the equipment and instrument category.

Yes. No, absolutely. Thanks for the question. Obviously, the cost transformation has been a huge focus for us. And Michael noted our four pillars: organizational efficiency, footprint optimization, go-to-market and procurement. Unsurprisingly, given that they're sort of shorter cycle in actions, we outperformed on the organizational efficiency and the procurement side there. A lot of this is frankly unlocked by the new segment structure, which really allows us to get the efficiencies of the new model. And frankly, that also drove to the procurement piece of it. In terms of the look on the full year there, we are gratified with a strong start. We worked very hard at that, and we're going to continue. But it's early in the year, and there are a lot of moving pieces. So I think let's hold at $75 million as a good assumption for the year. But if we get acceleration, certainly the next time we talk to you, we'll let you know.

I wanted to follow up on the last question. When we consider the pacing of the cost structure across the margins for the remainder of the year, could you provide some insights on the modeling aspect and by segment? Also, how does that relate to the balance between the gross margin, operating expenses, and SG&A?

Luke, I believe that was seven questions, but I will do my best to address them. Regarding the progression, we witnessed strong outperformance in transformation during Q1. We expect a significant increase from transformation savings in Q2, which will continue to rise somewhat consistently in Q3 and Q4. This is largely due to the timing of actions related to organizational efficiency, procurement, and other factors. Starting in Q2, we will also see merit coming in, which will not negatively impact this situation. Therefore, there shouldn't be a significant change in the SG&A line for Q2. However, we anticipate positive developments from additional actions in the latter half of the year. While we are not breaking down the transformation by segment, it is facilitated by that, and we won't make any external comments on it. This will lead to a steady improvement, which should positively affect the EBITDA margin when we consider the full-year guidance. We expect gross margins to remain fairly steady based on current observations. So, managing these factors together, I would view it in a relatively linear manner for how the year unfolds.

Yes, Luke, we are closely monitoring the developments with that legislation. The final details are still being determined, and we are probably not in a better position than anyone else to anticipate where it will land and how it will be implemented. However, we benefit from a global presence and are well positioned to support our customers through our collaboration model to help them navigate the implications of that act. We don't expect any significant impact at an aggregate level for us, as we don't have much exposure in China specifically. On the U.S. side, we are well positioned with both CDMOs and OEMs. From our perspective, there may be some variations between specific accounts, but given how deeply embedded we are across this space, we see ourselves as a solution provider capable of assisting our customers with any implications that arise.

I guess my first question, Michael, on consumables. I think you said improved sequentially. Can you split that out between bioprocessing and Lab Solutions? Were consumables up in both segments sequentially? Was it flattish? I think on the order side for bioprocessing, you didn't mention sequential growth. Could you quantify that with book-to-bill, perhaps north of 1?

Yes. Let me take the two questions there. So consumables are pervasive across both segments, as you noted. And encouragingly, we saw sequential improvement in both segments. We probably have less than, I don't know, 5% of our revenues in our production segment, our equipment and instruments. And so that's largely a consumables play for us in that segment. And you saw the modest beat to expectations there, and that's all linked to the consumables trends that we did see. And similarly, although a bit more equipment and instrument exposure on the Lab segment, we saw a similar upside from the consumables part of that business as well. So again, I think that speaks to just the power of our model. I indicated in my remarks that I think this quarter is actually a really good illustration of how our model is working. Where you see the activity levels, inventory health improving, leading to stronger pull-through of our core portfolio here, which are bringing the higher margins with it, which led to better mix in the quarter and the higher margins as you see. So really like how the model worked in the quarter. In response to your second question about the impact on our bioprocessing order book, we haven't typically reported on the book-to-bill ratio, as we don't consider it particularly relevant for our business. However, I can share that we have seen a few consecutive quarters of sequential improvement. The acceleration we noticed in the first quarter was even greater than what we experienced in the fourth quarter, indicating that the momentum is increasing. This improvement is widespread, affecting not just our chemicals, process ingredients, and excipients categories but also our single-use platform. This could be the initial indication that the engineering drawing activities we discussed last year are beginning to materialize in our pipeline. We have frequently mentioned our exceptional bioprocessing performance in terms of revenue, and I believe that this quarter's performance has been as good, if not better than our competitors. We are very satisfied with the progress of our order book, and you can reasonably expect that it was as strong, if not stronger, than any reported figures you've come across so far.

That's very helpful, Michael. Maybe one more on instrumentation. Anything on phasing, Michael, in the quarter on instrumentation? Were there any days impact or holiday impact, Easter, et cetera? I'm just trying to think instrumentation was down consistently throughout or anything happened late in the quarter?

The only meaningful intra-quarter dynamic that I would point out was we got off to a slow start in the year for equipment and instruments, which wasn't such a huge surprise. That's not unusual, coming into a new year, folks had satisfied probably a lot of their near-term needs at year-end using whatever budget they had, getting budget set for the coming year. What you normally then see though is a pickup in acceleration as you move through the quarter. We didn't see it. It was weak all quarter, as it turned out. So that's probably the only intra-quarter dynamic that I would highlight for you.

Thank you. Good morning. Michael, could you discuss the academic market? It seems to have experienced a slight downturn with a low single-digit decline. This appears to be in line with trends we're observing elsewhere. Can you share your insights on the marketing conditions in that area?

I'd like to mention a couple of points, Jack. First, you're correct that we experienced a low single-digit decline overall in the education and government end market. However, the more significant aspect consistent with our observations over the past few quarters in 2023 is our continued gains in large academic institutions. Even though the overall education and government market was down, our large academic customers showed growth again this quarter. We are seeing ongoing momentum and strong activity levels, and I noted some of our customer wins, renewals, and share gains in my prepared remarks. The academic sector, especially in the U.S., is a primary focus for us, and it's encouraging to report yet another quarter of growth.

Yes. As we consider Q2, we expect Lab Solutions to decline in the low-single digits and BPS to decrease in the low to mid-single digits. Within that, bioprocessing is anticipated to be down in the mid to high single digits.

First, just on geographic trends. Anything you can share across the business, capital versus recurring segment by segment or even specifically for bioprocessing? I think that would be really helpful as we're just thinking about how we update our models for the balance of the year.

Yes. I don't think we saw anything meaningful to point out between the regions that are probably too helpful, I think the trends in each region were pretty similar. With maybe the one caveat in Asia, continued weakness, maybe some early signs of stability in China, but less meaningful for us. But continued strength in some of the other submarkets within Asia for us in bioprocessing, particularly Korea and Southeast Asia. So that might be the only other trend that I might point out. But I think similar trends between Europe and the Americas. I want to highlight a few points regarding our long-term growth strategy. We are strongly focused on executing this strategy which involves investing in innovation, introducing new products, and implementing strategic marketing. We are making significant investments in our digital platform to ensure sustained growth and maintain our strong position in both of our segments. Regarding the cost transformation initiative we are pursuing, it is a multi-year effort that is strategically aligned with the launch of our new operating segments, which will create notable efficiencies. These initiatives require investments in capabilities that enhance our operations and in technology that improves our efficiency. As a result, we will see short-term savings that are beneficial, especially given the current environment with somewhat muted volumes. Importantly, our current actions do not hinder our ability to grow the business as it recovers. Additionally, our incentive structure clearly encourages performance upside for both our immediate and equity plans.

So I want to follow up on Vijay's question around bioprocessing. Great to hear that sequential growth on orders. So can you actually give us what was the number in terms of sequential growth for this quarter and for last quarter since you said it accelerated in terms of the velocity? And can you break out how orders trended by customer type across pharma, biotech and CDMOs? And then specifically on the full year guide, we heard you reiterate the mid-single-digit declines on Bioscience Production, but can you just confirm, are you still expecting the single-digit decline for the full year in bioprocessing as well?

There’s a lot to discuss here. Please redirect me if I miss any of your questions, Rachel. Regarding your first question about the bioprocessing order book, we haven't provided specific figures for the book-to-bill ratio, and I’m not sure we can get detailed enough to meet your expectations. However, I want to emphasize that we’ve seen two consecutive quarters of improvement, and the pace of that growth is accelerating compared to other metrics you’ve observed. We have a top-tier platform that relates to both revenue performance and growth, as well as the order book, which I consider to be among the best based on the available data. Looking at the year as a whole, while processing performed slightly better this quarter, Brent mentioned that for the second quarter, we expect bioprocessing to improve from a low teens decline in Q1 to mid- to high-single-digit declines in Q2. For the full year, I believe it’s reasonable to continue modeling a mid-single-digit decline overall, which would suggest sequential improvements in Q3 and a final improvement in Q4, mainly due to weaker comparisons from the previous year. Our guidance indicates we expect similar revenue levels across each period, so the growth rate increase is primarily influenced by last year’s figures. Yes. I'd say we're obviously early in the quarter here, not quite through April yet. But certainly do follow the business real-time and the trends that we're seeing in April, I think, are consistent with our commentary today and certainly reflected in our perspective on how we see Q2 trending, which, again, when I look at the first half, based on what we did in Q1 with what we said we anticipate doing in Q2, we're right in line with where we started the year, which is expectation of roughly 49% of our revenues in the first half, 51% of our revenues in the second half. And so I think what we're seeing here in April certainly is consistent with the guidance that we've provided you here today.

Maybe I'll start on the CDMO side, Michael. I think you sort of alluded to what you see in that end market in China and the fallout from the BIOSECURE Act and so on. But with the prospect of the degree of consolidation here or M&A rather in the U.S., does that impact your near-term visibility at all in terms of your relationship there with Catalent specifically? Is there a possibility that after a change of ownership there, the terms of that contract might need to be renegotiated?

Yes. If we're specifically talking about Catalent, they have been an excellent partner for us. We are definitely encouraged by the momentum we have there. It may not surprise you, considering our extensive involvement in serving this market. Clearly, we have a relationship with their potential acquirer, and if that goes through, we look forward to continuing our collaboration with Novo. In terms of our bioprocessing business, one thing I appreciate is that our materials, ingredients, buffers, chromatography resins, and single-use solutions are integral to the process and included in the regulatory filing. This aspect makes it quite resilient and reliable, and we have no contractual concerns. However, going beyond just Catalent, we have a low level of customer concentration in this business, and it is actually a diversified platform. We are well positioned to support the strategies of the OEMs and the ongoing innovation cycles. Regarding BIOSECURE and China, any negative impact that some of those partners may experience will likely be mitigated by opportunities elsewhere in the network, which we can leverage to assist our customers. I feel very positive about our positioning and setup here.

Got it. That's great to hear. And then a quick follow-up on the geopolitical side of things outside of China. And it's more of a medium-term question, really. What are you hearing in terms of governments in Europe starting to push for a greater degree of self-reliance when it comes to their own defense expenditures? They want to have a layer of insulation in place relative to the U.S. election outcomes, et cetera. Is there a risk here in your mind, if that research budgets there could get crowded out? Not so much in '24, like I said, but more in '25 and beyond?

There are certainly increased geopolitical tensions globally, and we closely monitor how these may affect our business. In response to your question, we firmly believe that good science will secure funding. We're encouraged by the robust pipelines, innovative modalities, and ongoing research. Our pipelines are at their fullest, with significant advancements, particularly in cell and gene therapy. To date, there have been three approvals this year, with a fourth just announced recently. The pace of these developments is picking up. Historically, we've seen that promising science receives the necessary funding to move forward, and we do not anticipate any recent conditions that would change this outlook.

A couple for you. First, Brent or Michael, wondering if you could comment on how you think visibility in the business has evolved over the last 90 days? Are you seeing any improvement in regards to the team's ability to forecast sales here in the near or medium term? And then along those lines, can you talk about how or if you're seeing bulk orders come back into the business? And how that impacts your ability to forecast?

Yes. Thanks, Josh. Good to hear from you. A couple of things I would say about visibility. I think one of the remarks I may have made in my prepared remarks was just some of the early returns we're getting from our new operating model. And one of those certainly is the operational rigor and improved forecasting that comes from a more simplified and more logical, in my opinion, structure to the business. It's easier to think about these businesses from a customer needs, research or production, environment, and it certainly aligns better with how our customers think about it as opposed to our historical approach from a geographic standpoint. So our operating reviews have become a lot more streamlined and a lot more straightforward, which, from our perspective, is certainly a helpful improvement. A relatively short order cycle business, as I commented earlier. And so I wouldn't say we've seen really any meaningful change in that regard over the last 90 days or so. Our supply chains have largely normalized in both segments. So we're back to pretty healthy levels of service in our Lab segment, which means we can satisfy most orders in a day or two. On the production side, we're 2 to 3 months out, which is kind of pre-COVID levels of performance there. So I'd say the visibility is similar. Now of course, with the accelerating order book and an improved in building order book here, that gives us a little bit more forward visibility on the production side of the business and certainly more confidence in underwriting the outlooks that we have here, which I think is encouraging.

Got it. And then wondering if you could talk a bit more about the pricing and share environment? You commented on contract wins. Any more context you could provide there? And then do you think you're seeing more account churn than normal this year? So does that pose any risk to pricing as the year plays out? Or would you see it more as a potential opportunity for share and maybe top line outperformance?

Let me address your questions in reverse order, starting with pricing and then discussing share. Regarding pricing, our team has delivered another solid year of execution on this front. We anticipate a contribution of about 1 to 2 percentage points from pricing, primarily to offset the inflation in costs we're experiencing. This is in line with historical contribution levels from pricing, and I think our teams have managed this well with minimal disruption so far. We expect to see an increase in revenue in the second quarter as we fully implement these price increases. Overall, I'm pleased with our pricing strategy, which is a favorable driver of our margins. Now, turning to share, this is a positive narrative for us, and I’m excited to share more. Our biomaterials and bioprocessing businesses have a strong history of share growth. We generally outperform the wider market in bioprocessing by 300 to 400 basis points. Even with the declines we experienced in the quarter, our performance remains impressive and top-tier. Even when considering our more limited footprint in China, I stand by this assessment. On the Lab side, we've placed significant emphasis on the academic sector, where we've been experiencing solid growth, new customer acquisitions, and important contract renewals. This segment has historically been a bit more prone to customer turnover, but I don't believe we are seeing any significant changes now, although we may be pursuing it more aggressively. With the current fixed budget landscape and lower regulatory sensitivity compared to biopharma customers, we believe this is an area where we can continue to thrive. So overall, it's been another strong quarter for share expansion across both of our segments.

Michael, I know on the last call, you talked a little bit about some of the margin pacing and even the exit rate potential this year. I guess with the bioprocessing order improvement, obviously, nice margin flow through on that. The cost savings plan, obviously, Brent talked a lot about just the visibility there. Can you talk about just the confidence on that margin exit rate and how you are viewing things on that front, given the current trend?

That's a great question, Patrick. We have reaffirmed our guidance for the full year today, which reflects our confidence in our current plan. The strong margin performance we achieved in the first quarter helps to reduce the risk associated with achieving our full-year margin targets. While it's still early in the year, Brent mentioned that our cost transformation initiative seems to be ahead of schedule. There’s still much to accomplish this year, but we remain focused on executing these plans, and there may be some additional benefits as the year progresses. At this point in the calendar, it's wise to capitalize on our first-quarter outperformance and continue to push forward with all our ongoing initiatives. We will keep you informed as we progress through the quarter. From my perspective, this indicates a reduced risk in meeting our margin targets for the year.

Yes, thanks, Patrick. We continue to generate cash effectively and are maintaining our pre-transformation costs and cash flow guidance for the year. If there isn’t a significant increase in EBITDA, we will likely meet our targets by 2025. We are fully committed to reducing our adjusted net leverage to below 3x and are taking steps to accelerate this process. We will keep you updated every quarter and will work diligently to reduce the debt balance.

Those are all the questions we have time for today. And so this concludes our question-and-answer session. I would now like to turn the call back over to Michael for any concluding remarks.

Yes. Maybe just a couple of quick comments here. I just would reiterate how well positioned we are here in this environment, particularly with our new operating model. As you can tell from our comments today. We're encouraged by the leading indicators that we're seeing, particularly in the improving order book in bioprocessing. We're out of the gate strong with our cost transformation initiative. We're able to accelerate some savings into the first quarter here, and I'm pleased with our progress here. So thank you all for joining us today. I certainly look forward to updating you when we meet next. Until then, be well, everyone.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.