Good morning. My name is Emily, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Avantor’s Second 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. 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. We delivered another solid quarter with sequential improvement to all key financial metrics, with reported revenue of $1.7 billion. Organic revenue declined 2%, modestly above the midpoint of our guidance, driven by stable conditions in the lab and improved demand in our production business, especially bioprocessing. Compared to the first quarter, adjusted EBITDA margin increased more than 100 basis points to 17.9% and adjusted EPS grew double-digits to $0.25, well above our guidance for the second quarter. Our margin improvement was driven by pricing, improved mix, and realization of savings from our multi-year cost transformation initiative. We also generated $235 million of free cash flow in the quarter, inclusive of cash costs related to achieving our transformation savings. Reflecting our strong working capital performance, year-to-date free cash flow conversion has exceeded 100%. We paid down over $200 million of debt in the quarter and remain committed to bringing our adjusted net leverage ratio below 3 times. We continue to make good progress with the implementation of our new operating model and are seeing early benefits, aligning our teams with our customers' needs in the lab and production environments. In addition to unlocking significant operating efficiencies and streamlining execution of our operating plan, we're also realizing benefits from ongoing commercial intensity. Highlights from the second quarter include the launch of the J.T. Baker Cell Lysis Solution and J.T. Baker Endonuclease, complementary products to sustainably optimize the gene therapy harvest process. We also launched our Masterflex MasterSense gear pump, which has exciting applications in mRNA encapsulation. We secured several new contract wins and renewals, including with biopharma and CDMO customers, as well as with leading academic and government institutions. As part of our effort to bolster operational excellence and improved service levels, we recently opened our new North America customer service center in Mexico, which is modeled after similar service centers in Europe and Asia. Sustainability is core to our strategy and the value we provide to our customers. We published our annual sustainability report in June, highlighting the progress we have made in the past year under our Science for Goodness platform, including broadening our sustainable products offering and working with our suppliers to create a more sustainable supply chain. Finally, our team continues to execute our multiyear cost transformation initiative, including aligning our manufacturing and distribution footprint with current and future areas of growth and improving our organizational efficiency. Accelerated results from this program drove margin performance above our guidance range, and we are on track to meet our in-year cost savings target of $75 million in 2024. The broader market conditions remain consistent with the first quarter, and the tone of our customer dialogue continues to be constructive. It is clear to me that the power of our channel and our commercial intensity are making a difference in the current environment.

Thank you, Michael, and good morning, everyone. I'm starting with the numbers on Slide 4. Reported revenue was $1.7 billion for the quarter, declining 2% on an organic basis. Sales trends in our Laboratory Solutions segment were similar to the first quarter levels, while we saw sequential improvement in our Bioscience Production segment driven by strength in bioprocessing. Adjusted gross profit for the quarter was $583 million, and adjusted gross margin was 34.2%. This represents a 40 basis point expansion year-over-year, with favorable impacts from pricing, mix, and productivity. This also represents a 20 basis point sequential improvement, helped by the relative outperformance in Bioscience Production. Adjusted EBITDA was $306 million, up $23 million sequentially. Adjusted EBITDA margin was 17.9%, up over 100 basis points sequentially. Our sequential adjusted EBITDA improvement was driven by the increase in sales and the impact of our cost transformation initiatives up and down the P&L. On a year-over-year basis, performance was impacted by low sales volumes and the impact of our incentive compensation reset. Adjusted operating income was $277 million at a 16.3% margin in line with adjusted EBITDA performance and the drivers just noted. Adjusted earnings per share were $0.25 for the quarter, a $0.03 sequential improvement driven by strong operating income performance. We generated $235 million of free cash flow in the quarter. Our free cash flow performance reflects our bottom line results and strong working capital performance, partially offset by cash costs of nearly $40 million from our cost transformation initiative in Q2. When excluding cash costs related to the transformation, we've generated $385 million of free cash flow year-to-date. Our adjusted net leverage ended the quarter at 3.9 times adjusted EBITDA. As Michael noted, we remain focused on deleveraging and paid down over $200 million of debt in the quarter. Slide 5 outlines our segment performance. Laboratory Solutions revenue was $1.16 billion for the quarter, declining 2.7% versus the prior year on an organic basis. Sequentially, sales were stable at Q1 levels. Adjusted operating income for Laboratory Solutions was $151 million for the quarter, representing a 13.1% margin. The year-over-year adjusted operating income decline was driven by negative sales volume and the impact of our annual incentive compensation reset, partially offset by favorable mix and savings from our cost transformation initiative. Sequentially, Laboratory Solutions adjusted operating income was up modestly, with similar sales volume and mix at the gross margin line and incremental cost savings driving improved conversion. Adjusted operating income margin increased 3 basis points from Q1. Bioscience Production revenue was $547 million, representing an organic decline of approximately 0.3% versus the prior year. Sequentially, reported revenue increased by $24 million, net of a $3 million headwind from FX. Bioprocessing, representing about two-thirds of the segment, outperformed and was down mid-single digits on an organic basis versus our expectation of down mid to high-single digits. Sequentially, bioprocessing grew high-single digits as improved order rates are translating into increased sales and are supportive of continued momentum as we enter the second half of the year. Specific areas of strength include both process ingredients and fluid handling products. As Michael noted, our fluid handling products returned to growth on a year-over-year basis, a very encouraging sign for activity in the space.

In summary, we delivered another quarter of solid performance and are encouraged by our momentum in bioprocessing. Enabled by the Avantor business system, we are ahead of plan in executing our cost transformation initiative and have delivered exceptional free cash flow generation with year-to-date conversion well over 100%. With that, I'll now turn it over to Brent to walk you through our second quarter results in more detail.

Moving to the next slide. As Michael said earlier, we continue to view our guidance ranges as appropriate, and we are reaffirming our full-year outlook as shown on Slide 6. In terms of revenue, given our strong year-to-date performance in bioprocessing and continued momentum, we expect Bioscience Production to exceed original expectations and finish the year down low-single digits organically. We expect Laboratory Solutions to be flat to down low-single digits organically with seasonal patterns driving the range. At an enterprise level, the midpoint of our organic growth guidance assumes normal lab seasonality, while the lower end accommodates more muted seasonal patterns. Year-to-date margin performance has significantly derisked our adjusted EBITDA margin and EPS guidance, and our year-to-date conversion puts us in a strong position on free cash flow. For the third quarter, we expect organic revenue growth of negative 1% to plus 2%. We also expect Q3 adjusted EBITDA margins to be stable sequentially.

Thank you, Brent. In summary, our team's commercial intensity, alignment with our customers' core research and production needs, and operational discipline generated another quarter of solid performance. Our margin expansion drivers are working. We are seeing relative strength in high-margin categories, including bioprocessing, and we continue to drive our multi-year cost transformation initiative. The impacts of these actions are evident in our results, and we expect they will continue to drive strong incremental margins as end market demand fully recovers. Additionally, the new operating model that we implemented at the start of the year is generating momentum across our business segments. Our commercial intensity is driving share gains with meaningful new contract wins and expanded customer relationships in our biopharma, education, and applied end markets. Our customer-driven innovation agenda and internal R&D engine continues to develop products that are inherently sticky. And our integrated sales and customer excellence organization is creating a stronger, more cohesive customer experience. As always, we are focused on execution and remain confident in the opportunities that lie ahead for our business. Finally, I'd like to close by thanking our Avantor associates for their dedication to serving our customers and for their many contributions to our transformation and operating results.

Thank you. Our first question comes from Vijay Kumar with Evercore ISI. Vijay, please go ahead.

Good morning, Michael, and congratulations on a solid quarter. My first question is about Bioprocessing. You mentioned destocking; could you provide any quantification of the destocking impact for the second quarter or the first half? I'd like to get a better understanding of the underlying growth. Additionally, how did orders perform this quarter regarding sequential and year-on-year trends? It would be helpful to hear comments on where the orders came from in consumables versus instrumentation.

Thanks for the question, Vijay. Good to hear from you. As we described in the prepared remarks, we are very pleased with what we're seeing in bioprocessing, and the fundamentals are clearly improving. I think we're encouraged by the outlook here. As we said, we had another quarter of strong orders. You asked about year-over-year, certainly, we saw good growth year-over-year as well. We characterize as just continued momentum in how that order book is building. Perhaps more importantly, I think, Vijay, it's important to realize, given our lead times and such, we are starting to see these positive trends convert to revenues, and we delivered another quarter of outperformance on the platform. We went into the quarter thinking about processing being off high-single digits to perhaps mid-single digits, and we obviously finished up at the high end of that. Given the momentum and the order book that we've realized in the quarter, it enabled us to improve our outlook on a full-year basis. We're certainly excited to see the platform return to growth exiting the year.

Understood. Brent, can you provide insight on the positive free cash flow trends this quarter and in the first half? Is there any timing aspect regarding free cash flow? You mentioned that pricing influenced margins. When volumes return to normal, how should we view margins? I understand that the normalized operating model was between 50 to 100 basis points. Will cost savings be additional to that 50 to 100 basis points outlook?

So thanks for the question. A few things to unpack there. Look, on the free cash flow side, I would think about it as just the performance in the first half there, a little lighter in Q1, very solid in Q2. If you look, we had really nice improvement in working capital days there, frankly, in all metrics. And I'd put that to real focus on execution and we reiterated the guide in connection with that. So I think we'll perform solidly for the year. In terms of other margin acceleration and being on the algorithm, I would just stick to what we stated in the algorithm there. We’re still in this dynamic period right now. We have a lot of costs coming out of the business and just stick to the general way we think about the business going forward.

Understood. Thanks, guys.

Our next question comes from Tycho Peterson with Jefferies. Tycho, please go ahead. Your line is now open.

Hey, good morning. Maybe just want to probe in on some of the Bioprocess recovery comments on process ingredients, you made some intra-quarter comments on API. So I'm just wondering if you can kind of put the process ingredient comments in context of where we are on the API front? And then how do we think about fluid handling products? You had mentioned that’s a good kind of leading indicator. So maybe put some context around that. And are there remaining pockets of weakness you can point to? And then maybe expectations for the core growth exit rate for Bioprocess for the year would be helpful?

Thanks for the question, Tycho. Good to hear from you. Welcome back. A few things to get into there. I think, again, just to reiterate what we've been saying, we're very pleased with the momentum that we are seeing as broad-based. You asked about the process ingredients, and I think one of the things I liked about our platform is that we are going to have exposure upstream, downstream, and through fill/finish, and we're seeing good momentum across the portfolio. We called out our Masterflex and single-use platform; that platform and associated solutions returned to growth on a year-over-year basis in the quarter. That was a platform where we were first starting to see some of the green shoots and leading indicators turn favorable for us last year as we really started to see an acceleration of engineering drawing activity, and certainly, that's continued and now also starting to translate into improved revenues. So I think there's a lot to like about the momentum that we have on that front. Relative to APIs and inventories and such, I think there's probably a couple of ways to think about that. Consistent with the way we've been talking about it over the course of the last year or so, the destocking of our products is largely complete. Yes, I'm sure there's a few isolated pockets of inventories at specific customers, but largely, that's getting behind us. The elevated inventories with some of the APIs in bulk drug substances that we've seen at our customers continues to improve, but still not at a level where we see underlying production matching end market demand, but certainly improving and one of the dynamics that's leading to the improved growth rates. I think your last question there was just around how we see Bioprocessing trending through the balance of the year and perhaps where we see it exiting the fourth quarter. I think we've indicated we're certainly looking forward to the welcome return to growth for the platform in the fourth quarter. Given the momentum to the order book, we have increased our outlook on a full-year basis. We see Bioprocessing probably down low-single digits on a full-year basis, which leads you to an exit rate in the mid to high-single digits for the platform. Thanks for your questions, Tycho.

Okay, thanks. Can I ask a quick follow-up regarding education and government? You mentioned some improvements there, but it declined mid-single digits compared to a low-single digits drop in the first quarter. I want to clarify what you mean by that.

Yeah. So the end market, education and government, you're right down mid-single digits. There's probably three key components to that platform. We have some exposure to K-12, which has a real seasonality component to it, kind of just the return of the school year falls right on top of the quarter. You see some dynamics, sometimes the orders come in June or revenue comes in June. Sometimes it comes in July. So it looks like this year, probably a little bit more weighted to the third quarter. Government was down for us a bit. I think on the higher education piece, which is probably the most important piece for us here, difficult comp. I think that was probably the high point for the year last year, leading to the results you see there. I think for us, the focus here remains on commercial intensity. We've had a lot of nice wins and ongoing share gains, and I think we're encouraged to see higher education improve sequentially as we move from Q1 to Q2.

Okay. Helpful. Thank you.

The next question comes from Doug Schenkel with Wolfe Research. Please go ahead. Your line is now open.

Good morning, and thank you for taking my questions. My first one is on Bioprocessing. Recognizing your mix of consumables is a lot higher than equipment. I'm just curious if you'd be willing to comment on what you're seeing in terms of demand for each category, meaning consumables versus equipment, and how you're thinking about that as you incorporate an assumption about that into your full-year guidance. And then kind of related to that, how does that impact margin? I would think if consumables are trending better than equipment, that would actually benefit margin for the year on top of the fact that you're now expecting Bioprocessing to be a little bit stronger for the year? I would think those would all be good factors for margin for the year. So any comments on that would be helpful.

Thanks, Doug. So on Bioprocessing, as you've indicated, we have a heavy mix favoring consumables. Roughly speaking, it's probably 95% consumables on our Bioprocessing platform, roughly 5% equipment. Of that equipment, what we're really talking here is primarily our peristaltic pump platform within Masterflex. Good momentum across both obviously, and interesting enough, our Masterflex line actually returned to growth in the quarter. I think the margin profile across our equipment or consumables is pretty similar within Bioprocessing. Both components of that are moving in the right direction and supporting the improved outlook there. When I think, at an enterprise level, about this discussion around consumables versus equipment, obviously, we're a consumables-driven platform. I think that's one of the attributes of our business model that is particularly attractive, given the recurring nature of the revenues here above 85%. One of the benefits we saw on margin this quarter was due to improving mix, and the ongoing recovery of consumables and consumables-driven growth is favorable for mix, just given how much of that is proprietary content for us. Equipment was stable sequentially in our lab platform, and we'll see where that goes going forward here. But I think we like the mix that we're seeing here, and particularly the return of proprietary content, which carries a higher margin for us. So, I think there are a lot of favorable dynamics there that support our momentum going forward.

Okay. One quick follow-up. It could be for Michael or for Brent. Given how things are trending right now, it seems like the 2025 exit rate target of 20% plus EBITDA margin is very much achievable. I just want to make sure that you guys agree with that?

We do agree with that, Doug. It's squarely in our sights, and there's a lot of different ways to get there. The thing I'm probably most focused on is how do we get there on driving the things that are fully within our control. Clearly, improved market recovery will help us, but not necessarily needed in order to get there. We're making great progress on our cost transformation initiative. We're ahead of plan and well on track to deliver our targets for this year. We'll be exiting the year at a run rate that has us roughly halfway through the program. So you can layer that in. I think it gives us good line of sight to getting there. If we can layer in improving market dynamics, I think that even gives us more of a tailwind. So in short, yes, very confident on being able to deliver that. We are squarely focused on it, and the team continues to execute well against that plan.

Our next question comes from Daniel Brennan with TD Cowen. Please go ahead. Your line is open.

Great. Thanks for taking the questions. Congrats on the quarter. Maybe first one is, just you have reiterated the full-year guide after the better Q2 with 3Q kind of in line. Your fourth quarter does imply a decent step-up on a stack basis year-over-year. Maybe just speak to the confidence in the fourth quarter. It looks like it's now with the adjusted guide for lab and bioprocess. Looks like it's definitely, you've got improvement in both, but probably more in bioprocess. Maybe just speak to how your second half sets up, if you will?

Yeah. I think we do like the way the year is playing out so far, Dan. At this point, as we see it, none of the assumptions that we laid out as we entered the year have really changed. All factors that we called out there that would drive the range and the guidance are still fully intact in terms of how pricing has played out in line with our plans. Obviously, order books are improving. There are some calendar implications to think about as we move from quarter to quarter, and that's certainly factored into the guidance. As we've said from the beginning, there is a modest seasonality built into our business. We think about kind of 49% of the revenues coming in the first half and 51% is kind of customary for the second half. As we sit here today, I don't think anything has caused us to change our view of any of those assumptions. As Brent outlined in his remarks, probably the biggest variable here as we look ahead to the balance of the year is the production segment, which is clearly on track to continue outperforming. We'll see how the seasonality dynamic plays out in the lab business. But I think in terms of confidence, the range of scenarios there is covered by the ranges that we've given today.

Thank you. I know there have been a few questions regarding Bioprocessing, and I might have missed some details. If we calculate the book-to-bill for the quarter, could you provide the expected figures for Q2? What are we anticipating for Bioprocessing for the full year? I know Tycho inquired about the exit rate, but could you also share the overall outlook for the Bioprocessing segment of your Bioscience Production business for the entire year?

No, good questions. I mean relative to things like book-to-bill, that's not a metric that we actually monitor that closely here for various reasons. So it's not something we've historically tried to quantify. I think we hang our hats on the momentum we're seeing in the order book, given the kind of two to three-month lead times we have, being able to see that order book convert to revenues in the quarter is encouraging for us. We're targeting somewhere in the low-single-digit range for Bioprocessing in Q3, also on a full-year basis. That will have us exiting the year at a mid to high-single-digit range as we enter 2025.

Our next question comes from Rachel Vatnsdal with JPMorgan. Rachel, please go ahead.

Perfect. Good morning. Thanks for taking the questions, you guys. I wanted to dig into some of the seasonality that you talked about, especially on the Lab Solutions segment. So first up, could you walk us through what is typical seasonality from quarter-to-quarter throughout the year on the Lab Solutions segments, so we all have that correct? And then, also on the Bioprocessing side of the business, one of your peers recently called out some seasonality trends heading into the summer months in Q3. So walk us through, are you assuming anything from a seasonality standpoint, even on orders versus revenues for Bioprocessing as well?

Yeah. Thanks, Rachel. Good to hear from you. Look, I think as a general observation, seasonality isn't that big of a factor in our business. This kind of 49% first half, 51% second half weighting is customary for the business, and that's the same basis that we've managed the guidance all year. There's probably some modest seasonality in our production platform, more related to holiday calendars and such, but not a factor that we overweight in our thinking. It's probably a little bit more pronounced within the context of a 49-51 split, a little bit more pronounced in the lab business. The patterns that we normally see play out here is what's contemplated in the color we've given on kind of Q3 and what that implies for Q4. You'll see that the patterns kind of match what we would customarily see. Of course, the business model doesn't give us transparency on the lab side. From an order book perspective to cover that period, we'll see how it plays out. But consistent with what we've said from the beginning, we think it's prudent to base the guidance and outlook based on current conditions, while leveraging some of the historical trends we see.

Great. I just wanted to follow up on some earlier questions to clarify certain answers. I understand you aren't providing book-to-bill information, but could you share the sequential orders for Bioprocessing? Additionally, regarding Dan's question, what are the full-year expectations for the Bioscience Production segment? I know you've shared some details on Bioprocessing specifically, but it would be helpful to understand the full segment expectations for the year.

Yeah. Let me take them in reverse order there. The expectations for the production segment in aggregate, which would include our medical-grade silicone offering into the medical device space, as well as what we do in aerospace and defense and semis. Bioprocessing is roughly two-thirds of that segment, so probably not much of a surprise for you that that's largely driving the outlook for the full year. With Bioprocessing expected to be down low-single digits on a full-year basis, that's also how we see the segment trending for the full year as well. Getting to your questions on the Bioprocessing order book, again, good momentum. Another great solid quarter of intake supporting not only the growth in the quarter that outperformed but leading to the improved outlook on a full-year basis. I think you characterized it correctly; we haven't quantified that or book-to-bill historically. But it'd be probably safe for you to assume that our order book certainly grew in line with what you see others talking about.

The next question comes from Michael Ryskin with Bank of America. Michael, please go ahead.

Great. Thanks for the question, guys. I want to switch to LPS. It seems like there is some revision in the outlook for the year there as well. You talked about 2Q came in mostly in line with expectations, then for the year now you're expecting flat to down low-single digits versus prior, I think I had you at plus low-single digits. So just any color on what's going on there, whether it's by product category and a lot of focus on instruments even as a small part of the business or maybe by customer class? And I've got a follow-up. Thanks.

Okay. Excellent. No, I think it's a good question, Michael. As we talked in Q1 on the lab part of our business, we were encouraged by what we're seeing on the consumables side of the business, particularly lab chemicals and some of the diagnostic formulations that we have showing good momentum. Services have been an element of growth for us this year. Given some of the friction in the system on capital spending, particularly within biopharma, we called out equipment and instrumentation headwinds in the first quarter. We haven't seen really any change in dynamics in the second quarter. I think we'd characterize it as pretty stable overall, which implies continued momentum on the consumables side and similar performance on equipment and instruments. Encouragingly, it certainly didn't deteriorate as we moved forward. One thing we watch closely is activity levels and opportunity pipelines, and we continue to be encouraged by what we're seeing there. It’s taking a little bit longer than maybe historical norms to convert those things to orders, but there are some really good signs. We actually have a business within our lab that does, on an OEM basis, a lot of electrical board design and manufacturing for various lab equipment and instruments, and those tend to be a leading indicator for us. We are really starting to see some reinitiation of projects that were halted and a good project pipeline there. Characterize it as stable sequentially. Performance year-to-date has been a little bit below where we exited last year, primarily due to the trends that we've described here on equipment and instrumentation, consistent with our methodology here of continuing to manage guidance according to current conditions. You'll see that reflected on a full-year basis. So lab is running a bit below the trends entering the year. Production is outperforming, leading us to the full year reiteration.

Let me ask a quick follow-up to that and then I'll include my second question. I want to clarify on the LPS again, is there any indication that you might be losing market share to a competitor since we've heard more positive trends elsewhere? It seems like the overall market for biopharma and academia is moving in a favorable direction. I understand that you're observing encouraging signs and stability, but it is still a downward adjustment. I want to explore this further. Also, regarding the total guide update, if we break it down, two-thirds of your business is LPS and LSS, where you are guiding down by a few percent. The other third is BPS, where you are guiding up by a few percent. Is there some rounding happening? It doesn't seem like that should equate to a fully reiterated guide. You would expect a more significant increase in BPS to offset the smaller size of that segment. I'm just curious where I might be misunderstanding the calculations. Thank you.

Yeah. Both good questions. Firstly, the question on just share performance in Q1 or Q2 in the lab business. I think you'll see from what's been announced, our lab business stacks up well against every number that certainly out there, including some of the numbers released this week. But the market is bigger than the two leading players. It's our strong view that we continue to enhance our position. We talk a lot about our commercial intensity over the last 12 to 18 months that is driving a lot of customer wins and renewals, including in the second quarter across all of our key end markets. You mentioned academia; we saw sequential growth moving from Q1 to Q2 there. We like the setup there, and it's been an area of strong focus for us. Regarding your second question, I’d caution you from trying to be too precise with the math. At an enterprise level, we reiterated the guide, as the assumptions we had coming into the year still hold true. The ranges we've provided for each of the two segments cover the range at the enterprise level. So, I’d caution you against trying to get too detailed there within the ranges that we've implied. I assume that's all supportive of our full-year guidance.

The next question comes from Jack Meehan with Nephron Research. Please go ahead. Your line is now open.

Thank you. Good morning, everyone. Could you provide an update on the $300 million cost savings program? How is that progressing? You have maintained your margin forecast for the year, so what are your thoughts on reaching the targets set back in December and what the timeline for that might be?

Yeah, Jack. It's Brent. Thanks for the question. Look, going back to the cost transformation program, we have four pillars on it: effectiveness, footprint, cost to serve, and procurement. The pillars you can move on more quickly, depending upon geography, are effectiveness and procurement. We have a lot of momentum, and you're seeing that both sequentially and in each quarter. You heard Michael talk about being on track to exit the year at a really nice rate. So, all the pieces are in place. It's not an easy thing to do, but not only are we getting at the cost savings, we’re also getting at the top line. The work is focused and we're very confident that you’ll be seeing improvements in the margins.

Okay. I was wondering if you could discuss the segment level as you look at the overall company guidance for the third quarter and the year. Any comments on the timing and margin would also be appreciated.

Certainly. In terms of Q3, we'd expect on a sequential basis flat to modest growth in Lab Solutions. As Michael noted earlier, we expect low-single-digit decline in BPS and Bioprocessing in Q3. In terms of margin, we expect gross margins to be pretty similar in Q3 to Q2 on a sequential basis, and the SG&A cost base to be very similar sequentially as well.

The next question comes from Matt Sykes with Goldman Sachs. Please go ahead. Your line is open.

Good morning. Thanks for taking my question. Maybe just the first one, Michael, for you, you made some comments about biotech funding, resulting in some elements of starting a positive momentum, yet large pharma remains somewhat constrained. Just what are your expectations for large pharma as we go into the back half of the year? And do you need large pharma to really recover in terms of spend in order to get back to what we consider a normalized specifically bioprocessing industry growth?

So on the biotech side, funding has been up considerably year-over-year and above pre-pandemic levels through the first half of the year. We see this as one of the bright spots supporting the improved market recovery expectations. Historically, you see an uptick in biotech funding, which likely takes a few quarters before translating into sales. For us, that would mean momentum in the lab, as you're talking about new projects getting started and labs being built out. Good funding and high levels of activity are encouraging as we look forward. Relative to large pharma, obviously, we have exposure on both segments due to their R&D activities. You look at the pipelines and the science being developed, I think there are a lot of positives in the setup going forward. The production side is linked to commercial platforms and patient demand. We’re looking at new molecular entities and launches into the market. There has been a very strong first half of the year, and we’re well-positioned to support all of these products and customers. With destocking coming to an end and improved health of pharma and product inventories, I think there are great opportunities as we move into the second half. Our performance has outperformed all year, and we expect the platform to return to growth as we exit the year.

Great. Thanks. And then, Brent, just on pricing, you guys called it out in your deck as a benefit this quarter. Could you maybe quantify what the pricing was in the quarter and what benefit you saw? And then, what pricing expectations are embedded in your full-year guide for '24?

We usually aim for a pricing increase of 100 to 200 basis points. Everything is proceeding right on track, and although there will be a greater pricing impact in Q2 due to the timing of the year, it isn't a major issue. We are successfully following our plan.

The next question comes from Conor McNamara with RBC Capital Markets. Conor, please go ahead.

Thanks. Good morning, guys. Congrats on a nice quarter. First off, just on the intra-quarter progression, either from an order perspective or customer activity, how did things progress throughout the quarter? Can you comment on how things exited June, and if you can, what you're seeing through July?

Thanks for the question, Conor. I appreciate the support. If you look at the quarter, I’m not sure anything necessarily stands out to me in terms of intra-quarter dynamics. It played out largely in line with what we would have expected. We certainly exited the quarter with some good momentum. As we sit here in the early days of Q3, I think we've seen that continue, and it's reflected in our thoughts here as we talk about the third and fourth quarters.

Thanks for the question. I appreciate the support. I realize it's a small part of your business, but what trends are you noticing in China?

Yeah. I would first acknowledge your point that it is a relatively small part of the business. It's tracking in line with our plan, which has relatively modest expectations for the year given the stocking dynamics in the region, which pose more of a headwind than we see anywhere else in the world. Some stimulus discussed there doesn't really influence our business one way or another. The best way to characterize it for us is that it's performing in line with expectations. It's got a longer runway to get back to normal compared to our other core regions.

Great. Thanks for the question. Appreciate it.

The next question comes from Luke Sergott with Barclays. Luke, please go ahead.

Great. Thanks for the question, guys. Just kind of wanted to dig in here on the Q3 sequential improvement across the business, particularly in Bioprocessing, just from a number perspective, because we haven't heard that from many of your peers. I just wanted to get a better understanding of the drivers there, if it's kind of like idiosyncratic to particular customers and how they order or anything like that? Just give us confidence where you get that visibility.

A couple of things. I guess, Luke, firstly, thanks for the question, but nothing particularly stands out to me as I look at the dynamics that led to the print in Q2 versus how we see the setup for Q3. Clearly, the order book as it's shaping up is giving us confidence in what we're seeing. We had another solid quarter of order intake in the quarter, which I think matches with what we're seeing from just a customer sentiment perspective and supports our views shared here on the second half. That order book supports continued growth of our single-use platform, which has been an area that we've focused on. Our ingredients and excipients platform is looking good as well. The mAbs platforms continue to drive the lion's share of the revenues, and these new modalities, particularly some momentum we see on gene therapy helps our business. There are broad-based growth drivers across products, modalities, and customers here. We're excited to see this part of our business falling back in line with our expectations.

Got it. And then just the last one here for Brent. Great margin progression, plenty of questions on this. I guess what I'm thinking about is you're on track here to hit your guide or at least the low end for the back half of the year. Just how much of this is due to when you guys are doing the cost outs and kind of rightsizing the cost structure? Are you finding more than what you thought was there, or is this more of just things are progressing faster than we expected? I'm just trying to get a sense of how much juice is left in that squeeze versus is it a timing issue.

Yeah. No, Luke. Thanks. It's a really good point to highlight. I would definitely point this to the latter, that it's around execution. We dimensionalized the opportunity well. When you dig into a program like this, you always find places that are a little larger than you'd expect and places where the juice is and what the squeeze is. What I would really emphasize is not only are we getting at it faster, allowing us to derisk the margin for the year, but it's not a confusing story within the business. What I'd say is that it’s not easy to do, but not only are we getting at the cost, but we’re also getting at the top line. You’re seeing it both in the P&L on the expense side as well as revenue side; the work is focused.

We have time for one more question. Our final question today comes from the line of Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Thank you. Michael, I'll ask a two-parter. One, just really a cleanup on BPS. On your bulk drug substance destock comments, are there ways for you to improve visibility there and how should we think about guardrails around time to normalization? Can you help us think through how much of a drag that was on your 2Q order growth, which you said was pretty good? Separately, one for Brent; margins here, again, like 70 bps of upside versus your own guide Brent. So can you parse that out for us between pricing versus the bioprocessing mix help versus the cost outs? Are any of these sort of timing-related in nature in your mind, which is why you decided to keep the margin outlook for the year unchanged?

Thanks, Tejas, for the question. I appreciate the support. On our Bioprocessing business, certainly, one of the things we try to triangulate is not only the inventories that are customers of our products, but also we watch closely what they're reporting on their balance sheets or inventories of their products too. Hopefully, all that gets reflected into production plans they share with us and gets reflected in orders. The trends are very, very favorable and seem to be accelerating for us.

On the margin side, let me break it down to gross margin and then the EBITDA margin. So, on the gross margin side, Q2 had a lot of aspects like Q1. We had the sequential BPS improvement that was very helpful as well as pricing actions coming to fruition. A significant balance of price and mix there on the gross margin side. I’d be remiss if I didn’t highlight some of the cost actions and productivity because it is challenging to improve our gross margin in an inflation environment. On the OpEx side, that’s a confirmation of direct transformation impact offsetting our incentive compensation reset and other elements, but really generally good execution.

Thank you all for joining us today. A couple of things I'd like to cover here in the close. Just to reiterate our assumptions for the third quarter, organic growth is expected to be minus 1% to 2%. At the segment level on a year-over-year basis, we anticipate flat to modest growth in the lab business and low-single-digit decline in our production segment. On a full-year basis, we've reaffirmed our guidance with lab now expected to be down low-single digits to flat, with our production segment's outlook improving, now expected down low-single digits. We're very pleased with how the year is playing out. The assumptions driving our guidance as we entered the year are still fully intact. Clearly, we've demonstrated strong performance against our plan. I'd like to again highlight the momentum we see in our bioprocessing business, and we're confident in our ability to deliver on our plans for the year, which do not depend on market recovery or improved conditions. We talked about the meaningful progress we're making on our transformation initiative, and we are well on track to meet our targets for this year and the program's three-year life. We look forward to updating you when we meet again in October. Until then, be well, everyone.

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