Avantor, Inc. Q3 FY2025 Earnings Call

Good morning. My name is Emily, and I will be your conference operator today. I would like to welcome everyone to Avantor's Third Quarter 2025 Earnings Results Conference Call. I will now turn the call over to Allison Hosak, Senior Vice President of Global Communications. Ms. Hosak, you may begin the conference.

Good morning, and thank you for joining us. Our speakers today are Emmanuel Ligner, 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 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 as a result of new information, future events or other developments. This call will include a discussion of non-GAAP measures. A reconciliation of the 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 Emmanuel.

Thank you, Ali, and good morning, everyone. I appreciate you joining us today. As you know, I joined Avantor a little more than 2 months ago. I came on board because I believe this company has tremendous potential. I have spent my entire career in the pharma and life science industries, spending meaningful time on 3 different continents. I was fortunate to spend 2 decades at GE Life Sciences and Danaher, where I built out the Cytiva business, significantly accelerated the growth trajectory of the platform, and led its integration with Pall Life Sciences. During that time, I had a front-row seat to Avantor's trajectories as a customer and supplier. I believe this experience enabled me to step into this role 10 weeks ago with a unique perspective on the company's strengths and areas for improvement. Throughout my career, the primary lesson I've learned is that there is no substitute for going to Gemba. This concept literally means visiting the place where work is done and value is created to learn and determine how to best improve our organization. And for the past 2 months, this is exactly what I have been doing. I have dedicated my time towards visiting our sites, meeting our people, speaking with dozens of our customers and suppliers across Asia, Europe, and North America. This not only sharpened my initial instincts but also provided invaluable insights as we map out our strategy moving forward. I want to personally thank all the stakeholders for the warm welcome, open dialogue, and trust demonstrated from my first day in the role. Here are some of the important learnings. First, this is a great industry with strong secular tailwinds. Scientific collaboration is more important than ever. If you talk to any pharma or biotech company right now, you will hear about the multitude of ways in which they are harnessing the power of technology and AI to accelerate the next breakthrough discovery. That gives us a tremendous amount of confidence in the long-term trajectory of the end markets we serve and reinforces the importance of our positioning within the industry. Our recent announcement with BlueWhale Bio is a perfect demonstration of how Avantor is advancing innovation through collaboration, and we are committed to continuing to do our part to facilitate the research, development, manufacturing, and delivery of next-generation therapies. Second, Avantor has a solid portfolio, a committed global team, and incredible customer reach, serving more than 300,000 customer locations across approximately 180 countries. As someone that has spent considerable time in recent years working to scale life science businesses, those attributes will be the envy of most companies. We have significant untapped potential and numerous opportunities in front of us, and we need to capitalize on those opportunities. Third, and most importantly, there are many things we can and should do better, and we are taking immediate action to turn the business around and hold ourselves accountable for rewarding the trust our investors place in Avantor. Starting from a commercial perspective, I believe our business is overly complex with unnecessary centralization, which inhibits frontline staff from most effectively meeting our customers' and supplier needs and expectations. Customers buy from Avantor because of the quality and service heritage of our incredible brands, VWR, J.T.Baker, Masterflex, NuSil. Those are some of the best-known names in the industry, and our commercial team is not being sufficiently empowered to leverage the equity of those brands. On the operation and supply chain side, I believe we need to make some investments and process enhancements to improve our ability to consistently serve our customers. Overall, I believe those challenges are generally self-inflicted. And the good news is that they are fixable with determination, focus, and time. At the conclusion of this call, I will share my preliminary thoughts on our plan for doing just that, which we are calling Avantor Revival. With those initial findings in mind, we strongly believe that our current share price does not reflect the long-term value of our platform. To demonstrate our long-term conviction in the prospects of this business, our Board of Directors has authorized a $500 million share repurchase program with immediate effect, which we will pursue opportunistically moving forward, while also delivering on our commitment to decrease net leverage. Now I would like to turn over to Brent for a more detailed overview of our third quarter financial results and our updated full-year guidance. Brent?

Thank you, Emmanuel, and good morning, everyone. I'm starting with Slide 4. For the quarter, reported revenue was $1.62 billion, which was down 5% year-over-year on an organic basis. This reflects weaker-than-expected top-line performance, primarily in lab. Adjusted EBITDA margin was 16.5%, and adjusted EPS for the quarter was $0.22. Free cash flow was $172 million, with adjusted conversion at 124%. Turning to Slide 5. Adjusted gross profit for the quarter was $527 million, representing a 32.4% adjusted gross margin. This is a decline of 100 basis points year-over-year, driven mainly by price actions in lab to protect and grow market share. We had another quarter of solid cost control with adjusted SG&A expense better than planned and prior year. Our results also benefited from reductions in incentive compensation accruals. We remain on track with our cost transformation program and continue to expect $400 million in run rate savings by the end of 2027. Adjusted EBITDA was $268 million in the quarter, representing a 16.5% margin, better than our expectations. Adjusted operating income was $237 million at a 14.6% margin. Interest and tax expense were in line with our expectations. As a result, adjusted earnings per share were $0.22 for the quarter, a $0.04 year-over-year decline. Our adjusted EPS performance in the quarter reflects the flow-through of our adjusted EBITDA results. Our cash generation was particularly strong with $172 million in free cash flow in the quarter. When adjusted for transformation-related payments, our free cash flow conversion was 124% of adjusted net income for the quarter. In terms of our GAAP results, we took a $785 million impairment to the goodwill associated with our lab distribution business. This noncash charge was necessitated in large part by the continued weakness in our share price as well as the margin headwinds this business is facing. Our adjusted net leverage ended the quarter at 3.1x adjusted EBITDA, down 0.1x from Q2 as our strong cash generation enabled us to reduce net debt. Finally, we recently affected a very attractive refinancing of our near-term maturities and upsized our revolving credit facility to $1.4 billion and extended its maturity to 2030. Other than modest required term loan amortization, we now do not have any debt maturities before 2028 and all of our debt is either prepayable at par or at very modest call premium. Our debt is approximately 75% fixed rate, and our current weighted average cost of debt is just over 4%. Let's now take a closer look at each of our segments on Slide 6. In Laboratory Solutions, revenue was $1.1 billion. On an organic basis, we declined 5% versus prior year, below our expectations of negative 2% to negative 4%. The market backdrop in lab is largely stable, and Corey Walker and his team have done a great job defending and expanding business at our largest accounts. The share losses we mentioned on our Q1 call have been phasing in over the past several quarters. The good news is that since Corey joined us in late March, we haven't lost any key customer accounts. In fact, we have won about $100 million in business at 2 top 15 global pharma customers, which will start phasing in in 2026. With that said, customer activity continues to be at lower levels than our original expectations for the year, driven by ongoing end market uncertainty related to basic research funding. Each of our lab businesses faced similar mid-single-digit headwinds on a year-over-year basis. Our distribution channel, which accounts for approximately 2/3 of segment revenue was primarily impacted by weakness in consumables and equipment and instrumentation, while our chemicals and reagents were essentially flat. Our services business, approximately 20% of segment revenue saw greater-than-expected headwinds due to the aforementioned share loss. Our proprietary business, which is the balance of labs revenue, was significantly impacted by our science education business. However, our attractive proprietary lab chemicals grew mid-single digits in the quarter and similarly year-to-date. The primary drivers of our miss to expectations were headwinds in services and higher education and K-12. While market softness is a key factor in the quarter's performance, we also continue to navigate competitive pressures. These need to be better mitigated by improved commercial and operational execution, which, as Emmanuel noted at the outset, is one of our key priorities as part of Avantor Revival. Adjusted operating income for Lab Solutions was $124 million for the quarter, with an 11.3% margin. The softer demand environment has pressured our ability to get price, which has meaningfully impacted margins year-over-year. On a sequential basis, the primary driver of the margin decline was lower volumes and related absorption. Turning to Bioscience Production. Revenue was $527 million in Q3, down 4% organically on a year-over-year basis and at the low end of expectations. Bioprocessing was down low single digits year-over-year versus our expectation of flat. Within bioprocessing, process chemicals was up low single digits but was lower than expectations. The planned maintenance downtime that impacted Q2 was remedied during the quarter. But as Emmanuel mentioned, we continue to face other operational headwinds that are impacting our throughput, including raw material availability and equipment uptime. As an example, downtime at several of our plants prevented us from shipping several orders that were due for delivery in Q3. Absent these issues, we would have delivered our bioprocessing guide for the quarter. Single-use largely performed as expected, and CEC was somewhat weaker than expected, down mid-single digits due to commercial execution and competitive dynamics. Year-to-date and in Q3, our book-to-bill is 1.0 for bioprocessing, with particularly strong performance in process chemicals, where order rates were up high single digits in Q3 and year-to-date, while billings are only up low single digits, indicating a solid trend. Our bioprocessing order backlog reduced modestly from Q2 to Q3, but still is too high. The team is working hard to reduce this as much as possible by the end of the year. For the balance of the segment, silicones performed as expected, and Applied Solutions had a stronger-than-expected quarter, up low single digits on significant strength in electronic materials that we expect to continue in Q4. Adjusted operating income for Bioscience Production was $128 million for the quarter, representing a 24.2% margin. Margin was down year-over-year, largely due to lower volumes and related under-absorption as well as higher expenses related to our operational challenges. On a sequential basis, volume was the primary headwind, only partially offset by price and lower operating expenses. Slide 7 shows our full-year 2025 guidance. This has been updated to reflect Q3 performance as well as our best assessment of the current environment. We now expect full-year organic revenue growth of negative 3.5% to negative 2.5%. Based on current FX rates, we expect a modest tailwind from FX of approximately 1.5%. Along with the 2% headwind from the Clinical Services divestiture, this leads to reported revenue growth of negative 4% to negative 3%. On a segment basis, we expect Laboratory Solutions full-year revenue growth to be mid-single digits to low single digits organically, down modestly from previous expectations. This implies Q4 organic performance of mid-single digits down. This change is due to the impact of Q3 performance as well as expectations for continued softness in consumables and in our lab services business. We also expect additional headwinds due to the impact of the U.S. federal government shutdown. We expect Bioscience Production's full-year revenue growth to be low single digits organically, down from previous expectations. This implies Q4 organic performance of down mid-single digits to down high single digits. This change is largely due to reductions in our outlook for bioprocessing as well as customer pushouts in our silicones business. Bioprocessing is expected to be down low single digits for the year organically, down from previous expectations of flat to low single digits. This implies Q4 organic performance of down high single digits to low double digits. Recognizing this is a meaningful change, I want to break down our expectations across bioprocessing. We believe process chemicals in Q4 will be flat sequentially versus Q3 and down double digits year-over-year despite solid year-to-date order book performance. We previously expected a mid-single-digit contraction in Q4 for process chemicals. This change is largely due to higher-than-expected backlogs as a result of the ongoing challenges previously discussed. Q4 is also a particularly tough comparable as process chemicals grew meaningfully in double digits in Q4 last year. We anticipate single-use to be up low single digits, both sequentially and year-over-year in the fourth quarter. We previously anticipated high single-digit growth in Q4 for single-use. Controlled environment consumables are expected to be flat sequentially and down low single digits year-over-year. We previously anticipated this business to grow modestly in Q4. This business is being impacted by competitive pressures and the general demand weakness we are seeing in consumables. Moving to profitability. We expect our strong cost controls and favorable compensation accrual impact to continue into Q4. As such, we expect full-year adjusted EBITDA margins in the mid-16s. We have reduced our adjusted EPS guidance range to between $0.88 and $0.92. We still expect free cash flow performance of $550 million to $600 million before any one-time cash expenses associated with our cost savings initiative. The reduction in earnings from our previous guidance should be offset with strong working capital performance, and we now expect about half of the prebate payments anticipated for the fourth quarter to push into fiscal year '26. I also want to address near-term capital allocation. Much of our debt complex is prepayable at par, and we will continue to reduce outstanding debt as we generate cash. At the same time, with our new share repurchase authorization, we intend to buy shares opportunistically without increasing leverage. We ended the quarter at 3.1x adjusted net leverage, and we'll continue to move towards our leverage target of sustainably below 3x. With that, I will turn the call back to Emmanuel.

Thank you, Brent. Clearly, we are disappointed with those results, and I am not here to make excuses for our underperformance. My focus is on addressing the root causes of those persisting challenges and implementing appropriate cost corrections quickly. At the beginning of this call, I introduced the concept of Avantor Revival. Our Board and management team are fully aligned with this effort, which will initially focus on 5 key pillars. First, our go-to-market strategy. We need to evolve our approach to ensure customers and suppliers clearly understand our value proposition and complete product and servicing offering. As I mentioned in my opening remarks, we have an incredible roster of brands. Embracing VWR heritage as a leading distributor and a company heritage as a leading provider of fine chemicals and specialty materials, for example, is essential to drive growth. So we are carefully evaluating our brand architecture, and we are going to give more prominence to key product and channel brands moving forward. We also intend to refocus attention to our distribution business and our value proposition to suppliers and customers. We also have work underway to analyze our and evolve our customer service and commercial organization. This work is really focused on empowering our sales representatives to better serve our customers, however and wherever they want to be served. This includes enhancing our e-commerce platform. Second, we need to invest strategically in our manufacturing and supply chain organization. Brent noted the operational issues we are having. In bioprocessing chemicals, the demand is there, and we need to be better positioned to meet that demand at all times. The current state of our manufacturing and supply chain organization varies with some facilities that are world-class, while others are in need of investment. Third, we will be carefully scrutinizing our portfolio to ensure a focus on our core business. We are going to hold each of our businesses accountable for delivering clear growth, profitability, and return on investment targets. We are approaching this process with an open mind, but if any of those businesses are not capable of delivering those targets in a reasonable timeframe, we are going to scrutinize whether we are the right owner for them. Fourth, we need to drive net cost savings and simplify processes across the organization. We are committed to being a business that generates strong operating leverage even as we invest in accelerating growth. And our ongoing EUR 400 million cost transformation program is an important step in that direction. However, we recognize that those savings today are not adequately falling through to the bottom line. Part of this is because we are still operating with far too much complexity today. We need to simplify our operating processes to remove barriers that prevent us from executing efficiently. Gaps in certain operating processes have contributed to inventory and forecasting challenges, preventing us from serving our customers at the on-time rates they expect. To address this, we are focused on improving leadership accountability across the businesses. We are establishing new operating norms and cadence that will ensure the leaders across our organization are aligned and focused on top business priorities. Finally, to help to do this, we must strengthen our talent and improve accountability in a few key areas. Very encouragingly, most of the associates I've met are deeply engaged and passionate about the work they do each day. They want the company to succeed. They are prepared to work hard and be part of the solution. They are looking for leadership and guidance on how to do that. To support those efforts and accelerate improvement, we will be bringing on new talent in a few key areas. A new Chief Operating Officer, a critical role that will report to me and help reinforce consistent manufacturing, supply chain excellence, and lean operations across the organization. A new executive leadership position dedicated to the quality and regulatory function reporting directly to me, a strategic move reflecting the critical role quality and regulatory play in safeguarding patient safety, ensuring regulatory compliance, and driving operational integrity across our global business. We are also hiring a new Chief Digital Officer to help strengthen digital commerce capabilities with our Laboratory Solutions segment. Avantor Revival will initially be targeted towards addressing each of those focus areas. Those important actions will help us drive meaningful changes and improvements across our organization over the next several quarters, but we are not stopping here. It is important to stress that those initial steps are based on my observations following about 2 months in the role. I'm committed to continue to meet with and learn from all our stakeholders. And as I do, rest assured those plans will continue to evolve with a renewed focus on getting our performance back on track and creating value for our shareholders. Clearly, turning business performance around will take some time, but we are confident the actions we are taking will have an impact that will continue to grow over time. It's about driving simplification, process improvement, and accountability across the organization. As I noted a moment ago, our Board and management team are 100% behind this effort. The recently announced addition of Greg Lucier to our Board and the elevation of Greg Summe as our next Board Chairman are demonstrative of our Board's active oversight and engagement in this project. I know we must rebuild our credibility with the investment community, and accountability will be my North Star. You can expect regular updates on our progress against those objectives. With that, I will now turn the call over to the operator to begin the Q&A session.

Our first question today comes from Vijay Kumar with Evercore ISI.

Emmanuel, welcome to your first earnings call. At a high level, based on your review of the business and your bioprocessing background, how confident are you that these declines can be addressed? I'm also interested in understanding how the quarter unfolded compared to your prior expectations. Did things progress as you anticipated, and did conditions worsen in September or October? When did these issues first arise?

Thank you, Vijay, for the warm welcome. I believe the issues we face are fixable. Over the past two months, I have spent significant time in the field with our team and customers, and I'm truly pleased with their conviction and passion for our brand and products. What the team needs is strong leadership. I recognize that the quarterly results are disappointing, and we acknowledge our shortcomings in several areas. I've emphasized the importance of improving communication, visibility, execution, and accountability. To address this, Brent and I are establishing new norms and cadences to foster teamwork. I remain confident that these issues are fixable. These are the five key areas I've identified in my first eight weeks, and we will keep learning and engaging with key stakeholders as our plan evolves.

Understood. Brent, when you consider 2026, some of your competitors have projected growth in the low single-digit range. Can the business grow in 2026? You mentioned a $100 million contribution from the lab. On paper, it seems that the lab should experience growth in bioprocessing, but it also appears that some of the growth was related to specific customer situations from fiscal 2025. Can the business achieve substantial growth in 2026?

Vijay, Emmanuel again. Look, I'm taking a fresh look at all the numbers, right, because I want accuracy. And so let me look at those numbers again, and then we'll come back to you when we have a good understanding of 2026.

I appreciate the transparency in your prepared remarks. You briefly mentioned share losses and competitive dynamics concerning the first and second quarters. Can you provide more in-depth insights on that? The recent results, particularly in the Lab Solutions segment and Bioscience, indicate significant share losses to your competitors. While I value your commentary on operational steps to address this, considering your portfolio and the markets you operate in, what are your plans to counteract this trend of share loss? Additionally, could you offer some assurance regarding your visibility to resolve this issue, as it appears to be a major structural challenge you are facing?

Yes, Michael. Look, it's my understanding; I think we've lost some share without any doubt in the lab services business. Here's why I'm super encouraged is we have Corey that took the lead of this business 6, 7 months ago. And what him and the team is doing is really having, I will say, a fighting spirit back. And what we have observed over the last 6 to 7 months is that we have not lost any new renewal of any large key account contracts. And I think this is really important for us. And on the contrary, we have the opportunity to grow our share of wallet in those accounts. Now we have some barriers that we need to fix and some challenges. I mean, e-commerce is one of them, and this is why we're taking really quick action to recruit a Digital Officer to help us to really get this e-commerce platform to engage with our customers in a much more lean way to provide not only products but really workflow, which is so important for the customers. On bioprocessing, my view is the following. Really, our key product line in the bioprocessing is our bioprocessing chemicals. When we look at our order intake year-to-date, our order intake is on a high single-digit level. So we're there. I met customers that clearly said to us, we want to work with you. We want to do better. We can give you more businesses. We need to fix a couple of things like our service level, in particular, our on-time delivery. And this is why it's so important to work on the S&OP to look on the plants that need upgrades, and that's what we're doing, and we are doing as fast as possible on this.

Okay. And if I can have a follow-up. On the Avantor revival dynamic, I mean, I think that's certainly resonates. You called out a couple of times that you believe the business is overly complex, unnecessary centralization. We've heard that from a number of our channel checks as well. What are the steps to fixing that, right? I mean, it's a huge organization. There's a lot of levels. It seems like there are going to be some deep changes there. But from an operational perspective, that seems to be the easiest 6. But could you talk us through the process to get there and how long that could take?

It's really early days for me. I remember. So look, we are going to start to really work on the go-to-market, really understand how we can decentralize more of the decision-making closer to the customers. And as you know, there's different regions with different dynamics. And so we really need to empower the local team to really drive the decision. I think the other thing is, look, we have 2 really important businesses. One is our lab services. It's VWR. It's a distribution business. We have a very strong brand there. And then the other one is about the science business with brands like J.T.Baker. I think we need to make sure that those brands are more, I would say, front at the customer's level to make sure that we engage with the customers with the brand they want to work with. The observation that I have, Michael, is many customers told me, we love VWR. We want to continue to work with VWR. Some even say, well, we didn't know that VWR was part of Avantor. And that's why I'm talking about brand revival and really making sure that we are improving our engagement with the customers. Service level is very, very important, okay? And this is why we are looking at what do we need to do in the plants which are in need of investment to make sure that we raise our service level on the bioprocessing. Again, as we said earlier, the demand is there. It's for us to really make sure we operate better.

To start with the lab side of the business, could you describe the pricing dynamics in the third and fourth quarters? What are your thoughts on the price volume mix? Also, while I understand it's early to discuss 2026, do you expect pricing to improve? Finally, from a strategic standpoint, since you've joined and assessed the lab market, you've mentioned share loss. Can you provide any insights on how much market share you believe VWR has lost over the last two or three years? It would help us understand the potential for regaining or stabilizing that share.

Regarding the price volume dynamic, there has been some decrease in volume related to share, and while prices aren't at the desired levels, we are seeing some improvement. We anticipate a similar trend in Q4. Looking at the performance from Q3 to Q4, the primary factor in the lab is a slight increase attributed to the number of days and seasonal variations in Europe. Overall, we expect stability in Q4, and this trend will also reflect on pricing.

On the market share, we've lost a couple of large accounts that we are tracking. It's important to understand that losing a key account takes time due to the many different sites around the world involved. Similarly, when renewing a contract and aiming to increase our share of wallet, it also takes time to ramp up. This highlights the importance of commercial effectiveness as we engage with every single lab to convert customers. Whether from a loss or a gain perspective, the dynamics play out over several quarters. This makes it challenging to accurately assess our market share loss, but we are aware of the contracts we have lost in the past.

And then maybe just on bioprocess, Emmanuel, since you've got such significant domain experience there. Just kind of how would you characterize the Avantor portfolio today? I mean, when you think about this market recovering, consumables, I think, have been growing double digits; equipment is still under pressure from a market basis. How do you think Avantor is positioned with their current portfolio as we look ahead into, say, the next 12 to 24 months? Can they get back to market growth above or below? Just what are the key variables there?

It's a great question. Look, I'm super excited about the portfolio we have, in particular, around the chemicals, acids, bases; we have adjuvants. So we have also viral inactivation products, which are proprietary. So we have a really good portfolio, and I think we have a good commercial team. And again, as I said, our order intake year-to-date is high single digits. So basically, it gives me the confidence that the demand is there. It's for us to make sure that we serve the customers better, and all the customers that I've met are super satisfied with that part of the portfolio. So I'm confident that the portfolio is good. And also, the recent announcement we've made, like BlueWhale, is very encouraging about the fact that we will continue to collaborate with strategic innovation that will give us a differentiated portfolio in the future. So quite excited about the bioprocessing portfolio.

I appreciate all the updates and everything you're thinking about. But as you think about when you're looking at '26 and the overall market rate, just in relation to how you guys are going to grow, what's your outlook for the market, I guess, given that the underlying demand that you've seen, especially across what your peers have said, too.

I believe we need to compare apples to apples regarding the peers' comments. It's important to emphasize that our bioprocessing portfolio mainly focuses on chemicals, creating a uniquely differentiated offering, particularly compared to my previous company. Currently, year-to-date, our order intake is in the high single digits. I need to re-evaluate the projections for 2026, considering the market, our growth potential, and the effects of the five pillars of our revival plan. Some impacts will be felt quickly, while others may take longer, and I will update you as soon as I have a clearer perspective.

I was trying to understand your overall outlook for your market and how that might influence your growth potential. Following up on your earlier points about the bioprocessing plant, I’d like to know what the downtime is attributed to. Is it simply planned maintenance? Additionally, you mentioned building redundancy; is that related to ensuring you maintain the quality and reliability that the market depends on?

Look, I visited several of our chemicals plants. We have really world-class plants, super modern, very well run with a very, I would say, dedicated team. Some are just in need of upgrades, okay? And so some of the tools are a bit old, and so therefore, they break down. So they give us a bit of unreliability of on-time delivery. So service level for some plants are excellent. Some are not where we should be. And this is what I'm talking about strategic investment. There is some investments that are needed. We need to be very surgical about this. And that's just, I will say, on the plants themselves. The second thing is about the processes. It's about how do we give visibility to the plant of what's going to be the demand, having a good understanding that the plant are putting in place, the planning to make sure that the products will be delivered as the customers requested and then, of course, at the quality level, which is requested. So it's really around the processes that today are not as simple as they should be, not as smooth as they should be and with a bit also of lack of accountability. So strategic investment on one side. And I think it's also about talent. One of my remarks was about the fact that the team is super passionate and want to do well and they want to fix the issue and they want to do better; they need direction. They need someone who is going to help them to focus, and they need leadership. And this is also why we are far advanced into recruiting a Chief Operating Officer, someone which has global experience, a long-term experience of leading different types of plants, including chemistry plants, someone who is a black belt, someone who has a lean mindset and a productivity mindset. And we are in the final stages of that recruitment. That will really help as well the team to drive and improve plant performance.

I want to go back to the pricing question earlier because I think it's an important point. I think the message coming out of last quarter, and admittedly, Emmanuel, was before you started, was that Avantor was willing to trade price to hold share. That's not what we heard from Brent a minute ago. So I guess, are you committing to actually taking price in the lab market next year? And can you maybe quantify what you're expecting there? Because I think that was a very different message than we heard coming out of 2Q.

Yes, Tycho, to clarify, we are facing raw material costs and inflation in the channel, which is affecting our pricing. The margin pressure is a result of the difference between our prices and the cost of goods sold. When we mentioned implementing price changes to gain market share, it was in response to the inflation impacting the products we offer. This aligns with our previous messages, and I appreciate your insight on the details. In the lab sector, our focus has been on increasing operating income, and we are actively taking steps to boost volume and gain market share through new contracts. As Emmanuel noted, we are experiencing an impact from contract losses, and it will require time to recover, both defensively and with the new contracts. Nonetheless, we aim to increase operating income and improve margins over time.

We believe our current share price does not reflect the company's long-term value, especially during the turnaround phase. The goal is to show our commitment to this long-term value. We are confident in our business and our ability to improve performance with the revival plan. Regarding capital allocation, mergers and acquisitions are always potential opportunities. However, any acquisition must complement a well-operating company. Successful integration requires a team with straightforward processes and strong talent capable of effectively executing the acquisition and integration. We firmly believe that the business will improve and that we will achieve a turnaround, and we think this is the right message and action to take.

Okay. And then last one on Bioscience. You quoted a number of kind of shipping timing issues. Are you assuming those come back in the fourth quarter? It was a little bit unclear what's actually baked in the guidance from a kind of timing and recapture perspective.

Yes. I think the team has already started to do some good job in Q3, but not enough, and we'll continue to do so. So yes, we're going to see some improvement in Q4. But as I said as well, some of the plants need some equipment investment, and those things sometimes take some time. So we're working as fast as possible. You have my commitment to really focus on executing the demand as much as possible and as fast as possible.

Brent, maybe a follow-up on the pricing side. You certainly understand some of the cadence there. Can you just talk about, I guess, the moving pieces on margins, just high level as we get into next year, in terms of what pricing rolls through next year and has to annualize and pressures margins versus some of the offsets? What levers do you guys have to pull? Obviously, you've done some cost-out initiatives over the last couple of years. How much more room is there on that front versus some of the pricing pressures? Maybe just the high-level moving pieces on margins would be helpful.

That's an important question, Patrick. As we look ahead, we don't anticipate making significant comments regarding margin dynamics into 2026. Our gross margin is down year-over-year, mainly due to inflationary pressures, despite achieving some modest price increases. This has been the key factor affecting lab pricing and gross margin. On a sequential basis, the gross margin faced pressure primarily due to the mix of our business segments, as we didn't see the same growth in Bioscience. Emmanuel mentioned that we need to focus on driving costs down rather than just offsetting inflation and foreign exchange impacts. Key drivers include improving pricing against costs of goods sold and managing the mix of our business segments, which negatively affected us in Q3. Lastly, enhancing productivity at our plants will be crucial as we move forward. These factors will certainly be included in our discussions as we outline our views for 2026.

Can I just add something, Patrick? Yes, go ahead. I'm absolutely committed to really improve not only the top line but also the bottom line, right? We need to be an operation that is leveraged. And so this is what we're going to do. So part of the revival of course, we talked about simplification processes. It also means productivity gain. That is going to be very, very important, and I think that we will make sure that the entire leadership is really focused behind this.

Understood. And maybe just a quick one on the academic government side. You touched a little bit on it in the prepared remarks. What are the expectations there? Obviously, you have the government shutdown. You guys have some exposure there. Maybe just talk about what you're seeing on that front and what the expectations are going forward for that market; a lot of noise there. I appreciate it.

Yes, Patrick, we experienced a decline in the academic and government sectors in Q1. We saw a modest increase in Q2, but then a significant drop in Q3. I believe we are witnessing some of the delayed issues come to light in Q3. The K-12 sector was notably affected before the school season began, along with some weakness in higher education consumables. The U.S. government shutdown will certainly worsen that situation. This is a crucial factor contributing to the lowered lab guidance for Q4 and the yearly forecast, which is now projected to decrease to mid-single digits, along with challenges in consumables. We anticipate that these challenges will persist moving forward.

A few questions. Emmanuel, it's only been 8 weeks. There's a lot going on here. Is it reasonable to expect you to outline your full assessment and strategic framework by early Q1? Or is that too aggressive? So that's my first question. My second is really for Brent. Emmanuel talked a lot about new hires and investments. Revenue growth is likely to remain challenging for the next several quarters. Margin comparisons are notably tough in the first half of next year. So when I just look at that fact pattern; my words not yours, given you don't want to talk too much about 2026, but it just seems hard to see a scenario where we would get meaningful EBITDA expansion in 2026, maybe no expansion at all given those 3 observations. Is there anything you think I'm missing? And then really, the last one is for both of you. Recognizing it's been a tough period for tools in terms of downward estimate revisions. I think the challenges, to be fair, have lingered a bit more for Avantor than for most of the group. Clearly, visibility and forecasting has been a challenge for you guys in the past few quarters. Do you think this is systems and requires more investment? Or is this more a function of just competitive dynamics maybe evolving in a way that you didn't anticipate?

Doug, thanks for your question. Look, I think in terms of timing, when I came, I spoke with the Board, I spoke with the team, and I said I needed 100 days to really learn the business, meet everybody that I could, all the stakeholders, our people, the customers, and a few main investors. And look, after 60 days, I already need to be in action because, first of all, there are some few things that are absolutely obvious, some challenges that we need to fix, and that's what I shared with you. And indeed, in Q1, I'll come back with you with further thoughts and with further strategic vision, absolutely. I'll let Brent answer the question, then we'll come back to the other part.

Yes, you're spot on with the facts, and those are indeed the more challenging comparisons when looking at this year's trend. However, I want to emphasize that we shouldn't make too many comments about 2026 just yet as there's still more work to be done. The focus is on driving revival, which influences not just our operations but also the costs involved and how we achieve revenue growth and conversion. We'll provide more updates during our discussions about 2026.

And Doug, on the market, my sense is the following. I think production is solid. I think in the R&D aspect from an academic standpoint and even from pharma, there is some uncertainty, and uncertainty is never good. But so I would say it's a mixed market dynamic.

My first question is on the revival program. Emmanuel, can you frame the cost impacts of that program? It seems like there's a lot of extra money to be spent on e-commerce, on investment needs in manufacturing, on new hires. And I'm just trying to think about how to balance that with margin objectives.

Dan, thanks for your question. Look, I think it's early days for me to really put a number to it. We are really pushing the program as soon as possible and making sure we make our plan. I don't want also to rush on giving you a number, which is not accurate. Look, I really want to gain accuracy about numbers, any numbers that we're going to put in front of you. So let us put the plan together, let's say, review the plan, and let's make sure that the plan will have an impact. And I think it's back to a further question earlier; I really want to give you answers about how much, when, what we will see by when. It will take several quarters, without any doubt, but it's early days for me. So let me come back to you when we have a precise plan and accurate number.

Understood. And then a follow-up. You referenced a couple of large clients you lost from a share loss perspective. How would you characterize the risk of further big share loss? I can't imagine you have large contracts that turn over every year. Are we in a period of stability now for some time? Or are there further just big opportunities ahead in either direction?

That's a great question, Dan. Look, what I've discussed with Corey and what we've discussed with the team is that most of our very large key account contracts have been renewed. We've kept them. And on the contrary, we have the opportunity to gain share of wallet in those accounts. So I think we are in a much more stable position right now. However, as I explained earlier, the loss that we've seen in the past, they're still having an impact on us, okay? It takes time for those large contracts to switch over the same way that it takes time for us to ramp up the share of wallet gain. So I think we are in a much more stable area. I think Corey is a very good leader that is bringing a lot of rigor in the business. And from that standpoint, I'm confident about the future of the lab business.

Those are all the questions we have time for today. And so I'll now turn the call back over to Emmanuel for closing remarks.

Thank you, Emily, and thank you, everybody, for joining us. Today, we just outlined the beginning of our, I will say, next chapter called Avantor Revival. I want you guys to remember and to know that we are moving with urgency to improve our performance. I want to regain your trust. I want to be accurate. I want us to be accurate, and I'm looking forward to giving you further updates on our progress in the next quarter. Be well, everybody. Thank you.

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