Earnings Call
Avantor, Inc. (AVTR)
Earnings Call Transcript - AVTR Q1 2026
Operator, Operator
Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to Avantor's First Quarter 2026 Earnings Results Conference Call. I will now turn the call over to Chris Fidyk, Vice President of Investor Relations. Chris, you may begin the conference.
Chris Fidyk, Vice President, Investor Relations
Thank you, operator. Good morning, and thank you for joining us. Our speakers today are Emmanuel Ligner, President and Chief Executive Officer; Brent Jones, Executive Vice President and Chief Financial Officer; and Steven Eck, Senior Vice President and Chief Accounting Officer. The press release and our presentation accompanying this call are available on our Investor Relations website at ir.avantorsciences.com. Following our prepared remarks, we will open the call for questions. A replay of the call will be made available on our website later today. During this call, we will make 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 may 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 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 Emmanuel.
Emmanuel Ligner, President & Chief Executive Officer
Good morning, and thank you for joining us today. Let me begin with a few financial highlights for the quarter. First quarter results exceeded our expectations due to improved execution in our Bioscience and Medtech Products segment, and we have reaffirmed our full year guidance. VWR Distribution and Services generated $1.15 billion of revenue in the first quarter, down 5% organically versus the prior year. This performance was in line with our expectations despite soft market conditions in Europe and adverse winter weather in the U.S. I'm pleased to report that in the quarter, the VWR e-commerce platform showed green shoots of improved performance in traffic, conversion and revenue growth following multiple upgrades as part of our digital roadmap as well as the successful relaunch of vwr.com. Importantly, Q1 results provide evidence that the VWR segment is stabilizing with financial performance in line with our expectations. Turning to BMP. BMP revenue was $431 million in the first quarter, down 2% organically versus the previous year. This was ahead of our expectations due to better-than-expected execution from process chemicals and new sales. Brent will discuss the details in his remarks, but comps had a heavy influence on year-over-year growth metrics. I'm pleased to report that revival efforts are already taking hold in BMP. In Q1, we saw modest improvement in BMP operational performance and we also saw strong commercial performance given the enhanced focus with which our teams are working. BMP had a book-to-bill of more than 1.1x in the quarter. Other elements of the P&L, including margins, were generally in line with expectations, and we generated $0.17 of adjusted EPS in the quarter, ahead of our expectation. There are three key messages I want to convey about the first quarter. First, Revival is already having a positive impact on Avantor. Across the organization, we see a clear improvement in execution and increased accountability. Our team has a more intense focus on serving customers and we are taking a data-driven approach to measure their performance. Second, improved execution has translated into improved and more stable operational performance, most notably within the VWR platform and BMP manufacturing. Improved execution is also reflected in the strength of our order book and demand funnel. Third, we believe that we are turning a corner financially. We believe that VWR's growth rate reached a bottom in Q1 and that BMP's growth rate will reach a bottom in Q2, which positions Avantor for organic revenue growth in the second half of this year. We moved the company forward in the first quarter, and I'm encouraged by the momentum and positive energy across the organization. In the interest of continued transparency, I want to share two examples of actions that we have taken as part of Revival. Please turn to Slide 4. Revival begins with people. For Revival to be successful, we must have the right talent in place. One of the first things we have done is move with speed to recruit exceptional leaders and enhance our leadership structure. This slide summarizes the changes we have made to the senior leadership team, defined as my direct reports plus their direct reports. We have moved quickly to refresh approximately 25% of this leadership group, filling positions such as Chief Operating Officer, Chief Procurement Officer, Head of VWR Sourcing and Head of VWR Pricing. Recently, we welcomed James Finn, our Chief Digital Officer, who joined us from Medline. And last week, we announced that a senior leader will join us from Cytiva to lead BMP and serve as our Chief Transformation Officer. We expect to announce the addition of other high-impact leaders soon. Many of those talent investments are self-funded with increased productivity. Year-to-date, our overall headcount is down approximately 2%. I had a very clear vision on how the leadership team should be constructed and in short order, we have supplemented internal talent with external talent. We have a diverse set of leaders in place with skills and experience that will allow us to best execute the Revival agenda. Please turn to Slide 5. Enhancing operations is one of our four top priorities. I wanted to dig deeper into actions underway within this important revival pillar, which is led by our COO, Mary Blenn. In the first quarter alone, we completed over eight weeks of kaizen events across our operational network. I participated in several of those kaizen events as did other senior executives. In parallel, we established a CapEx Council that meets monthly to plan, review, sanction and monitor our capital commitments with one eye focused on near-term needs and the other focused on long-term strategic requirements. Our CapEx Council has sanctioned 12 projects recently, one of which is depicted on this slide. This project focuses on a downstream production process at an important North American manufacturing facility, where the current workflow is a people-intensive process with scope for improvement. We reimagined the process during a kaizen and as a consequence are moving forward with a project to install modular automation equipment in a previously unused space in the facility. The before and after images on this slide demonstrate how this automation project will radically simplify workflows. Furthermore, this investment will enhance quality, compliance and throughput, it will reduce our cost per unit, and it will free up capacity for the team to focus on higher-value activities. We expect to earn highly attractive returns on the capital we deploy. This is just one example of the approach we are taking globally. In all our projects, including the $20 million of incremental investment we announced previously, we use tools such as Lean Six Sigma and kaizen to rethink the way in which we work, and we are marrying that with rigorous data-driven analysis to measure the financial consequence of our investment. I will conclude my opening remarks with a few words about the news that Brent will depart Avantor next month. Brent, we are all deeply thankful for your leadership and contribution to Avantor, including the development of a deep and talented finance team. I wish you and your growing family nothing but the best in the future. Thank you, Brent.
Brent Jones, Executive Vice President & Chief Financial Officer
Thank you for the kind words, Emmanuel. It's been a privilege to serve as the CFO of this great company, and I'm grateful to have worked with such a wonderful group of people. The finance function will be in good hands with Steven, who is an outstanding leader, and I remain completely confident in Revival and Avantor's future prospects. With that, please turn to Slide 6, where I will review our Q1 financial results. In Q1, we generated $1.581 billion of revenue, which was down 4% on an organic basis and flat year-over-year on a reported basis. Adjusted EBITDA in the quarter was $219 million, with a margin of 13.9%. Adjusted EPS in the quarter was $0.17 due to good execution in BMP, specifically process chemicals and new sales, allowing us to outperform our expectations. Free cash flow in the period was $25 million. Excluding restructuring costs, free cash flow in the quarter was $39 million. Both figures were within expectations and reflect a meaningful and anticipated headwind associated with customer prebates. We repaid approximately $105 million of debt and ended the quarter with an adjusted net leverage ratio of 3.3x adjusted EBITDA. Leverage increased by 0.1 points sequentially and year-over-year, primarily due to lower trailing 12-month adjusted EBITDA. Please turn to Slide 7. Revenue for the VWR Distribution & Services segment was $1.15 billion in the first quarter, down 5% organically versus the prior year. The primary driver of the organic revenue performance was a decline in volumes with industry dynamics and European market weakness both contributing. We estimate that severe winter weather in the U.S. negatively impacted segment revenues by about 50 basis points. The bulk of the revenue decline sequentially versus Q4 2025 is due to seasonality. In the quarter, the VWR e-commerce platform showed green shoots of improved performance in traffic, conversion and revenue growth rates in the U.S. and Europe. This followed multiple upgrades as part of our digital roadmap as well as the successful relaunch of vwr.com. Enhancing our digital capabilities remains one of our top strategic priorities. Adjusted operating income for VWR was $105 million in the quarter, representing an adjusted operating margin of 9.2%. The year-over-year decline in margin is due primarily to volume and net price capture. Increased freight costs were also a headwind. The bulk of the margin decline sequentially versus Q4 2025 is due to seasonal declines in revenues with a number of other puts and takes. There are two key takeaways from the VWR quarter. First, we are pleased with the positive impact our upgrades had on e-commerce performance. Second, and perhaps more importantly, the VWR platform is stabilizing with Q1 performance in line with our expectations. We will address the stability again in our guidance commentary. I will now discuss our other segment, Bioscience and Medtech Products or BMP. BMP revenue was $431 million in the first quarter, down 2% organically versus the prior year. This was ahead of our expectations due to better-than-expected execution from process chemicals and new sales. In the quarter, process chemicals grew double digits organically due to improving operations and strong order performance. Fluid handling and new sales were down double digits in the quarter, due in part to difficult comps as we had anticipated, while research and specialty chemicals declined about 100 basis points organically. Pricing was positive in the quarter. Last quarter, we indicated new sales and the serum and electronic materials businesses within research and specialty chemicals would be headwinds to growth in 2026 and that this comp headwind is primarily due to normalization of idiosyncratic customer ordering patterns and shipments in 2025. In the first quarter, this dynamic in aggregate was a mid-single-digit headwind to the organic revenue growth of BMP. Adjusted operating income for BMP was $103 million in the quarter, representing an adjusted operating margin of 23.8%. The year-over-year decline in margin is due to inventory provisions, lower volumes and mix, among other things. Key headwinds in the sequential margin decline were volume and mix. There are two key takeaways from the BMP quarter. First, our efforts to enhance operations are bearing fruit as our operations showed increased stability in the quarter. More specifically, BMP back orders declined modestly in Q1, and we have better line of sight to improved operational performance. Second, we had strong order performance in the quarter with a book-to-bill of more than 1.1 for the whole of BMP. Order trends were healthy across all business units, and we saw particular strength in our process chemicals order book. I will now turn the call over to Steven Eck to discuss our guidance.
Steven Eck, Senior Vice President & Chief Accounting Officer
Thank you, Brent. Please turn to Slide 8. We reaffirmed our 2026 guidance this morning, but I want to make a few supplemental comments. In Q2, we expect to generate adjusted EPS of between $0.19 and $0.20 per share. Next, as everyone is aware, the Middle East conflict has created inflationary and supply chain pressures that are rippling around the world. At this stage, we are more concerned about the price of raw materials and services rather than their availability, but our concerns could evolve if the conflict persists. As of today, we estimate that inflationary pressures stemming from the Middle East conflict represent an incremental headwind of approximately $10 million to $20 million to our 2026 operating income, and our reaffirmed guidance incorporates this headwind. We have established a task force whose responsibilities are to identify, monitor and mitigate these inflationary headwinds. Next, on VWR. The financial performance we saw in Q1 was largely in line with our expectations. We believe that VWR is turning a corner and that VWR's growth rate reached a trough in the first quarter. We expect that VWR's growth will improve gradually over the course of 2026, with the segment showing positive organic growth in the second half. In BMP, the year-over-year comp headwinds from the idiosyncratic customer ordering patterns and shipments mentioned by Brent as well as new sales, serum and electronic materials will increase sequentially from Q1 to Q2, and we faced another tough comp in fluid handling as well as a tougher comp in process chemicals. Therefore, we expect BMP's year-over-year organic growth in Q2 will be worse than the Q1 experience by more than 500 basis points. There is no new news in these comp dynamics as our assumptions about their impact are unchanged versus 90 days ago. We believe that Q2 will mark the low point for BMP growth in 2026. Finally, we expect the adjusted operating margins of both segments to increase sequentially from Q1 to Q2 in line with seasonal patterns. I will conclude with a comment on capital allocation. Debt reduction remains the top capital allocation priority, and we remain committed to reducing our adjusted net leverage ratio sustainably below 3x. With that, let me turn the call back to Emmanuel.
Emmanuel Ligner, President & Chief Executive Officer
Thank you, Steven. I will conclude our prepared remarks by reiterating the key takeaways from the quarter. Number one, Revival is already having a positive impact on the organization. Number two, improved execution has translated into improved operational performance. And number three, we believe that we are turning a corner financially and now believe that the growth rate of VWR reached a bottom in Q1 and that the growth rate of BMP will reach a bottom in Q2. This, combined with our tangible revival progress, gives me confidence that Avantor will return to positive revenue growth in the second half of this year. Finally, I want to extend my gratitude to our Avantor associates across the globe for their dedication to serving our customers. Thank you for embracing Revival and the new ways in which we are working together. I am incredibly pleased with the progress we are making together as a team. With that, operator, we are happy to take questions.
Operator, Operator
The first question today comes from Dan Leonard with RBC.
Dan Leonard, Analyst, RBC Capital Markets
My first question, can you talk a bit more about any countermeasures you're taking to offset incremental inflation? And I'm thinking of transportation costs specifically, but it sounds like there are other watch areas as well.
Emmanuel Ligner, President & Chief Executive Officer
Yes. I think, Dan, if I understand your question correctly, you're asking about the measures we are taking to address the inflation that we are seeing. Is that correct?
Dan Leonard, Analyst, RBC Capital Markets
Correct.
Emmanuel Ligner, President & Chief Executive Officer
All right. Dan, first of all, thank you for the question. I think it's important to also review the fact that we have a new Chief Procurement Officer; Keith Balzo is joining us from Cytiva. I've worked with him a lot in the past; he is a really, really good person. We've put in place a task force. The good thing about what we see in the Middle East is that the inflation will happen in two areas. The first is inbound and outbound freight. And of course, the team is really looking at our contracts and seeing what we can do on that side. Then the other is a few critical materials, where we will see inflation though not necessarily shortages. So we have a task force in place already evaluating the impact. I think, as Steven mentioned in the opening remarks, we are contemplating a $10 million to $20 million headwind that we have incorporated into our guidance. And I think it's really an action for us in terms of monitoring and in terms of what we can pass through to our customers.
Dan Leonard, Analyst, RBC Capital Markets
Okay. I appreciate that. And then as a follow-up, Emmanuel, can you talk about the significance of that book-to-bill in the BMP segment? And what is the lead time required to translate that greater than 1.1 book-to-bill to revenue growth?
Emmanuel Ligner, President & Chief Executive Officer
Yes. No, it's a very good question, Dan. If we look at what we shared in Q4, our order intake in process chemicals was high single digit in Q4. With the operational improvements and the Revival impact on operations, we were able to deliver double-digit growth in Q1 in terms of revenue. The very positive thing and what we are very encouraged by is that in Q1, our order intake was double digit. So there is a sequential acceleration, and it's due again to Revival on the commercial side. A lot of those products have lead times between 30 to 60 days, and some up to 90 days. It also depends on the customer; some give us blanket orders with a lot of visibility. We have asked the commercial team to work on this to make sure that through the demand forecasting process that we have put in place, we are helping operations to have good visibility of what is coming. So we are super encouraged with what happened in both operations and commercial due to Revival. So 60 to 90 days — that's why we are positive and confident about the fact that we'll go back to growth in the second half of the year.
Operator, Operator
The next question comes from Patrick Donnelly with Citigroup.
Patrick Donnelly, Analyst, Citi
I was hoping for just a few more specifics on 2Q. Helpful to hear the VWR and BMP pieces. Can you just talk about overall organic growth and then also the margins for each and how we should think about that margin cadence for 2Q and going forward?
Brent Jones, Executive Vice President & Chief Financial Officer
Yes. Yes, Patrick, I'll take this. Look, I think from Emmanuel and Steven as well as my comments, you see a bottoming in VWR in Q1; we expect to see continued improvement in that business sequentially. There are more shipping days in Q2 than Q1. So even keeping at the same pace that we did in Q1, even though recognizing that's a seasonally lighter quarter, that easily gets us within the range of our guidance. On BMP, you'll see lower organic growth; that has to do more with the idiosyncratic comps we brought up. You put those together, you get better fixed cost absorption against that, and then you'll see modest increases in margin sequentially. You marry that to Revival working in other cost outs and that very comfortably gets you to the range of our guidance.
Patrick Donnelly, Analyst, Citi
Okay. That's helpful. And then maybe just on the BMP side, helpful comments there. Can you just talk about what you're hearing from customers? Obviously, some mixed data points out there. Are there certain segments you're seeing a little more strength? And then again, I guess, the visibility into that recovery and confidence level of that recovery as we work our way into the second half and beyond just with the market positioning there.
Emmanuel Ligner, President & Chief Executive Officer
Patrick, I think there's not much change in terms of market dynamics versus what we shared in our last call 90 days ago. The biopharma market is healthy, in particular in bioproduction. We see that in our order book. This is particularly true in process chemicals for Q1 in terms of revenue but also in orders, as I just talked about. We also see a strong funnel for us; we have pushed the commercial team to have better visibility on opportunities. Around academia and government, nothing really changed. The market is pretty stable. There's maybe a lower level of activity than what we would prefer, and we continue to assume that customers are a bit reluctant to spend money in that part. NIH funding is stabilizing, capitalizing incremental demand that will represent upside potentially if customers decide to spend their budget. Bottom line is that the end markets are exactly as we were expecting. I also want to add that despite the difficulties we had, we never let down the customers, in particular in bioprocessing. When I meet customers there is strong feedback about the service level and the engagement that we have. This is reflected in our Q1 order book and the book-to-bill, which is 1.1x.
Patrick Donnelly, Analyst, Citi
Okay. And Brent, just to close the loop on 2Q, is there a specific organic number you can give?
Brent Jones, Executive Vice President & Chief Financial Officer
You're probably talking about a decline of 500 basis points on the firm level for the quarter.
Operator, Operator
The next question comes from Vijay Kumar with Evercore ISI.
Vijay Kumar, Analyst, Evercore ISI
Congrats on a good execution here. Brent, wishing you the best as you transition here. Maybe Emmanuel, I heard the term confidence in the business bottoming — it sounded very constructive. And when you think about VWR bottoming out in Q1, what gives you the confidence that VWR bottomed out? And Brent, if VWR has bottomed out in Q1, why is 2Q organic minus 5% when you guys just did minus 4% in Q1?
Brent Jones, Executive Vice President & Chief Financial Officer
Do you want to — we're talking about it at the firm level there, Vijay. So you're going to see more decrementals in BMP taking the firm rate down to minus 5%. So you'll see a sequential improvement in VWR and then a sequential decline of about 500 basis points or more in BMP.
Emmanuel Ligner, President & Chief Executive Officer
Yes. I was going to add that around VWR we had a strong reset last year. We shared with you that we'd lost market share. Q1 was really the tail of those market share losses. We have really stabilized the situation with VWR. We also looked at the order trend, contract conversion, the new contracts we win, and we measure the engagement of our commercial team. Everything that we are doing on VWR, in particular around the e-commerce channel, has been executed phenomenally well. We're super happy with that and with strengthening the platform. This is why we're expecting stabilization in Q2 and then onward to positive growth.
Vijay Kumar, Analyst, Evercore ISI
Understood. Maybe one follow-up Emmanuel for you. We're starting the first half somewhere down mid-single digits, minus 4% to minus 5%. What improves in the back half? Is it just comps getting easier in the back half? Or is the business turning? Is there a bridge from first half to second half, how we get to positive growth in the back half?
Emmanuel Ligner, President & Chief Executive Officer
Sure. This is what I said in the opening comments. Bottom for VWR in Q1; bottom for BMP in Q2; stabilization of VWR; and then we have the order book that we just discussed, which is particularly strong on the BMP side. The confidence comes from the impact that Revival has on commercial intensity and operational excellence, and also from the fact that we are bringing talent, some of whom are already having an impact and more who are coming. So it's a combination of all of this that gives us confidence that the second half will be back to growth.
Brent Jones, Executive Vice President & Chief Financial Officer
And Vijay, taking the comp piece aside, there's not a dramatic sequential increase that we have baked into the plan from Q1 to Q2. We aren't getting more specific on the back half, but broadly beyond that. To be super clear, into Q2 you'd see about minus 5% at an enterprise level, improvement in VWR sequentially coming off Q1, and then about 500 basis points more pressure in BMP. You can put that math together and it gives you a clean picture for Q2; it does not require a significant sequential ramp for the company in Q2.
Operator, Operator
The next question comes from Catherine Schulte with Baird.
Catherine Ramsey, Analyst, Baird
Maybe as you look across your manufacturing and logistics footprint, I guess, what portion of facilities would you say are in good shape today versus still needing some investment? I think you mentioned you've greenlighted projects. What kind of investment do those projects entail? And what's the timeline to complete those?
Emmanuel Ligner, President & Chief Executive Officer
Thanks, Catherine. I have visited most of our sites. There are a few facilities I haven't been to yet, like some in India, which I'm planning to visit by the end of May and maybe one or two in the U.S. So I don't have the complete picture of every site yet. But generally speaking, we have excellent sites. I was recently in Poland and Brie in France and Louvain in Belgium; these are strong facilities. In terms of projects, there are always projects at every site. We encourage every leader to apply lean and kaizen to make sure we have productivity improvements. Mary is driving a huge improvement here; we are measuring productivity by site. Therefore, every site leader is encouraged, with the help of our internal lean team, to propose projects that create productivity. We shared one of them earlier. Those projects vary by site. We sanctioned 12 recently and will have more across the rest of the year. The team is responding well.
Catherine Ramsey, Analyst, Baird
Okay. Great. And then can you just walk through how the BMP idiosyncratic order pattern comp base looks throughout the year? I think you said they were a mid-single-digit headwind in Q1 and will be higher in Q2. But how does that look in the back half? And does BMP get back to positive growth at some point in the back half of the year?
Brent Jones, Executive Vice President & Chief Financial Officer
The idiosyncratic comp pressure gets a little better in the back half of the year. If you recall, the primary driver in the back half is going to be headwinds in electronic materials, so continue to think about sequential improvement here. The theme we're driving is sequential stability and then modest growth against that.
Emmanuel Ligner, President & Chief Executive Officer
We shared on the last call that new sales, serum and electronics had different timing in the past. New sales and serum give a headwind in the first half, and electronic materials give a headwind in the second half. We continue to work with supply chain and with customers so that we return to a normalization of customer ordering patterns and shipments across the year.
Operator, Operator
Our next question comes from Casey Woodring with JPMorgan.
Casey Woodring, Analyst, JPMorgan
Maybe to start, can you walk through the price versus volume performance in the quarter? You said pricing was positive in BMP. So assuming that was down in VWR. Some more color on pricing in the quarter and updated pricing expectations for the year would be helpful. Also curious to hear your updated thoughts around gross margins and where those could land on the year, given some of your comments around freight costs and such.
Brent Jones, Executive Vice President & Chief Financial Officer
So Casey, broadly in the quarter, the right way to think about gross margin is sequentially. We talked on the last call about taking the 31.5% adjusted gross margin as a jumping-off point. On a total company basis, you had decrementals on volume offset by pricing actions that came at the beginning of the year. Then you have other puts and takes such as freight. We saw somewhat better performance there, and we believe that will continue to grind up during the year. On a full year-over-year basis, price-cost spread was negative, again due to the VWR margin reset beginning in the second half of last year, but we like the execution and believe you'll see a grinding up certainly into Q2. We're not being more specific about the back half of the year, but our guide is predicated on that gross margin improvement.
Casey Woodring, Analyst, JPMorgan
Understood. And then as a follow-up, can you just talk briefly about free cash flow performance in the quarter. You did $25 million here in 1Q, but reaffirmed the $500 million to $550 million guide. So just curious if the free cash in the first quarter was in line with your expectations. The guide implies a pretty big step-up moving forward. Walk through how you plan on getting there, the puts and takes, and any sense for phasing and how back-end loaded that range is?
Brent Jones, Executive Vice President & Chief Financial Officer
Yes. We noted that free cash flow was consistent with our expectations. Our guide is before restructuring expenses, so it was around $40 million when you exclude restructuring expenses. We cited the significant prebates. If we had not had the significant prebates in the quarter, we would have looked a lot more like last year, and then we would expect a similar ramp throughout the year. There weren't really any other significant moving pieces. If you look at the cash flow statement, there weren't working capital swings that drove it in a different way. So really, the story in the quarter on the relative was the prebates as well as the year-over-year lower earnings. It's not unusual for Q1 to be lower on a seasonal basis, and then you'll see continued sequential improvement.
Operator, Operator
The next question comes from Brandon Couillard with Wells Fargo.
Brandon Couillard, Analyst, Wells Fargo
Emmanuel, on the VWR business, you talked about some market softness in Europe. Would that region deteriorate sequentially? Or is that just a year-over-year comment? And then the 50 basis points of U.S. weather impact in the quarter: I would have thought you would have made up those orders at some point in the quarter. Did those get pushed out into 2Q? How do I think about the impact of that? Or did you just lose revenue in general?
Emmanuel Ligner, President & Chief Executive Officer
On the weather, it did have an impact, but fortunately the team worked very well and delivered what we expected. VWR in Q1 was really spot on in terms of our expectations, which gives us confidence in the team's ability to be flexible and make it work. On Europe, there is some softness, in particular in industry in Germany and a couple of other areas. Remember that in Europe we are the largest distributor, so where the market is weak it can impact us a bit more. We didn't have a leader for some time there; we now have Christophe taking care of that. We did some reorganization and the team is reverting the situation right now. We have confidence for the second half in Europe as well.
Brandon Couillard, Analyst, Wells Fargo
Got you. And then maybe Steve or Brent, on the inflationary impact, the $10 million to $20 million — nice to see you're able to absorb that in the guidance for the year. Two questions. Do your contracts generally allow for freight-related surcharges to be passed through? And number two, to what extent have you stress-tested those assumptions? Are there other known unknowns that could push you above that range as you look out the next few months that you've heard about?
Emmanuel Ligner, President & Chief Executive Officer
Brandon, let me start with a quick comment on contracts. We tested this during COVID and post-COVID inflation. We have tools in place for surcharges; it's working well in some geographies, and in other geographies it's a bit more difficult. We are looking at the success we had post-COVID when we had significant inflation and are putting a team in place to reproduce that, not only in one geography but across the entire territory. So the answer is yes — maybe not every contract, but a large majority. The potential headwind we see related to the Middle East conflict is something we're carefully watching, and we are monitoring weekly and looking for every opportunity to mitigate that impact on our results as best we can.
Brent Jones, Executive Vice President & Chief Financial Officer
Brandon, I'd just add, you coined a phrase 'known unknowns.' We certainly thought very deeply about this and believe we've identified the appropriate range.
Operator, Operator
The next question comes from Matt Larew with William Blair.
Matthew Larew, Analyst, William Blair
I wanted to ask about the bioprocess portfolio. You referenced BMP as a category that is down slightly and then improving in the back half. Many of the bioprocessing peers are closer to normalized growth in the high single digits. Emmanuel, do you think on a long-term basis this portfolio can grow at those market rates and how long it might take to get back there?
Emmanuel Ligner, President & Chief Executive Officer
No doubt. The BMP negative growth into Q2 that we anticipate is mostly due to the timing idiosyncrasies in serum and new sales in 2025. The core of that segment — process chemicals — showed double-digit growth in Q1 in revenue and in orders. We think the market is roughly 6–7% as peers indicate, and we are pushing the team to grow at market or above market for the rest of the year. Revival's focus on commercial intensity and operations gives us confidence that we will grow in the second half of the year. We're getting more optimistic every day about the business.
Matthew Larew, Analyst, William Blair
That's great. Emmanuel, you joined last July, so almost a year. You referenced that roughly 25% of top leaders have changed and that you've brought in external people. Where would you assess you are in terms of structural personnel changes you want to make? How much more do you need to do to position the company for the next phase?
Emmanuel Ligner, President & Chief Executive Officer
I joined mid-August, so not yet a full year. I'm pleased with the internal reaction: we have strong internal talent and we've supplemented that with external hires. Some roles we've created did not exist before. We need a strong right-hand person and the CFO search is underway; someone who can partner to continue to execute Revival. We expect to announce additional executive members soon, including roles such as CIO and others. Talent is dynamic; we are focused on retaining our people and motivating them. One Revival initiative is simplification and changing delegation of authority to empower people closer to the business to make decisions. The team is reacting quickly and positively. We're pleased with Q1 and optimistic about the rest of the year.
Operator, Operator
The next question comes from Michael Ryskin with Bank of America.
Michael Ryskin, Analyst, Bank of America
Great. A couple of minor ones. First, you alluded to prebates a number of times. Could you expand on that — the magnitude in the quarter; was that unusual for Q1; and how to think about the impact going forward?
Brent Jones, Executive Vice President & Chief Financial Officer
Michael, prebates are associated with enterprise contracts with large customers. We started talking about that in Q2 or Q3 of last year. We had a meaningful impact from payments due to that in Q4 of last year. We're not specifically quantifying it further, but it had a very significant impact on cash flow. It was anticipated and expected in our guidance and how our cadence was planned.
Emmanuel Ligner, President & Chief Executive Officer
Michael, I'd also look at it this way: if you do not renew or do not win contract you don't have prebates, so we view it also in the context of contract renewals and wins.
Michael Ryskin, Analyst, Bank of America
Okay. And then on the VWR business, you expect the organic rate to be improving and that Q1 was the trough. You posted negative 5% organic in Q1 on a negative 3% comp. Could you talk about share dynamics — gains and losses — and confidence that this is stabilizing and will be less of an issue going forward?
Emmanuel Ligner, President & Chief Executive Officer
Last year we had some share loss, and losing share doesn't happen as a one-off; it accumulates month after month. Q1 was the tail of those losses. We are stabilizing: we win contracts and renew contracts; sometimes we lose share within a contract. The important point is stabilization. Coupled with actions like e-commerce enhancements and improved commercial execution, we believe Q1 was the bottom and that we'll see improvement into the second half.
Michael Ryskin, Analyst, Bank of America
Okay. If I could squeeze in one small follow-up. To Patrick's question, I want to make sure I understand margin cadence. You're pointing to gradual improvement through the year including gross margin. Is there anything unusual in gross margin this year that explains that, given prior seasonality?
Brent Jones, Executive Vice President & Chief Financial Officer
Michael, we expect revival productivity initiatives to contribute to margin. There's always noise of mix within that. We're not pointing to heroic improvement, just classic revival productivity and better top-line absorption. You should expect a grinding up in gross margins, consistent with our guide.
Operator, Operator
The next question comes from Dan Arias with Stifel.
Daniel Arias, Analyst, Stifel
Brent, how much of the plastic ware portfolio within VWR is yours versus OEM? I'm thinking about oil sensitivity and resin cost — trying to understand how much control you have when managing inflation versus being at the mercy of OEM providers on price.
Emmanuel Ligner, President & Chief Executive Officer
Daniel, we have a large portfolio and I don't have the exact breakdown in front of me. We can follow up with you on that detail. What I can tell you is we've put new sourcing leaders in place in VWR; Emilia and Keith are working together to negotiate the best deals and manage pass-through where possible.
Daniel Arias, Analyst, Stifel
Okay. Fair enough. Maybe looking ahead a little bit to 2027, does the operational improvement you're confident in now give you confidence that EBITDA margins will be up next year?
Emmanuel Ligner, President & Chief Executive Officer
Let me answer in two parts. First, it's April 2026 and it's too early to provide detailed 2027 guidance. I take these comments seriously. However, I will say that we are pleased with Q1 and optimistic about a positive second half. Revival is having an impact and I am confident Revival will accelerate across commercial, operations and the support functions. We expect to exit 2026 with more capital deployment flexibility and greater confidence across the organization, and I am optimistic that 2027 will be a growth year.
Chris Fidyk, Vice President, Investor Relations
Operator, we have time for one more question, please.
Operator, Operator
Our final question today comes from the line of Dan Brennan with TD Cohen.
Daniel Brennan, Analyst, TD Cowen
Great. Maybe just on the distribution business, could you zoom out and talk about what you're seeing in the broader market? There's a lot of uncertainty around pharma spending and academic/government trends. How is the broader market doing versus what you're delivering? And related to that, are you assuming positive price in the back half of the year?
Brent Jones, Executive Vice President & Chief Financial Officer
Do you want to answer the pricing for the back half? We have very modest price baked into our plan.
Emmanuel Ligner, President & Chief Executive Officer
From an overall market perspective, it's similar to what I said three months ago. Academia and government are stable, perhaps at a lower level. Education is a question mark. There are pockets in Europe, and industrial is struggling given the macro environment. There are geographic differences. We are stabilizing. The team is motivated and implementing our digital plan; our new Chief Digital Officer, Jim Finn, will help accelerate this. We think the market is probably low single-digit and we will be back to growth in the second half. We'll continue to monitor the macro environment.
Daniel Brennan, Analyst, TD Cowen
Maybe just a final one. You called out a material headwind in Q2 from BMP across different businesses. It sounds idiosyncratic and company-specific but pretty big. Can you provide any more color on that? And you mentioned current materials as a headwind in the back half of the year. Any additional color there?
Brent Jones, Executive Vice President & Chief Financial Officer
Look, we talked about this broadly. In the first half of last year, due to timing of customer orders and our fulfillment, you saw very strong performance in new sales, which also had strong margin contribution. Now that becomes a headwind. You also saw very strong performance in serum. In the back half of last year, we saw exceptional performance in the electronic materials business, particularly in Q3. So new sales and serum provide headwinds in the first half of this year, and electronic materials were a driver in the back half of last year. That's why the segment comps are more difficult in early 2026. We're focused on process chemicals and other pieces that are less impacted by these comps. The theme is sequential improvement through the year moving away from the tough comps.
Emmanuel Ligner, President & Chief Executive Officer
All right. Thank you, Steven. Thank you, Brent. Thank you, everybody, on the call for joining us today. We moved the company forward in the first quarter, and I'm encouraged by the momentum and positive energy across the organization. Revival is having an impact. Avantor is turning a corner financially, which gives me confidence that we will return to positive growth in the second half of the year. I look forward to updating you again next quarter. Until then, be well, everyone. Thank you.
Operator, Operator
Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.